FDIC’s Sheila Bair, Diana Olick & Moe’s Response to Their Views on Loan Modifications

By Moe

Loan modifications are the new buzz term in the media and with our government. It looks like they have all have finally jumped on the Moe band wagon.

On Monday, Diana Olick of CNBC posted on her blog, what she said, “  I ranted quite a bit yesterday on loan modifications,” where she had made these comments.

It seems like suddenly everyone is jumping on the bandwagon. First Countrywide [CFC  9.04    0.07  (+0.78%)   ]   announced a deal with Neighborhood Assistance Corp. of America (NACA) to modify loans on a case-by-case basis. Then California Gov. Arnold Schwarzenegger announced a plan with Countrywide, GMAC and others to freeze ARM interest rates on certain loans temporarily, as long as the borrower is living in the home and up-to-date on current payments.

And then Treasury Secretary Hank Paulson, who previously talked about more “communication” between troubled borrowers and lenders with his “Hope Now” initiative, is stepping up the rhetoric, telling the Wall Street Journal that he’s “aggressively encouraging” the mortgage-service industry to come up with a plan to help large groups of borrowers in distress.

All this after FDIC Chair Sheila Bair proposed that interest rates on more than two million loans be frozen at the initial rates and turned, voila, into fixed-rate, long-term loans.

Everyone is asking: is it too little too late? But I’m asking: is it fair? I’m not advocating that we all sit around and watch thousands of people lose their homes and take the whole housing industry and the greater economy down in the process. But is it fair to come up with blanket plans, which essentially allow some borrowers to get away with, well, dare I say it, thievery?

Let’s face it, the shoddy mortgage products introduced in this latest housing boom were faulty, nay defective, but borrowers ate them up, and not just borrowers who were duped. Many of the borrowers were gambling on the market, hoping that home prices would appreciate fast enough for them to refinance out of the dicey products quickly and thereby live in homes beyond their means.

Some hoped to flip their houses for a profit. Most just saw a whole lot of free money, and instead of asking questions they jumped in without looking back.

And what about the potential for fraud? It goes both ways you know. I’m sure there are plenty of homeowners out there now who would be happy to connive their way into a lower interest payment, even if they can afford the higher reset. And what about those who stuck to more conservative products? Should they (including me) be penalized — that is, have to pay higher interest rates than many others simply because we took out long-term ARMs or fixed rate loans that we knew we could afford in the long run?

I know something has to be done. I don’t want to see the housing and credit markets crash and burn any more than the rest of you, but I do think blanket solutions will leave many hard-working, bill-paying Americans out in the cold.

Yes, Diana, most of the subprime loans sold were essentially “defective” credit instruments. But how can we do this effectively on a case by case basis? I understand the theory, sounds great and I agree. However, I believe it is impossible to do it on a case by case basis.

What is needed is like when the FDA issues a “beef recall” for mad cow disease. We have “mad loan disease” and you have to treat this break out effectively to “truly” cure the problem. You can’t just ask every person that ate the tainted beef (ie: adjustable rate loans) if they are feeling OK and if their not, we take them to the hospital and take the beef (loan) out of their fridge.

NO! You recall ALL the beef (loans) and you take no chances of risking death (foreclosure) and injury.

Freezing these loans on a case by case basis will never be truly effective. Lenders and servicers can’t even keep up with their loss mitigation departments as it is. Their efforts thus far have been dismal at best. Now, what they are going to suddenly be on top of their loss mitigation game and magically fix hundreds of thousands of loans with staff the size of a pee wee football team. That’s a joke!

They need an army and we need to force them to recruit and hire appropriate staff to properly equip these loss mitigation departments or this is all just lip service as usual. Are these lenders and servicers going to throw hundreds of millions into this effort?

OK, enough of Moe’s rant. Here Sheila Bair’s response to Diana Olick.

Diana,

I read your piece yesterday on loan modifications on the CNBC Realty Check blog. I know that you are following this issue closely and have been in contact with our public relations office at the FDIC. Many of the concerns that you raise in your article are the same ones that I had as we thought through solutions to the massive hybrid arm resets that we are facing in the coming months. Like you, I believe it would be unfair to craft an inequitable “blanket” plan.

My loan modification proposal targets a specific set of borrowers: those that are in subprime hybrid adjustable rate mortgages (2/28s and 3/27s) who have been current on their payments at the starter rate but are unable to make their resets. If it is determined that they can make the reset payment, then they will be bound to the terms of their contract. Because of weak underwriting, however, we believe that the overwhelming majority will not be able to make the reset, which typically results in a payment shock increase of 30 – 40%. The FDIC currently estimates that 1.2 million borrowers who are facing resets in the next five quarters may be eligible for this proposal.

These are individuals who have been in their homes for years and will eventually default if their loans are not modified. These are not speculators, but disproportionately working class and minority borrowers. There is always an issue of equity in any loan modification, but many of these borrowers were led to believe that they would be able to refinance before the payment shock occurred. While modifying these loans will keep the borrowers in their homes, it will also protect home values of surrounding properties. Foreclosed homes typically sell at steep discounts, having a significant negative impact on neighboring properties.

One last important point I would make is that this category of borrowers is typically already paying between 7 – 9% at their starter rate. This is well above prime rates for a typical 30 year fixed mortgage. The vast majority of borrowers who took the conservative route will still be paying a lower interest rate than the targeted borrowers receiving this modification.

Regards,

So, my question of the day to Bair and other Government officials is, ”How are these lenders and servicers going to be able to handle 1.2 million loan modifications, when they can’t barely handle a couple thousand a month? Countrywide is only claiming to do 2,000 a month and they service almost 25% of the subrime loans out there. That means they would have to perform 250,000 plus loan modification over the next year and a half. That’s more like 20,000 a month!

They are on target for 25,00o, only 225,000 to go! Isn’t gonna happen ladies and gentleman.

What now needs to be addressed by Diana Olick, the media and our government, is how are we going to fix these loans in a timely and effective manner. Plus, who is going to hold these lenders and servicers accountable during the process?

When those questions are answered and satisfied, then I will stop ranting. Until then, the Moe rantathon will continue.

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