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FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications
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Systematic Loan Review by Participating Servicers: Participating servicers would be required to undertake a systematic review of all of the loans under their management, to subject each loan to a standard NPV test to determine whether it is a suitable candidate for modification, and to modify all loans that pass this test. The penalty for failing to undertake such a systematic review and to carry out modifications where they are justified would be disqualification from further participation in the program until such a systematic program was introduced.
Reduced Loss Share Percentage for "Underwater Loans": For LTVs above 100%, the government loss share will be progressively reduced from 50% to 20% as the current LTV rises. If the LTV for the first lien exceeds 150%, no loss sharing would be provided.
Simplified Loss Share Calculation: In order to ensure the administrative efficiency of this program, the calculation of loss share basis would be as simple as possible. In general terms, the calculation would be based on the difference between the net present value of the modified loan and the amount of recoveries obtained in a disposition by refinancing, short sale or REO sale, net of disposal costs as estimated according to industry standards. Interim modifications would be allowed.
De minimis Test: To lower administrative costs, a de minimis test excludes from loss sharing any modification that did not lower the monthly payment at least 10 percent.
Eight-year Limit on Loss Sharing Payments: The loss sharing guarantee ends eight years of the modification.
Impact of the Program:
The table below outlines some of the basic assumptions behind the scale of the plan and its expected costs. To summarize, we expect that about half of the projected 4.4 million problem loans between now and year-end 2009 can be modified. Assuming a redefault rate of 33 percent, this plan could reduce the number of foreclosures during this period by some 1.5 million at a projected program cost of $24.4 billion.
-- Federal Deposit Insurance Corp.
