Friday, the FDIC requested that acquirers of failed institutions who had entered into loss-share agreements with the FDIC “consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed.” The new program is designed to provide such borrowers with additional foreclosure protection and an opportunity to return to full employment. Chairman Bair described the forbearance agreements as a “win-win” for the borrower and the acquirer of the failed bank holding the mortgage and noted that the program will cost the FDIC less money under the loss-share agreements.
The program is designed to provide the borrower with the opportunity to stay in his or her home while seeking employment. It is also designed to ensure that the acquirer continues to receive loan payments. The FDIC’s recommendation “applies where unemployment, or underemployment, is the primary cause for default on a home mortgage” and would call for the borrower and the acquirer to enter into a temporary forbearance plan or agreement to reduce loan payments to affordable levels for at least six months. The forbearance plan should consider the borrower’s circumstances and set monthly loan payments at amounts that provide the borrower with sufficient income to cover reasonable living expenses.
Reductions in mortgage payments under a temporary forbearance plan are not covered losses under the acquirer’s loss-share agreement with the FDIC. However, losses incurred by a subsequent modification to the mortgage loan would be as would losses incurred in subsequent foreclosures or short sales, should the home preservation efforts be unsuccessful.
When an acquirer enters into a loss-share agreement with the FDIC, they are subject to the FDIC’s Mortgage Loan Modification program for the assets purchased from the failed bank. This program allows the acquirer to modify “qualifying loans” meeting certain criteria to set the borrower’s monthly housing debt to income ratio to no more than 31 percent as of the date of the modification and eliminate “adjustable interest rate and negative amortization features.” The objectives of the Mortgage Loan Modification program are to (i) improve affordability, (ii) increase the probability of the loan asset’s performance in the long-term, (iii) allow borrowers to remain in their homes, and (iv) increase the value of the loans.
Unlike the Mortgage Loan Modification program, the program announced Friday does not involve a true modification and would thus not be considered a “loss” covered by the loss-share agreement between the FDIC and the acquirer of the failed bank. Additionally, the FDIC’s press release does not indicate that the forbearance plan is only available for “qualifying loans,” suggesting that the acquirer could enter into the short-term forbearance agreement on any loan asset in which unemployment or underemployment is causing the loans asset’s nonperformance. Given the Administration’s difficulties with other mortgage loan modification and foreclosure relief programs, this newest initiative appears to provide another avenue to keep homeowners out of foreclosure with little or no cost to the government.