Emulating The Path Taken By Indymac Is The Best Way To Tackle Foreclosure Crisis

The best way to tackle the foreclosure crisis is to emulate the path taken by IndyMac under the stewardship of Sheila Bair.

Regarding the $700 billion bail out her goal is that the monthly payment of an individual towards mortgage should not be more than 31% of the person’s income. The loan period should be extended and the servicing companies offered payments of about $1,000 as incentive to come forth to negotiate. The government guarantee should be sufficient to entire group of lenders and investors to suffer 50% of the losses that the plan would entail. In any case if they pursued the path of foreclosure they would suffer bigger losses – a reality to which many borrowers are waking up to. Bair anticipates that if this plan is put into operation about 1.5 million foreclosures will be avoided.

The government will lend a helping hand only if the victim facing foreclosure is defaulting by six months. The help will be in the form of a modified loan. Professor Guttentag of Wharton however has reservations about the efficacy of the plan. He said, “I don’t think it is going to work because I don’t think that the servicers are going to buy into it. Re-defaults are one of the issues that servicers always bring up with modifications… Most of the re-defaults are probably in the first six months.” He also opined that by focusing on interest rate cuts rather than on reduction of principal would leave many house owners underwater. This will encourage them to abandon their properties. Even if with reduction of interest the banks and investors will continue to suffer from lack of cash flow. Thus they will continue to make the same objections.

Bair however is insisting that the approval of the investor will not be required for the loan modification to be made. She says that the servicing agencies have the right to modify the terms of the loan if they feel that the loan pools will show better performance. It is much a better alternative to being flooded with defaults, foreclosures and vacant unmanageable houses. In her testimony before the House Bair said, “While some have argued that servicing agreement preclude or routinely require investor approval for loan modifications, this is not true for the vast majority of servicing agreements.”

However it should be noted that many servicing companies do not have the legal authority to go ahead with loan modifications.