FHFA’s Mod Plan ‘Falls Short,’ Says FDIC’s Bair

The “streamlined modification plan” announced Tuesday by federal regulators and industry representatives for mortgages owned or guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE) isn’t drawing the sort of praise from industry insiders that some might have expected — and its definitely generating outrage among regular borrowers, too. In particular, there appears to be some friction as to just how involved the Federal Deposit Insurance Corp. really was in developing the plan. “We have drawn on the FDIC’s experience and assistance, and have greatly benefited from the FDIC’s input,” said Federal Housing Finance Agency director James Lockhart in announcing the plan, suggesting the Fannie/Freddie mass loan-modification program was modeled after FDIC’s efforts at IndyMac Federal Bank. There’s one slight problem, however, with that; FDIC chairman Sheila Bair suggested later that the FHFA plan wasn’t enough. While the plan may be a step in the right direction, she said in a statement, it “falls short of what is needed to achieve widescale modifications of distressed mortgages.” “As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans,” Bair said. Thus far, Treasury secretary Henry Paulson Jr. has committed $265 billion of the initial $350 billion approved by congress to aid banks and financial institutions — $125 billion for capital injections into nine banking giants; $100 billion for injections into regional banks; and $40 billion to buy up preferred shares from American International Corporation (AIG). Barney Frank, chairman of the House Financial Services Committee, like Bair, said he would like to see Paulson and his team use more of the money to help homeowners. “I think we’ve given them more authority than they have used,” said straight-talking Frank, according to the New York Times. The plan unveiled Tuesday, according to officials, would target high-risk borrowers first — those 90 or more days delinquent — and employ various modification strategies to get borrowers down to an “affordable” mortgage payment, defined as a first mortgage debt load of no more than 38 percent of household income. “These voluntary plans sound nice, but they don’t do the job,” Sen. Charles Schumer said, according to a report in American Banker Wednesday morning. Part of the problem, according to feedback HousingWire has received from numerous readers, lies in the fact that the worst performers are receiving what appears to be the best deal. “I wish I had a bad loan so that I would have enjoyed a very nice house with no down payment, just for the price of a rent,” said one HW reader, in an email sent Tuesday afternoon. “And when I can’t pay, no big deal, we go rent somewhere else, whereas tax payers continue to pay my bad loan.” Other readers were more direct. “All I have to do is voluntarily drop down 90 days, and get a 1 percent mortgage? That’s the best refinancing deal I’ve seen yet!” said another reader, a mortgage analyst for a large insurance firm. And for once, consumer groups and industry sources alike echoed the same sentiment. “In order to qualify, you have to destroy your finances,” said Bruce Marks, the often-combative CEO of the Neighborhood Assistance Corp. of America, according to American Banker. “If you are doing everything in your power to make your mortgage payment, you don’t qualify. The only way you can qualify is if you are 90 days or more late. They are telling people not to make their mortgage payment.” Vital questions remain surrounding the implementation, issues that could further derail the effort, as well. FDIC’s Bair pointed to uncertainty about “allowing extended amortization prior to interest rate reductions; whether payment increases are capped for the life of the loan; the use of higher interest rate caps; and sufficiently granular reporting to determine compliance results.” Not all negative Despite a less-than-ringing endorsement of the plan from the FDIC and consumer groups, some organizations weighed in with praise for the plan. The Mortgage Bankers Association said in a statement that it had helped design the SMP, and called it “another critical tool that mortgage servicers will have at their disposal as they work to keep more of America’s homeowners in their homes.” “Over the past year, mortgage servicers have drastically accelerated their efforts to reach out and help borrowers who are having trouble paying their mortgage,” said MBA COO John Courson. “It has always been in the industry’s best interest to help the homeowner avoid foreclosure.” Others that helped put the plan together were even more careful not to paint the SMP as a panacea for current mortgage and housing woes. In fact, Treasury officials went out of their way to stress otherwise. “There is no silver bullet to address the housing downturn,” said Neel Kashkari, assistant Treasury secretary, in his statement Tuesday. “We are experiencing a necessary correction and the sooner we work through it, the sooner housing can again contribute to our economic growth.” Write to Kelly Curran at [email protected] Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.