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Thursday, August 21, 2008

FDIC Mod Plan: Welcome to the Real World

by Tanta on 8/21/2008 10:48:00 AM

I'm going to go out on a limb here and suggest that the FDIC's plan for modifying IndyMac loans is, overall, a great thing. I am glad it is happening and I truly look forward to snickering over the results.

Housing Wire has a post up this morning encapsulating the main angry responses to the FDIC's plan. Plus one response voting for the "No Big Deal" option, which I think is really the wisest one (I'm sure it comes from an industry insider):

If the FDIC follows its stated plan, which is to maximize loan value or recovery value, a good chunk of these mods won’t go through anyway, despite the press given to it. The FDIC will find out what every other servicer already knows: for one thing, the majority of borrowers will simply ignore the offer. For another, those that do step up will give credible proof that they cannot afford their homes unless the FDIC were to undercut home value by 40 or 50 percent from current levels. And the FDIC didn’t say it was going to modify blindly here, so this is not a big deal.
The fact is that Sheila Bair has spent a lot of time and energy in the last year or so castigating mortgage servicers for not doing enough to modify loans and prevent foreclosures. So now, being the proud owner of the former IndyMac Bank, Bair has a great opportunity to show the rest of us how it's done.

And so what innovative plan did the FDIC think up that has so far eluded every other mortgage servicer out there?
The goal of this streamlined loan modification program is to achieve improved value for IndyMac Federal by turning troubled loans into performing loans and, thereby, avoiding unnecessary and costly foreclosures. Accomplishing this goal will reduce the costs to the FDIC of the failure of IndyMac Bank and provide improved returns to investors in securitized mortgages.

Some mortgages serviced by IndyMac Federal are subject to additional contractual terms governing loan modifications. While additional steps are necessary to comply with those contracts, IndyMac Federal will work to expedite approvals for modifications to help eligible homeowners keep their homes.

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. Modification offers will be provided consistent with agreements governing servicing for loans serviced by IndyMac Federal for others. The modification program does not guarantee a modification offer for IndyMac Federal borrowers.
Translation: the FDIC has discovered no magic way to get around securitization rules or the basic calculus of maximizing recoveries to the investor (that is, doing a mod only when it is "less loss" to the investor compared to foreclosure). They will, however, "work to expedite" this process. Because of course no one else has tried that yet.

Oh, but the FDIC's program is "streamlined," you see. What does that mean?
Once a borrower has provided financial information to an IndyMac Federal customer service representative, IndyMac Federal will evaluate whether a loan modification may be available and, if so, provide a proposed offer to the borrower by mail.

Once a borrower has received a proposed modification offer, all it takes for them to bring their mortgage current and qualify for a final modified mortgage is to

1. sign and return the enclosed Modification Agreement along with a check for their modified monthly mortgage payment and

2. provide verification of their income to confirm that they qualify for the proposed modification.

The borrower must then continue to make timely payments at the modified monthly payment amount and comply with all other terms of their mortgage agreements. If the borrower’s verified income information demonstrates that they do not qualify for the proposed modification, IndyMac Federal will contact them to discuss alternatives that may help them keep their home.
This is a whole lot faster than the way servicers have been doing mods, you see, because the FDIC goes ahead and draws up the modification agreement based on "stated" income information given by the borrower. Then the mod is mailed out, and all the borrower has to do is sign it, write a check, and, um, finally provide the documentation of the income used to qualify for the mod. If it turns out there are some, um, issues with that, then the FDIC will, um, do something else. 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 mods might be more or less the same, but nobody had to spend three weeks listening to hold music.

Do I know where the FDIC is going to get the staff to do all this lickety-split? No. But you see, the FDIC wants to do mods, unlike those lousy private mortgage servicers who just don't care and are evil. As an empirical test of the belief that attitude trumps experience and headcount, this is a public service.

So I think everyone should just quit griping and let the FDIC rip on this one. Since they've promised to use the "maximize value" test here, if they actually manage to get more successful mods done than anyone else has, they will have minimized losses to the FDIC and private investors and we can all congratulate them for that. If, as I fully expect, they don't do any better at making a silk purse out of a sow's ear than anyone else can, maybe Sheila Bair will quit pontificating about a subject that remains a lot harder than she thinks it is. That, too, we could all get behind.