New Model Is Forged In Bank's Wreckage

IndyMac has three main types of loans in its portfolio. Some are mortgages it owns. Others are loans it has managed for other lenders, such as Lehman Brothers. Still others are loans that had been bundled into pools, known as mortgage-backed securities, governed by agreements or rules that dictate what if any changes can be made to their terms.

The FDIC can easily rework the loans IndyMac owns.

Regulators achieved a breakthrough with the second type after persuading Lehman Brothers, the investment bank under bankruptcy proceedings, earlier this month to allow its 38,000 loans in IndyMac's portfolio to be included in the modification program. FDIC officials are now hoping to use Lehman's example to persuade others to sign on. The key, agency officials said, will be convincing lenders that a modified loan, even with a reduced interest rate, will be more profitable than a foreclosure.

The third category, securitized pools, can be even more complicated because, often, dozens of investors own portions of the pool. Revisions to the contracts that establish what kinds of changes can be made to mortgages must be approved by all the investors. Sometimes those contracts can forbid modification of more than a small portion of the loans in the pool.

Lenders that want to modify loans in mortgage pools have said they have been hamstrung because they fear that investors would sue them for damaging their investment.

The FDIC said IndyMac's portfolio allows modifications. So regulators have bypassed the time-consuming process of asking each investor for permission or changing the contracts.

But the contracts did have one restriction that challenged the FDIC and that it could not get around legally. They required that a homeowner be seriously delinquent before a loan could be modified. When the FDIC's Krimminger saw that, he said, he was "disturbed and bothered."

The agreements meant that hundreds of thousands of homeowners in IndyMac's portfolio facing interest rate increases on risky loans could not be covered by the program. "I wish I could say that we could do something to help people who are current but have a problem coming up, but it's difficult to do under our agreements," Krimminger said. "There is nothing worse than having somebody call and say, 'I'm current, but I think I'm going to have a problem here soon,' but unfortunately we can't do anything."

In addition, about 25 percent of the delinquent homeowners vetted by the FDIC's formula did not qualify. In many of those cases, even after the FDIC's adjustments to interest rate and principal, the homeowners could not afford the monthly payments.

Another problem is getting homeowners to respond to offers of help. The FDIC mailed 35,000 unsolicited modification invitations. About half of those included a detailed estimate of how much the program could save the homeowner. These offers, which are based on financial information about the borrowers, had a response rate above 70 percent.

But the FDIC is struggling to reach about 18,000 other homeowners for whom the agency does not have salary information. The FDIC sent those homeowners a letter asking that they call a customer-service line to discuss a modification. But only about 15 percent of those homeowners have responded.

Last week, the FDIC began hiring nonprofit groups to help it reach this population. The agency will pay the housing counseling agencies $150 if the homeowner gets in contact with IndyMac and $350 more if the modification is successful. And the FDIC is preparing another outreach program, including new solicitations that note that the average modification includes a savings of about $380 a month.