The FDIC announced earlier that it will halt foreclosures in IndyMac’s $15 billion loan portfolio. But I found this bit of the Wall Street Journal’s article “IndyMac Reopens, Halts Foreclosures on Its Loans“:
In its effort to halt foreclosures, the FDIC has much more flexibility to intervene with the roughly $15 billion of loans that were owned by IndyMac. But IndyMac also was handling another roughly $185 billion in mortgages in its servicing business. Ms. Bair said that FDIC officials also were looking at the troubled loans in the broader portfolio to see if there was a way to help borrowers avoid losing their homes…..IndyMac is the nation’s eighth-largest mortgage servicer, with $199 billion of assets, according to Inside Mortgage Finance, an industry newsletter. Some 8.26% of loans the company services were at least 30 days past due at the end of the first quarter, excluding loans in foreclosure, up from 5.41% for the same period a year earlier.
While the exact size of the servicing portfolio appears to be at issue, by any standards, it’s pretty big. And we see a couple of interesting issues at work in Bair’s desire to modify loans in the servicing portfolio.
On the one hand, we’ve long believed that more mods should be done than are actually taking place (and by that we mean principal writedowns). With housing prices down as far as they are already, and market clearing prices in many areas are almost certainly even lower (foreclosures in some locales are considerably delayed, due either to backlogged courts or banks who’d rather keep a resident in place, even a non-paying one, rather than have a vacant house that will deteriorate quickly). So if you have areas where the loss on sale + foreclosure costs puts the mortgage at a 40% or 50% loss, there ought to be a lot of room to do principal reduction and still have the investor come out ahead.
Even though mods to date have reportedly not been very successful, borrower counselors tell us that servicers are seldom writing down principal, mainly offering catch-up plans or offering near-term rate relief (at best with modest principal reduction).
The FDIC could in theory get some valuable insight into why modifications aren’t being made. Theories abound, ranging from real (some bar mods) or perceived restrictions in the servicing agreements to disincentives (a successful mod reduces servicer cashflow) to servicer business models (servicer are not set up to do anything on a case-by-case basis and the cost of establishing this capability is beyond their means).
It would be very valuable to learn whether the failure to see many loan modifications is indeed due to the fact that most borrowers are too far over their heads to be saved, even with a substantial modification, or whether rigidities in the servicing role are preventing realistic changes to be made.
But there is a second complication: the FDIC is supposed to maximize recoveries on banks it seizes. Loan modifications in the servicing portfolio will reduce its income and thus its value to potential buyers. It appears that the FDIC would prefer to trade off any reduction in sales price against the gains to investors and homeowner, but it is a tradeoff that servicers heretofore have seemed reluctant to make.
I’m no fan of Bair’s, but this is one case where her willingness to break china may be a plus. I stress “may” because I have serious doubts about her competence. But having announced her interest in trying to modify loans in the servicing portfolio, hopefully alert members of the press will follow up with her on her progress and more important, what she has learned about the impediments.
Tom Lindmark 
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Yves,
Very good write-up. The banking lobby will be up in arms (since banks don’t pay deposit insurance premia to provide housing subsidies), and it will be interesting to see who has more clout in Congress—the deposit insurance premium is more of a hot potato than outsiders might suspect. I do hope that Bair realizes the mortgage servicing operation is separately rated, and that pool trustees can pull servicing (or litigate), leaving much less value in the business. If anything, FDIC should be looking to sell the servicer in the very near term. I also hope she’s not indirectly encouraging Indymac mortgagors to skip a payment or two. Overall, Bair is significantly overstepping her mandate here.
There is a, um, feature of the deposit insurance law that comes into play here in terms of the scope of her prerogatives. During the last banking crisis, FDIC and all others creditors shared pari passu in Receivership recoveries. So basically there were no agency problems. The law was changed in the early nineties to give FDIC absolute priority in monies recovered: no one else gets paid until FDIC is made whole. So now there’s an agency problem: Bair may think the Receivership assets belong exclusively to FDIC, so she can do as she pleases. The agency problem is with the banks that must pay the insurance premia, and with the Treasury, which backstops FDIC.