Saving IndyMac's mortgages
Sheila Bair has had a lot to say about how to stem foreclosures. Now that the FDIC chief controls $200 billion in home loans, it's time to put words into action.
NEW YORK (CNNMoney.com) -- When FDIC Chairwoman Sheila Bair swooped in on Friday and took over IndyMac Bank, she became steward to billions of dollars in customer savings deposits. She also inherited $200 billion worth of home mortgages - a sizable number of which are in trouble.
Bair, from her bully pulpit as one of the nation's top bank regulators, has long pressed lenders to help struggling homeowners by modifying their mortgages to more affordable terms.
Now she has to do it herself.
The Federal Deposit Insurance Corp. already has suspended foreclosures on $15 billion in loans owned by failed bank IndyMac. Officials will examine the delinquent loans in the portfolio to see whether they can modify the terms to let homeowners get back on track with payments.
The agency will also attempt to help borrowers with delinquent mortgages in the $185 billion portfolio of loans IndyMac administers - or services, in industry terminology - for other lenders. While making changes to these mortgage contracts is not as easy as modifying loans owned by the bank, the servicing agreements allow for some flexibility, FDIC officials said.
"We are committed to working with those borrowers to seek long-term and sustainable modifications," said Andrew Gray, an FDIC spokesman. "It's a benefit to both the borrower and lender to have these borrowers stay in their homes."
While consumer advocates applauded the move, industry observers say Bair faces many hurdles. It can take months to review all the delinquent loans and many people may be beyond saving.
"The perception in the market is, 'Good luck, Sheila. Let's see what you can do with the loans'," said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.
The FDIC declined to specify how it would accomplish this goal beyond saying it intended to shift borrowers into loans that were affordable over the long term. Bair was not available to be interviewed for this article.
Bair's speeches and testimony over the past 10 months provide an insight into her views. Since last fall, the chairwoman has advocated for a systematic approach to restructuring loans of troubled borrowers rather than a case-by-case review. This will allow lenders to more quickly help homeowners, while freeing up resources for more difficult situations.
For borrowers who are current on their payments but are facing mortgage rate resets, Bair supports using a debt-to-income ratio to determine a loan's affordability. Translation: If the reset results in payments greater than 50% of a borrower's income, then the rate should be frozen at the introductory level, she has said.
In addition to freezing rates, Bair told CNNMoney.com in March that she approves of reducing principal payments, not just deferring them. And she told the Senate Banking Committee last month that she generally supports shifting borrowers into affordable loans insured by the Federal Housing Administration, as laid out by the housing legislation working its way through Congress.
Under a bill that passed the Senate last week, struggling homeowners could be put into 30-year fixed rate mortgages if the lenders agree to write down their mortgage principal to 90% of their current appraised home value. Only those who live in their homes and have debt-to-income ratios of more than 31% would qualify under the Senate bill.
Bair, however, may find that it could take months to sift through the delinquent loans in IndyMac's portfolio. According to FDIC statistics, 6.77% of IndyMac's residential loans were not current as of March 31. Bank staffers were already reaching out to troubled homeowners before the institution was taken over.
"IndyMac has probably already done as much as they could with those loans," Cecala said.
One of the central problems: IndyMac specialized in Alt-A loans, which are even tougher to modify because borrowers often did not have to provide proof of their income or assets. Many of those homeowners were given loans with payments they simply could not sustain.
"These are loans that are very hard to restructure because you look at the original loan documents and there is nothing there," said Chris Mayer, real estate professor at Columbia Business School.
Some experts question whether modifications even work. A recent Moody's Investors Service study found that 42% of loans modified in the first half of 2007 were more than three months behind in payments as of March 31.
Another complicating factor is that the FDIC's ultimate goal is to shore up the bank and sell it within 90 days. That means it can't be too generous in modifying loan terms.
Consumer advocates, meanwhile, are hopeful that Bair will show the industry how to tackle this thorny problem.
"I'm confident the FDIC will be able to do a very good job," said Ken Wade, chief executive of NeighborWorks America, a national community revitalization group chartered by Congress whose board is made up of bank regulators. "I'm hopeful she'll be able to demonstrate a better way to accomplish modifications in a more substantial way that will end up keeping people in their homes and saving institutions money."
In any case, the FDIC-run IndyMac should be able to do more for struggling homeowners than it did before it was taken over, housing counselors say. The bank was one of the worst when it came to working with them to restructure loans. They will be watching what steps Bair takes.