Loan Modification in The United States - IndyMAC Plan

IndyMAC Plan

With the George W. Bush administration refusing to enact FDIC Chairwoman Sheila Bair's controversial loan modification plan, lawmakers are taking matters into their own hands.

• Offer proactive workout solutions designed to address borrowers who have the willingness but limited capacity to pay.

1. Return the loan to a current status.
2. Capitalize delinquent interest and escrow.
3. Modify the loan terms based on waterfalls, starting at a front-end 38 percent HTI ratio down to a 31 percent HTI ratio subject to a formal net present value (NPV) floor.
4. Reduce interest rate to as low as 3 percent.
5. Extend, if necessary, the amortization and/or term of the loan to 40 years.
6. Forbear principal if necessary.

• Provide borrowers the opportunity to stay in their home while making an affordable payment for the life of the loan.

1. Require the borrower to make one payment at the time of the modification.
2. Cap the interest rate at the Freddie Mac Weekly Survey rate effective as required to meet the target HTI ratio, fixing the adjusted rate and monthly payment amount for 5 years.
3. Step up the initial interest rate gradually starting in year 6 by increasing it one percentage point each year until reaching the Freddie Mac Weekly Survey rate cap.

• Use a financial model with supportable assumptions to ensure investor interests are protected.

1. Input borrower specific income information into the NPV Tool, which provides a real-time workout solution.
2. Perform automated loan level underwriting across large segments of the portfolio to support pre-approved bulk mailings.
3. Verify income information the borrower provided via check stubs, tax returns, and/or bank statements.
4. Compare the cost of foreclosure to mitigate losses.
5. Mandate that the cost of the modification must be less than the estimated foreclosure loss.

• Borrower eligibility

1. The loan is at least 60 days delinquent where the loan is considered one day delinquent on the day following the next payment due date. Many servicing contracts often contain a standard clause allowing the servicer to modify seriously delinquent or defaulted mortgages, or mortgages where default is “reasonably foreseeable”.
2. Foreclosure sale is not imminent and the borrower is currently not in bankruptcy, or has not been discharged from Chapter 7 bankruptcy since the loan was originated.
3. The loan was not originated as a second home or an investment property.

"We (IndyMac Bank) commend FDIC Chairman Sheila Bair for her leadership in developing a systematic loan modification protocol. FHFA, the GSEs and HOPE NOW relied heavily on the IndyMac model in developing this new protocol". As history unfolds on the U.S. Housing and Finance crisis that caused the persistent recession, the (IndyMac Bank) bankruptcy and ensuing scandal are important to understand. A dynamic interplay between social good, capital ownership and the rule of law is ongoing in the U.S. experiment with the democratic process. Much of the business models of IndyMac and also the government backed FrannieMae and FreddieMac quasi-banks were based on concentrated debt. This model became very high risk as it was based on the faulty assumption that housing values would increase. In fact, the prevalence of their mortgages greatly fed the housing bubble with significant crossfunding and possible corruption to the government regulatory function through dramatic campaign funding contributions from these organizations. In the less regulated business climate of the late 1800s, speculative bubbles were corrected by painful financial panics. True understanding is yet to be documented for the speculative housing bubble of 2008, but federal government management has seemingly replaced the severity of a financial panic with a persistent yet less severe correction. This correction is becoming known at the Great Recession.