FDIC Changes Deposit Insurance Rules For Mortgage Loan Securitizations

The Emergency Economic Stabilization Act of 2008 (the "Act") temporarily increased the standard maximum deposit insurance amount from $100,000 to $250,000, effective October 3, 2008, and ending December 31, 2009. After that date, barring further action by Congress and the President, the standard maximum deposit insurance amount will return to $100,000.

Under regulations in effect prior to the passage of the Act, principal and interest payments on mortgage loans that were deposited into a Federal Deposit Insurance Corporation ("FDIC")-insured institution were treated as owned by the investors (and therefore insured as to the investors) that owned the mortgage loans, and taxes and insurance funds were insured to the mortgagors or borrowers on the theory that the borrower still owns the funds until the tax and insurance bills are actually paid by the loan servicer. Because principal and interest payments on mortgage loans that are part of a securitization may involve multi-layered securitization structures, the FDIC became concerned that it may prove difficult for the servicer holding a deposit account in the institution to identify every security holder in the securitization and determine his or her share. The FDIC also acknowledged 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.

As a result, effective on October 10, 2008, the FDIC revised the deposit insurance rule to provide that principal and interest payments on mortgage loans will be determined for deposit insurance purposes on a per-mortgagor (or borrower) basis rather than a per-investor basis. This insurance coverage will not be aggregated with or otherwise affect the coverage provided to mortgagors in connection with other accounts the mortgagors might maintain at the same insured depository institution. This will likely result in all mortgage loan principal and interest payments deposited with an insured depository being fully insured. Amounts constituting payments of taxes and insurance premiums will continue to be insured on a pass-through basis as the funds of the mortgagor, and will be added to other individually owned funds held by each such mortgagor at the same insured institution and insured to the applicable limit.

Authored by:

Sherwin F. Root

(213) 617-5465

[email protected]

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