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.
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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.
If Bair reduces asset sales and thus cash recoveries due to loan modifications isn’t that coming directly out of the pockets of uninsured depositors? It might be laudable for her to pursue agressive loan mod but in the end who gave her the right to pick the winners and losers. It seems as if her job is to maximize any recovery.
One slight quibble with your analysis. While prices might be down as much as you suggest that does not necessarily imply that a loan mod is in the best interest of the lender. The presence of mortgage insurance or other areas of potential recovery may often suggest that foreclosure is the path of least loss.
Tom,
I probably should have used the term “loss severity” which is more encompassing, rather than disaggregating it in a crude fashion.
I am hearing anecdotally that loss severities of a mere 40% is a good number these days (any reader input here very much appreciated).
At the Milken Institute Global Conference, Lew Ranieri was appalled and saddened that mods weren’t being made, and he maintained that they were in almost all cases better than foreclosing. He also said that in his day, servicers did mods and investors never complained.
Conditions are different now, but all things being equal, bigger loss severities means more mods might make sense. Ranieri was keen on mods, and his experience was a foreclosure led to a 30% loss (and remember in his days, you didn’t have a lot of no equity purchases or cash-out refis getting you to the same place).
But I am also hearing from borrower counselors that mortgage fraud by the brokers was common, which raises a whole ‘nother set of questions. One (who runs a 100 counselor operation and has extensive national contacts) believes it runs in the 70-80% range. The typical pattern is the broker quotes terms but the documents at closing are for a completely different deal. She even knows of PhDs who thought they were getting 30 year fixed and found out when their statement arrived that they had signed on for an Option ARM.
Bair… another loose cannon walking around in the gunpowder magazine.
I think Ms Bair is attempting to help in a bad situation, but this type of substitution is something that doesn’t happen in a press conference, i.e, it seems to me that FTC should be looking at the competitive nature of antitrust issues and fair competition. These types of government on-the-fly fixes are perhaps well intended, but I question the legality of these actions and this smacks as being the same type of fix used to bail out Bear Sterns from its corruption and mis-management!
There is, of course, the possibility that IndyMac’s portfolio is large enough and concentrated enough that doing a large number of mods would keep enough REO off the market so as to reduce losses throughout the system. For the FDIC, this may be an entirely rational action if they believe that further acceleration would cause even more bank failures and severely damage the FDIC balance sheet.
There are some agency issues, of course.
This is just speculation, but if this is anything like what FDIC thinks, it would imply they have a very negative view of the coming months.
Since Hope NOW principle reductions require a cut to 85% of current value, you’re talking at least 40% reductions on the typical loans. In the IMB case, that equates to $6.6B in forgiven principle for delinquents.
If you had $1M in an IMB account (10,000 folks had above the $100k insured limit), the FDIC does not have enough to make you whole ($1B total uninsured deposits).
So the FDIC has $6.6B to give to slackers, but does not have $1B to return the money to their rightful owners.
Am I the only one to see the lunacy here?
The reason? In 2002, Bush wanted to win the 2004 election. He knew he needed to get out of that recession quickly. Wall St and the NAR wanted their cut too, so they hatched a plan to get lots of money into the hands of unsophisticated borrowers. Why? THEY ARE FEE-INSENSITIVE. Great for realtors, great for Wall St.
Now that this lunacy comes home to roost, they are stealing from the accounts of the fiscally responsible to give to the delinquents. Why? THEY ARE FEE-INSENSITIVE. More fees for the reworked mortgage.
Everyone wins. Almost.
Maybe I’m misunderstanding, but the “mods” being discussed… are they possible writedowns? And if that is the case, isn’t there an additional potential problem — perhaps under the heading of “moral hazard”, but certainly falling under the heading of equity?
That is, if I am delinquent — perhaps in part because I borrowed to fund a cruise, a new 4×4, and a boat — and am therefore entitled(?) to a “mod”, then what of my neighbor, who is able to make his payments because he drives a ten-year-old Toyota and vacations at the state park? Presumably he has suffered the same 30% (or whatever) paper “loss” on his house as I; is he also entitled to relief?
If not, then there is a danger of rewarding the reckless while punishing the careful.
Greg, your assumption is correct. The more vacations and boats you have, the more you get bailed out.
Even better, you get to keep the boat.
Ain’t America grand? (unless you are fiscally responsible)
Average loss severities are running around 50-75% for subprime first liens for the 2004-2007 vintages. Second lien losses are in the 100+% range. Some of the Trustees (for example Wells Fargo, Citibank) will list on the monthly trust reports the indivual loss amount and loss severity for each loss taken.