IndyMac Loan Modifications Perform Well

The Federal Deposit Insurance Corp.'s experiment in modifying loans at IndyMac Bank is still showing good results in terms of keeping borrowers in their homes with a low redefault rate of less than 16%. The Pasadena-based thrift failed in July 2008. As receiver, FDIC developed an innovative loan modification program to reduce the mortgage payments of delinquent borrowers down to 38% of their income. Starting in early 2009, monthly payments were reduced to 31% of mortgage DTI on new modifications. Overall, the weighted average payment reduction is 24% per loan. The bulk of the modifications were completed in the fourth quarter of 2008. As of May 31, the redefault rate on nearly 17,400 FDIC modifications was 15.6%. The redefault rate on most loan modifications completed in the fourth quarter was 27% as of March 31. Most servicers in the fourth quarter did not emphasize the importance of reducing the borrowers' monthly payments and only 37% of loan mods resulted in payment reductions of more than 10%. Unless the payments are reduced, "you are almost guaranteeing a redefault," a FDIC official said.