(Adds details on mortgage yields, comments)
By John Poirier
WASHINGTON, Sept 17 (Reuters) - The Federal Deposit Insurance Corp has prevented many foreclosures by modifying distressed mortgages held by failed IndyMac Bancorp Inc IDMC.PK, FDIC Chairman Sheila Bair said on Wednesday.
“These efforts have prevented many foreclosures that would have been costly to the FDIC and to investors,” Bair said in prepared testimony for a U.S. House of Representatives Financial Services Committee hearing on a recent housing law.
The FDIC took control of IndyMac in July and has since then tried to clean up its assets, including its mortgages, for resale of the company later.
The independent federal agency insures up to $100,000 per deposit at insured banks and up to $250,000 per individual retirement account.
Months ago Bair urged banks to modify troubled mortgages by implementing a quick, streamlined process aimed at helping salvage a worsening housing problem.
She said the FDIC, which acts as the conservator of IndyMac until a buyer can be found, is responsible for about 742,000 mortgage loans, including more than 60,000 mortgages that are 60 days past due or in the process of foreclosure.
Bair said among the 60,000 delinquent mortgages, about 40,000 are eligible for the FDIC’s loan modification program.
Restoring troubled loans into performing ones has yielded 87 cents on the dollar for a mortgage later sold, compared with 32 cents for nonperforming mortgages, Bair said, citing data over the past few years.
The FDIC is reviewing mortgages held by IndyMac and those for which IndyMac acts as a servicer to pay investors that have bought slices of a pool of mortgages, called mortgage-backed securities.
Servicers, which includes banks, have complained that certain accounting and legal barriers have stood in the way of modifying mortgages.
“It does seem to me as a matter of public policy that as servicer somebody ought to have the same flexibility as the owner” of the mortgage,” Financial Services Committee Chairman Barney Frank said.
Frank is expected to explore possible changes to the securitization model that was used as the primary vehicle to originate mortgages and distribute them to investors.
“I think it absolutely needs to be looked at going forward,” Bair said.
One of the first actions the FDIC took after taking over IndyMac was to suspend most of IndyMac’s foreclosure actions to evaluate and improve the California bank’s portfolio.
“We hope to convert as many of these distressed loans as possible into performing loans that are affordable and sustainable over the long term,” Bair said.
The program comes at a time when the economy is struggling, home prices falling and big financial institutions faltering.
American International Group Inc (AIG.N) became the latest victim of the financial turmoil after mortgage finance companies Fannie Mae FNM.N and Freddie Mac FRE.N were placed under U.S. custody.
The focus of the hearing was on a foreclosure-prevention program as part of a recent sweeping housing reform legislation that is a cornerstone of just-passed federal housing legislation.
The Federal Housing Administration is expected to refinance thousands of troubled borrowers under a foreclosure-prevention program slated to start next month.
“We are firmly committed to having the program up and running by October 1, 2008, and believe this goal is achievable,” said FHA Commissioner Brian Montgomery said. (Reporting by John Poirier; Editing by James Dalgleish)