Mr Mortgage: Actual IndyMac (Exotic) Loan Modification

Posted on December 3rd, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Sheila Bair’s underwriting makes Angelo Mozillo’s look tight. The IndyMac loan modification shown here has redefined ‘exotic’ and ‘leverage’ with respect to mortgages.  I am going to name it the 5-year hybrid, 30-year term, 8-year graduated payment, 176% combined loan-to-value, mega-balloon, super bendover ARM (document below).  And you thought Pay Option ARMs were exotic!

Even IndyMac has a extraordinarily long acronym for this modification.  The image below is cut straight from the document. Breaking out the acronym using mortgage lingo you get: Bulk Modification Principal & Interest and Interest Only Fixed and Adjustable Rate Mortgage with Step-Term Balloon. It is this very ‘innovation’ that got us here in the first place.

If they would have had these loans out during the bubble years the housing bubble could have grown twice as large.

This borrower is not as bad off as many in the bubble states – they are only 44% or $370k underwater in their home. Their present first mortgage is only slightly higher than the value of $475k. But when you add in the $345k second mortgage that the IndyMac modification lets stay in place, they are $370k upside down.

This modification makes the borrower a renter and debt-prisoner for life. This is not a financial solution for the borrower, rather a structure that lures the borrower into a terrible financial decision because it is cheaper to stay than walk away and rent. All of these new proactive loan modification plans by the law makers, regulators and bank are designed to do just this.  A ‘solution’ where the borrower still owes $840k on a $475k home and will never be able to refi or sell, should send them running.

While some will take this offer, I am hopeful that the typical home owner is not this ignorant. That is a lot of debt to carry around for life. On the other hand when you have nothing to lose and your only alternative will be foreclosure 6 months down the road, you may just accept the offer not considering the legal ramifications. I am sure this is also what the banks hope.

One thing is for sure – having millions of zombie homeowners unable to refi or sell their property awaiting the day a life circumstance forces their default and foreclosure is not the clearing process needed for an ultimate bottom in housing. Modifications such as this stretch the problem out several years.

I do believe that Sheila Bair is doing all that she can with the tools provided to her and banks that refuse to modify loans using principal balance reductions.

Let’s be clear – I am all about letting the housing markets clear naturally. That is the only way we can be sure when we hit a real bottom. But the solons are hell bent on modifying there may out of this and they are on the wrong track.

I am in firm belief that the only successful mortgage modification is one where the loan is re-underwritten / restructured using a market-rate 30-year fixed mortgage at 28/36% debt-to-income ratios.  To get there, a principal balance reduction will likely be necessary in most cases.  But the process will allow home-owners to operate at leverage ratios that greatly reduce the chances of walking away due to negative-equity permanently solving the problem.

A year from now when the after-modification 50% mortgage default recidivism rate keeps growing they will do mods the right way. But between now and then hundreds of thousands of home owners could sign their lives away. It is a shame.

Please see my most recent report on mortgage modifications and the right solution:

New IndyMac Loan Mod Structure & Term

New first mortgage: $494k
Second mortgage in place: $345k
Total liens:  $840k
Combined Loan-to-Value: 176%
Negative Equity: 44% ($370k)
Interest rate: First 5-years at 3%
Graduated rate/payments: Years 6-8
Max rate: 6.25%
Balloon (deferred principal): $245,581 (even at 3% this borrower could only legitimately qualify for roughly a $250k loan.)

The actual numbers have been changed slightly to protect the borrower.  They are in exact proportions to the original loan modification.

63 Responses to “Mr Mortgage: Actual IndyMac (Exotic) Loan Modification”

  1. I know who you are Ron. You know me too. That being said I have always respected your place in the industry. That being said, this time I think you are wrong.

    I don’t have time to comment in full right now but I am against all modifications. But since the solons are hell-bent on doing, I want to make sure they don’t destroy the housing market and borrowers for 30-years. There is a right and wrong way to do it.

    With respect to borrowers being bailed out – due to fraud by the investment banks and banks they overpaid for their homes. Below is frm a recent post…

    EVERYONE EARNED $150K PER YEAR

    Due to the way the loans were structured, from 2003 through 2007 everyone made $150k a year for the purposes of buying a home. Teaser rates, interest only, high allowable debt-to-income ratios, zero down, stated income etc made all homes affordable and borrowers rich. Home prices responded by surging higher to meet the new found nationally high affordability level. As home prices surged, new loan programs were rolled out what seemed like daily to keep affordability in check.

    Everyone was suckered, as these loan programs became the norm. Folks who really earned $150k a year went out and bought over priced homes based upon flawed and temporary fundamentals not knowing they were being suckered. Now they too are upside down in their home by 50% and have seen their life savings go up in smoke. They overpaid because the janitor was bidding against them using a stated income 100% interest only combo. Hey, the loan officer at the bank and the Realtor told the janitor that ‘based upon his income and credit you qualify for this loan’. Why should he argue with his bank? They know best. They are the experts.

    REALITY

    But now it is obvious that the past six years was an illusion and none of those easy credit, high-leverage programs exist any longer. Prices are coming down to the real affordability levels using 15 and 30-year fixed rate loans and a down payment, which has rendered the nations financial institutions and millions of home owners instantly insolvent. The same household that earns $75k per year that two years ago could buy a $650k home with no money down can now buy a $275k home with 10% down. It now takes at least $150k a year and a large down payment to buy a $650k home.

    100% stated interest only and Pay option ARMs will not return. Nor will 100% HELOCs. They were doomed to fail from their creation. The banks had modeling systems that they never stress tested. You mean to tell me that it never occurred to the smartest guys in the room to plug into the model that home prices could actually fall? That was a fatal error that the world is paying for.

    This is why this crisis was never ‘contained’ to Subprime. This is why those who put down 20% are walking away from their homes – it makes for a sound financial decision. Negative equity is now the leading cause of loan default among higher paper grades. As house prices fall further, more will walk.

    Yes, there were people who took advantage of the system. But, that was a small percentage of everyone who bought a home on flawed and temporary market fundamentals induced by easy credit and exotic loan programs that never should have existed in the first place. This five year period of absolute recklessness and blind greed on the bank’s part was the real driver of home prices. Taking that away is ‘going straight’ is the leading driver for the destruction of the housing market and consumer.

  2. Admin… you pretty much have it right at a high level. However, I would not blame the banks, they were merely the conduit for the product that was actually peddled on wall street. It is a wall street product of which they were making an insane amount of money and needed more and more product. The banks dumped them off.

    Losses today for the banks seem to be coming from buy-back agreements with those products and the instant inability to generate any revenue due to no products. If bank portfolio’s are declining at such a rapid rate, can you imagine the MBS’s?

    There is no real fix for all of this… it just has to run its course.

  3. There is a fix look under Bubble States Revisited.

    Save the Flippers stated:

    31% of the population were renters
    26% own their homes outright
    43% have a mortgage

    the government records agree that 69% of homeowners, so I agree with him so far.

    The 43 % that have mortgages decide the market value, since LENDERS are the judges issuing the mortgages, not many people have all cash to purchase.

    Here’s where it gets confusing:

    6.99% of homeowners are deliquent
    1 of out of every 10 homeowners are underwater
    20% of all homeowners are underwater or deliquent

    These fiqures were out taken out of the NY TIMES. In reality it doesn’t matter what percentage you want to believe, the reality is that home values have declined from the market peak over 24% Nationally. Some area’s have only decreased by 5 or 10% but some have by 35 or 40% and all areas will continue until something is done.

    When and How does the market correct or bottom out, if nothing is being done to correct the deflationary cycle from fueling itself to “zero”?

    The market is not a reasonable or logical instrument that states okay now we stop deflating because we are at affordability for the majority or the correct rents vs mortgagehas been reached REGARDLESS of having the same fuel of discounted reo’s being applied and affecting lower values.

    I believe that the “course” is to long and definately has the ability to over-correct to the extreme.

  4. As much as the terms of the modification are not all that great… one very glaring and important element of the Indymac modification agreement is it does not contain a release of liability of clause. I have to admit it is an honest approach geared merely at the modification. Most of the other modifications I have reviewed contain full releases of all liability and I would never recommend a consumer ever sign one with such provisions unless they were settling some very specific issues that they area aware of. So while there are criticisms, I think their approach is more genuine. Would I accept it? No way, I would give them the keys and go rent for half the price.

  5. So it’s a problem that people aren’t turning around massive profits on their bubbled properties? They’d actually PAY their loans back if they wanted to keep their houses? Oh those poor souls, for a second I thought we were going to be a society of nothing buy gimmes and quick profits from flipping. I hope that this option to keep their houses and lesson of person responsibility doesn’t bite too hard. I mean, we wouldn’t want people to stop buying what they couldn’t afford.

  6. I’ll certainly agree with something that Mr. Mortgage has figured out before probably anybody else out there (and still most people don’t get it). Subprime, Option-ARMs, etc are not the problem any longer. Nothing in that regard will surprise us at least. It is the incentive to walk away from your house because it makes you house poor and is worth a fraction of what you owe. That’s why the reset schedules don’t really matter any more unlike a year ago. And the problem can compound on itself.

    But with an angry fire in my soul I am absolutely appalled that anybody with a good understanding of these greedy homeowners thinks they should have a principal reduction. Go read the forums on loansafe.org. They will make you lose your minds. “Why does the bank not want to let me keep the money I borrowed? Should I tell them about my RV or three vacation properties when begging for a principal reduction?”

    The greed is sickening. All the Scorcese mobsters combined lack the level of wretched scum, selfishness, and narcissism that each of these people have.

  7. I am for letting the market clear but here is my case for principal bal reductions – it was not all greedy consumer by any means. Those were the exceptions.

    http://mrmortgage.ml-implode.com/2008/12/14/mr-mortgage-my-case-for-mortgage-principal-reductions/

  8. Mark, I read it and it repulsed me. They were greedy consumers. They wanted in on the big game, but now cry that they aren’t reaping profits exceeding their annual income. We cannot construct a society that artificially dictates who owes how much and try to engineer people’s lives. That is what they do in countries like North Korea.

    Now while people today are saying “this sucks, I never thought I’d owe more than my house is worth,” it’s really an follow-up from what they said three years ago: “My house is awesome. I’m going to make a killing off of it. My neighbor just bought his for 10% more than I paid, so I’ve made $50k. Time to refi and buy that Jaguar.” These people shouldn’t be bailed out, they deserve to be cock-punched.

  9. What is INDYMAC offering for land loans with balloons payments? I recently spoke with a law firm who claims they can negotiate mortgage reductions from INDYMAC arguing that the reduction in principle still provides the bank a performing asset. Sounds too good to be true.

  10. Brian – please email me privately with their contact information.

  11. I heard a rumor that these loans are going to be both:

    (a) full recourse loans (meaning that if you default the creditor can sue and obtain a judgement against you), and

    (b) exempt from discharge under both Chapter 7 and Chapter 13. (meaning that Bankruptcy won’t wipe them out — simmilar to student loans).

  12. Kevin, that is awesome. Perhaps if the current concerns are that the incentive to walk away is too great, permanently attaching them to their debt will force them to stay and we won’t have to worry about it getting out of control.

  13. Latest plan to save housing values, immigrants over bulldozers….

    http://finance.yahoo.com/tech-ticker/article/149374/Housing-Cure-Give-Us-Your-Skilled-Your-Educated-Your-Bundled-Mortgages?tickers=%5Edji,%5Egspc,XHB,TLT,TOL,DHI,PHM

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