IndyMac Modifications Outperform Industry Redefault Standard

Months after IndyMac Federal Bank failed a year ago, the Federal Deposit Insurance Corp. (FDIC) implemented a streamlined modification program to improve the performance of seriously delinquent or defaulted mortgages.

As of May 31, 2009 the redefault rate among modified IndyMac Federal Bank (IndyMac) loans was 15.6%. The bulk of these modifications took place in Q408 — as early as September 2008, according to FDIC spokesperson David Barr — indicating many of these loans are at least six months past modification.

The FDIC rate is well below the industry standard six-month redefault rate, which ranges from 30% to more than 40%.

For example, Lender Processing Services (LPS: 40.62 -0.76%) in late May 2009 reported that nationwide modification efforts as of April achieved a redefault rate of nearly 50% six months after modification.

Modification methods among servicers may vary nationwide, possibly accounting for the varying redefault performance.

The FDIC’s modification plan — serviced by OneWest Bank — employs interest rate reductions, extended amortization and principal forebearance, according to initial program guidelines.

The FDIC began its IndyMac mod plan with the intent of lowering the mortgage payments to within 38% of a borrower’s income, where cost-efficient. In 2009, however, the program cut the debt-to-income (DTI) ratio down to 31%. Income verification therefore plays a major role in the FDIC’s plan.

“We look at their ability to repay based on their income,” spokesperson David Barr says. “The lower you get that DTI, the lower the chance of redefault.”

IndyMac loans modified under the FDIC’s program experienced an average 23% monthly payment reduction to achieve this ratio. In other words, a borrower whose IndyMac mortgage payment was $1,000 per month before modification now pays around $770 per month.

As of July 16, 2009 the program had modified 20,260 loans, according to Barr.

But even under a “streamlined” modification program, some mortgages are left untouched. The FDIC, in modifying IndyMac loans, must consider the value of modification as opposed to how much a foreclosure would cost. Some loans are too far outside the DTI ratio that foreclosure would be more cost-efficient.

Barr says: “There are instances where, to modify the loan down to that 31% DTI, we’d have to make too many concessions.”

Write to Diana Golobay.