Obama: Loan Modification Plans
Obama’s plan may expand on the Federal Deposit Insurance Corp.’s streamlined loan modification program, which serves as a model for workouts being conducted by several banks and by Fannie Mae and Freddie Mac.
The FDIC’s program, which is underway at failed lender IndyMac, calls for making monthly payments more affordable by reducing interest rates, lengthening loan terms or deferring principal. Servicers aim to reduce payments to no more than 31% of a borrower’s monthly income. So far, more than 10,000 delinquent loans have been modified, and offers have been made to another 20,000 borrowers.
Summers has said that banks that receive bailout funds will be required to implement foreclosure prevention programs.
The Obama administration is expected to put some money behind the loan modification efforts. It’s likely any loan modification plan will come with incentives for servicers and with some type of backstop in case the borrower defaults again. FDIC Chairman Sheila Bair unveiled a $24.4 billion plan in November that offered servicers $1,000 and provided a guarantee to cover 50% of any losses in case of redefault. The proposal, which she estimates will help 1.5 million people avoid foreclosure, has gone nowhere so far.
