Regulator to help IndyMac mortgage borrowers

Customers wait outside the Encino branch of IndyMac Bank in Los Angeles on July 17, 2008.

WASHINGTON (Reuters) - Thousands of homeowners with distressed mortgage loans linked to failed lender IndyMac may soon be able to avoid foreclosure under a program announced on Wednesday by U.S. banking regulators.

The Federal Deposit Insurance Corp, which seized Pasadena, California-based IndyMac on July 11 in the third-largest bank failure in U.S. history, said 4,000 mortgage modification proposals were going out this week and it hoped to send out 25,000 modification notices over the next few weeks.

"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," FDIC Chairman Sheila Bair said in a statement.

IndyMac, the ninth-largest U.S. mortgage lender in 2007, according to the Inside Mortgage Finance newsletter, has about 740,000 loans that it either owns directly or it services for others in a $184 billion mortgage portfolio.

Bair has scolded banks for months to speed up loan modifications. Now the FDIC has a chance to practice what it has been preaching.

She expects most of the modified IndyMac mortgages to exceed the foreclosure value. "I hope it can serve as a model for other servicers," she said.

The modified loans will be available to most borrowers with a first mortgage either owned by, or securitized and serviced by, IndyMac. They will be available to borrowers who are seriously delinquent or in default and apply only to a borrower's primary residence.

Modified loans will be permanently capped at an interest rate of about 6.5 percent, the current Freddie Mac survey rate for conforming mortgages, but rates for many modified loans will be lower, to achieve a debt-to-income ratio of 38 percent.

Bair said foreclosure is a costly and destructive process. Modifying troubled mortgages would maximize value for the FDIC when the agency finds a buyer for IndyMac's portfolio, and improve returns for IndyMac's creditors.

Shortly after assuming control of IndyMac, the FDIC said it had temporarily halted any foreclosures on the $15 billion of bank-owned mortgage loans found in IndyMac's portfolio.

Bair told reporters that other mortgage servicers have been reluctant to roll out systematic loan modification programs because they fear investors' reactions. But she said the FDIC's IndyMac program could prove that such an approach can be valuable to all parties involved.

IndyMac was the fifth of eight banks to fail so far this year. The FDIC has said it expects IndyMac's failure will cost its $53 billion insurance fund between $4 billion and $8 billion.

Bair said she could not estimate the cost of the loan modification program, but said laws require the FDIC to take a lowest cost approach. If it is cheaper to foreclose a loan than to modify it, the FDIC is obligated to foreclose.

"In the vast majority of cases, we believe the net present value of loan modifications will exceed the foreclosure value," Bair said. "It will decrease our costs, not increase them."

(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)