ebruary 19, 2010
IndyMac Incorporates HAMP DTI Ratios and Sees Results
By Brian Collins
Mortgage credit analysts have noticed fewer redefaults on IndyMac loan modifications after the FDIC directed the servicer to make deeper reductions in borrowers' monthly payments.
In the first quarter of 2009, the Federal Deposit Insurance Corp. was using a 38% mortgage debt-to-income ratio as its target for lowering monthly payments made to IndyMac Bank. But then the agency lowered the DTI to 31%, aligning its effort with the Treasury Department's redesigned Home Affordability Modification Program.
Prior to the change, IndyMac's loan modifications had a 48.5% redefault rate after 12 months, according to figures compiled by Bank of America Merrill Lynch Global Research. But after the FDIC dropped the DTI ratio to 31% the redefault rate fell by up to 10 points over the next nine months.
<!--teaser-->"Assuming that trend continues, these modifications would have 12-month recidivism rates in the range of 30%-40%," said B of A mortgage strategist Max Nissman.
In the summer of 2008 Pasadena, Calif.-based IndyMac, once a top player in alt-A lending, failed at a cost of $9 billion to the government. Eventually, it was sold to private investors and renamed OneWest Financial. Shortly after taking it over, the FDIC used the thrift as a laboratory of sorts for loan modifications.
The monthly payment for homeowners participating in HAMP trials are reduced, on average, by $500. But these borrowers have to make three timely payments before they can qualify for a permanent modification. (Mr. Nissman believes the performance of the HAMP modifications can be enhanced by the trials and the timing of restructurings.)
The bulk of the IndyMac mods occurred during the first half of 2009 amidst rising unemployment. The first 60,000 HAMP mods were approved in the fourth quarter as layoffs were declining.
"I would conservatively expect HAMP recidivism rates to be in a similar range (30%-40%) with a decent chance of being better due to the filtering process created by the trial period specifically and a stabilizing macroeconomic environment in general, assuming the program's guidelines do not change significantly," Mr. Nissman said.
This bodes well for the HAMP program, which is finally gaining traction. Mortgage servicers completed nearly 50,000 permanent HAMP modifications in January, compared to 35,000 the previous month.
The Treasury Department said that HAMP servicers have completed 116,300 permanent modifications since the program was launched in the spring of 2009. The first 5,000 permanent modifications were completed in October after a long implementation period.
Currently, 830,500 homeowners are participating in three-month payment trials. "With nearly one million homeowners paying less each month and the number of permanent modifications steadily rising, HAMP is doing the job it was designed to do," said Phyllis Caldwell, chief of Treasury's Home Preservation Office.
Treasury also reported that 60,500 borrowers have dropped out the payment trials during the life of program and 1,000 permanent modifications have been cancelled. The Obama administration is expected to keep pressuring HAMP servicers to increase their trial-to-permanent modification conversion rates. At the same time, Fannie Mae and Freddie are focusing on implementing a new short sale and deed-in-lieu component of the HAMP program.
This is a "necessary step because everyone is not going to get into a modification," said Alanna Brown, a Fannie administrative project manager who works with servicers. "A short sale or deed-in-lieu transaction might be the right alternative to help them get out of their home gracefully," she said.
Ms. Brown noted that the volume of distressed borrowers is still growing, including borrowers who haven't missed a mortgage payment yet. "They are calling their servicers because there is an issue in front of them and they feel they are not going to make it," Ms. Brown said. "That is causing some capacity constraints," she added.
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