Mortgage Rescue Plan Could Look Like IndyMac

Source: FDIC has proposed rescue plan similar to IndyMac loan modifications.

Oct. 30, 2008— -- The FDIC has submitted a proposal to the Treasury Department to help Americans avoid foreclosure through a plan similar to one now in place for borrowers at a failed California-based bank, has learned.

Under the proposal, servicers of home mortgages would make certain loan modifications for borrowers and, in exchange, the government would guarantee those loans, according to a person familiar with the matter.

The plan, the person said, was similar to measures being taken by the Federal Deposit Insurance Corporation at IndyMac Bank. The FDIC seized IndyMac in July after the lender, battered by the housing crisis and the credit crunch, became the largest regulated thrift to fail.

Another source who has been following the negotiations closely told ABC News that he did not believe the announcement of a plan was imminent.

According to published reports, the plan currently under consideration by the government would cost up to $50 billion, would include loan guarantees and could aid 3 million homeowners.

Officials at the Treasury Department said today that it was too early to discuss specific proposals.

"No specific option has been decided on. It is premature to be assigning any specific figures or parameters to these proposals," said Treasury spokeswoman Brookly McLaughlin. "The administration and Treasury and FDIC and HUD have been and continue to look for ways to reduce foreclosures. And the White House has a policy process to work through the different ideas, but no decisions have been made on any particular approach."

An FDIC spokesman declined to comment, but in testimony before Congress last week, FDIC chairwoman Sheila Bair touted the benefits of loan guarantees and loan modifications. The government, she said, "could establish standards for loan modifications and provide guarantees for loans meeting those standards. By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."

Bair said that the government's $700 billion financial rescue plan, the Emergency Economic Stabilization Act, grants the Treasury Department authority to use loan guarantees to achieve loan modifications.

She also suggested that the IndyMac program could inspire more loan modifications elsewhere.

"Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country," she said.

Since the IndyMac takeover, the FDIC has implemented a loan modification plan targeting some 40,000 IndyMac borrowers who were delinquent on their payments or in foreclosure. The plan seeks to modify loans so that a borrower is not spending more than 38 percent of his or her monthly income on loan payments. The modifications include the reduction of interest rates and extending the term of the loan. The modifications are being made only when they prove less costly than allowing a homeowner to enter foreclosure.

Critics have warned that loan modification plans might run afoul of contracts held between mortgage servicers and investors who hold stakes in mortgage securities, but Bair said that that didn't hold true for the IndyMac plan. The contracts, she said, "typically provide servicers with sufficient flexibility to apply the IndyMac Federal loan modification approach."

Bair said that the 3,500 homeowners who had accepted IndyMac loan modication offers thus far saw their monthly loan payments slashed by an average of more than $380.