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An Article in The Washington Post

Saturday, November 01, 2008


An article in The Washington Post on November 1, 2008 highlighted the IndyMac experiment.  Coupled with the Federal Depository Insurance Corp (FDIC), regulators are attempting to create a model for reworking mortgages and rescuing homeowners.

In the article, Renae Merle, reports that the “IndyMac initiative is seen as a way to test some aggressive methods for breaking through traditional barriers to loan modification. For instance, regulators are using a formula -- rather than individually scrutinizing each borrower -- to try to decide who should and should not be saved from foreclosure. In addition, regulators have won the cooperation of a major Wall Street firm in their mortgage modification effort, something critical to their success.”
This plan, backed by FDIC chairwoman Sheila Bair, would create an incentive for banks to change the terms of troubled mortgages by guaranteeing mortgages for millions of Americans who are struggling with their house payments but are otherwise creditworthy. Massimo Calabresi further reports in the Business and Tech Supplement for Time Magazine that “the plan would use up to $50 billion of the $700 billion in bailout funding approved recently by Congress and would draw on new loan-guarantee authority passed under the bill. The Federal Government would guarantee loans readjusted for homeowners who can show annual income worth 38% of the debt on their house. Under the plan, lenders would be encouraged to lengthen loan terms and make other adjustments in order to lower monthly payments to help borrowers keep their homes.” Although these plans won’t stop the foreclosures, the plans hope to minimize them for those that qualify.
Merle explains to us that “the FDIC is skipping the traditional but time-consuming approach of making customized modifications to individual mortgages. Instead, regulators are plugging homeowners' incomes into a formula to determine how much they can afford to pay -- usually 38 percent of their gross monthly income. Regulators first try to reach that payment level by lowering the interest rate. If that is insufficient, they then extend the term of the loan to 40 years. If that also is insufficient, homeowners might pay interest on only a portion of the principal.”  What I like about this plan is, as it stands right now, there is no forgiveness of the thousands and thousands of dollars in reduced principal which has been the norm up to this point.


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