When U.S. Bank last month assumed the assets of failed Downey Savings and Loan in Newport Beach, it agreed to implement a loan modification program similar to one invented by the FDIC to deal with delinquent borrowers of failed IndyMac Bank. Citigroup made a similar promise when it got federal backing.
So how effective is the Federal Deposit Insurance Corp.’s IndyMac loan-mod model? (I know I am not the first writer to pose the question, but the FDIC’s consistent promotion of its program invites further scrutiny.)
There are two key aspects of the model:
- Modify loans so no more then 38% of gross income goes to principal, interest, taxes and insurance.
- Streamline modifications by identifying delinquent borrowers who would qualify and sending them a prepackaged offer.
The performance so far has been mixed. The FDIC has helped thousands of borrowers keep their homes, but only modified a small percent of all Indymac’s delinquent loans.
When the FDIC began the program in late August, the newly named IndyMac Federal Bank had about 60,000 mortgages at least 60 days past due.
As of last week, 6,758 borrowers have accepted a modification offer, started making payments and had their incomes verified, said IndyMac spokesman Evan Wagner.
So a little more than three months after starting the program 11% of all delinquent Indymac loans (at least what it started with in August) have been modified.
Is this a better record than private companies that handle modifications on a case-by-case basis, instead of some streamlined program?
The answer is probably not from the view of the number of people getting help. The quality of the help is another question.
The total of 6,758 loan mods by the FDIC/Indymac equates to a rough monthly rate of 3.3% of all 60-day lates getting a loan modification. (The math: IndyMac is modifing about 2,000 loans a month, and 2,000/60,000 delinquent loans = 3.3%. In both September and October IndyMac had at least 60,000 delinquent loans. Spokesman Wagner did not have the November total.)
Industrywide data on loan mods is hard to come by, but Credit Suisse, looking at subprime loans, said the industry as a whole was modifying about 3% to 3.5% of all 60-day lates each month during summer. That’s up from less than 1% monthly for most of 2007. These numbers suggest the industry as a whole, taking modifications on a case-by-case, are helping as many borrowers as the FDIC.
Of course, subprime loans were the first to go bad on a massive scale, so it’s possible that servicers have focused first on subprime and are lagging in modifications to other borrowers. But clearly private companies are doing more mods.
Still, FDIC/Indymac borrowers may be getting a better deal, and thus less likely to default a second time.
IndyMac’s Wagner said his company’s program is the first of its kind to focus on affordability. Before the FDIC took over IndyMac, the company focused on repayment plans, getting people to make up missed payments rather than modifying the loan to make it more affordable, he said. (This sentence edited 11:26 a.m. to change reference to ‘loan modification’ to ‘repayment plan.’ Modifications generally refer to changes of loan terms, such as lowering interest or principal. Repayment plans are simply adding missed payments to future months.)
Industrywide, loan mods are working about half the time. Government officials recently said more than 50% of most loans modified in the first half of this year have redefaulted within five to six months. And 58% of loans modified in the first quarter were delinquent within eight months. That was for loans one-month past due.
Credit Suisse said about 15% of subprime loans modified in the first quarter were 60-days late within five months, and 33% of loans modified in the third quarter of 2007 were 60-days late after 10 months. I have not seen any data on how many modified loans historically end up in foreclosure.
It remains to be seen how many FDIC/Indymac borrowers will default again.
And in other mortgage news…