FDIC experiments with homeowner rescue plan

The agreements meant that hundreds of thousands of homeowners in IndyMac's portfolio facing interest rate increases on risky loans could not be covered by the program. "I wish I could say that we could do something to help people who are current but have a problem coming up, but it's difficult to do under our agreements," Krimminger said. "There is nothing worse than having somebody call and say, 'I'm current, but I think I'm going to have a problem here soon,' but unfortunately we can't do anything."

In addition, about 25 percent of the delinquent homeowners vetted by the FDIC's formula did not qualify. In many of those cases, even after the FDIC's adjustments to interest rate and principal, the homeowners could not afford the monthly payments.

Another problem is getting homeowners to respond to offers of help. The FDIC mailed 35,000 unsolicited modification invitations. About half of those included a detailed estimate of how much the program could save the homeowner. These offers, which are based on financial information about the borrowers, had a response rate above 70 percent.

But the FDIC is struggling to reach about 18,000 other homeowners for whom the agency does not have salary information. The FDIC sent those homeowners a letter asking that they call a customer-service line to discuss a modification. But only about 15 percent of those homeowners have responded.

$380 per month average savings
Last week, the FDIC began hiring nonprofit groups to help it reach this population. The agency will pay the housing counseling agencies $150 if the homeowner gets in contact with IndyMac and $350 more if the modification is successful. And the FDIC is preparing another outreach program, including new solicitations that note that the average modification includes a savings of about $380 a month.

Even after homeowners receive loan modifications, there is still a considerable risk they will default. In the past, about 40 percent of homeowners were delinquent again within a year of receiving a traditional loan modification, according to a recent Credit Suisse report. And some industry officials warn that the proportion could jump if the economic downturn deepens, throwing more people out of work.

Lenders say that the FDIC effort has pointed out some possible solutions but also has highlighted problems. "The FDIC has good intentions, and they are probably demonstrating things that can be done better," said Bob Davis, an executive vice president with the American Bankers Association. "But they are also demonstrating there is no silver bullet."

The industry has pointed to its Hope Now effort, an alliance of lenders established by the Treasury Department last year. The group says it has helped about 2.5 million homeowners, but nonprofit advocacy groups say the assistance won't necessarily keep participants out of foreclosure over the long term.

Indeed, the FDIC effort also does not go as far as some housing advocacy groups would like. The program defers but does not forgive principal for homeowners who owe more than their house is worth. Regulators have in many cases made the modifications temporary rather than permanent. For instance, a loan reduced to a 3 percent interest rate will begin to creep back up after five years to the survey rate set by Freddie Mac — currently about 6 percent.

In some cases, the FDIC effort is less aggressive than Bair advocated earlier. For example, a year ago, she said lenders should freeze the interest rate for certain subprime loans with adjustable rates. But faced with such a wide variety of loans at IndyMac, regulators determined that doing so would be impractical.

The American Securitization Forum, which represents many lenders and investors, is studying the IndyMac experiment. "As the housing market continues to experience severe stress, we are discussing with our members the approach taken by the FDIC and others as we consider additional industry initiatives to enhance the loss-mitigation process," Tom Deutsch, the group's deputy executive director, said in a statement.

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