The Federal Deposit Insurance Corp.'s (FDIC) Indymac systemic loan modification plan could have a widespread impact on bond holders, according to a recent report from Barclays Capital.
Following the July 11 OTS closure and appointment of FDIC as the receiver of IndyMac Bank, the FDIC announced a plan last week to systematically modify seriously delinquent mortgages that are owned or securitized and serviced by IndyMac Federal, the new OTS-chartered institution.
The plan applies to first lien mortgages on the borrowers primary residence and is aimed at limiting the borrowers mortgage debt-to-income (DTI) ratio to 38% based on documented income.
With $2.5 billion worth of loans serviced by IndyMac as of March 31, whether the program will be widely used for IndyMac-serviced MBS and how bondholders will be impacted will offer insights into the future of MBS loan modifications in non-agencies, Barclays analysts said. They noted that IndyMac is the servicer for many non-IndyMac shelf deals.
IndyMac Federal is now sending modification offers to several thousand seriously delinquent or defaulted borrowers. It will also later target borrowers having difficulty as a result of payment resets and recasts. The FDIC also encouraging those borrowers who are having difficulty but who have not received a modification offer to contact IndyMac to see if they can qualify for a modification. Modifications being offered include the following: interest rate reductions to no higher than the Freddie Mac survey rate for conforming mortgages (and possibly below), extended amortization, and principal forgiveness aimed at achieving the 38% front DTI, Barclays noted.
IndyMac is requiring borrowers to send back the signed agreement, a check for the new payment amount, and information for IndyMac to verify income; upon income verification, IndyMac will finalize the modification. Based on the verified income, the final modification might have different terms than the original modification offer, the borrower might not qualify for a modification altogether, or another type of home retention workout plan may be developed. Aside from this, no fees are charged for the modification and all late fees will be waived.
FDICs plan states that modification offers for securitized mortgages will be consistent with MBS agreements and that additional steps are necessary for these loans. Barclays analysts reviewed IndyMac pooling and servicing agreements (PSA) to see what they allow for mortgages remaining in the trust. For mortgages delinquent at least 30 days, the payment due date can be extended up to 125 days, Barclays said.
Meanwhile, for seriously delinquent mortgages, which the PSA does not define, permanent loan modifications that change the mortgage rate, forgive principal or interest, or extend the final maturity can be done if the servicer believes losses will be minimized. Unlike PSAs for many other MBS shelves, IndyMac deals don't have the ability to modify loans where a default is reasonably foreseeable.
In the report, Barclays questions whether a strictly streamlined approach is possible for securitized mortgages under this or any plan. Additionally, simply requiring borrowers to send in the first modified payment amount and certain income documentation opens it up for many borrowers to fail to meet this hurdle. Analysts said that If they are wrong, and many MBS loans are modified or there are many modified loans in any one transaction, it could have large scale bondholder consequences.
"Unfortunately, it is impossible to determine how individual holders will be impacted. It depends on the deals servicer and trustee, as well as the unique deal provisions, including interest calculation and waterfall priority," Barclays analysts wrote.
However, analysts also said that the FDIC plan can serve as a broad market indicator of how many loan modifications will come from other servicers in the near term and how unique bondholders will be affected. Since IndyMac services several types of mortgages such as Alt-A, prime, and subprime and fixed, hybrid ARM, and option ARM, Barclays analysts said its experience will shed light across all MBS deal types.