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Servicing for Mortgage Loans Supplemental Information for Loss Mitigation Strategies

Lending / Investments
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

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



Additional 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
Attachment(s)

Last Updated: September 4, 2007