WASHINGTON — The Obama administration is working with banking regulators to develop interagency guidance that would serve as the government's broadest approach yet to modifying troubled loans, American Banker has learned.
Specifics of the program, including a launch date and eligibility criteria, are still being developed by the administration. But a source familiar with the situation said it could be announced in the coming week.
In a shift from the Bush administration's approach, the loan modification program would apply to performing loans in imminent danger of default, in addition to those that are already delinquent.
Under the plan, the regulators would issue best practices guidance for performing loan modifications.The guidelines are designed to establish a uniform national standard for all modifications, including those that might receive government assistance.
The guidance could protect servicers who have been skittish about modifying loans due to fears of legal repercussions from investors.
The development of the guidance comes as the Obama administration prepares to articulate its plans to revive the banking industry. Treasury Secretary Timothy Geithner is expected to unveil a plan Monday that would target toxic assets on bank balance sheets and President Obama will hold his first news conference of his administration that evening.
Administration officials continue to debate the form of the loan modification program. Under one idea, investors or servicers would be expected to reduce the cost of a troubled mortgage to a certain level. The government would then partner with the investor or servicer to reduce the loan's cost to an even lower level to increase affordability further.
Another possible approach would call on the government to pay servicers a fee for completing a modification. The government-sponsored enterprises are already doing this. Fannie Mae and Freddie Mac pay servicers $800 for each modification successfully completed.
A third approach would follow recommendations from Federal Deposit Insurance Corp. Chairman Sheila Bair. Through that program, the government would guarantee 50% of losses on loans modified by lenders based upon standardized procedures.
Another option is for the government to provide incentives for borrowers to remain current in their loans. Such incentives could include payments to the borrower to remain current.
Avoiding redefaults on modified mortgages is a key goal. Comptroller of the Currency John Dugan said in December that half of the loans modified in the second quarter of 2008 were 30 days past due within six months.
The modification program has not been scored for its budgetary impact yet but administration officials are working under the assumption that it will total $50 billion, which would come from the Troubled Asset Relief Program. The administration is still considering how the program would be managed.
The top two candidates are the FDIC and the GSEs. The FDIC ran the Resolution Trust Corp. in the wake of the savings and loan crisis.
But sentiment appears to be shifting toward the GSEs due to a sense that the existing infrastructure and technology there. It is not clear how responsibilities would be split between the two GSEs.
Fannie Mae and Freddie were placed into a government conservatorship on Sept. 7 and the Federal Housing Finance Agency, which now runs the companies, has made modifications a central theme.
Still, it is unclear whether the GSEs could manage the program while also working to right themselves after the government takeover.
The administration has not made firm decisions on what types of loans would be eligible for modification though some themes are crystallizing. For one, the administration is unlikely to modify mortgages on expensive homes but a cap has not been decided.
The program is being jointly developed by the White House, the Treasury Department and the Department of Housing and Urban Development.