Wednesday, October 8, 2008

IndyMac's Fast-Track Mortgage Modification Program

IndyMacs Fast-Track Mortgage Modification Program

When Mark Akers got an offer from his mortgage lender in September to slash his monthly payments down to $2,500, from $4,200, he jumped at the chance. The Norco (Calif.) resident ran into trouble earlier this year after his wife got sick and he lost his job managing a factory that made doors for houses. The 53-year-old Akers could have become another foreclosure statistic if his bank, IndyMac, had not stepped forward to halve the interest rate on his fixed-rate loan to 3%, for a period of five years. In exchange, the bank will add Akers missed payments to the loan principal, hiking it to $611,000. Akers says he's grateful. "Our neighbor across the street just lost his home," he says. "I said to my wife: 'We've got a house we'll die in.'"

Akers is one of more than 3,000 borrowers who have signed on to a fast-track loan modification program launched by IndyMac, the insolvent California-based lender seized by the feds in July. Officials from the Federal Deposit Insurance Corp. have moved quickly to tackle the 60,000 delinquent mortgages in IndyMac's 742,000-loan portfolio. In late August letters went out to 7,500 distressed borrowers, offering new terms. IndyMac says those taking part have seen their monthly payments lowered by $430, on average.

Simplified Process

FDIC Chairman Sheila Bair is hoping the IndyMac initiative will provide a blueprint for the rest of the industry. Lenders have been under fire from politicians and consumer advocates for not doing enough to stave off foreclosures, which spiked 72% in the first half of the year. At Hope Now, an alliance of banks and mortgage servicers formed to speed up loan negotiation efforts, foreclosures are still running at twice the level of loan modifications.

If successful, programs such as IndyMac's not only could keep people like the Akers family in their homes but also help arrest the rot in the complex, mortgage-backed securities market that precipitated the worldwide financial meltdown. Indeed, the $700 billion financial rescue bill passed by Congress on Oct. 3 includes terms modeled in part on the FDIC's efforts at IndyMac. It encourages the Treasury to offer new loan-payment terms before foreclosing on mortgage assets it buys from banks. "Theirs is the first systematic effort to really simplify the loan modification process," says Austin King, director of the financial justice unit at Acorn, an advocacy group that represents low- and middle-income Americans. "That is the solution to the mortgage crisis."

Like it or not, more lenders may be compelled to negotiate new terms with delinquent customers. On Oct. 6, Bank of America (BAC) announced it would modify loans for nearly 400,000 troubled borrowers. This is part of a legal settlement reached with authorities in 11 states that had been looking into allegations of predatory lending practices at Countrywide Financial, the troubled mortgage lender Bank of America acquired earlier this year.

Bankers have long argued that there is no one-size-fits-all solution to the mortgage mess. Loan workouts, they say, must be done on a case-by-case basis. Yet the IndyMac program was designed around a straightforward formula: Borrowers' monthly home payments should amount to no more than 38% of their gross income. "The key is to make the new loans affordable," says John Bovenzi, the senior FDIC executive now serving as CEO at IndyMac.

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