WASHINGTON–The Federal Deposit Insurance Corp. has moved beyond urging banks to adopt its systematic loan modification program, and is now forcing some to do so.
In two recent deals–the government's backstop of Citigroup Inc. and U.S. Bancorp's agreement to buy assets of two failed California thrifts — the agency conditioned its approval on agreement to adopt the FDIC's plan.
That worries some bankers, who say privately it could displace their own efforts or force them to take unnecessary steps. But it pleases consumer advocates, who argue the FDIC's program is curbing foreclosures.
One thing is clear to both sides: more such deals are likely. "It could very well be a precedent for getting help from the FDIC," said Robert Clarke, who leads the global financial services practice at Bracewell & Giuliani LLP and was comptroller of the currency in the late 1980s.
The FDIC has already pledged to require modifications, where appropriate, when failing banks are purchased.
"The FDIC will include loan modifications as part of the resolution process if the failing bank has the right mix of assets, but you cannot systematically require it in all cases," a spokesman for the agency said last week.
The first such deal came Nov. 21, when U.S. Bank agreed to purchase the deposits and assets of Downey Savings and Loan in Newport Beach, Calif., and PFF Bank and Trust in Pomona, Calif. Under the deal, the FDIC required systematic modifications for all qualified mortgages held by the two failed thrifts. But the FDIC spokesman said U.S. Bank does not have to apply the program to its own mortgages. U.S. Bank did not respond to requests for comment.
Days later, the FDIC made its modification program a requirement in the government's bid to backstop Citi. The FDIC had leverage in that deal because it agreed to cover $10 billion of losses in a portfolio of bad assets at the bank. Ironically, the requirement came just two weeks after Citi had rolled out its own loan modification initiative.
Sanjiv Das, the chief executive of CitiMortgage, said implementing the FDIC's streamlined program would not conflict with Citi's own plan.
The FDIC program, which draws from the agency's experience in modifying loans at the failed IndyMac Bancorp., requires the servicer to reduce the borrower's mortgage payment to between 31% to 38% of his income. The FDIC gives servicers several ways to accomplish that. The amount outstanding may be lowered, the length of the loan may be extended to 40 years, and interest rates may be reduced to as low as 3% for five years, and increased after that point by 1% a year until hitting the Freddie Mac survey rate.
