FDIC sets mortgage plan for IndyMac borrowers

WASHINGTON — Thousands of troubled home borrowers with loans from IndyMac Federal Bank will be able to switch to fixed-rate mortgages under a new plan from federal regulators, who seized the bank last month after it became the largest regulated thrift to fail.

Most IndyMac borrowers who are seriously delinquent or in default on their mortgages and can document their situation will be able to switch into loans capped at an interest rate around 6.5 percent, the Federal Deposit Insurance Corp. said today.

The average U.S. rate on 30-year, fixed-rate mortgages was 6.52 percent last week, unchanged from the previous two weeks.

The FDIC has been operating the Pasadena, Calif.-based bank, which was called IndyMac Bank, under a conservatorship since July 11.

More than 60,000 of the bank's home borrowers are 60 or more days behind on their payments, according to the FDIC.

Under the FDIC's "streamlined loan modification plan," the changes are designed to achieve sustainable payments by borrowers at a 38 percent debt-to-income ratio of principal, interest, taxes and insurance, the agency said.

The rule of thumb in the mortgage industry is that the loan payment, taxes and insurance shouldn't exceed 28 percent of the borrower's gross monthly income, and total long-term debts shouldn't exceed 36 percent.

The FDIC plan applies to troubled mortgages with higher interest-rate resets, mainly in the category of so-called Alt-A loans, which traditionally were made to borrowers with solid credit but little proof of their incomes, or small or no down payments.

Only mortgages on primary residences are eligible, and borrowers must demonstrate their financial hardship by documenting their income, the FDIC said. Besides borrowers whose loans are seriously delinquent or in default, the bank also will try to work with those who are unable to make their mortgage payments because of resets or changes in their ability to repay.

The FDIC temporarily froze all mortgage foreclosures for IndyMac borrowers when it took over the bank. It said today that there will be no fees for the loan modifications and all unpaid late charges will be waived. Thousands of delinquent borrowers will receive proposed offers for modifications in the coming weeks, based on current income information they provided, the FDIC said.

FDIC Chairman Sheila Bair has been urging mortgage lenders and firms that service mortgages to develop comprehensive plans for modifying unaffordable loans, rather than doing so on a loan-by-loan basis.

The agency's mortgage plan for IndyMac could be a key test case for that policy.

"Our goal is to get the greatest recovery possible on loans in default or in danger of default, while helping troubled borrowers remain in their homes," Bair said in a statement today. "I believe we achieve that with this framework."

Avoiding the lengthy and costly process of foreclosure can help neighborhoods and makes good business sense, Bair said.

IndyMac, with around $32 billion in assets and $19 billion in deposits at the time it failed, was the second-largest financial institution to close in U.S. history, after Continental Illinois National Bank in 1984. IndyMac's closure prompted hundreds of angry customers to line up for hours in Southern California to demand their money.

The pressures to which IndyMac succumbed — tighter credit, tumbling home prices and rising foreclosures — have been battering many banks of all sizes nationwide.

IndyMac's failure is expected to cost the federal deposit insurance fund, currently at $53 billion, between $4 billion and $8 billion.

IndyMac Bancorp, which was the holding company for IndyMac Bank, had been struggling to raise capital and manage losses from soured mortgage loans. It has filed for Chapter 7 bankruptcy protection, meaning its business will be liquidated to help pay off its creditors.

IndyMac borrowers can call 1-800-781-7399 to find out if they qualify for a loan modification under the program or other alternatives. Borrowers also can go to the bank's Web site at www.imb.com.