FDIC Chairman Sheila Bair, a long-time advocate of systematic loan modifications, today proposed the idea of loan guarantees during testimony before the Senate Banking Committee.
Loan workouts have certainly risen in recent months, but foreclosures continue to outpace those efforts, putting strain on home values and pushing more borrowers to the brink of default.
Part of the problem is motivating more servicers to assist borrowers, so the idea of guaranteeing the new loan could prompt wide-scale workouts, though as Bair aptly pointed out, there is no silver bullet.
“Loan guarantees could be used as an incentive for servicers to modify loans,” she said in prepared remarks. “Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards.”
“By doing so, unaffordable loans could be converted into loans that are sustainable over the long term. The FDIC is working closely and creatively with Treasury to realize the potential benefits of this authority.”
The Treasury has yet to comment directly on the matter, but it’s likely a systematic approach will at least be tested now that the agency has the ability to lay out such guarantees.
Since August 20, the FDIC has mailed more than 15,000 loan modification proposals to delinquent borrowers, and more than 3,500 borrowers have already accepted offers.
Roughly 40,000 of the 60,000 delinquent borrowers currently serviced by Indymac Federal are eligible for a loan modification.
The trick now is just getting more mortgage lenders and servicers on board.
“Our experience has been that performing loans yield greater returns than non-performing loans,” she added. “In recent years, we have seen troubled loan portfolios yield about 32 percent of book value compared to our sales of performing loans, which have yielded over 87 percent.”
Sounds good; now there’s just the matter of all those prudent borrowers flipping out while at-risk borrowers secure their new three percent fixed-rate mortgages.