Applying workout procedures for troubled loans in a failed bank scenario is something the FDIC has been doing since the 1980s. Our experience has been that turning troubled loans into performing loans enhances overall value. In recent years, we have seen troubled loan portfolios yield about 32 percent of book value compared to our sales of performing loans, which have yielded over 87 percent.
In implementing the loss-mitigation program, IndyMac Federal’s first priority is maximizing the value of the mortgages by assisting borrowers who are seriously delinquent or in default on their mortgages. However, where its servicing agreements permit, IndyMac Federal also is working with borrowers who face upcoming resets or other changes in their ability to repay.
Only mortgages on the borrower’s primary residence are eligible for the streamlined approach, and borrowers have to demonstrate ability to repay the modified loan by documenting income. Under the loan modification program, IndyMac Federal determines whether the modified mortgage payments will be affordable to the individual borrower based on the borrower’s income information. The modifications are designed to be sustainable based on achieving a 38 percent first mortgage debt-to-income ratio of principal, interest, taxes and insurance.
A combination of interest rate reductions, extended amortization and forbearance are all tools being used to reach a payment affordable for the borrower. The modified mortgages are capped permanently at the current Freddie Mac survey rate for conforming mortgages — currently about 5.93 percent. To achieve a sustainable mortgage payment equal to a 38 percent DTI, IndyMac Federal can reduce the rate to as low as 3 percent for five years. After five years, the interest rate would gradually increase by 1 percentage point per year until it reached the Freddie Mac survey rate applicable when the mortgage was initially modified. The interest rate would be fixed at this rate for the balance of the mortgage term. If necessary to achieve a payment at a 38 percent DTI, IndyMac Federal also can extend the amortization term of the mortgage or defer payments on a portion of the principal of the loan. Application of these options always must be evaluated to ensure IndyMac is maximizing the value of the mortgage that can perform as compared to foreclosure. No fees are being charged for these loan modifications, and unpaid late charges are being waived.
If a borrower’s income information reveals that the borrower is not qualified for the proposed modification, IndyMac Federal will work with the borrower to discuss alternatives to allow the borrower to remain in the home, including options such as the HOPE for Homeowners Program.
By the end of August, more than 4,000 modification proposals had been mailed to IndyMac borrowers. Through today, IndyMac has mailed more than 7,400 modification proposals to borrowers and has called many thousands more in continuing efforts to help avoid unnecessary foreclosures. While it is still early in our implementation of the program, over 1,200 borrowers have accepted the offers and many more are being processed. I am pleased to report that these efforts have prevented many foreclosures that would have been costly to the FDIC and to investors. This has been done while providing long-term sustainable mortgage payments to borrowers who were seriously delinquent. On average, the modifications have cut each borrower’s monthly payment by more than $430.
Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country.
The FDIC strongly supports programs that result in mortgage loans that are sustainable over the long term and avoid unnecessary foreclosures that harm individual borrowers and the economy. Prudent workout arrangements are in the long-term best interest of both the financial institution and the borrower. As a member of the Oversight Board for the HOPE for Homeowners Program, the FDIC is committed to successful implementation by the October 1 deadline. In addition, the FDIC will continue the systematic program now in place at IndyMac Federal to convert troubled loans into performing loans and enhance the value of these assets.
I commend the Committee on its leadership in passing the HOPE for Homeowners Act and look forward to working with Congress on this and other programs to return our housing markets to stability and improve our economy.
From the FDIC