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.

Image via WikipediaTalk about your loan modification myths… check out this commentary from TheStreet.com’s Glenn Hall:

The story went almost unnoticed and is already lost in the flurry of headlines about Bank of America’s extra $20 billion in bailout bucks and its quarterly loss.

Or maybe Bank of America would prefer to discuss “commercial puffery” in bankruptcy court?

Earlier this week I shared my top five myths about loan modifications. Here are five more loan modification myths to keep in mind:

LOAN MODIFICATION MYTH #6: I can quickly modify my loan by calling my lender myself. This “myth” has some truth to it. You can certainly negotiate a loan modification with your lender on your own. However, an attorney who has experience in the field is much more capable than most people at negotiating the best deal possible. Experienced attorneys know what the lenders are willing to negotiate and how far they can be pushed, because they have worked with the lender and other lenders in the industry. Attorneys also carry more legal weight than consumers. With the threat of a possible law suit sitting at the negotiating table, the lender is usually more open to negotiating a reasonable deal.

LOAN MODIFICATION MYTH #7: If the lender doesn’t want to negotiate, it doesn’t have to. Lenders often feel compelled to negotiate a solution with borrowers for the simple reason that they do not want to have bad loans on their books. If they have too many bad loans, their reputation in the industry suffers, and they may have trouble borrowing money to make future loans available. In addition, many loans that are in default contain evidence that the lender or someone else involved in approving the loan acted inappropriately. In cases such as these, the lender is legally obligated to re-negotiate the loan agreement with the borrower. A knowledgeable attorney can perform a forensic audit that often identifies RESPA (Real Estate Settlement Procedures Act) violations that most consumers would never notice on their own.

LOAN MODIFICATION MYTH #8: Up-front fees are a scam. Not paying fees up front is a good rule of thumb for avoiding scams, particularly those involving credit counseling services with some companies that offer loan modification services. If the loan modification company is offering legal representation, however, the rule of thumb changes. Attorneys almost always charge up-front fees in the form of a retainer. The key is to work with a reputable loan modification company that has a reasonable refund policy if it cannot help you. Make sure the company has a mailing address (not just a P.O. Box number or website address) and a phone number, and do some checking to make sure the company is legitimate and has successfully negotiated loan modifications for its clients.

LOAN MODIFICATION MYTH #9: If I do not qualify for a loan modification, I will lose my home. Not everyone qualifies for a loan modification, but other options and exit strategies are always available to help you avoid foreclosure. In fact, most homeowners have about a dozen options they can pursue to either keep their home or get out from under it gracefully. These include placing the home on the market, refinancing out of trouble, borrowing money from a friend or relative to reinstate the loan, and working out a payment plan with the bank (forbearance), to name a few. If you live in a jurisdiction that offers a redemption period, you even have the option of buying back the property from whoever happens to purchase it at the auction. An attorney can help you analyze the various options and offer guidance on which option is best for your situation.

LOAN MODIFICATION MYTH #10: I can only modify the loan on my primary residence. Loan modification is designed for homeowners, not investors, so you have a better chance of negotiating a loan modification for your primary or secondary residence – that is, for a home you actually live in rather than an investment property. However, the mortgage lending industry is in such dire straights now that it cannot afford to have any loans go into default. Lenders are even willing to work with investors in renegotiating their loan agreements.

Remember, you may not be fully aware of the options you have until you do your research. The landscape is constantly changing, and only by consulting with someone knowledgeable in the field of loan modifications can you truly become educated enough to make the best decision.

As I’ve been telling my readers for years, relief is available for homeowners facing the prospect of losing their home in foreclosure, yet far too many homeowners are reluctant to pursue their options, including loan modification. In many cases, people are simply confused or ill informed. In other cases, they have had such a bad experience with their lenders and with bill collectors and attorneys to trust anyone who offers assistance.

The truth is that help is available to homeowners through the loan modification process. For homeowners who qualify, lenders are able and often willing to adjust the terms of the loan and even, in some cases, reduce the balance due, to make the monthly payments more affordable.

Unfortunately, homeowners often mistakenly think they cannot possibly qualify or some other psychological barrier is standing between them and the help they need. To overcome any barriers that might be standing in your way, the following list busts the top five myths about loan modification:

LOAN MODIFICATION MYTH #1: My bank wants me out of my house. / My bank wants my home. Banks and other lending institutions do not want to foreclose. They earn more money if you can make your payments. When they foreclose, they not only lose your monthly payments, but they also have the expense of foreclosing (attorney fees), rehabbing the home, and then selling it (agent commissions). In today’s market, there’s a good chance they’ll have to sell the home at a loss. This is all good news for you – it means the bank is highly motivated to make a deal with you.

LOAN MODIFICATION MYTH #2: My credit score is bad so I won’t qualify. Unlike the option of refinancing out of trouble, which requires you to apply for a new loan, loan modification simply adjusts the terms and perhaps reduces the balance of a loan you already have. Your credit score is much less of a factor in determining whether you qualify for a loan modification. In addition, a successful loan modification can actually improve your credit score over time, especially if it prevents you from ending up in foreclosure or bankruptcy.

LOAN MODIFICATION MYTH #3: I am not late on my mortgage payments so I won’t qualify. / I have to miss a payment to be eligible. Early on, this was true. In fact, some early eligibility requirements stated that you had to be 61 days delinquent in order to qualify. In other words, you would have had to have missed two full payments. The truth is that the eligibility requirements are constantly changing and differ among lenders. Many lenders are now working out loan modifications with borrowers who are up to date on their payments. It’s difficult to determine whether you qualify until you actually discuss your situation with the lender or with an attorney who is knowledgeable and experienced in loan modifications.

LOAN MODIFICATION MYTH #4: I would be better off walking away or declaring bankruptcy than modifying my loan. Walking away from the home and filing for bankruptcy are certainly two options, but they are rarely the best options when you are facing foreclosure. If you simply walk away, the lender is unlikely to pursue legal action against you, but in some jurisdictions, the lender can pursue a deficiency judgment against you to collect the difference between what the lender receives for your home at auction and what you currently owe on the balance of the mortgage. Filing for bankruptcy may be better than just walking away, but it can leave a blemish on your credit history that makes it difficult to borrow money in the future. A successful loan modification is almost always a more prudent choice.

LOAN MODIFICATION MYTH #5: It’s too late. I have already received a foreclosure notice. As long as you still reside in the home – that is, you didn’t voluntarily abandon it, and the home hasn’t been sold at a foreclosure auction – you may still have time to work out a loan modification with your lender. The sooner you take action, the more options you have available and the more time you have to pursue the best option, but you can still negotiate late into the process. By contacting the lender or, better yet, having your attorney contact the lender on your behalf, you demonstrate a good faith effort to work out a solution and can often buy yourself extra time to negotiate a loan modification.

I’ll post a few more loan modification myths later in the week. In the meantime, if you have a loan modification-related question, please leave a comment by clicking on the “Comment” link below.