Citigroup Bailout May Assist More Homeowners

Under its bailout deal, Citigroup must implement FDIC's loan modification plan.

Nov. 25, 2008 — -- The government's rescue package for struggling banking behemoth Citigroup won't just shore up the firm's balance sheet -- it could also help more Americans avoid foreclosure.

The rescue package, which includes $306 billion in loan and securities guarantees for the bank, requires the firm to implement the Federal Deposit Insurance Corporation's mortgage modification program.

The FDIC's program is currently in place at IndyMac Bank in California, a failing institution that the FDIC took over earlier this year. The agency's IndyMac mortgage modification program targeted 40,000 homeowners and, as of earlier this month, had helped more than 5,000 homeowners reduce their monthly payments by an average of more than $380, FDIC chairwoman Sheila Bair told a Congressional committee last week.

Frank Lomba, of Margate, Fla., a truck driver who fell a month behind on his Citi mortgage payments after losing his job, said that the FDIC requirement gives him hope.

"They would be forced to help people rather than just letting them go into foreclosure, rather than take my house and resell it and leave me out on the street," he said.

It is unclear whether the FDIC's plans for Citi would differ substantially from existing Citigroup homeowner help programs, but Guy Cecala, publisher of the trade publication Inside Mortgage Finance, said that, at the very least, the FDIC's involvement will ensure that Citi makes good on its intentions to modify loans.

"The FDIC agreement is actually built into (Citigroup) getting bailed out and has definitely more teeth in it," he said. "They can't turn around tomorrow and say, 'We don't want to do it anymore.'"

Citigroup owns roughly 1.5 million home loans and services another 5 million mortgages.

Through its subsidiary CitiMortgage, the firm already has at least two programs in place to assist homeowners in trouble -- a new program targeting some 500,000 homeowners who are at risk for falling behind on their mortgage payments, and another intended to help homeowners who are already delinquent on their loans. The latter, Citi officials say, was already modeled on the FDIC's IndyMac plan.

It's now up to Citi officials to figure out how the bank's existing programs should be changed to accommodate the FDIC plan.

"We look forward to working with the FDIC to coordinate our efforts as we move ahead under our agreement," said Citi spokesman Steve Silverman.

An FDIC spokesman did not return calls for comment yesterday.

The FDIC's IndyMac program seeks to modify loans so that an eligible borrower is not spending more than 38 percent of his or her monthly income on loan payments. The potential modifications include the reduction of interest rates, extending the term of the loan or "partial principal forbearance" -- setting aside a portion of the loan for the borrower to pay off separately, interest-free, after the rest of the loan has been repaid.

The modifications are being made only when they prove less costly than allowing a homeowner to enter foreclosure.

The FDIC program specifically targets loans that are 60 days delinquent.

Citigroup's modification program for delinquent loans also aims to reduce eligible borrowers' payments to no more than 38 percent of their income through the reduction of interest rates and the extension of the loan terms. Unlike the FDIC, however, Citigroup offers principal forgiveness -- the bank will permanently reduce the amount owed on the loan -- instead of principal forbearance.

But when lowering interest rates, Citigroup generally leaves rates at a minimum of 4 percent while the FDIC has dropped rates as low as 3 percent.

A Citigroup official said that the bank would work to reconcile these differences with the FDIC plan.

One of the major stumbling blocks facing modification efforts has been the proliferation of securitized mortgages -- loans that were bundled into large, complicated investments. When modifying a securitized mortgage, a loan servicer must take care to ensure that the modifications are in compliance with contracts held with the securities' investors.

While Citigroup has worked to modify some securitized mortgages, its loan modifications are generally limited to the mortgages that it owns outright.

But in Congressional testimony last week -- before the announcement of the Citigroup bailout -- Bair said that the FDIC's IndyMac plan allowed for the modification of loans, even in the face of investor contracts.

Kathleen Engel, a law professor at Cleveland-Marshall College of Law in Cleveland, Ohio, said that she hoped the FDIC's involvement in Citigroup would result in the modification of more securitized mortgages serviced by Citi.

The public, she said, could see "wide-scale loan modification on loans on which the banks hold an interest but don't own the whole loan."

"This is a new model," Engel added. "I've never seen this before where the FDIC's policies on loan modifications are being imposed on the bank as part of the bailout and I think it shows a lot of creativity on the part of the FDIC, the Treasury, the Federal Reserve and everyone involved in this deal."

Not everyone is as optimistic.

Len Blum, a managing director with the New York investment bank Westwood Capital, said he doubted that the FDIC would be successful in modifying Citigroup's securitized mortgages.

Obtaining the approval for the modifications from investors who own the mortgages, he said, "is harder than herding cats."