The possibility of solving the underwater mortgage problem by writing down principal has been deemed politically impossible by the Obama administration, but some government officials see write-downs as the best long-term solution.
One of the most outspoken supporters of write-downs is Federal Deposit Insurance Chair Sheila Bair. This week, she called underwater mortgages a continuing problem and said the FDIC is “actively looking” at ways to encourage principal write-downs in the deals it does to facilitate acquisitions of failed banks.
As loss mitigation efforts continue, we need to recognize the evolving nature of the mortgage problem. The initial phases of the crisis involved poorly structured mortgages that posed an affordability problem. Now we’re dealing with underwater mortgages. That’s why we’re actively looking at principal write-downs within our loss share agreements and other failed bank programs.
We see this as one possible way to encourage borrowers to stick with their mortgages. This could help reduce defaults, keep people in their homes, avoid costly foreclosures, and enhance the value of these loans. We understand that this will not be the solution for every distressed borrower.
And we are approaching this issue strictly by the numbers, in keeping with our fiduciary duty to every bank receivership that we manage. But the fact is that deeply underwater mortgages – those with loan-to-value ratios of 150 percent or more – are very likely to default.
Models also show that the odds of default can be greatly reduced if the LTV ratio can be brought down a level closer to 100 percent. This approach can help mortgage owners cut their losses by avoiding foreclosure costs. Our analysis is ongoing. But I’m committed to doing everything possible along these lines to reduce our resolution costs, minimize foreclosures and help to stabilize our housing markets.
How do you feel ? We put a very large down payment when we bought our current home. If I had known that I could get a loan write down and stay in the house I might have bought a much more expensive home and used 100% financing !
Read the full report from the FDIC here