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Loan Workouts and Government Bailouts

Now that the government has nationalized Fannie Mae and Freddie Mac, it should step in and modify the mortgage loans of troubled borrowers on a massive scale, consumer advocates say.

Housing Wire reports that advocates are pushing the two mortgage giants to follow the lead of the Federal Deposit Insurance Corp., which is attempting an en mass modification of loans to borrowers from IndyMac. The FDIC this summer took over IndyMac, a subprime lender, in one of the nation’s largest bank failures.

The FDIC effort is being closely watched by the lending industry and by housing advocates. Our story this week explained that while the government is pushing private industry to do loan workouts through efforts like Hope Now, there hasn’t been much real progress made. FDIC Chairwoman Sheila Bair is an advocate of doing more mass restructurings.

According to Housing Wire, Bruce Marks, chief executive officer of the Neighborhood Assistance Corp. of America, which has been battling banks for years, is behind the pressure on Fannie and Freddie. From Housing Wire:

“Look what Sheila Bair’s doing — she’s walking the walk, as well as talking the talk,” Marks told Amercan Banker. “Now we need Secretary Paulson to walk the walk, as well as talk the talk.”

NACA, as we reported, also launched an effort this week in 40 cities to do loan restructurings on a large scale and to pressure servicers and lenders to follow through on them.

Not surprisingly, the lending industry isn’t exactly enthusiastic — since genuine loan restructurings mean lowering the principal and interest rate and taking losses. But with the government increasingly involved in the mortgage markets, it won’t be so easy for Treasury Sec. Henry Paulson Jr. and the Bush administration just to urge private industry to do more workouts as a solution to the mortgage crisis.

With the government in charge of so many mortgages, it either has to do what it’s been urging the private sector to do, or lose all its moral authority on this one.

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