Will Lenders Begin Cutting Mortgage Principal Balances?

The Federal Deposit Insurance Corporation (FDIC) and specifically its Chairman Sheila Bair may ask lenders to begin to cut principal balances on up to $45 billion worth of mortgages. The FDIC has taken over 124 failed banks this past year and now may ask lenders entering into loss-sharing agreements when acquiring the assets of these failed banks to not only cut interest rates, but also agree to possibly reduce principal loan balances.
“We’re looking now at whether we should provide some further loss sharing for principal write downs,” Bair said. “Now you’re in a situation where even the good mortgages are going bad because people are losing their jobs. So you have other factors now driving mortgage distress.”
Thus, the FDIC is now considering whether lenders that acquire banks should share a larger portion of the losses on loans whose principal is cut and whether the FDIC will recover the additional subsidy through reduced foreclosure rates.
The FDIC insures deposits at 8,099 institutions with $13.2 trillion in assets. The agency is charged with dismantling failed banks and manages an insurance fund it uses to reimburse customers for deposits of as much as $250,000 when a lender collapses.
This is the first time that a government agency has come out and said that they are willing to seriously consider and look into principal reduction for troubled homeowners. Whether this will happen or not is still to be decided, but as always we will provide information and analysis on any such program should it become available.