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The FDIC’s Loan Modification Program
FDIC, Federal Deposit Insurance Corporation
Office of Inspector General,
Office of Evaluations,
3501 Fairfax Drive, Arlington, VA 22226-3500
DATE: February 4, 2010
SUBJECT: The FDIC’s Loan Modification Program
This report presents the results of our evaluation of the FDIC’s Loan Modification Program (LMP). In 2008, the FDIC initiated a systematic and streamlined approach to loan modifications at IndyMac Federal Bank, FSB (lndyMac), in order to place borrowers into affordable, long-term mortgages while achieving an improved return for bankers and investors compared to the results of foreclosure. In February 2009, President Obama tasked the Department of the Treasury (Treasury) with program responsibility for developing and implementing uniform guidance for loan modifications across the mortgage industry based, in part, on the FDIC’s work at IndyMac. Since November 2008, the FD IC has required most purchasers of failed bank assets to implement the FDIC’s LMP, Treasury’s Home Affordable Modification Program (HAMP), or some other loan modification program acceptable to the FDIC.
BACKGROUND
In 2008, the FDIC developed the LMP after taking over as conservator for IndyMac to achieve improved value for the IndyMac Federal conservatorship by turning troubled loans into performing loans and, thereby, avoiding unnecessary and costly foreclosures. The FDIC LMP requires that a successful candidate for loan modification result in a (1) positive net present value (NPV) as opposed to a foreclosure option and (2) monthly payment representing no more than 31 percent of the borrower’s gross monthly income, known as the front-end debt-to-income ratio. The FDIC LMP utilizes a “waterfall” approach to reach the 31-percent ratio, by first lowering the borrower’s interest rate, then extending the term of the loan not to exceed 40 years, and finally forbearing principal to the end of the loan period. FDIC officials have noted that a critical characteristic of the FDIC LMP process is that it has to be straightforward and efficient in order to modify a large number of “at-risk” mortgages in a short period of time.
In February 2009, the Obama Administration announced The Homeowner Affordability and Stability Plan, a $75 billion federal program designed to provide for a sweeping loan modification program targeted at borrowers who are at risk of foreclosure. The plan tasked Treasury with developing and implementing uniform guidance for the government’s loan modification efforts. Treasury announced its HAMP guidelines on March 4, 2009, which built on the work of Congressional leaders and the FDIC’s LMP. Treasury’s HAMP uses the FDIC LMP 31-percent “waterfall” process and the NPV test. However, HAMP also provides various incentive payments to the loan servicer and borrower for achieving sustainable loan modifications.
Under Treasury’s HAMP, the Federal National Mortgage Association (Fannie Mae) serves as the financial agent and fulfills the role of administrator, record-keeper, and paying agent for the program. The Federal Home Loan Mortgage Corporation (Freddie Mac) is the compliance agent for the program and is responsible for ensuring that participating servicers comply with Treasury’s guidelines.
As of August 2009, Treasury had signed Servicer Participation Agreements (SPA) with 38 servicers, who, along with 2,300 servicers of Fannie Mae and Freddie Mac loans, account for more than 85 percent of the mortgage market.1 In an August 2009 report, Treasury stated that more than 230,000 trial modifications had started and that the program was on pace to help 3 to 4 million homeowners over the next 3 years.
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