FDIC To Help Banks Help 12 Million Homeowners Under Water
As foreclosures continue to rise—foreclosures have nearly tripled to 80,000 in California during the last three months—the government is trying to do all it can to help lenders figure out how to keep people in their homes. The latest is that the FDIC is trying to create a loan guarantee program that would incentivize lenders to modify home loans.
The definition loan modifications has evolved rapidly during 2008 … it used to imply expanding the fixed period of an ARM and/or lowering a rate on an existing loan. With 12 million homeowners under water—that is, those who owe more than their home is worth—the definition of a loan modification has come to mean reducing the principal balance so that homeowners don’t just walk away and keep making the foreclosure problem worse. It’s absolutely necessary to stop the bleeding. Details are slim so far (see below), but let’s hope the $700b government “bazooka” can be aimed at the loan modification and foreclosure problem:
“Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards,” [FDIC head Sheila] Bair said in prepared remarks to be delivered before the Senate Banking Committee. “By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.”
Bair did not immediately give an estimate for how large such a loan guarantee program could be, but said the bailout legislation provides “authority that could hold significant promise for future loan modifications. The FDIC is working closely and creatively with Treasury to realize the potential benefits of this authority.”
Bair also said the bulk of the U.S. banking industry is healthy and well-capitalized, but that FDIC is “prepared to do whatever it takes” to preserve confidence in the financial system.
The plans already announced under the bailout legislation should give banks the confidence to resume normal lending, Bair said. The FDIC has also enacted a temporary liquidity program that expands deposit insurance to cover all transaction deposit accounts. It also provides a guarantee to banks’ new unsecured senior debt. But Bair said more needs to be done to address the root problem of home foreclosures.