The FDIC and IndyMac Federal Bank, FS have put their heads together on a loan modification program that will help at-risk borrowers avoid foreclosures.

In the blockbuster movie Death Race, character Jensen Ames is given the choice of risking his life for a chance to get out of jail. IndyMac Federal Bank is giving its borrowers a choice, too: document your income for a chance to get out of a possible foreclosure scenario.

Loan modification heads off foreclosure

Foreclosure spells bad news for borrowers, lenders, and investors, alike. For mortgages that are serviced and securitized by IndyMac Federal Bank, it also causes problems for the FDIC and the creditors of the former IndyMac Bank. To address this issue, the FDIC and IndyMac Federal Bank have developed a program to offer loan modifications to late-paying borrowers. Doing so will increase the value of the former bank's assets, so that the FDIC can recoup money to its Deposit Insurance Fund (DIF) and pay off the creditors.

Offers for borrowers

The loan modifications are being offered only to borrowers who have first mortgages on their primary residences-and those loans must be securitized and serviced by IndyMac Federal. Borrowers who have loans that were made by the former IndyMac Bank, but were subsequently sold to another loan servicer, will not be receiving a modification offer.

The FDIC indicates that the terms of each loan modification were developed to satisfy two main parameters:

  • An interest rate that's no higher than the current Freddie Mac survey rate for conforming mortgages (this was 6.47 percent as of August 21, 2008)
  • A cap on the PITI payment amount, such that the borrower's total monthly debt payments are no more than 38 percent of gross income

Maximum payment amounts were calculated using the income information that the borrower originally provided during the loan approval process. In situations where the debt outstanding cannot be reconciled with the payment limitation, other structural changes may be made to the mortgage, such as extending the amortization, writing off some of the principal, or reducing the interest rate.

Paperwork and loan modification

To finalize the loan modification, borrowers will have to accept the new terms and provide proof of income to IndyMac. For those who have that documentation, the process should be relatively efficient. But, realistically, there may be many borrowers who can't document the required level of income, either because their financial situation has changed, or because they lied about their income initially to obtain a stated income loan.

If the borrower doesn't provide the necessary paperwork, the modified loan offer will be withdrawn. In some cases, the borrowers will receive a revised offer. But where loan modification proves to be unworkable, the FDIC and IndyMac Federal will cease efforts to alter the loan.

The FDIC and IndyMac Federal are giving borrowers a choice: legitimize their mortgage or face foreclosure. The stakes aren't as high as in Death Race, but then, this is reality, not entertainment.

Published on September 15, 2008