FDIC Rescue For Home Loan Foreclosures

A major cause of our economic woes now is largely due to financial institution’s liberal loan policies, involving high risk real estate mortgages. According to a 2006 report in Harper’s Magazine, almost half of first-time home-buyers gave no down payment as equity for their mortgages in 2005. Single family home loans have reached a total of $2.33 trillion in 2007. By the end of 2008, 2 million home mortgage foreclosures are predicted with the loss in real estate value expected to top $3 billion, in which 620,000 of them dealing with sub-prime loans- made to people with poor credit standing. Some analysts believe a much larger number of mortgages are in trouble.

Average home prices in the US have doubled over the past ten years, from $$109,000 in 1995 to $206,000 in 2005; more than the increase of the consumer price index by over 33 percent during this period. As medium-priced homes have moved out of reach of middle-income earners, this group have sought riskier mortgage schemes to bridge the gap. Moreover, a 2004 study by the Federal Reserve Board found that more than a quarter of low-income households spend forty percent or more of their earnings in repaying their debts. Despite the increase in home prices during the past 15 years, there has been a five percent increase in the home ownership rate. Considering that the middle-income wages have been stagnant since 1999, and incomes of low-paid workers have been declining for decades, these resulted in increasing indebtedness for these groups.

The FDIC is a U.S. governmental agency created to protect bank customers against loss of deposits held in an FDIC insured bank or savings association that fails. Since the creation of the FDIC in 1933, no depositor has ever lost a penny of insured bank deposits.

The Federal Deposit Insurance Corp. seized control of IndyMac Bancorp -- the nation's 10th-largest mortgage lender (by loan volume). The new entity, called IndyMac Federal Bank, has become a laboratory test of whether the FDIC's program can keep people in their homes.The FDIC wanted to show the mortgage industry how it could reduce home foreclosures by making decisions both sensible and humane. The agency found plenty of bad loans to work with. IndyMac's specialty was Alt-A mortgages, a category that frequently includes loans made with little or no documentation and exaggerated borrower incomes.

"Our goal is to get the greatest recovery possible on loans in default or in danger of default, while helping troubled borrowers remain in their homes," said FDIC Chairman Sheila Bair at the time

IndyMac services about 653,000 mortgage loans, on its behalf and other investors. About 65,100 are delinquent. Of those, the FDIC says about 47,000 might meet its criteria for a new loan. But FDIC is expecting losses on IndyMac to the tune of $8.9 billion.

FDIC said that those who have restructured their loans have seen their monthly house mortgage payments reduced by more than $380, or about 23 % of the total installment payments. It restructured delinquent loans so that a borrower's monthly payments for principal, interest, taxes and insurance equal not more than 38 % of his or her take home pay. The loan payments were also modified to suit the capacity to pay of the borrower- even allowing interest only payment schemes, with the loan durations extending up to 15 to 30 years period.

Furthermore, Ms. Bair is now pushing a separate plan, close to being finalized by the White House, in which the federal government would help borrowers keep their homes by absorbing a portion of any losses on a modified loan. That could help as many as three million homeowners.

Written by Katherine M