The Federal Deposit Insurance Corp.'s program to lower loan payments for struggling borrowers with mortgages from IndyMac Bank has been lauded by consumer advocates and government leaders as a model of foreclosure prevention.
But when the FDIC, which is running IndyMac, mailed out 35,000 letters offering homeowners a chance to rework the terms of their mortgages, more than half the borrowers were apparently so discouraged, scared or stressed out that they didn't bother to respond.
"Anecdotally, what you hear is that a lot of people kind of hunker down when they're getting into trouble with their mortgages, and maybe just stop opening the mail," said Mike Krimminger, a special policy advisor to FDIC Chairwoman Sheila C. Bair.
"Some people have contacted us previously but then just decide they can't handle it anymore and go silent," Krimminger said. "And some have maybe just walked away from the home. So it's a combination of things."
The FDIC's experience has implications beyond IndyMac because the loan-modification program there is being looked at as one of the templates for an emerging government plan to help stem foreclosures. That plan would offer loan guarantees to encourage loan companies to alter as much as $500 billion in mortgages to make them more affordable to struggling homeowners.
But you can't help borrowers if you can't reach them. Despite the difficulties it has encountered, the FDIC appears at IndyMac to have been more successful at reaching them than most mortgage companies have been. Horror stories about elusive homeowners abound in the mortgage industry.
Bank of America's Countrywide unit tried to contact one delinquent borrower 150 times before the homeowner called -- in response not to the deluge of letters and phone calls but to news accounts of a new Bank of America plan to modify loans, said Steve Bailey, a mortgage executive at the bank.
The FDIC, which was appointed IndyMac's receiver when soured mortgages toppled the Pasadena savings and loan in July, announced a plan in August to aggressively reduce payments for borrowers who had fallen behind on their first mortgages.
The intent wasn't charity, the FDIC's Bair said; instead, she reasoned, it would be easier to find a buyer for the thrift if more borrowers were current on their loans.
The goal is to reduce the monthly payment on a loan, including taxes and insurance, to no more than 38% of the borrower's pretax income. To reach the target, the FDIC is prepared to take as many of the following steps as necessary:
Reduce the interest rate to as low as 3%.
Extend the loan's term to 40 years.
Waive interest on a portion of the mortgage balance. The borrower would still owe that amount but wouldn't have to pay it back until the loan was refinanced or the house was sold.
But of the 35,000 seriously delinquent IndyMac customers who were sent letters about the possibility of such modifications, more than half have yet to be heard from, officials said this week.
The response rate is higher -- 73% -- for borrowers who had already talked with IndyMac and provided their current income. The letters to such people were sent by registered mail and proposed new mortgage terms. If the borrower signs the agreement and returns it in an enclosed, prepaid Federal Express envelope -- along with proof of income and a first new monthly payment -- the mortgage can be modified with no further action by the borrower.
So far, IndyMac has completed the modification process for about 3,500 of these borrowers, with "thousands more in the pipeline," Krimminger said. The average reduction in principal and income payments has been 23%, saving the typical borrower $380 a month.
But IndyMac has no current income information for about 20,000 seriously delinquent customers who were sent letters. Many of them hadn't needed to document their income when they took out their loans. People in that group were sent invitations to discuss loan modifications by regular mail, and only 15% to 20% have replied, the FDIC said.
Still, that response rate "is remarkably off the charts to what other servicers are getting -- we're hearing about response rates of 4% to 5%," Krimminger said. "So I'm pleased but also frustrated because I'd like it to be a lot higher. These are people we need to get in touch with. It's kind of a last effort before we have to go into foreclosure."
IndyMac has even resorted to paying a bounty of sorts to mortgage counseling groups to contact borrowers who haven't responded, Krimminger said. The reward is $150 after the borrower's income is documented, with an additional $350 paid if the loan is successfully modified.
The agency also is experimenting with letters that tell borrowers how much they would save if their income is within a certain range. Krimminger and consumer advocates said just seeing a hypothetical number could prompt a borrower to sit down and talk.
To be sure, not everyone can be helped.