Wednesday, August 20, 2008

FDIC to modify IndyMac loans

The FDIC announced today that will start to systematically modify existing IndyMac mortgage loans. According to the press release:

"The program is designed to achieve affordable and sustainable mortgage payments for borrowers and increase the value of distressed mortgages by rehabilitating them into performing loans. This in turn will maximize value for the FDIC, as well as improve returns to the creditors of the former IndyMac Bank and to investors in those mortgages."

"Under the IndyMac Federal program, eligible mortgages would be modified into sustainable mortgages permanently capped at the current Freddie Mac survey rate for conforming mortgages (now about 6.5%). Modifications would be designed to achieve sustainable payments at a 38 percent debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance."

Chairman Blair, since last year, has been calling on mortgage servicers and banks to modify loans by converting the loans (Subprime ARMs) to fixed rates mortgages. But, in her own words, "Renegotiating terms loan by loan is too costly and time consuming." Hmm...

Not only am I curious to see if other banks follow her lead, but I'm really wondering if this will work. How will the owners of these loans (banks, investors, etc) react?

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