The agonizing mortgage and housing downturn has brought FDIC to the forefront of efforts to keep the financial system from being sucked into a dark, unpleasant place. The Federal Deposit Insurance Corp. takes over failed banks and then allows other healthier financial institutions to acquire the wrecks. So far this year it has shuttered 124 banks, absorbing losses in the billions.
Mortgage portfolios have played a large role in the total assets FDIC then offers up for acquisition. Typically when a bank purchases assets it also signs a loss-sharing contract with FDIC. In this current recession they generally have agreed to a forbearance clause and/or lowering the interest rate on the underlying home loans. Now FDIC, seeing its insurance fund shrinking perilously, is seeking to shift more of the loss-sharing to the acquiring banks.
To do that it plans on requiring banks to lower the principal on the mortgages they acquire. This particular course of action has been debated for months now, only to draw lukewarm acceptance from the financial sector. Washington has also floated the idea of allowing the courts to slash principals closer to market, but it has been quietly shoved onto a shelf in some remote closet on Capitol Hill, thanks to pressure from Wall Street.
Banks see bright red when the topic of mortgage principal reduction is brought up for conversation. They have been doing everything thus far in their dog-eared playbooks to avoid doing so. Obviously they have been calling on any available higher authority willing to listen to bless the real estate market for a quick recovery that would then prop up their damaged balance sheets dragged way down with almost worthless mortgage paper. It hasn't happened, though, and seems to be at least a few more moons away.
Cutback on mortgage principal would undoubtedly slow down the still-active foreclosure tsunami and thus help FDIC and even the banks. Homeowners would have a much better chance of meeting their payment obligations, likely keep them in their houses and largely arrest the loss of property values. It would also give them a psychological boost in that they would then be living in a place that is only marginally underwater, if at all.
Southern Nevada communities - Summerlin, North Las Vegas, Henderson, Mountains Edge, Anthem, Mesquite, Rhodes Ranch and Silverstone Ranch - would certainly gain from this adjustment, if enacted. Upside down homes saturate the landscape here, as it does in many other areas throughout the country. Banks may still throw tantrums over it, but that frankly appears to be the only sensible way out of this prolonged mess.
Photo by greenbroke.
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