Mortgage lender IndyMac was taken over by the FDIC this past summer with the head of the FDIC, Sheila Bair, instituting a modification process for loans that were 60 days or more past due.  They estimate about 40,000 loans, or 2/3 of the total loans serviced by IndyMac will be eligible for the loan modification program.

IndyMac Federal, as it’s now known, has mailed out 15,000 modification proposals and has called many thousands more in an attempt to avoid additional foreclosures.  More than 3,500 borrowers have accepted the offers and others are being processed.

Sounds great, right?  Sheila and the FDIC are going to show everyone how to resolve problematic loans.  As I recall, IndyMac was one of the earlier, and larger users of Alt-A loan product, which means there wasn’t much income or savings documentation when the loan was originated.  These “eligible” loans are already 60 days or more past due, so it seems obvious the borrowers can’t really afford the payments.  Was it due to interest rate resets?  Was it due to the Alt-A liar loans?  I haven’t seen any details on that, so it’s a little bit difficult to say.

The big question, as I see it, is what kind of modifications are being done?  If there’s an interest rate reset and the borrower can’t afford the new, higher payment, who’s eating the loss on the higher interest rate that can’t be realized?  The investor(s) who own the loan, or is this the beginnings of the Treasury plan to prop up housing prices by having taxpayers foot the bill for keeping unqualified borrowers in their homes?

My belief is the FDIC is moving toward loan modification guidelines they will use to determine borrower qualification, if the loan servicer and investor agree to the loan modification, FDIC guarantees the loan.  Technically, this takes risk from the lenders and puts it on FDIC, which is lender funded.  If the losses stay small, and the majority of modified loans don’t fall into default once again, then it might work out with minimal cost to the taxpayer.  I just have my doubts that the majority of borrowers in default, with property very likely underwater, will treat this as a one-time opportunity and continue to faithfully make payments on time for the next thirty years or so.  It could happen, but it’s not too likely.