FDIC Moves to Increase Deposit Insurance Coverage for Servicers

The FDIC said late Friday that it had adopted an interim final rule designed to simplify the deposit insurance rules for accounts held at FDIC-insured institutions by mortgage servicers. In essence, the change will prevent mortgage servicers from withdrawing their deposits at banks — a timely change, given the importance of maintaining deposit coverage. Under the previous rule, accounts maintained by a mortgage servicer comprised of principal and interest payments made by borrowers were insured based on the ownership interest of each lender (or investor) in those accounts. But the emergence of the securitization machine made those ownership interests more complex and time consuming to identify — for most servicers, identifying which investors owned what share of P&I deposited at a bank was nearly impossible. It also led some servicers to yank their funds from a bank if they felt it was in danger of failing, HW sources explained. “We never knew whose funds were insured and whose were note relative to P&I deposits, so we’d usually move the whole thing if we felt a bank was in danger,” said one servicing manager, who asked not to be named. Our sources suggested in part that such withdrawals helped bring Washington Mutual to its knees, although a source close to the failed thrift that asked not to be named in this story denied that such was the case. Under the new interim rule, the FDIC said coverage will be provided to the lenders/investors, as a collective group, based on the cumulative amount of the borrowers’ payments of principal and interest into the account. Because servicers are able to identify borrowers more quickly than investors, FDIC officials said they expect the per-borrower coverage provided for under the interim rule would enable the FDIC to make deposit insurance determinations on mortgage servicing accounts more quickly and to pay deposit insurance more quickly to affected servicing shops. The decision to simplify the rules comes on the heels of the failure of IndyMac Bank, which maintained a relationship with its own huge mortgage servicing platform, according to HW sources. FDIC officials have had a difficult time determining what funds were insured and what deposited funds were not. “This simplification of the coverage rules for mortgage servicing accounts will help prevent losses to otherwise insured depositors and prevent withdrawals of deposits for principal and interest payments from depository institutions,” said FDIC chairman Sheila Bair. “Thus, we believe the new rule will benefit both mortgage security-holders and insured institutions.” It also means that servicing accounts are largely fully insured, which is the ultimate net effect of the rule change. For more information, visit http://www.fdic.gov.