FDIC: New 3% mortgage rates for some IndyMac borrowers

The FDIC today announced plans to help thousands of IndyMac borrowers modify mortgage loans, in some cases at remarkably generous terms. LATimes.com: "The regulators operating failed IndyMac Bank said Wednesday 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."

The New York Times reports the FDIC's modification plan is "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."

Noting that the program is for borrowers who are behind in their mortgage payments, Calculated Risk observes, "This seems to provide an incentive for IndyMac borrowers to stop making their mortgage payments until they are 'seriously delinquent or in default'. Then the borrower -- especially Alt-A borrowers who stated their income originally -- would apply for a loan modification based on their actual income. The borrower could then receive an interest rate reduction and principal forbearance."

--Peter Viles
Thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Bloomberg News

Comments

[LA-renter]

Okay, I didn't read the Washington Post article, but...

Are you telling me, Peter that:

If I put my life savings (in excess of $100,000) into an IndyMac account, I could lose 50% of my "excess" savings.

If, instead, I neglected to pay my mortgage, they'll give me the interest rate of my dreams.

Wow! It is a wonderful life!

[Drew]

Well Cheezus H. Rice -- I want a 3% mortgage rate too!

[Nelcisco]

so Peter, you're saying that Alt-A borrowers who went stated will get a loan on their actual income @ 3% when the 10 yr bond is closing @3.8 to 3.9%? Today or Wednesday(depending on when you're reading this) closed at 3.7990%
how will that work?

Peter can you or someone explain that?
thanx

[Cal]

Without principal reductions, no agreement among any junior liens, and such a high front end ratio it seems doomed to failure. Best case scenario it just allows the foreclosures to be spread out over a longer term. They don't even talk about a back-end ratio.

Any borrower taking these mods must desperately want to stay in their overpriced home. There will be no hope for appreciation, if the junior liens agree to not foreclose in the hopes of being paid sometime in the future they can just keep the deferred payments adding on. If the value of the property does happen to rise enough the seconds can just foreclose. IMHO any borrower who is in the situation where the borrower qualifies for a loan mod would be so obviously be better off renting.

The bondholders really are faced with the choice of taking a more clearly defined loss now or an uncertain loss later. I think many of these loans would be set up for a redefault and the FDIC clearly has a very optimistic vision for any investor demand for these "performing" loans to be able to sell. Nobody in their right mind would treat these as performing.

I hope Tanta does an Ubernerd post because none of the math I did made the loans make sense from anyones perspective. To me, regardless of whether you look at this from the borrowers or bondholders perspective it seems to be "You'll be screwed later, you just don't have to face it now". I thought Sheila Bair, with all the noise she was making, was going to come up with something much more dramatic.

[Rational Renter]

This is a remarkably bad idea. The foreclosures are a necessary part of this correction. Bubble prices must be purged for the good of the American economy.

[Rational Renter]

This is scary stuff. Last month's housing bailout plan was essentially DOA, because all it does is encourage banks to act against their own self interest. Nothing will come of it. But when the government actually runs a bank (as they now do with FDIC), they can actively set the policy of those banks. Nothing more disastrous than the government sticking its grubby hands right in the middle of market forces.

[E]

What happens in year 6?

Do they do a cash out refinance with another ARM?

[CaliforniaDreaming]

So, yet again, irresponsibility pays off big time.

[Buy Houses Now!]

The difference between the FDIC and private lenders is that the latter would have to eat losses that hit their own pockets, whereas the FDIC freely spends taxpayer money to subsidize overextended borrowers.

[Laker]

Sheila Bair does not understand moral hazard at all. Also you would expect someone ranked so high in charge of a major financial government facility to know economics. They are basically giving away new teaser rate mortgages for 5 year ARM at 3% to start. Which is good if you could sell after 5 years. However all they do, is to postponed the foreclosure to 5 years ahead. Instead of purging all the foreclosures, reducing price to affordable levels and letting all that truly can buy to get into homes, they will create a slow bleeding that will last for maybe 20 years or more. Maybe the whole generation of people will not see any price increase in RE.
This is scary as our nation has become use to live on home equity money. If this money is removed for the next 20 years or so....only god or shiela bair will help us.

I thought such a government official would understand that the ability of banks to foreclose is the best thing that happened to the RE industry as it allows banks to offer very low interest rates for mortgages...
If FDIC truly wants to help, they need to give 3% loans for 30 years not 5. And also, give those 3% loans to everybody that wants to buy a house...and btw F*** the inflation that will be created as a result of this crazy money printing...
Keep in mind that every dollar that is forgotten from the loans will reduce the value of the loan and the value of indymac and thus is coming directly from the tax payers once indy is sold....

If FDIC keeps playing with such bad ideas at Indymac, i would remove all my money from Indymac to another bank. (in my case it would be more than $180,000. Then let's see for if they can sell those 40 cents on the dollar loans....

[Jake d.]

From where I sit the big picture seems to be that the government is trying in every way possible to delay and dilute as many inevitable foreclosures as possible over the longest stretch of time possible. The reasons for this are obvious, not the least of which is that the whole mess is going to cost taxpayers a lot of money and it will be easier to slip it little by little like this.

[Cal]

Tanta labeled it nothingburger.

[Lou]

Why did I study hard and go to college and live responsibly. I should have dropped out of high school, had 3 kids before I was 20, and gotten one of these dumb loans. Why? Because the government would be hooking me up.

[Uncle Billy Is Wimpy]

I'll gladly pay you tuesday for a nothingburger today!

[KLV]

Step 1: lie about income on mortgate application and commit mortgage fraud.

Step 2: receive taxpayer-funded bailout.

Simply amazing.

The irony is, many liar loan recipients probably still won't modify their loans because they're better off simply walking away from houses realistically worth 50% of what they paid at bubble peak prices.

I'm curious - what are the relative advantages and disadvantages of (1) a rapid crash and return to housing prices more in line with incomes like what is occuring in the Inland Empire right now, versus (2) a slower, more gradual correction like what occurred in SoCal in the early to mid 90s and which the government apparently is trying to engineer now?

[Nelcisco]

Lou,

How naive can you be thinking that in our country today a person that goes to college, studies hard and live by the rules will have any reward?

"Change we can believe in", right?

[the problemwithcaring]

Step 1: lie about income on mortgate application and commit mortgage fraud.

Step 2: receive taxpayer-funded bailout.

Simply amazing.

The irony is, many liar loan recipients probably still won't modify their loans because they're better off simply walking away from houses realistically worth 50% of what they paid at bubble peak prices.

Posted by: KLV | August 21, 2008 at 12:56 PM

Exactly, this is designed to keep the poor lost idiots who are still overpaying each month for a depreciating asset, coming back to the trough...

[RM]

Lenders have basically two choices: Sit behind a desk all week waiting for hundreds of thousands of house keys to get mailed in on loans that can't be paid, or try something that may or not may not work. Only time will tell. What were they expecting? Starting a mortgage with a teaser rate and then bumping it up to double or triple on a half a million dollar home, and with huge early payment penalty fees to boot. They must have learned the scheme from the credit card companies that give the holder a 0% for 12 months and then boost it to what ever they want.

All the note holders (investors) that thought they were buying mortgage securities that were going to be paying double digit returns are getting burned, but they too were getting greedy and short sighted. The party is over!

[Teddy D]

I think its about time. I stopped paying my mortgage in May. Luckily I bought my house through Indymac. I listened to the people who told me that my house would keep going up, but they were very wrong. Luckily I won't have to pay the price for thier mistake. Plus I was able to save some money I thought I would have to use for rent, so now I can buy a more fuel efficient car and move from an X5 to a tiny 325i. The only good thing that has come out of this was some trips to mexico and a new car for my 17 year old. Guess I'll get to keep the memories and my house, but I thought I would just have the memories.

[BARRY TRACH]

THE BUSH ADMINISTRATION WAS WARNED ABOUT THIS BUT FAILED TO DO ANYTHING ABOUT IT. THEY WANTED TO KEEP THE ARTIFICIAL ECONOMY GOING. BUSH BAILED OUT BEAR STEARNS FOR 30 BILLION DOLLARS.
WHERE DO WE GO FROM HERE???

[Jeanie]

I have two Indymac loans. One for my residence and one on a rental. I have lost about 30% value on both (my down payments), which means I have no equity left. Without equity, I cannot refinance my five year arms (3 years left) despite a super high credit score and perfect payment history. Times are tight. I could really use a rate reduction. If I stop being responsible and trash my credit with non-payments, does that mean the government/Indymac will cut me a deal? It sucks to be good.

[J S]

It must be nice up there on your high horses!!! I have an Indymac loan that is in default right now. I didn't lie about my income. I was in a transtional time in my life where my husband was offered a much higher paying job and we just needed the crazy teaser rate to float us a couple of years until we planned to refinace into a better deal. His job fell through. I work for WaMu and just got laid off. We are living on 25% of the income we would have earned if our lives didn't blow up. Do you think we like being three months behind on our mortgage? Our credit was stellar until last year. These are hard times. Yes, some deadbeats will benefit from this plan. But, there are people like us who have been crushed by these unprecedented times. I am glad that everyone would prefer it if we lose our home, too. Thanks.

[sUSAN]

I don't feel that sorry for the people who have a ton of kids, live off welfare lie about income. This plan would be something that they would love.

They should weed them out, and help everyone with the 3% why not go all the way!! Give to all the honest people in need, Check the people's record see if they are on welfare refuse to get married so they can get all these benifits.

Hay I would love the3 %
Just weed out the welfare fruads, and losers. Who live off this type of Goverment give a way, bailout.

Give it to the Good hard working, or unemployed trying to work. ! But it must be for everyone like that.

This time around lets help the
everyone except the irresponsible
people who should not even have a house to begin with.

They spend thier money on luxuried and skip the mortgage or get goverment help and do nothning.

[Brooke]

I am so sick of hearing uneducated people blame the housing market on people having "lied" on their loan applications. Income is easy enough to verify. Nobody had to lie...everyone qualified all of a sudden because in the late 90's government made it a goal to provide "home ownership for everyone" (even those that couldn't afford it) and put pressure on the banks to loosen up their historically tight lending standards. Other banks followed suit to compete. Clinton started it and Bush kept it going and here we are today. How stupid and naive to think it's because "liars" finally figured out a way to fool the banks. Unbelievable. Wake up.