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Financial Institution Letters

Servicing for Mortgage Loans
Supplemental Information for Loss Mitigation Strategies
FIL-77-2007
September 4, 2007


Summary: As supplemental information to FIL-76-2007 on the interagency "Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages," the FDIC, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) encourage servicers to consider the borrower's ability to repay modified obligations, taking into account the borrower's total monthly housing-related payments as a percentage of the borrower's gross monthly income (referred to as the debt- to-income or "DTI" ratio). Attention should also be given to the borrower's other obligations and resources, as well as additional factors that could affect the borrower's capacity to repay. DTI ratios exceeding 50 percent will increase the likelihood of future difficulties in repayment and delinquencies or defaults.

Highlights:

  • The FDIC, CSBS and AARMR encourage supervised institutions to apply loss mitigation techniques that will achieve long-term, sustainable obligations to provide stability to borrowers, investors and the marketplace.
  • In developing the appropriate loss mitigation strategy for individual borrowers, it is essential to consider the borrower's ability to repay the modified obligation.
  • As noted in the interagency Statement, one methodology commonly used by servicers is an analysis of the borrower's resulting debt-to-income ratio. The DTI ratio should include the customer's total monthly housing- related payments (e.g., principal, interest, taxes and insurance, or what is commonly known as "PITI") as a percentage of the borrower's gross monthly income. Attention should also be given to the borrower's other obligations and resources, as well as additional factors that could affect the borrower's capacity to repay.
  • In applying the DTI ratio to evaluate the borrower's ability to repay the modified obligation, the FDIC, CSBS and AARMR note that, absent mitigating circumstances, resulting DTI ratios exceeding 50 percent will increase the likelihood of future difficulties in repayment and delinquencies or defaults.

Distribution:
FDIC-Supervised Banks (Commercial and Savings)

Suggested Routing:
Chief Executive Officer
Chief Loan Officer
Chief Compliance Officer

Related Topics:
Nontraditional Mortgage Product Risks
Subprime Mortgage Lending
Workout Arrangements for Residential Borrowers
Securitized Subprime Residential Mortgage Loans
Implications of Restructuring Certain Securitized
Residential Mortgage Loans
Loss Mitigation Strategies

Contacts:
Examination Specialist Beverlea S. Gardner at
BGardner@FDIC.gov or (202) 898-3640 or
Senior Capital Markets Specialist Suzanne L. Clair
at SClair@FDIC.gov or (202) 898-6605

Printable Format:
FIL-77-2007 - PDF (PDF Help)

Note:
FDIC financial institution letters (FILs) may be accessed from the FDIC's Web site at www.fdic.gov/news/news/financial/2007/index.html.

To receive FILs electronically, please visit http://www.fdic.gov/about/subscriptions/fil.html.

Paper copies of FDIC financial institution letters may be obtained via the FDIC's Public Information Center (1-877-275-3342 or 703-562-2200).




Last Updated 9/4/2007 communications@fdic.gov