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FDIC LoanModification Program
 
FDIC Loan Modification Program Page 2
A message from FDIC Chairman Sheila Bair
I have long supported a systematic and streamlined approachto loan modifications that puts borrowers into affordable, long-term mortgages while achieving an improved return forbankers and investors compared to foreclosure. Using thistype of approach, we can help stabilize the U.S. financialmarkets by minimizing foreclosures on the 6.4 million loansthat are currently past due or are projected to becomedelinquent by mid-2010. Avoiding foreclosure, when it isfinancially prudent to do so, reduces the downward pressureon the price of nearby homes and helps communities tomaintain the services they provide to neighborhoods.Unnecessary foreclosures perpetuate the cycle of financialdistress and risk aversion, which potentially could causehousing prices to overcorrect and create even larger losses forboth borrowers and the financial industry.
Chairman Sheila C. Bair Federal Deposit Insurance Corporation
At IndyMac Federal Bank, the FDIC initiated a systematic and streamlined loan modificationprogram for delinquent borrowers who occupy their home. These distressed mortgages are beingrehabilitated into performing loans while avoiding unnecessary and costly foreclosures. Byachieving mortgage payments for borrowers that are both affordable and sustainable, we expectto reduce future defaults, improve the value of the underlying mortgages, and cut servicing costs.This approach makes good business sense and creates a ‘win-win’solution for everyone. Istrongly encourage bankers, servicers, and investors to implement systematic and streamlinedloan modifications that result in monthly mortgage payments thatborrowers can afford over thelong term.To assist bankers, servicers, and investors in this process, this guide provides an overview of theFDIC’s loan modification program. It outlines our program terms at IndyMac Federal Bank, offersinsight into the specific portfolio characteristics that drive modification modeling at that bank, andprovides a framework for developing and implementing a similar program at your institution.While the final program each of you implements will be based on the characteristics specific toyour respective portfolios, I am confident that the value of such a program will benefit both yourinstitution and your investors while helping many troubled borrowers remain in their homes. Yoursupport in this industry-wide effort will help avoid unnecessary foreclosures and bring stability tothe housing and mortgage markets during this time of unprecedented economic turmoil.Sincerely,Sheila Bair
 
FDIC Loan Modification Program Page 3
Loan Modification
Input borrower specific income information into theNPV Tool, which provides a real-time workout solution.
Perform automated loan level underwriting acrosslarge segments of the portfolio to support pre-approvedbulk mailings.
Verify income information the borrower provided viacheck stubs, tax returns, and/or bank statements.
Compare the cost of the modified concessions to theestimated cost of foreclosure to mitigate losses.
Mandate that the cost of the modification must be lessthan the estimated foreclosure loss.
Use a financialmodel withsupportableassumptions toensure investorinterests areprotected.
InvestorProtectionViaNPV Tool
Require the borrower to make one payment at the timeof the modification.
Cap the interest rate at the Freddie Mac WeeklySurvey rate effective at the time of the modification.
Lower the interest rate as required to meet the targetHTI ratio, fixing the adjusted rate and monthly paymentamount for 5 years.
Step up the initial interest rate gradually starting in year6 by increasing it one percentage point each year untilreaching the Freddie Mac Weekly Survey rate cap.
Provide borrowersthe opportunity tostay in their homewhile making anaffordable paymentfor the life of theloan.
Return the loan to a current status.
Capitalize delinquent interest and escrow.
Modify the loan terms based on waterfalls, starting at afront-end 38 percent HTI ratio down to a 31 percentHTI ratio, subject to a formal NPV floor.
Reduce interest rate to as low as 3 percent.
Extend, if necessary, the amortization and/or term ofthe loan to 40 years.
Forbear principal if necessary.
Offer proactiveworkout solutionsdesigned to addressborrowers who havethe willingness butlimited capacity topay.
BorrowerAffordabilityDeterminationProcessStrategyFDIC Loan Modification Program
As indicated in the summary table below, the FDIC’s Loan Modification Program is primarily based ontwo principals:1)Determining a payment the borrower can afford by multiplying the borrower’s gross monthlyincome times the appropriate housing-to-income (HTI) ratio, less taxes and insurance to achieve aminimum payment reduction of 10 percent, and2)Protecting investors’interests by requiring that the cost of the modification is less than theestimated cost of foreclosure (the Net Present Value (NPV)floor).
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