Tuesday, November 18, 2008

FDIC Loan Modification Program is Failing

From MarketWatch Many modified mortgages become troubled again

The FDIC has already modified more than 5,000 delinquent mortgages owned or serviced by failed lender IndyMac.

IndyMac Bancorp Inc and Bair's broader proposal is modeled on those efforts.

Under the IndyMac program, eligible homeowners have been offered more affordable monthly payments through reduced interest rates on the loans, extended amortization and deferred principal payments.

Lender Processing Services processes the 650,000 loans that the FDIC manages through its control of IndyMac. Company executives discussed what's happened since modifications began with analysts at Keefe, Bruyette & Woods and the results are uninspiring.

"Industry evidence indicates that in a majority of instances loan modifications simply delay the timeline from default to foreclosure but don't prevent them from taking place," Nathaniel Otis and William Clark, analysts at KBW, wrote in a note to investors on Tuesday.

Of the IndyMac mortgages modified by the FDIC so far, 25% went delinquent after just one post-modification payment and more than half were delinquent again after several post-modification payments, Lender Processing Services told the analysts.

…The internal models of Lender Processing Services suggest that the number of foreclosures will continue to rise through 2010 before peaking in 2011, the KBW analysts reported.

Foreclosures six months ago were mostly associated with bad loans, but now job losses are increasingly the cause in newer foreclosure notifications, Lender Processing Services also noted.

HousingWire adds Questions Arise Over IndyMac Loan Mods

The FDIC chief cited the fact that more than 5,000 of the 40,000 or so eligible troubled borrowers have received loan modifications under the plan to date; a number that HousingWire noted was rather dubious, not only because it represented less than 2,500 modifications per month, but also because the FDIC wasn’t disclosing what sort of modification numbers IndyMac had on the books prior to the government stepping in to clean up shop.

We still don’t have any benchmark data on the IndyMac loan modifications, whether prior to the FDIC’s involvement or on the 5,000 or so loans it has already modified under the program. And I’d suspect nobody is going to make that information public anytime soon. But we do know this much: the track record of loan modifications in general isn’t all that great. The latest evidence comes courtesy of analysts at Keefe, Bruyette & Woods, who cited industry data provided by Lender Processing Services, Inc. (LPS: 21.49 +3.07%). LPS processes the 650,000 loans that the FDIC now manages via IndyMac, along with having data on pretty much the majority of the rest of the mortgage market, as well.

The results show that, in general, 25 percent of recent loan modifications went delinquent after just one post-modification payment — and more than half had become delinquent after multiple payments, according to a MarketWatch report.

Nonetheless, a 50 percent recidivism rate on loan modifications suggests that loan modifications — IndyMac led or not — aren’t usually the sort of world-saving panacea that many regulators and lawmakers expect.