For all of the press that the failure of IndyMac Bank has generated in recent weeks — it was the largest thrift and the second largest financial institution to ever have failed, after all — it’s what hasn’t gotten press at all thus far that is much more likely to be the largest test of resources at the Federal Deposit Insurance Corp., as it seeks to sell off the bank’s assets. Consider that IndyMac held the nation’s 8th largest residential mortgage servicing portfolio, at $200.7 billion by the end of the first quarter, according to statistics compiled by Inside Mortgage Finance. Now consider that the FDIC is tasked with managing the single largest servicing transfer tied to a failed bank in history — and by a long shot, too. It’s not even close. The next closest comparison would be Superior Bank, which failed in July 2001 and serviced a $3.7 billion portfolio of securitized subprime mortgages, eventually sold to former Bear Stearns & Co. subsidiary EMC Mortgage Corp. in February 2002. But this isn’t a $3.7 billion servicing portfolio. This is more than 50 times larger. Understandably, more than a few MBS investors have been on edge in recent weeks as the future of the servicing portfolio remains up in the air; $184 billion of the loans in the servicing portfolio were sold or securitized, with IndyMac retaining servicing rights. The future of the portfolio will likely remain in limbo for some time longer, as well, as FDIC officials sort through their options for selling off the portfolio. Many industry participants had suggested to HW at the outset of IndyMac’s failure that trustees would look to move servicing elsewhere — a report by analysts at Credit Suisse Group (CS), published last week, suggested that such movement is unlikely so long as the FDIC continues making servicing advances. “Even if the trustee elects to initiate a servicing transfer, the FDIC may ignore the request in order to maximize the value of the assets it plans to sell,” wrote the team of analysts, led by Rod Dubitsky. “So the event of default directly resulting from receivership will not trigger an immediate transfer of IndyMac servicing.” “[W]e believe that once the FDIC decides to assume the servicing contract it would be required to advance and comply with the servicing agreement. The bottom line is that we don’t believe the FDIC can selectively comply with the terms of the servicing agreement.” HW’s sources have suggested that the FDIC has been blanketing much of the mortgage industry with requests for proposals regarding the servicing portfolio. Beyond large banks with their own servicing portfolio, who have been bidding on the active and parts of the special servicing business, independent REO shops have received requests to bid on pieces of the IndyMac portfolio as well. “Nobody really knows which way the FDIC will go on this, or if they can sell the entire portfolio to one buyer,” said one source, a senior banking executive that asked his name not be used in this story. “There aren’t but four or five firms that could take on this big of a portfolio in one piece, and so far, it’s anyone’s guess if there’s interest there enough to make it the least-costly scenario the FDIC will look for.” The team of Credit Suisse analysts postulated that the servicing book could be split along GSE and non-agency lines; $60 billion of loans in IndyMac’s servicing portfolio were sold to either Fannie Mae (FNM) and Freddie Mac (FRE), according to the report. In the short run, loan modification clearly looks to be on the rise within the IndyMac portfolio. As HW reported earlier, the FDIC has initiated a foreclosure freeze on the serviced loans owned by IndyMac, equal to roughly 10 percent of the servicing portfolio; the government wants to attempt workouts with troubled borrowers, according to press remarks made by FDIC chairman Sheila Bair. But our sources suggest that the FDIC is also actively looking into the Pooling & Servicing Agreements that govern the rest of the servicing portfolio, as well, in an effort to gauge the degree of flexibility in loan modification authority that exists. The team of Credit Suisse analysts suggested that FDIC officials see IndyMac’s substantial portfolio as an “ideal test case with which to trigger a paradigm shift” towards the sort of modifications that Bair has pressed for in the past six months — in particular, the FDIC chairman has strongly advocated use of principal reductions in public speeches recently. Of course, that all depends on how quickly the FDIC can sell off the servicing portfolio, in whole or in parts. And it depends on whether or what sort of messes the FDIC is called on to clean up next — some of the nation’s largest mortgage servicing portfolios are with institutions that have faced some pretty big challenges of their own as of late. Among the nation’s top servicers: Citigroup Inc (C), which holds a $798.8 billion portfolio; Washington Mutual (WM), which holds a $616 billion servicing book; and Wachovia Corp. (WB), which holds $197.3 billion. Disclosure: The author directly held various put option contracts on WB and WM, and no other relevant positions, when this story was published; other indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.