Wednesday, August 20, 2008

FDIC Releases Details on IndyMac Loan Mods; Questions Remain

(Housing Wire) We’ve reported earlier that Federal Deposit Insurance Corp. chairman Sheila Bair was planning to use IndyMac Federal Bank — that’s the FDIC-led replacement for failed IndyMac Bank, which was closed on July 11th by the Office of Thrift Supervision — as a test case for her push towards greater loan modifications. On Wednesday, Bair formally outlined details of the program; it’s an effort to at least in part improve the selling profile of the bank to a prospective future buyer.

But it left industry participants we spoke with asking plenty of questions, mostly centered on second liens and secondary market investors.

The bottom line: borrowers with IndyMac-owned loans — those whole loans held in portfolio and controlled completely by the bank — could be involved in some extensive loan modification work, second liens notwithstanding. For those borrowers whose loans were sold off and securitized, the picture is far less clear.

The FDIC said it would focus on actively modifying loans for delinquent and severely delinquent borrowers, employing so-called “affordability modifications” en masse; in other words, the FDIC will look to write down loans to roughly whatever levels the borrower can afford, a strategy that has long been advocated by consumer groups but panned by industry representatives.

In the program details, the FDIC said it would look to put borrowers with various Alt-A loan products into “affordable” mortgages that would reduce their payment load down to a 38 percent debt-to-income ratio, including principal, interest, taxes and insurance — even if that means writing off principal, or reducing rates well below current market rates to get there.

Borrowers looking to qualify for the program would need to document their income and provide proof of primary residence, the FDIC said.

“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,” said Bair in a press statement. “The program we are announcing today will provide affordable mortgages for eligible borrowers primarily in the so-called ‘Alt-A’ market.”

The FDIC said it will send an estimated 4,000 modification proposal to borrowers this week, with many more coming in the weeks ahead. IndyMac holds a $200.7 billion servicing portfolio, and roughly $21 billion of that total is in the form of whole loans owned by the bank; the rest is servicing on loans that have been sold or securitized.

HW’s sources suggested to us that pushing through the kind of loan modifications Bair touted in her press statement may likely prove to be much more difficult than most think, regardless of who owns the loan.

“I doubt the investors at the lower end of the RMBS deal chain will simply agree to be wiped out because the FDIC says so,” said one source, a mortgage consultant. “Something tells me investor groups are preparing their legal docs already, if so.”

Same thing for second lien holders, said a senior bank executive, commenting under condition of anonymity.

“We’re talking Alt-A here, which means we’re also talking second liens,” said the source. The FDIC statement on loan modifications at IndyMac didn’t address second lien positions, which would likely be wiped out in the event of a borrower refinancing.

Taken together, all that’s really known at this point that the FDIC’s move will impact some borrowers and not others; but which, and under what circumstances, remains as unclear today as it was when Bair first announced a halt to foreclosures on IndyMac-owned loans in the wake of the FDIC’s assumption of the bank’s deposits.

Related docs: FAQ on IndyMac/FDIC loan modification program, Bair’s remarks on the program

(Calculated Risk) From the FDIC: Loan Modification Program for Distressed Indymac Mortgage Loans. A couple of excerpts:

What loans are eligible?
The streamlined loan modifications will be available for most borrowers who have a first mortgage owned or securitized and serviced by IndyMac Federal where the borrower is seriously delinquent or in default. IndyMac Federal also will seek to work with others who are unable to pay their mortgages due to payment resets or changes in the borrowers’ repayment capacities. This streamlined approach applies only to mortgages for the borrower’s primary residence. As with all modifications, borrowers will have to demonstrate their financial hardship by documenting their income.
What modification options will be available to borrowers?
Under the IndyMac Federal program, eligible mortgages would be modified into sustainable mortgages permanently capped at the current Freddie Mac survey rate for conforming mortgages (now about 6.5%). Modifications would be designed to achieve sustainable payments at a 38 percent debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance.
This seems to provide an incentive for IndyMac borrowers to stop making their mortgage payments until they are "seriously delinquent or in default". Then the borrower - especially Alt-A borrowers who stated their income originally - would apply for a loan modification based on their actual income. The borrower could then receive an interest rate reduction and principal forbearance.

Note: I didn't see any restriction on borrowers that overstated their income originally.

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