Speeches & Testimony
Sheila C. Bair
Federal Deposit Insurance Corporation
A Review of Foreclosure Mitigation Efforts
Financial Services Committee
U.S. House of Representatives
September 17, 2008
2128 Rayburn House Office Building
Chairman Frank, Ranking Member Bachus, and members of the Committee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) concerning strategies to avoid unnecessary foreclosures, including
implementation of the HOPE for Homeowners Act of 2008 and the FDIC's recent loan
modification efforts at IndyMac Federal Bank.
My testimony will provide a brief discussion of the problems created for
communities and individuals by unnecessary foreclosures and the importance of
converting distressed loans into long-term, sustainable loans through programs such as
the HOPE for Homeowners. In addition, I will provide an update of the FDIC's recently
launched loan modification program for customers of IndyMac Federal Bank.
The Housing Markets and the Impact of Unnecessary Foreclosures
In testimony before this committee in April, I discussed various proposals to
address the turmoil in the mortgage markets and stem unnecessary foreclosures. This
turmoil was caused by a complex set of interrelated causes, including weakened lending
standards, inadequate consumer protections, regulatory arbitrage and speculative activity.
Steep home price declines are an important dynamic that drives up foreclosure rates.
Falling home prices reduce homeowner equity, which then makes it more difficult to
refinance or sell a home, leading to lower sales and higher delinquencies.
Following a period of sustained growth in home sales, new home construction and
average home prices in the first half of this decade, U.S. housing markets are now
experiencing their most serious downturn of the past 60 years. Severe housing market
downturns have occurred in California, Nevada, Arizona, Florida and other boom
markets where rapid increases in home prices proved unsustainable. Dozens of cities
have now experienced average home price declines of more than 10 percent, and the
Case-Shiller index of 20 large U.S. cities has declined by almost 19 percent from its July
Through the second quarter of 2008, U.S. residential construction activity has
fallen for 10 consecutive quarters, subtracting an average of almost 1 percentage point
from annualized GDP growth over that period. Yet even as construction activity has
declined, inventories of unsold homes have steadily risen. The Census Bureau reports
that the inventory of unsold new homes in July stood at a level equal to 10.1 months of
current sales--r twice the level at the end of 2005.
Declining home prices and an excess supply of unsold homes are closely linked to
the historic levels of credit distress that have recently been recorded in nonprime
mortgage portfolios. As of June, seriously delinquent loans amounted to some 4.5
percent of all U.S. mortgage loans outstanding and almost 27 percent of subprime
adjustable-rate mortgages.1 An estimated 1.5 million mortgages entered foreclosure
during 2007, followed by almost 1.2 million additional loans in the first half of 2008.
Distressed sales continue to place downward pressure on home prices in the most
troubled markets. An estimated 45 percent of all California home sales in July 2008 were
foreclosure resales, up from 7.6 percent one year ago.2
The rising trend of foreclosures imposes costs not only on borrowers and lenders,
but also on entire communities. Foreclosures may result in vacant homes that may invite
crime and create an appearance of market distress, diminishing the market value of other
nearby properties. In addition, the direct costs of foreclosure include legal fees, brokers'
fees, property management fees, and other holding costs that are avoided in workout
scenarios. These costs can total up to 40 percent or more of
the market value of the property.3
Minimizing foreclosures is important to the broader effort to stabilize global
financial markets and the U.S. economy. Foreclosure is often a very lengthy, costly and
destructive process that puts downward pressure on the price of nearby homes, as noted
above. While some level of home price decline is necessary to restore U.S. housing
markets to equilibrium, unnecessary foreclosures perpetuate the cycle of financial distress
and risk aversion, raising the possibility that home prices could overcorrect on the
Over the past year and a half, the FDIC has worked with mortgage lenders, the
securitization industry, servicers, consumer groups, other regulators and Congress to
identify and correct barriers to solving current market problems while establishing
controls to guard against their reappearance in the future.
The HOPE for Homeowners Act
As I stated in April, no single solution or "silver bullet" can address the adverse
effects of the deficiencies that have contributed to the current market turmoil. Rather, a
number of approaches emphasizing different solutions for the different segments of the
market are required. One of these approaches, for which Congress should receive
significant credit, is the HOPE for Homeowners Act. The HOPE for Homeowners
Program (Program), which the Act established, will make a positive difference for many
homeowners facing foreclosure.
I am pleased the FDIC is able to lend our assistance as a member of the Board of
Directors of the Program (Oversight Board), which oversees implementation of the
HOPE for Homeowners Act. The Oversight Board consists of the secretaries of Housing
and Urban Development (HUD) and Treasury and the chairpersons of the Board of
Governors of the Federal Reserve System (FRB) and the Board of Directors of the FDIC,
or their designees. General duties of the Oversight Board include establishing
requirements and standards for the Program that are not otherwise specified in the
legislation, and prescribing necessary regulations and guidance to implement those
requirements and standards.
The FDIC and fellow Oversight Board members are committed to full
implementation of the Program by the October 1, 2008 deadline. Our respective agencies
have worked cooperatively together to address the many issues necessary to achieve full
implementation by the statutory deadline. These efforts also have included outreach,
projecting the volume of potential loan activity in the Program, forecasting loss rates for
new loans, and estimating credit subsidies. Representatives of various groups that will be
affected by the new program, including lending, loan servicing, and consumer groups,
have participated in what has been an intense and collaborative effort by the agencies to
get the Program up and running quickly.
The statutory approach for the Program made effective use of existing
governmental and market structures. By modeling the proposal on existing FHA
programs, the time and expense of implementing the Act have been significantly reduced.
The new program incorporates many of the principles the FDIC considers necessary to be
effective. It converts current problematic mortgages into loans that should be sustainable
over the long-term and convertible into securities. It also requires that lenders and
investors accept significant discounts and prevents borrowers from being unjustly
enriched if home prices appreciate.
As part of the planning for the HOPE for Homeowners launch on October 1, the
Board will be authorizing a series of efforts across the country to quickly inform the
public about the availability of the Program. The FDIC's Community Affairs program
staff is working with HUD on an outreach strategy and will provide whatever support and
expertise we can to assist in the effort.
IndyMac Federal Bank Loan Modifications
As the Committee knows, the former IndyMac Bank, F.S.B., Pasadena,
California, was closed July 11. The FDIC is conservator for a new institution, IndyMac
Federal Bank, F.S.B. (IndyMac Federal), to which the accounts and assets of the former
IndyMac Ban, F.S.B. were transferred. As a result of this arrangement, the FDIC has
inherited responsibility for servicing a pool of approximately 742,000 mortgage loans,
including more than 60,000 mortgage loans that are more than 60 days past due or in
foreclosure. As conservator for IndyMac Federal, the FDIC has the responsibility to
maximize the value of the loans owned or serviced by IndyMac Federal. Like any other
servicer, IndyMac Federal must comply with its contractual duties in servicing loans
owned by investors. Consistent with these duties, we hope to convert as many of these
distressed loans as possible into performing loans that are affordable and sustainable over
the long term. We are now actively evaluating distressed mortgages for refinancing
through FHA programs, including FHA Secure. Once it is implemented, we certainly
plan to utilize the Hope for Homeowners Program as well.
An additional option that I have long advocated is streamlined loan modifications.
This is particularly necessary as delinquencies have continued to increase. IndyMac
certainly has experienced significant delinquencies. As a result, on August 20, the FDIC
announced a loan modification program to systematically modify troubled residential
loans for borrowers with mortgages owned or serviced by IndyMac Federal. Of the more
than 60,000 delinquent mortgages serviced by IndyMac Federal, approximately 40,000
are now eligible for our loan modification program because they are either owned by
IndyMac Federal or serviced under securitization agreements providing sufficient
flexibility. We are working with the owners of the remaining mortgages to gain approval
to apply the new modification program to those loans as well.
As we have done in some past failures, the FDIC as conservator for IndyMac
Federal has suspended most foreclosure actions for loans owned by IndyMac Federal in
order to evaluate the portfolio and identify the best ways to maximize the value of the
institution. As mentioned above, the FDIC also has begun a program of loan
modifications for delinquent and at-risk borrowers. The FDIC as conservator for
IndyMac Federal is systematically identifying loans in the portfolio that are currently
delinquent or in default, or where borrowers are unable to make their payments due to
interest rate resets or other reasons. Where it will improve the value of the loan, IndyMac
Federal is offering loan modifications to eligible borrowers.
By achieving mortgage payments for borrowers that will be both affordable and
sustainable, these distressed mortgages will be rehabilitated into performing loans and
avoid unnecessary and costly foreclosures. We expect that by taking this approach,
future defaults will be reduced, the value of the mortgages will improve, and servicing
costs will be cut. The streamlined modification program will achieve the greatest
recovery possible on loans in default or danger of default, in keeping with our statutory
mandate to minimize impact on the insurance fund and improve the return to uninsured
depositors and creditors of the failed institution. At the same time, we can help troubled
borrowers remain in their homes. Under the program, modifications are only being
offered where doing so will result in an improved value for IndyMac Federal or for
investors in securitized or whole loans, and where consistent with relevant servicing
Applying workout procedures for troubled loans in a failed bank scenario is
something the FDIC has been doing since the 1980s. Our experience has been that
turning troubled loans into performing loans enhances overall value. In recent years, we
have seen troubled loan portfolios yield about 32 percent of book value compared to our
sales of performing loans, which have yielded over 87 percent.
In implementing the loss-mitigation program, IndyMac Federal's first priority is
maximizing the value of the mortgages by assisting borrowers who are seriously
delinquent or in default on their mortgages. However, where its servicing agreements
permit, IndyMac Federal also is working with borrowers who face upcoming resets or
other changes in their ability to repay.
Only mortgages on the borrower's primary residence are eligible for the
streamlined approach, and borrowers have to demonstrate ability to repay the modified
loan by documenting income. Under the loan modification program, IndyMac Federal
determines whether the modified mortgage payments will be affordable to the individual
borrower based on the borrower's income information. The modifications are designed
to be sustainable based on achieving a 38 percent first mortgage debt-to-income ratio of
principal, interest, taxes and insurance.
A combination of interest rate reductions, extended amortization and forbearance
are all tools being used to reach a payment affordable for the borrower. The modified
mortgages are capped permanently at the current Freddie Mac survey rate for conforming
mortgages -- currently about 5.93 percent. To achieve a sustainable mortgage payment
equal to a 38 percent DTI, IndyMac Federal can reduce the rate to as low as 3 percent for
five years. After five years, the interest rate would gradually increase by 1 percentage
point per year until it reached the Freddie Mac survey rate applicable when the mortgage
was initially modified. The interest rate would be fixed at this rate for the balance of the
mortgage term. If necessary to achieve a payment at a 38 percent DTI, IndyMac Federal
also can extend the amortization term of the mortgage or defer payments on a portion of
the principal of the loan. Application of these options always must be evaluated to ensure
IndyMac is maximizing the value of the mortgage that can perform as compared to
foreclosure. No fees are being charged for these loan modifications, and unpaid late
charges are being waived.
If a borrower's income information reveals that the borrower is not qualified for
the proposed modification, IndyMac Federal will work with the borrower to discuss
alternatives to allow the borrower to remain in the home, including options such as the
HOPE for Homeowners Program.
By the end of August, more than 4,000 modification proposals had been mailed to
IndyMac borrowers. Through today, IndyMac has mailed more than 7,400 modification
proposals to borrowers and has called many thousands more in continuing efforts to help
avoid unnecessary foreclosures. While it is still early in our implementation of the
program, over 1,200 borrowers have accepted the offers and many more are being
processed. I am pleased to report that these efforts have prevented many foreclosures
that would have been costly to the FDIC and to investors. This has been done while
providing long-term sustainable mortgage payments to borrowers who were seriously
delinquent. On average, the modifications have cut each borrower's monthly payment by
more than $430.
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.
The FDIC strongly supports programs that result in mortgage loans that are
sustainable over the long term and avoid unnecessary foreclosures that harm individual
borrowers and the economy. Prudent workout arrangements are in the long-term best
interest of both the financial institution and the borrower. As a member of the Oversight
Board for the HOPE for Homeowners Program, the FDIC is committed to successful
implementation by the October 1 deadline. In addition, the FDIC will continue the
systematic program now in place at IndyMac Federal to convert troubled loans into
performing loans and enhance the value of these assets.
I commend the Committee on its leadership in passing the HOPE for
Homeowners Act and look forward to working with Congress on this and other programs
to return our housing markets to stability and improve our economy.
1 Source: Mortgage Bankers Association, National Delinquency Survey, Second Quarter 2008. Seriously
delinquent loans are defined as loans 90 days or more past due or in foreclosure.