FDIC Restructuring Some IndyMac Loans

Federal regulators yesterday announced a plan to systematically modify the loans of at least 25,000 homeowners with mortgages held by failed lender IndyMac in an attempt to create an industry model for assisting troubled borrowers.

Throwing a lifeline to distressed homeowners, the Federal Deposit Insurance Corp. will offer delinquent IndyMac borrowers new mortgages with interest rates as low as 3 percent. It is partly a challenge of speed: The FDIC wants to complete the modifications by mid-October, three months after it took control of the troubled California bank. It aims to sell off IndyMac's assets by then.

"I have long supported a systematic and streamlined approach to loan modifications to put borrowers into long-term, sustainable mortgages -- achieving an improved return for bankers and investors compared to foreclosure," FDIC Chairman Sheila C. Bair said in a statement.

FDIC officials said they hoped the program would become a model for the industry and prompt other mortgage lenders to do more to work with troubled borrowers, but they did not indicate whether they would adopt this program in future bank failures. Freddie Mac has also launched a pilot program allowing for mass modifications of loans.

"I think a lot of the [mortgage lenders] will frankly welcome the initiative," Bair said in a conference call with reporters.

Not likely, said Bert Ely, a banking industry consultant based in Alexandria. A one-size-fits-all approach to loan modifications is unproven and contradicts industry experience that every borrower should have a program tailored to his or her circumstance, he said. "This is a gamble with the industry's money," Ely said.

Making the calculations tougher is that some troubled loans involve fraud, he said. "There are a lot of mortgages out there where foreclosure will be the best outcome," Ely said. "It will be interesting to see how this experiment will turn out."

The initial 25,000 loans that the FDIC will modify represent more than half of the 40,000 first mortgages owned by IndyMac. The agency suspended foreclosures on those loans after it took over the bank in July. The first 4,000 offers will go out this week. The FDIC will also attempt to tackle some of the 597,000 mortgages that IndyMac managed for other lenders.

The offer to IndyMac borrowers includes a loan capped at a 6.5 percent interest rate, the current market rate. The new loan payment, including insurance and taxes, would be lowered to 38 percent of the borrower's gross income.

If lowering the interest rate to 6.5 percent does not reduce a borrower's payment enough, the rate could be lowered to as little as 3 percent, and the length of the mortgage could be extended to up to 40 years. In those cases, after five years, the borrower's interest rate would rise over time to 6.5 percent.

The borrowers will not face the fees commonly charged by lenders to modify a loan, and unpaid late charges will be waived. If the property has been abandoned, the agency will move to foreclose.

The FDIC's plan falls short of promising the principal reductions that consumer advocates have called for. If the home is affordable only if the principal is reduced, FDIC will consider a temporary principal forbearance, agency officials said. The new mortgage payments may, for example, be based on 90 percent of the principal balance with the remaining 10 percent put in forbearance. When the home is sold or refinanced, the borrower would owe the remaining 10 percent principal.

IndyMac's failure is expected to cost the FDIC insurance fund $4 billion to $8 billion, and this process could help offset some of those losses, agency officials said. A delinquent loan sells for 32 percent of its value, while a performing loan sells for 87 percent, according to the FDIC.

"Our goal is to get the greatest recovery possible on loans in default or in danger of default, while helping troubled borrowers remain in their homes," Bair said in the statement. "I believe we achieve that with this framework."

The FDIC is focusing on delinquent homeowners first but will also include those facing interest rate increases. The borrowers must prove that the home is their primary residence and that they cannot afford it. IndyMac borrowers can call 800-781-7399 to find out whether they qualify for a loan modification.

The program focuses on modifying the homeowner's first lien -- the primary mortgage that does not include a home-equity line or another type of second loan. The challenge facing the FDIC is that second lien holders have been reluctant to agree to loan modifications because they are likely to lose much of their investment. The FDIC will attempt to modify the second liens when possible but sometimes may not be able to come to agreement, agency officials said.

"The second liens have been a long-standing problem," Bair said during the conference call.