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FDIC Adopts a Final Rule Regarding Special Assessments

On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment and authorizing the FDIC to impose additional special assessments of 5 basis points, if necessary.  The initial special assessment and any additional special assessment will be based on an institution’s assets minus Tier 1 capital as of June 30, 2009.  This final rule differs significantly from the interim rule that FDIC issued on March 2, 2009.

The interim rule contemplated a 20 basis point special assessment, based on an institution’s deposits, which is the assessment base used for the regular quarterly risk-based assessments.  The interim rule also contemplated imposing additional special assessments of up to 10 basis points at the end of each remaining calendar quarter of 2009.

The final rule lowered the initial special assessment from 20 to 5 basis points, and any additional special assessment from 10 to 5 basis points, but changed the assessment base from deposits to assets minus Tier 1 capital.  The memorandum from the FDIC’s director of the insurance and research division indicates that the “departure from the regular risk-based assessment base is appropriate in the current circumstances because it better balances the burden of the special assessment.”

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Enhanced Deposit Insurance Extended Through 2013

On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009 (Senate Bill 896).  Among other things, the Act:

  • extended the $250,000 deposit insurance limit through December 31, 2013;
  • extended the length of time the FDIC has to restore the Deposit Insurance Fund from five to eight years;
  • increased the FDIC’s borrowing authority with the Treasury Department from $30 billion to $100 billion;
  • increased the SIGTARP’s authority vis-a-vis public-private investment funds under PPIP (including the implementation of conflict of interest requirements, quarterly reporting obligations, coordination with the TALF program); and
  • removed the requirement, implemented by the American Recovery and Reinvestment Act of 2009, for the Treasury to liquidate warrants of companies that redeemed TARP Capital Purchase Program preferred investments.  The Treasury is now permitted to liquidate such warrants at current market values, but is not required to do so.

This extension does not affect the Transaction Account Guarantee provided by the FDIC’s Temporary Liquidity Guarantee.  The Transaction  Account Guarantee, which provides an unlimited guarantee of funds held in noninterest bearing transaction accounts, is still scheduled to expire on December 31, 2009.

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Making Home Affordable – Program Updates

On May 14, 2009, the Treasury and the Department of Housing and Urban Development announced updates to the Making Home Affordable Program.  These updates detail Foreclosure Alternatives Incentives and Home Price Decline Protection Incentives.

Foreclosure Alternative Program.  The Foreclosure Alternative Program provides incentives to mortgage servicers to pursue short sales of homes or deeds in lieu of foreclosure.  In either case, the incentives are aimed at helping homeowners who can no longer afford to stay in their homes by allowing them to avoid foreclosure and relocate to a home that they can afford.

The updates indicate that homeowners who satisfied the minimum eligibility requirements for a modification under the Program but who could not qualify for a modification will be eligible for the Foreclosure Alternative Program.  For example, a homeowner may meet all eligibility requirements yet the servicer determined that the borrower would not be able make payments on a loan as modified under the Program; in this case, the homeowner may be eligible for the foreclosure alternative.  Further, homeowners who received a modification but who were unable to sustain payments under that modification will be eligible for the Foreclosure Alternative Program.

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Making Home Affordable Programs – Updates for Mortgage Holders and Servicers

On April 28, 2009, Treasury announced updates to the Making Home Affordable Program.  As previously discussed, the Treasury’s Making Home Affordable Program, which is aimed at helping 7 to 9 million homeowners, consists of two programs: The Home Affordable Refinance Program and the Home Affordable Modification Program.  The newly announced updates address modifications to second mortgages where the first mortgage has been modified under the Home Affordable Modification Program.

The Making Home Affordable Program is a completely voluntary program.  However, mortgage holders and servicers that do sign up for the Program, should realize that they must modify any second mortgage for a homeowner whose first mortgage has been modified under the Program.   A mortgage holder cannot elect not to modify a second mortgage once it has entered the Program.  A list of participating institutions is available here.

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Making Home Affordable Programs – Updates for Homeowners

On April 28, 2009, Treasury announced updates to the Making Home Affordable Program.  As previously discussed, the Treasury’s Making Home Affordable program, which is aimed at helping 7 to 9 million homeowners, consists of two programs: The Home Affordable Refinance Program and the Home Affordable Modification Program.  The newly announced updates address modifications to second mortgages where the first mortgage has been modified under the Home Affordable Modification Program.

The important thing for homeowners to recognize is that the modification to the second mortgage is automatic.  That is, if the holder of the second mortgage is a participating servicer under the Making Home Affordable Program, then the holder must modify the second mortgage whenever a first mortgage is modified under the Program.  The updates address both traditional, amortizing second mortgages and interest-only second mortgages.

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The Lottery is Not an Acceptable Funding Source

On March 3, 2009, the FDIC published Financial Institution Letter FIL-13-2009 on the use of volatile or special funding sources by financial institutions that are in a weakened condition.  The guidance generally suggests that banks should be run safely and soundly.

Directors and officers of institutions that are in a weakened financial condition are expected to oversee the operations of these institutions in a way that stabilizes the risk profile and strengthens the financial condition. Actions taken by a weak financial institution to increase its risk profile are inconsistent with this expectation.

While the guidance is overly broad, we believe the FDIC guidance may be focused on two practices:

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Summary of the Making Home Affordable Programs

On March 4, 2009, the Treasury announced the release of details for Making Home Affordable, which is comprised of two programs: The Home Affordable Refinance Program and the Home Affordable Modification Program. In total, these programs aim to help 7 to 9 million homeowners by making mortgages more affordable and by helping to prevent foreclosures.

The Home Affordable Refinance Program seeks to provide 4 to 5 million homeowners with the opportunity to refinance first mortgages to take advantage of the historically low mortgage interest rates.

The following criteria must be met to be eligible for this Program:

  • the home is one to four unit and owner occupied;
  • the loan is owned or controlled by Fannie Mae or Freddie Mac;
  • the mortgage payments are current;
  • the amount owed on the first mortgage is not more than 105% of the current market value of the home; and
  • the borrower has a stable income to support the new mortgage payments.

Homeowners looking to take advantage of this Program, should note two things: First, a borrower who is delinquent on first mortgage payments is ineligible. Second, only first mortgages are altered – second (or third) mortgages cannot be altered under this Program, which means a borrower’s eligibility will depend, in part, on any second (or third) mortgage holder agreeing to maintain a junior position even after the first mortgage has been altered.

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