Bank Foreclosure Sales Addressed by FDIC Chair Bair

by on Foreclosure Help

Bank foreclosure sales by banking firms that acquired failed banks have recently been the focus of Sheila Bair, chairperson of the Federal Deposit Insurance Corporation, as she continues to find ways to help stop the rise in foreclosures due to unemployment.

Bair has been considering asking banks to reduce the principal on about $45 billion worth of home loans acquired from banks closed by the FDIC and state banking regulators.

In an interview with reporters, Bair said that her office is weighing plans on revising loss-sharing contracts with banks that acquired failed banks so that these banks can cut down the principal of distressed home loans and help more homeowners keep their homes during this time when many Americans have lost their jobs.

Since the start of the housing meltdown, Bair has been working to help reduce residential foreclosures. She has frequently called on mortgage servicers to modify loans and reduce monthly payments and has campaigned for the use of Troubled Asset Relief Program funds to directly help homeowners save their homes from bank foreclosure sales, although she failed to convince lawmakers about using the funds.

She was however successful in implementing a foreclosure prevention program at Indymac, a failed federal savings bank and mortgage lender in California that the FDIC saved. About one-third of troubled home loans at IndyMac were successfully restored because the Bair loan modification model involved the combination of loan term extension, mortgage rate reduction and principal reduction.

Last September, Bair also asked acquiring banks to reduce home loan payments for jobless homeowners as the nationwide unemployment rate continued to rise. In November, the jobless rate hit 10.2 percent, the highest level in 26 years.

Bair said she is considering whether the FDIC and the acquiring banks can recover losses from loan principal reductions through the resulting reduction of foreclosure rates and whether FDIC needs to assist acquiring banks through a greater share in the loan-loss-sharing structure.

Under typical current loss-sharing contracts with banks that acquire failed banks, the FDIC absorbs 80 percent of the loss on defaulting residential mortgages up to certain limits while the acquiring bank absorbs 20 percent.

According to FDIC spokesperson Andrew Gray, the FDIC currently has loss-sharing contracts on $109.1 billion of bank assets, $44.7 billion of which are for single-family house loans.

According to the Center for Responsible Lending, Bair’s principal reduction plan will significantly reduce bank foreclosure sales arising from underwater option ARM loans.