Foreclosure Mitigation – Who’s Authorizing The Expenditures


This week will bring us the data, more or less, on the success to date of the HAMP program. That’s the program that has undertaken the Sisyphean task of righting the U.S. foreclosure debacle. Early indications are that it’s been a bust but that hasn’t deterred many from seeking to get the stone up the mountain.

As usual, when bad news can’t be buried any longer the PR mill starts churning. There’s been much about how to fix the program about in the blogs and MSM for the past week. This article from Bloomberg is indicative of the hype that’s being ginned up to justify more action.

Note the contradictions in these two passages:

“We’re looking now at whether we should provide some further loss sharing for principal write downs,” Bair said. “Now you’re in a situation where even the good mortgages are going bad because people are losing their jobs. So you have other factors now driving mortgage distress.”

Principal reductions will help borrowers who are “underwater” on their payment-option adjustable-rate mortgages, whose principal expands over time, said Julia Gordon, senior policy counsel at the Center for Responsible Lending.

“In order to make those loans affordable and give those homeowners a reason to stay rather than walk away, principal reduction is going to be key,” Gordon said.

So the problem with the ongoing foreclosure problem is unemployment according to Bair or it’s option ARMs and underwater borrowers according to Ms. Gordon. It might even be both but the advance news is that so far no remedy seems to have stemmed the flood.

What to do? Spend more money of course. In case you missed it in the citation above, here’s a little more detail on how the FDIC and its Chairwoman plan to solve the problem:

In September, Bair urged banks that are sharing losses with her agency to temporarily reduce mortgage payments for out-of- work borrowers. U.S. unemployment soared to a 26-year high of 10.2 percent in November.

The agency now is considering whether lenders that acquire banks should share a larger portion of the losses on loans whose principal is cut and whether the FDIC will recover the additional subsidy through reduced foreclosure rates.

“I think we’re going to gain by reducing re-default rates or delinquencies with people walking away,” Bair said. “We’ll obviously lose by providing loss-share for principal writedowns.”

Under the average loss-sharing agreement, the FDIC pays as much as 80 percent of losses on a residential mortgage up to a set threshold, with the acquiring bank absorbing 20 percent. Any losses exceeding the threshold are reimbursed at 95 percent of the losses booked by the acquirer.

$80 Billion

The FDIC has loss-sharing agreements on $109.1 billion of failed-bank assets, including $44.7 billion for single-family home loans, spokesman Andrew Graysaid.

“For the acquiring banks, it’s great because now they get more protection for the assets that they’re picking up and they have more flexibility in dealing with the problems,” John Douglas, who leads the bank regulatory practice at Davis Polk & Wardwell LLP in New York and is a former FDIC attorney, said in a telephone interview.

Note that what Bair is doing is tantamount to betting the farm that even more aggressive modification efforts backstopped by the FDIC will result in a long-term positive outcome. This despite evidence that the whole thing is a fool’s errand.

I could go on, but let’s wait until we have some real data later this week on the outcomes, assuming the government releases meaningful data. In the meantime let me ask a question.

Under what authority can Sheila Bair commit the FDIC to these sorts of expenditures? We are truly discussing tens of billions of dollars being committed to further foreclosure mitigation plans with absolutely no oversight from any branch of the government. Anyone have some thoughts on this one?

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