It not only can stave off foreclosures but also provide a blueprint for how the industry can tackle troubled home loans

When Mark Akers got an offer from his mortgage lender in September to slash his monthly payments down to $2,500, from $4,200, he jumped at the chance. The Norco (Calif.) resident ran into trouble earlier this year after his wife got sick and he lost his job managing a factory that made doors for houses. The 53-year-old Akers could have become another foreclosure statistic if his bank, IndyMac, had not stepped forward to halve the interest rate on his fixed-rate loan to 3%, for a period of five years. In exchange, the bank will add Akers missed payments to the loan principal, hiking it to $611,000. Akers says he’s grateful. “Our neighbor across the street just lost his home,” he says. “I said to my wife: ‘We’ve got a house we’ll die in.’”

Akers is one of more than 3,000 borrowers who have signed on to a fast-track loan modification program launched by IndyMac, the insolvent California-based lender seized by the feds in July. Officials from the Federal Deposit Insurance Corp. have moved quickly to tackle the 60,000 delinquent mortgages in IndyMac’s 742,000-loan portfolio. In late August letters went out to 7,500 distressed borrowers, offering new terms. IndyMac says those taking part have seen their monthly payments lowered by $430, on average.
Simplified Process

FDIC Chairman Sheila Bair is hoping the IndyMac initiative will provide a blueprint for the rest of the industry. Lenders have been under fire from politicians and consumer advocates for not doing enough to stave off foreclosures, which spiked 72% in the first half of the year. At Hope Now, an alliance of banks and mortgage servicers formed to speed up loan negotiation efforts, foreclosures are still running at twice the level of loan modifications.

If successful, programs such as IndyMac’s not only could keep people like the Akers family in their homes but also help arrest the rot in the complex, mortgage-backed securities market that precipitated the worldwide financial meltdown. Indeed, the $700 billion financial rescue bill passed by Congress on Oct. 3 includes terms modeled in part on the FDIC’s efforts at IndyMac. It encourages the Treasury to offer new loan-payment terms before foreclosing on mortgage assets it buys from banks. “Theirs is the first systematic effort to really simplify the loan modification process,” says Austin King, director of the financial justice unit at Acorn, an advocacy group that represents low- and middle-income Americans. “That is the solution to the mortgage crisis.”

Like it or not, more lenders may be compelled to negotiate new terms with delinquent customers. On Oct. 6, Bank of America (BAC) announced it would modify loans for nearly 400,000 troubled borrowers. This is part of a legal settlement reached with authorities in 11 states that had been looking into allegations of predatory lending practices at Countrywide Financial, the troubled mortgage lender Bank of America acquired earlier this year.

Bankers have long argued that there is no one-size-fits-all solution to the mortgage mess. Loan workouts, they say, must be done on a case-by-case basis. Yet the IndyMac program was designed around a straightforward formula: Borrowers’ monthly home payments should amount to no more than 38% of their gross income

“The key is to make the new loans affordable,” says John Bovenzi, the senior FDIC executive now serving as CEO at IndyMac.

Reaching Out to Borrowers

Bovenzi also knows how to tailor his pitch. At banks, the traditional approach is to send delinquent borrowers a form letter asking them to call the bank to discuss their payment problems. But instead of using regular mail, IndyMac sent out its letters in overnight delivery packages, which had to be signed for (to prevent the contents from being tossed in the trash, with the rest of the junk mail). What those envelopes contained was—by bank standards—a remarkably straightforward piece of communication: a letter stating “We want to help you stay in your home” at the top, accompanied by a dollar figure—the new, lower monthly payment being offered. All the borrower had to do was sign a couple of pages and pop the documents, along with a check for the new payment, back in a prepaid return envelope.

Not surprisingly, IndyMac’s new management chose to tackle the less problematic loans first. The first set of letters went out to delinquent borrowers for whom the bank had complete financial information. In late September the bank mailed out an additional 19,100 letters. To participate in the loan modification program, these folks will have to provide verification of income in the form of pay stubs and tax returns. An even thornier problem are the 30,000 delinquent loans owned by outside investors but on which IndyMac collects the payments. In those cases, the bank has to get investors on board before it can spell out restructuring terms.

What’s more, IndyMac insiders figure as many as one-third of delinquent borrowers can’t be helped because they just don’t have the income to support even reduced payments. In one case involving a Nevada woman whose husband—the sole breadwinner—suffered a stroke, the bank negotiated a “cash for keys” offer of $5,000. The money covered expenses so the woman could move closer to relatives who would help her care for her husband.
“Triage After a Train Crash”

As word of its program has gotten around, IndyMac also has been deluged with requests from borrowers who likely can afford to stay on top of their loans but are in the market for a low-cost refinancing. Others are seeking help with second homes or investment property. One Washington D.C. woman telephoned senior FDIC officials as well as each of the top four IndyMac executives in California to badger them about lowering payments on an investment property. The bank postponed a scheduled foreclosure but hasn’t agreed to new terms. “This is like triage after a train crash,” says IndyMac spokesman Evan Wagner. “You take care of the worst cases first.”

Besides dealing with a big pile of bad loans, Bovenzi has been charged with readying IndyMac for sale—ideally before the year is out. He’s hopeful the bank’s new owners will carry on with the loan-modification program—though there are no guarantees. In the meantime, he’s trying to recover all he can through asset sales. First to go were the season tickets to Los Angeles Dodgers games—once used for corporate entertaining. A company-owned Porsche, an executive perk, went for $65,000 on AutoTrader.com in August. Next on the list: the paintings hanging on the wall of IndyMac’s Pasadena (Calif.) headquarters.

Original article: IndyMac’s Fast-Track Mortgage Modification Program From businessweek