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IndyMac Pursues Wide-Scale Alt-A Modifications

FDIC plan to initially target delinquent loans

August 20, 2008

By MortgageDaily.com staff

The chairman of the Federal Deposit Insurance Corporation, who has been calling on servicers to make more loan modifications, is putting U.S. and investor money where her mouth is.

FDIC took over troubled IndyMac Bank FSB on July 11, reopening it as IndyMac Federal Bank FSB.

Last week, IndyMac's acting Chief Executive Officer John Bovenzi issued an e-mail to employees indicating that of the 740,000 loans it services, 60,000 were at least 60 days past due.

FDIC Chairman Sheila C. Bair today announced today that the Pasadena, Calif.-based thrift will implement a new program to systematically modify troubled mortgages. She said that by rehabilitating the loans, current IndyMac stakeholders will see the highest return.

In October 2007, Bair began calling for servicers to restructure owner-occupied loans with teaser rates and expressed frustration over the slow pace of restructurings.

"We're strongly encouraging banks, loan servicers, and others to try to find refinancing or restructuring opportunities for people who are trapped in these adjustable-rate mortgages as they reset to higher interest rates," she said at an investor conference.

Bair said the program announced today will initially be targeted at borrowers who have defaulted or are seriously delinquent. It will subsequently seek to work with borrowers who cannot afford payments due to payment resets or changes in the borrowers' repayment capacities.

The program will primarily benefit Alt-A borrowers with payment resets due to negative amortization and other resets by modifying their loans to a 38 percent maximum debt-to-income ratio using Freddie Mac's survey rate for conforming mortgages as well as an extended amortization and principal forbearance. If needed, the rate could be reduced below Freddie's survey rate for up to five years, increasing by up to 1 percent each year until reaching the survey rate.

"I have long supported a systematic and streamlined approach to loan modifications to put borrowers into long-term, sustainable mortgages -- achieving an improved return for bankers and investors compared to foreclosure," she said in the statement. "By providing long-term sustainable payments, this program will reduce future defaults, improve the value of the mortgages, and cut servicing costs."

The week, 4,000 modification proposals will be sent to borrowers, while thousands more will be sent out in coming weeks. Borrowers will be expected to immediately begin making the modified payment amount and provide the thrift with income verification information. Once income is verified and the borrower has been qualified for the proposed modification, it will become permanent.

"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 statement said.

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