Latest Articles FDIC Implements Fiscal Amnesty
For all the banter that has occurred relative to “solving” the current housing crisis, F.D.I.C. chairperson Sheila Bair has been a vocal proponent of implementing a systematic and steam-lined approach to loan modifications. On Thursday she finally got her wish.
With the Office of Thrift Supervision having shut down IndyMac Federal Bank, The F.D.I.C. formerly outlined its plan to implement modifications for the masses. If you missed the story, here are the highlights:
• The F.D.I.C. will look to write down mortgages for IndyMac Bank customers to whatever levels the borrower can afford.
• Borrowers would have their debt-to-income ratios reduced to no more than 38%, which in most cases will require writing off principal and/or reducing interest rates below their current level.
• Starting this week, 4,000 modification proposals will be sent to borrowers, with many more to follow in coming weeks. Once a borrower receives the offer, “all it takes for them to bring their mortgage current and qualify for the modified mortgage” is:
1. Sign and return the agreement along with the check for the modified payment.
2. Provide verification of their income to confirm they qualify for the proposed modification.
All of this has left the rest of us saying, “Drats! Why didn’t I get my mortgage through IndyMac?”
Housing Wire reported last week on the challenges behind implementing this program – the difficulty in getting second lien holders and investors at the lower end of the RMBS to take their lumps in order to facilitate the transaction. What’s more concerning is whether the F.D.I.C. has introduced the first official amnesty program for borrowers who falsified loan applications.
Logic would seem to dictate that a significant percentage of delinquent borrowers opted for some form of limited documentation program (SISA, SIVA, NINA etc) given that a large proportion of these loans make up IndyMac’s total book of business. Once the borrower sends in proof of income we can also assume that many will come in with figures lower than what was stated on their original loan applications. If the verified income demonstrates they don’t qualify for the proposed modification, according to the press statement released by the F.D.I.C., “IndyMac Federal will contact borrowers to discuss alternatives to help them keep their homes.” At this stage, the only plausible way to facilitate a loan modification will be to use the verifiable income to comply with the terms of the program (lower principal balance and/or rate to get below 38% DTI). When the F.D.I.C chooses to ignore that borrowers falsified their initial loan applications, we’ll have the first bona fide mulligan granted for falsifying a federal loan application.
As Bush will certainly grant pardons as his term comes to a close, just as other Presidents have done before him, the F.D.I.C. is creating its own form of amnesty for the financially distressed. That any institution, governmental or not, would think of enacting such a wide-sweeping measure is telling. It shows just how far things have progressed that such an initiative would even be considered, let alone enacted.
At some level I suppose it was inevitable. With foreclosures increasing at a steady clip, someone in the government eventually was going to step up with a proposal that absolved the consumer of any wrongdoing. Now that the F.D.I.C. is calling the shots at IndyMac, they finally have the leverage to make it happen.
For a moment, let us put aside the systemic failures of the lending industry, as significant as they are, and discuss the horrible precedent this decision creates. For a nation that has become addicted to living beyond its means, the F.D.I.C. is making a monumental statement –fraudulent activity accompanied by fiscal stupidity come with a get out of financial purgatory card.
They have taken the same malfeasance that has plagued our system of government for decades and applying it to distressed borrowers. So the loan application they signed at closing wasn’t really authentic or enforceable? Did it come from a box of Cracker Jack’s?
Well, I for one am not taking this sitting down. I’ve written Scottrade demanding that my decision to go long on Bear Stearns last January be nullified due to limited capacity. That’s correct. I was too misguided to know any better and shouldn’t be held accountable for my actions. Yeah, they should buy that argument.
It seems to have worked for the F.D.I.C.
Richard,
I recently learned about your book and this website through an online article regarding the latest bailouts. I will be heading out to purchase your book in the short term. I was a market participant in the title insurance arena for 15 years. I left the industry to pursue a long-standing desire to work in criminal prosecution, which unfortunately allows me to continue to work with a few of the overzealous real estate market participants.
Your suggestion that “a comprehensive solution that addresses every level of the food chain is the key to fixing the mortgage industry” is spot on in my opinion. You might want to check out www.oaita.org, which is an organization that shares your principals and goals (only in the title insurance sector of the market).
If a large enough group of people with power (real or perceived) in the industry unite towards this common goal, I think it will be accomplished.
The “get out of jail free” card is being overutilized by the government. How will the market learn from its mistakes if Uncle Sam keeps bailing them out? And isn’t it just postponing the inevitable? I, for one, would just like the market to finally hit bottom so we can breathe a sigh of relief, roll up our sleeves and start rebuiding a future based on good lending practices and sound business ethics.