Tuesday, November 18, 2008

Questions Arise Over IndyMac Loan Mods

(Housing Wire) Perhaps the single largest question for anyone watching the unfolding saga over loan modifications, and the political posturing on Capitol Hill and by regulators over the need to “do more” to help troubled homeowners, has been this: what about IndyMac Federal Bank?

The bank, seized by regulators and placed into the hands of the Federal Deposit Insurance Corp. in August after an Alt-A lending binge left it too vulnerable to a collapse of much of the U.S. mortgage market, has become the veritable poster child for government-led intervention into troubled mortgages. On August 20, FDIC officials rolled out an ambitious plan for mortgage modifications, one they said at the time would set the example for how aggressive loan modifications should work. Implicit in the program was an indictment of existing servicers, who ostensibly weren’t doing enough to help their borrowers.

Under its program, the FDIC said it would streamline the modification process for troubled homeowners by offering a modified payment option upfront to 40,000 qualified IndyMac borrowers. To accept, all borrowers needed to do was mail in a check for the new payment amount, along with documentation of their income.

The goal here was 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 meant writing off principal, or reducing rates well below current market rates to get there.

On Tuesday, the FDIC’s Sheila Bair used the IndyMac program to lobby for another ambitious borrower assistance program proposed by the FDIC — one that would see the federal government insure redefault risk on modified mortgages underwritten to the sort of “sustainable, affordable” criteria that IndyMac has been using.

The FDIC chief cited the fact that more than 5,000 of the 40,000 or so eligible troubled borrowers have received loan modifications under the plan to date; a number that HousingWire noted was rather dubious, not only because it represented less than 2,500 modifications per month, but also because the FDIC wasn’t disclosing what sort of modification numbers IndyMac had on the books prior to the government stepping in to clean up shop.

We still don’t have any benchmark data on the IndyMac loan modifications, whether prior to the FDIC’s involvement or on the 5,000 or so loans it has already modified under the program. And I’d suspect nobody is going to make that information public anytime soon. But we do know this much: the track record of loan modifications in general isn’t all that great. The latest evidence comes courtesy of analysts at Keefe, Bruyette & Woods, who dug through data provided by Lender Processing Services, Inc. (LPS: 21.49 +3.07%). LPS processes the 650,000 loans that the FDIC now manages via IndyMac, along with having data on pretty much the majority of the rest of the mortgage market, as well.

The results show that, in general, 25 percent of recent loan modifications went delinquent after just one post-modification payment — and more than half had become delinquent after multiple payments, according to a MarketWatch report. (Editor’s note: The news service had earlier suggested these statistics applied to IndyMac Federal loan modifications, as well, but later recanted on that point.)

Nonetheless, a 50 percent recidivism rate on loan modifications suggests that loan modifications — IndyMac led or not — aren’t usually the sort of world-saving panacea that many regulators and lawmakers expect.

As for the performance results, file them under “patently obvious” to any mortgage market participant that has ever been around loan servicing before. More than a few people versed in the field — myself included — rolled our eyes at the insinuation that the FDIC could do better than other loan servicers at modifying troubled mortgages. While we still don’t know for sure, this type of data is exactly the reason why. It’s not that anyone wishes the FDIC fails in its attempt; Ms. Bair’s heart is in the right place, after all. It’s just that we know better.

It’s also evidence that the issue here goes well beyond simply dropping payments an average of $320, and achieving some nominal level of “affordability.” It has to do with debt management, financial skill, and the fact that there are good many borrowers that simply cannot afford to remain in their homes or lack the discipline needed to do so. As I’ve suggested repeatedly throughout this mess, our tax dollars — spending our money is a foregone conclusion at this point, after all — would be far better allocated by helping borrowers transition out of homes and into rentals, and increasing the available supply of rental housing in key markets.

Perhaps eventually, policymakers, consumer groups and regulators alike will be forced to listen. The only question is how much of taxpayers’ dollars they’ll have wasted before they get there.

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