FDIC Offer to Modify 25,000 Most Troubled IndyMac

After repeated calls to the mortgage industry for more aggressive loan modification policies to help struggling homeowners, FDIC chairman Sheila Bair said the agency will begin automatically modifying some of the most problematic loans at IndyMac Bank following the federal takeover of the company.


Six weeks ago, IndyMac Bank reopened under federal control to become the largest thrift and the second-largest federally insured financial company ever to be seized by regulators.

The already fragile company collapsed when Sen. Charles Schumer (D-NY) questioned the company’s viability in a letter to regulators which sparked the withdrawal by customers of $1.3 billion in 11 business days.

At the end of the first quarter, IndyMac indicated that loans representing about 8.3% of its mortgage servicing portfolio were delinquent, while loans 90 days past due or in foreclosure represented 6.5% of IndyMac’s total assets.

IndyMac said that roughly 43% of the residential mortgages in its portfolio were made to borrowers in California, which had the second-highest foreclosure rate in the nation in July, according to RealtyTrac.

With about $200 billion in mortgages owned or serviced by IndyMac, the Federal Deposit Insurance Corp. now has begun to send out the first of an estimated 25,000 letters to the most seriously delinquent borrowers of IndyMac loans in an attempt to curtail foreclosures and related losses to mortgage-backed securities (MBS) investors.

"Foreclosure is often a lengthy, costly and destructive process. Avoiding foreclosure not only strengthens local neighborhoods where foreclosures are already driving down property values, it makes good business sense," said FDIC chairman Sheila Bair.

"This is a 'win-win' program all around."

Bair has been a vocal advocate for more aggressive attempts to keep homeowners in their homes.

Last October, the FDIC chairman argued against a case-by-case restructuring of the millions of subprime adjustable-rate mortgages (ARMs) due for reset, in favor of simply converting the loans to a fixed-rate at the “teaser” introductory level for owner-occupied homes.

"Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it," said Bair at the time.

The mortgage industry largely scoffed at the suggestion, despite billions of dollars in loans which came to be considered non-performing in the following months – and ultimately leading to costly foreclosure proceedings.

The latest move by the FDIC is an explicit attempt to turn currently non-performing loans into performing loans, in an effort to maximize the value of IndyMac assets to potential buyers and lower costs to the agency which would otherwise go to IndyMac customers who had uninsured deposits.

"By turning troubled loans into performing ones, we enhance their overall value," said Bair.

In April, the FDIC chairman pressured members of the Hope Now coalition – a group of loan servicers, investors and community groups working to help struggling borrowers – to move away from repayment plans to actual loan modifications.

Bair contends that repayment plans only serve to make the problem worse, since borrowers couldn't afford their monthly payments in the first place.

She said she hopes this new policy at the FDIC will prompt other loan servicers to similar programs.

"It's my hope that it will provide further catalyst to provide more loan modifications for borrowers across the country," Bair said.

To place struggling borrowers into “affordable” loans, the FDIC indicated that no more than 38% of a borrower's income should go to the mortgage payment, including principal, interest, taxes and insurance.

The federal agency put out a number of possible solutions to achieving a sustainable debt-to-income ratio for homeowners.

The FDIC can simply reduce the interest owed on the loan or increase the number of years over which the loan may be paid back.

Another possibility reserved by the agency is principal forbearance, which essentially defers payment on part of the original principal until the homeowner refinances or sells the property.

Although most of IndyMac loans are Alt-A loans without proof of income, borrowers would have to verify their income to qualify for an FDIC modification.

Posted 8/21/2008 @ 3:12 PM | Mortgage