Coming Soon? FDIC’s Loan Modification Plan, Foreclosure Moratorium

by Alex Stenback on November 6, 2008

Today's Wall Street Journal has an update on the forthcoming loan modification program from the Treasury and FDIC that we mentioned last week.  It appears they are getting closer:

And the Treasury, the Federal Deposit Insurance Corp. and other government agencies are said to be close to announcing a government program to address residential foreclosures at the root of the crisis.

Semi-related and also worth noting is that with the election over, a resurgent democrat congress will likely redouble it's pursuit of a 90 Day Moratorium on Foreclosures.  The general idea behind a moratorium is that it will (forcibly, we note) inspire servicers to consider modifications rather than foreclosures, thereby keeping people in homes.

American Banker notes that some servicers are terrified of this:

"A foreclosure moratorium would make a correction take much longer and have unintended consequences on servicers who already have liquidity constraints," said Dennis Stowe,a buyer and servicer of distressed mortgages."

The likelihood some sort of moratorium will pass as early as January has inspired at least one big bank, Chase, to institute it's own 90 day moratorium, presumably to get ahead of the coming legislative storm, and focus on modifications.

To supporters, a moratorium sounds great, albeit in a populist, "lets stick up for the little guy sort of way."   But in practice, these types of sweeping "solutions" can be riddled with problems.  And you can bet your sisters kitty that there will be consequences neither desirable nor intended from any moratorium.

Higher rates, higher down payments, higher mortgage insurance rates, a prolonged housing correction, and the possibility that we'll have to shovel more taxpayer dollars into the ailing banking system are the first few that spring to mind. There are more.

On the other hand we've already seen much the preceeding list happen, so I guess the questions worth asking are: How much worse could a moratorium make things, and whether servicer objections are as much about keeping congress out of their knickers as they are about preventing distress to future borrowers.

One thing is clear, and worth keeping in mind when the details of these efforts are put forth: Any attempt to prop up housing values will not work, and the shortest distance between where we are now and a healthy housing market is to let the correction happen, and get it over with as quickly as possible. We don't see how a moratorium helps in that regard.

Our guess is that the number of additional modifications that happen as a result of a moratorium will be small, at least if the industry and FDIC's modification track record thus far are an indication of how this will go.

For most, the best this will do is forestall the inevitable.

We'll be sure to update you when there's an official announcement.

{ 2 comments… read them below or add one }

Richard November 6, 2008 at 2:42 pm

My guess is that the banks are so backed up anyway that a 90 day delay on foreclosures will have little impact one way or the other. Still, the disturbing part is thinking of capital and human resources being tied up by bad loans, which will only keep healthy loans out of the system longer.

Idaho Real Estate November 9, 2008 at 8:34 pm

Moratoriums make as much sense as federal bailout programs. The quickest way to heal the current housing crises is to bring down mortgage rates that will then encourage qualified home buyers to get back into the home buying market. Moratoriums are band aids and is not a long-term cure.

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