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.
"Our program was very similar to the [FDIC's] program," Mr. Das said. "It is good that the industry is converging towards some kind of a standard benchmark for how to do these things, because I'm sure borrowers are really confused. … It really helps to have a program like the FDIC's IndyMac program to set the standard for the industry."
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.
Mr. Das said Citi's program essentially did the same thing — lowering debt to income ratios to 38%, reducing interest rates, and in some cases even forgiving the principal.
But unlike the FDIC's program — under which borrowers must be at least 60 days delinquent — Citi said it was willing to help borrowers still current on their mortgages. Mr. Das said Citi would continue with its own efforts in addition to implementing the FDIC's program.
The largest change, Mr. Das said, will be one of scale. Citi had been looking at mortgages on a case-by-case basis — an approach FDIC Chairman Sheila Bair criticized — while the FDIC approach is systematic.
"We can't turn on the switch tomorrow morning, but certainly within the course of the coming months" mass modifications can take place, Mr. Das said.
Academics and consumer groups welcomed that shift, saying it was necessary to make any headway against a growing number of delinquencies and foreclosures.
"The FDIC plan is an improvement over current voluntary and ad hoc efforts," said Alan White, an assistant professor at Valparaiso University's school of law.
Sheri Powers, manager of the Unity Center's Home Ownership Center in Oakland, Calif., said one client she was working with has waited since January for Citi to agree to a loan modification plan.
"Up until now they have been digging their heels in," Ms. Powers said. "Now that they've announced they're going to do the IndyMac program, we're going to ask for more than we were asking for before."
Though the mortgage industry may not like the streamlined nature of Ms. Bair's plan, a common approach to loss mitigation is necessary, some said.
"Right now I think there are too many workout programs out there," said Bob Caruso, the former head of Bank of America Corp.'s home loan division, now an executive vice president at Lender Processing Services Inc. "Consumers are overloaded with 'great new programs' and don't know which to choose. They want the best deal, but which is best and what do they qualify for?"
To be sure, consumer advocates and industry representatives alike continue to take issue with certain parts of the FDIC's plan, including that borrowers must be two months overdue.
"Reaching out to borrowers before they actually become delinquent on their loans is very important in terms of preventing defaults and foreclosures," said Anne Canfield, the executive director of the Consumer Mortgage Coalition.
Bruce Marks, the chief executive of Neighborhood Assistance Corporation of America, lauded the FDIC's program but said he also wants the 60-day delinquency stipulation changed.
"The overall framework, we support it 100%," he said. "It's a big improvement over what's out there today, and to get Citi to agree to that is moving it further toward becoming the standard."
Ms. Bair has pushed for the Treasury Department to give $24 billion from the Troubled Asset Relief Program to back a loan guarantee program. Under the plan, lenders and servicers that agree to the FDIC's systematic modification program would have a certain amount of their losses covered by the federal government. Though sources have said Treasury officials, including Secretary Henry Paulson, are amenable, the White House has balked.
As the FDIC makes headway with its plan on its own, some industry representatives said the White House may eventually come around. "Despite industry efforts … the economy has soured and foreclosure rates are rising," said Scott Talbott, senior vice president of government affairs of the Financial Services Roundtable. "There is recognition that more needs to be done."
