The FDIC’s Loan-Mod Plan

DON’T GET YOUR HOPES UP: The FDIC’s chairman, Sheila Bair, has said all year that mortgage servicers need to do more to help homeowners who have fallen behind on their monthly payments. Now that the FDIC controls IndyMac, an institution that used to be one of the country’s biggest mortgage lenders, she has her chance to show other mortgage servicers how it’s done. 

IndyMac specialized in Alt-A mortgages, which were designed for people who wanted to lie about their incomes so they could qualify for home loans. When the FDIC shut down IndyMac Bank in late July and reopened it as IndyMac Federal Bank, the bank serviced tens of thousands of mortgages. Over the next few months, the FDIC-controlled IndyMac will mail packets to about 25,000 borrowers who are late on their IndyMac-serviced mortgages. 

Before I describe what will be in these packets, let me stress that we’re talking only about homeowners who have mortgages serviced by IndyMac. Hundreds of thousands of people got mortgages from IndyMac, and then their loans were sold, and are being serviced by other companies.

Those borrowers aren’t going to receive these packets from the FDIC. If you’re supposed to send your monthly house payment to IndyMac, the FDIC offer applies to you. If you’re supposed to send your check elsewhere, the FDIC offer doesn’t apply to you.

I await the deluge of e-mails from people asking, “But what if I got my loan from IndyMac but they sold it?” Grrrr!

People who are late on their IndyMac-serviced loans will get a packet in the mail. The packet will contain a loan modification contract. Here’s what the FDIC says <http://www.fdic.gov/consumers/loans/modification/indymac.html#Available> about these contracts:

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.
 
Note that the FDIC plans to draw up this modification agreement based on a debt-to-income ratio. That’s all well and good, but most of these borrowers exaggerated their incomes. It would be safe to say that they’ve fallen behind on their payments because they lied about their incomes.

Note also that the FDIC isn’t asking for documentation of income before coming up with a loan-modification plan. The FDIC is drawing up loan-mod offers based upon the incomes stated in the loan applications. It is mailing these flawed offers to borrowers — and asking borrowers to document their incomes when they return their signed loan-mod docs.

I hope I’m not being too repetitive when I note that most of these late payers lied about their incomes. The FDIC will discover this when it gets the paperwork back from borrowers and sees the income documentation. In cases where borrowers greatly exaggerated their incomes when they applied for loans, the loan modifications won’t work.

Not initially. The FDIC will have to send back modified modifications in some cases. In many cases, it will be clear that the borrowers can’t afford their homes no matter what, and no modifications will be forthcoming.

In the normal order of things, the mortgage servicer asks to see income verification first, and then it comes up with an offer for a loan modification, based on the borrower’s income. The process sometimes takes weeks or months, and people get frustrated as they wait by the phone and the mailbox. The FDIC’s method — make a modification offer first, then verify income — will appear faster. In the end, doing the process this way might bog things down.

No one says it as well as uberblogger Tanta at Calculated Risk, who writes <http://calculatedrisk.blogspot.com/2008/08/fdic-mod-plan-welcome-to-real-world.html> :

Does this mean that the FDIC risks wasting a bunch of time and energy drawing up modification agreements that it will be unable to accept because when it finally sees those income docs, it realizes that the borrowers still don’t qualify? Well, yeah. But the borrowers won’t be made to wait weeks and weeks for a mod offer, unlike with those lousy private mortgage servicers. The actual ratio of successfully executed modifications might be more or less the same, but nobody had to spend three weeks listening to hold music.

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