The FDIC took over IndyMac Bank on July 11, 2008.
It was the 5th bank failure in 2008. Shortly after taking over Indymac,
the FDIC temporarily halted all IndyMac foreclosures on July 14, 2008
as reported by Reuters.
FDIC chairwoman Sheila Bair has been critical of banks and lenders for
not doing enough to modify loans to help customers that are in trouble.
Based upon the conversations that I have had with various people, I
would have to agree. The banks would rather take the property and lose
money than to modify a loan. The FDIC has finally announced what they
are going to do about the 25,000 or so IndyMac owned loans that are in
default.
Click graph for larger view.
From the LATimes.com:
The regulators operating failed IndyMac Bank said Wednesday that they would try to modify about 25,000 troubled mortgages by slashing interest rates to as low as 3% for five years, extending payments over 40 years and in some cases charging interest on only part of the loan balance.
From the New York Times:
The
regulator that seized IndyMac last month said Wednesday it would help
thousands of the failed thrift institution's cash-short borrowers repay
their mortgages and stay in their homes, a model it hoped other banks
and collection companies would adopt to stem a wave of new foreclosures
in the nation's weakened housing market.
…Ms. Bair said she strongly believed that keeping borrowers in their homes was the optimal low-cost choice.
"By
turning troubled loans into performing loans, we enhance their overall
value," she said. Recent F.D.I.C. research has shown that sales of
nonperforming loans to outside investors recover 32 cents on every $1
of book value, while sales of performing loans recover about 87 cents.
From CNBC interview:
"Modified loans will be worth more than foreclosed loans," she said in an interview on CNBC television.
I
can't agree more. As banks foreclose on more homes, they are simply
adding to the already historically large inventory. This is good for
home-buyers, but bad for the banks that will lose money on the loans
and the properties.
Something to note, this is for borrowers
that are behind on their mortgage payments. If you can afford your
mortgage, regardless of how egregious the terms are, you will not be
helped. I would hope that this does not encourage existing borrowers to
stop paying in order to get a better deal.
I wish more banks
would take the time to work with their borrowers. In the long run, we
will all be better if those that are struggling in this economy to stay
in their homes are enabled to. I certainly do not think that the banks
should take it in the shorts, but neither should the general public.
Providing the customer a lower rate while the market recovers will
allow home to appreciate to the point where the borrower will be able
to refinance or sell and pay the full value of the loan. In the long
run, the banks will make more money by working with borrowers. In the
long run, this will help the general public. Rest assured, these losses
will be made up by the banks in the form of higher fees, higher loan
interest rates, and lower savings interest rates.
Let's give
a simple example. If you purchased a home for $300,000 at a rate of
4.5% and had that rate for 2 years and it then adjusted to 9.5% your
payment would jump from $1520 per month to $2468 per month. The average
middle class borrower would consider the jump in monthly payment
impossible to pay. That is a jump of almost $1000 per month. That
amount seems just simply insurmountable. I can understand why a
borrower would simply mail the keys to the bank and let the bank have
the house. It is just overwhelming imagining that for the next 336
months you will have to find an extra $1000. If the borrower is able to
pay this, then they will pay an additional $539,452 in interest on the
remaining balance. However, as we can see by the abysmal statistics of
over 1500 foreclosures a day occurring in California, the borrower
isn't going to do this. They are going to let the bank take the loss.
To
keep borrowers in their home, they need a payment that is affordable.
If the bank were to fix the rate at 6.5%, which is a reasonable rate
for both the bank and the borrower today, and extend the existing
balance out to 40 years the payment on the remaining balance would be
$1696 per month. This is a more modest $176 increase. The borrower is
not punished or rewarded for purchasing a home with a bad loan. If the
borrower were to keep this loan and pay it in full, the bank will
receive approximately $524,351 in interest on the balance. This isn't
that much less than the original loan.
The alternative is for
the bank to foreclose on the loan. They will have received
approximately $36,482 in payments. After paying for expenses to
foreclose and actually selling it at probably a $200k they will end up
with about $200k. That is a loss of $100k. So they can lose $100k or
make over $500k in interest.
Unfortunately these banks can't
seem to think. Their greed has clouded their judgment and blinded them.
Instead of waiting for their borrowers to give up and mail in the keys,
they should be actively offering to modify the terms of their
adjustable loans in their portfolios that are most likely to default.
In the long run, it will increase the values of the portfolios enabling
them to sell them to investors. This will increase their capital and
keep them from being taken over by the FDIC.
I suspect that
the banks will not do this. I hope the FDIC takes my bank over. I could
certainly benefit from a fair modification of my loan.