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New Model Is Forged In Bank's Wreckage
A bank employee, center, talks with customers waiting at IndyMac branch as it reopens after the FDIC takeover.
(By David Mcnew -- Getty Images)
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Even after homeowners receive loan modifications, there is still a considerable risk they will default. In the past, about 40 percent of homeowners were delinquent again within a year of receiving a traditional loan modification, according to a recent Credit Suisse report. And some industry officials warn that the proportion could jump if the economic downturn deepens, throwing more people out of work.
Lenders say that the FDIC effort has pointed out some possible solutions but also has highlighted problems. "The FDIC has good intentions, and they are probably demonstrating things that can be done better," said Bob Davis, an executive vice president with the American Bankers Association. "But they are also demonstrating there is no silver bullet."
The industry has pointed to its Hope Now effort, an alliance of lenders established by the Treasury Department last year. The group says it has helped about 2.5 million homeowners, but nonprofit advocacy groups say the assistance won't necessarily keep participants out of foreclosure over the long term.
Indeed, the FDIC effort also does not go as far as some housing advocacy groups would like. The program defers but does not forgive principal for homeowners who owe more than their house is worth. Regulators have in many cases made the modifications temporary rather than permanent. For instance, a loan reduced to a 3 percent interest rate will begin to creep back up after five years to the survey rate set by Freddie Mac -- currently about 6 percent.
In some cases, the FDIC effort is less aggressive than Bair advocated earlier. For example, a year ago, she said lenders should freeze the interest rate for certain subprime loans with adjustable rates. But faced with such a wide variety of loans at IndyMac, regulators determined that doing so would be impractical.
The American Securitization Forum, which represents many lenders and investors, is studying the IndyMac experiment. "As the housing market continues to experience severe stress, we are discussing with our members the approach taken by the FDIC and others as we consider additional industry initiatives to enhance the loss-mitigation process," Tom Deutsch, the group's deputy executive director, said in a statement.
