The Federal Deposit Insurance Corporation's experiment in modifying loans at IndyMac Bank is still showing good results in terms of keeping borrowers in their homes with a low re-default rate of less than 16%.
The Pasadena, Calif., thrift failed in July 2008. As receiver, FDIC developed an innovative loan modification program to reduce the mortgage payments of delinquent borrowers down to 38% of their income. Starting in early 2009, monthly payments were reduced to 31% of mortgage DTI on new modifications.
Overall, the weighted average payment reduction is 24% per loan. The bulk of the modifications were completed in the fourth quarter of 2008. As of May 31, the re-default rate on nearly 17,400 FDIC modifications is 15.6%.
The re-default rate on most loan modifications completed in the fourth quarter is 27% as of March 31. Most servicers in the fourth quarter did not emphasize the importance of reducing the borrowers' monthly payments and only 37% of loan mods resulted in payment reductions of more than 10%.
Unless the payments are reduced, "you are almost guaranteeing a re-default," a FDIC official said.