As part of its loss-share agreement with acquirers of failed institutions insured by the Federal Deposit Insurance Corp. (FDIC), the FDIC is encouraging its loss-share partner institutions to consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed.
This program will provide additional foreclosure prevention alternatives to these borrowers through forbearance agreements that will give them an opportunity to regain full employment and avoid an unnecessary foreclosure, the FDIC says.
‘With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures," says FDIC Chair Sheila Bair. "This is simply good business, since foreclosure rarely benefits lenders and would cost the FDIC more money, not less.’
The loss-share approach helps reduces losses to the FDIC, Bair adds.
The recommendation to loss-share partners applies where unemployment or underemployment is the primary cause for default on a home mortgage. In such cases, the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months.
The monthly payment during this period should be established based on an affordable payment and allow for reasonable living expenses after payment of mortgage-related expenses. The reductions in mortgage payments during a temporary forbearance period are not covered losses under the loss-share agreement with the FDIC, though losses incurred from subsequent permanent loan modifications are covered.
If the home preservation efforts are ultimately unsuccessful, losses incurred in subsequent foreclosures or short sales also are covered losses, the FDIC says.
Acquirers of failed insured institutions that agree to a loss-share arrangement with the FDIC must abide by the FDIC Mortgage Loan Modification program for assets purchased from the failed institution. The program provides for the modification of ‘qualifying loans’ – those that meet certain criteria – by reducing the borrower's monthly housing debt-to-income ratio to no more than 31% at the time of the modification and eliminating adjustable interest rate and negative amortization features.