UPDATE: FDIC OKs Deposit Insurance Hike, Mtge Account Rules
10/10 03:55 PM
(Updates with final approval, comments from FDIC lawyer and Fannie Mae executive)
By Sarah N. Lynch
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The Federal Deposit Insurance Corp. Friday granted final approval to a temporary increase in bank account deposit insurance and acted on a new proposal aimed at simplifying federal insurance coverage for mortgage servicing accounts.
The FDIC already raised its standard deposit insurance amount to $250,000 from $100,000 per account as part of the $700 billion bailout package that was signed into law by President George W. Bush on Oct. 3.
Friday's vote formalized the temporary increase, which will remain in effect until Dec. 31, 2009 in an effort to protect the public from potential increased losses arising from the financial crisis.
The mortgage account proposal is new. The FDIC hopes it will help better protect investors, mortgage servicers and borrowers from unexpected losses on mortgage servicing accounts if a bank fails. The interim rule also seeks to simplify these rules for determining insurance coverage of mortgage serving accounts.
Mortgage servicing accounts are bank accounts opened by a mortgage servicing company that collects monthly mortgage payments from borrowers. Those payments are deposited into the accounts before they are sent to the owner of the loan along with whatever interest the owner makes on the principal. The company that opens the account, meanwhile, gets to keep a cut for servicing the loan.
Under the proposal, insurance coverage for a mortgage serving account would be based on the borrowers' payments of principal and interest up to the newly increased temporary amount of $250,000 per borrower. That would mean, in effect, that insurance coverage would be provided for investors collectively, and the pay-outs would be based on the cumulative amount of principal and interest in the account.
"The FDIC's goals in this rulemaking are twofold," the FDIC proposed interim rule change reads. "First, the FDIC seeks to make the coverage rules for mortgage servicing accounts easy to understand and easy to apply."
"Second, the FDIC recognizes that, at any one time, billions of dollars in principal and interest funds may be on deposit at insured depository institutions, providing a significant source of liquidity for the institution and credit to the institution's community."
Currently, accounts containing principal and interest payments are insured based on the ownership interest of each investor or lender.
Mortgage securitization, or bundling multiple mortgages into securities that can be sold to investors, has made it difficult for anyone to determine the share that each individual investor has in a mortgage-backed security because the principal and interest from those payments are lumped together.
An account with a $500,000 deposit, for instance, may appear on face value to be eligible to receive only $250,000 worth of FDIC insurance if the bank were to fail. But if there are actually 20 or 30 different borrowers associated with the account, it may be fully insured by the FDIC.
"The concern is there would be a significant delay in determining who the investors are," said Joe DiNuzzo, an attorney for the FDIC. "So if a bank that should fail had a high balance, millions of dollars, for example, in a mortgage servicing account, we wouldn't be able to make, in certain cases, a deposit insurance determination quickly. We couldn't match the payments to each of the investors. This, we think, is a valid alternative."
Under the new rules, FDIC-insurance coverage of tax and insurance premium payments for borrowers would remain the same.
Following the approval of the new rules, Fannie Mae's Executive Vice President Tom Lund issued a statement praising the new rule.
"With the FDIC's announcement today, Fannie Mae will begin to allow institutions servicing our mortgage-backed securities to continue to hold the principal and interest payments from loans in our MBS in eligible depository institutions, thereby freeing additional liquidity for these institutions and the financial system," he said.
"Recently, Fannie Mae exercised its option to collect the principal and interest on its MBS from certain institutions on a daily basis and placed the payments in a trust account to safeguard the funds on behalf of the MBS holders. Given that the FDIC's new policy effectively safeguards these principal and interest payments, we believe collecting the payments daily and holding them in trust may no longer be necessary."
The interim rule will go into effect immediately, but the public would still be able to comment on the issue.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@ dowjones.com
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10-10-081555ET
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