IndyMac May Serve as Template for Modifications
The FDIC has started a program to systematically modify thousands of troubled alt-A home loans from IndyMac, and the effort may help set parameters for large-scale, streamlined modifications across the industry.
The FDIC is also hoping to avoid a fire sale of troubled assets at a time when the market for distressed mortgages is weak. In a conference call with reporters, FDIC chairman Sheila Bair said that historically, nonperforming loans have sold at 32% of face value, on average, while performing loans have yielded 87% in the market.
The FDIC and IndyMac Federal Bank, which was seized by regulators on July 11, have decided that the crux of the loan modification effort should be to bring payments down to 38% of income for seriously delinquent and defaulted borrowers. Payments would be fixed for five years on the plan at the prevailing Freddie Mac survey rate or below, and then would adjust upward to that prevailing rate gradually after five years.
Ms. Bair made it clear that she thinks the FDIC/IndyMac modification model may serve as a template for the industry at a time when loan servicers are struggling to streamline a growing default management workload and facing pressure to avoid foreclosure whenever possible.
"It is my hope that this program will serve as a catalyst to create more modifications across the country," she said. "I think a lot of servicers will frankly welcome the program."
In part, that's because a streamlined modification effort with the imprimatur of the FDIC on it should help pave the way for the securities investors who ultimately own the home loans to embrace these efforts.
IndyMac is sending out 5,000 modification proposals to seriously delinquent or defaulted borrowers this week, and the company plans to send out another 25,000 within a few weeks, according to FDIC officials.
Ms. Bair said the modifications, designed to make monthly payments affordable to the borrowers, will feature a combination of interest rate reductions, extended amortization and "principal forbearance" where necessary, though she made it clear that reducing the amount of principal debt is viewed as something of a last resort.
She said that many of the alt-A loans were sold to Fannie Mae or Freddie Mac, and FDIC/IndyMac officials are negotiating with the government-sponsored enterprises regarding the details of how principal forbearance would work. Most of the loans pooled into private-label securities are covered by pooling and servicing agreements that have fairly flexible parameters for modifications, and FDIC officials said they believe that the IndyMac modification program will not run afoul of those PSAs for private-label MBS.
IndyMac's $185 billion servicing portfolio, consisting mostly of alt-A credit quality loans, includes $15 billion of loans that are owned by IndyMac. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/