FDIC: Use IndyMac Model to Prevent Foreclosures

The federal government;s response to the financial crisis has been criticized as focusing too much on helping out banks while neglecting the troubled borrowers facing foreclosure.

Speaking Thursday before the Senate Banking Committee, FDIC Chairman Sheila Bair outlined a new approach to tackling this painful epidemic:

From Bair's prepared testimony:

The EESA, recently passed by Congress, includes a number of provisions to encourage loan modifications. In particular, EESA addresses the issue of foreclosure mitigation and provides authority that could hold significant promise for future loan modifications. The statute grants authority to the Secretary of the Treasury to use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

Loan guarantees could be used as an incentive for servicers to modify loans. Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards. By doing so, unaffordable loans could be converted into loans that are sustainable over the long term. The FDIC is working closely and creatively with Treasury to realize the potential benefits of this authority.

Bair also said the agency's efforts to modify the troubled loans it inherited when IndyMac failed could serve as a model for how others could work with borrowers.

The following is my transcript from Bair's testimony, which I watched on C-Span:

As you know, a number of steps have already been taken in this direction. But I think it is clear by now that a systematic approach is needed to help us finally get ahead of the curve. The FDIC is working closely and creatively with Treasury on ways to use the recent financial rescue law to create a clear framework and economic incentives for systematically modifying loans. The aim is for loan servicers to offer homeowners more affordable and sustainable mortgages. In sharing ideas with the Treasury, we have drawn from the program that we are using for modifying loans at IndyMac Federal Bank since we took control of that bank in July.

We have introduced a streamlined process to systematically modify troubled home mortgages owned or serviced by IndyMac. As we have done in some of the past bank failures, we initially suspended most foreclosures in order to evaluate the portfolio and to identify the best ways to maximize the value of the institution. Through this week, IndyMac has mailed more than 15,000 loan modification proposals to borrowers. More than 70 percent have already responded to the initial mailings in August. More than 3,500 borrowers to date have accepted the offers, and thousands more are being processed.

The hope is that our mortgage relief program can be a model and a catalyst to spur loan modifications across the country. It's a process that most loan servicers can use under existing legal arrangements.