Friday, November 14, 2008

FDIC Foreclosure Plan

The FDIC releases their plan today.

Marginally better than the FHFA plan released earlier this week (described below) in that it reaches more problem loans and provides some carrots and sticks for lenders to participate.

However, it still doesn't focus on principal reduction. "Principal forbearance" is different in that you are still required to pay the entire original loan balance in full if you sell or refinance. This is going to result in lots of short sale issues down the road, and still leaves too many families with an incentive to default.

I think principal forgiveness with shared appreciation mechanisms can be much more effective. The % by which future appreciation is shared with the lender who helped you out can be a function of the amount of principal forgiven. Before embarking on yet another plan, why not modify the plan passed this summer.

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