The Federal Deposit Insurance Corp. unveiled plans Wednesday to modify tens of thousands of loans at IndyMac Federal Bank in hopes of boosting the failed thrift's sale value and spurring more modifications across the industry.
The agency, long an advocate of large-scale modifications to avoid foreclosures, said it is offering modified loans for 4,000 borrowers this week, part of an initial phase to target 25,000 troubled IndyMac borrowers for possible loan changes.
"It is my hope that this program will serve as a further catalyst to promote more loan modifications for troubled borrowers throughout the country," FDIC Chairman Sheila Bair said in a conference call with reporters.
The FDIC, which took the thrift's reins after the July 11 failure of $32 billion-asset IndyMac Bancorp, is proposing to lower interest rates for borrowers who live in their home and are "seriously delinquent or in default" on their first mortgage.
Under the program, modified loans will be capped at the Freddie Mac prime survey rate of 6.5%, and must achieve a debt-to-income ratio, including taxes and insurance, of 38%. In addition to interest rate reductions, modified loans may also receive principal forbearance and an extension of payment terms.
"This is a well-balanced program that will maximize the value of these loans, ultimately returning more money to uninsured depositors and creditors along with investors in the servicing portfolio," Ms. Bair said. "At the same time, we hope to keep tens of thousands of troubled borrowers in their homes, and avoid the negative consequences that foreclosures can have in the broader economy."
While the exact number of loans to be modified is unclear, the program has set some goals. This week, proposals will be sent to about 4,000 borrowers for new, beneficial payment plans. Borrowers can then make the modified payments, and provide income verification to prove their qualification and finalize the new loan terms.
Mailings to as many as 25,000 borrowers will follow, with a wider net cast at a later stage. In an e-mail to IndyMac employees last week, John Bovenzi, a top FDIC official now serving as the thrift's chief executive, said IndyMac would target 60,000 borrowers, who had fallen 60 days or past due on their loans, for possible loan modifications.
After the failure, Ms. Bair had announced a halt to foreclosures for IndyMac's $15 billion in owned mortgages. But the program aims to also modify the thrift's securitized loans, which are the bulk of its $184 billion servicing portfolio. (The portfolio contains 740,000 mortgages).
"We are full speed ahead with the loans that we own, and we are working and having a very constructive dialogue with our investors and Fannie Mae and Freddie Mac to garner their support for our approach, ... and we think we've come up with a good program, and one that we hope can serve as a model for other servicers," Ms. Bair said.
Yet the success of the modification program could also be crucial in lowering the ultimate price of IndyMac's resolution. Its failure was the second biggest of all time, and the largest of a thrift.
The cleanup – estimated to cost between $4 billion and $8 billion – is complicated by the thrift's abundance of alternative-A mortgages, including payment-option adjustable-rate mortgages that currently have a low market value.
The agency's hope is that enough troubled loans can be rehabilitated to produce steady income from current borrowers so that they become more attractive to potential buyers.
FDIC officials stressed that loan modification plans to increase the value of an FDIC receivership were not unprecedented. The agency has commonly attempted to restructure loans after taking over a portfolio.
"Part of the procedures that we often implement are to put a hold on foreclosures so we can take a look at the assets we have and try to determine the best way of handling those situations," Mr. Bovenzi said in the conference call. "Often a loan modification makes sense."
But while the FDIC's plans for modifications appeared broad, officials cautioned that receiving a modification at the failed thrift is not a sure bet for borrowers.
"IndyMac Federal will only make modification offers to borrowers where doing so will achieve an improved value for IndyMac Federal or for investors in securitized or whole loans," the agency said in a press release. "The modification program does not guarantee a modification offer for IndyMac Federal borrowers."
Still, the FDIC's stab at broad-scale modifications corresponds with the agency's strong position since last year that lenders and servicers generally need a systematic approach to restructuring loans and mitigating foreclosures.
At the time, Ms. Bair urged companies to convert large swaths of subprime hybrid variable-rate loans facing prohibitive resets into fixed-rate products that would be more affordable and retain some market value. Yet critics countered that servicers needed a more case-by-case approach.
Ms. Bair said IndyMac's modifications could help servicers at other institutions feel more emboldened to restructure loans.
"A lot of the servicers will frankly welcome the initiative. … Perhaps some have been more aggressive than others in modifying loans, but I think there is a lot of uncertainty about investor reactions to loan modifications," she said.
Many observers said the FDIC's attempt to restructure IndyMac's portfolio could prove a laboratory for broader loan modifications by servicers. But others counter that the FDIC has clearer advantages over private-sector companies – including zero accountability to shareholders – and worry that the consequences of the FDIC getting it wrong are higher deposit insurance premiums for banks.
"Will people be watching? Yes. Will people follow in their footsteps? The jury is out, because the private-sector parties have different constituencies to answer to," said Lawrence Kaplan, an attorney at Paul, Hastings, Janofsky & Walker, LLP.
"The FDIC is practicing what it's been preaching now that it's sitting in the same shoes" as the industry. "But they do have the benefit of: 'We can just assess more if we make a mistake.' That's where there's going to be tension."
