FDIC Loan Modification Program Guide



The FDIC's Loan Modification Program Guide provides an overview of the FDIC's loan modification program. The FDIC developed "a systematic and streamlined loan modification program" at IndyMac Federal Bank for delinquent borrowers who occupy their home. The FDIC believes it's IndyMac program "offers insight into the specific portfolio characteristics that drive modification modeling", and provides a framework for developing and implementing similar programs for bankers, servicers, and investors.

As indicated in the summary table below, the FDIC’s Mortgage Loan Modification Program is primarily based on two principals:

1) Determining a payment the borrower can afford by multiplying the borrower’s gross monthly income times the appropriate housing-to-income (HTI) ratio, less taxes and insurance to achieve a minimum payment reduction of 10 percent, and

2) Protecting investors’ interests by requiring that the cost of the modification is less than the estimated cost of foreclosure (the Net Present Value (NPV) floor).

This information was compiled from the FDIC.

FDIC Loan Modification Program

Borrower Affordability Determination

 Offer proactive workout solutions designed to adddress borrowers who have the willingness but limited capacity to pay
  • Return the loan to a current status.
  • Capitalize delinquent interest and escrow.
  • Modify the loan terms based on waterfalls, starting at a front-end 38 percent HTI ratio down to a 31 percent HTI ratio, subject to a formal NPV floor.
  • Reduce interest rate to as low as 3 percent.
  • Extend, if necessary, the amortization and/or term of the loan to 40 years.
  • Forbear principal if necessary.
Provide borrowers the opportunity to stay in their home while making an affordable payment for the life of the loan
  • Require the borrower to make one payment at the time of the modification.
  • Cap the interest rate at the Freddie Mac Weekly Survey rate effective at the time of the modification.
  • Lower the interest rate as required to meet the target HTI ratio, fixing the adjusted rate and monthly payment amount for 5 years.for the life of theloan.
  • Step up the initial interest rate gradually starting in year 6 by increasing it one percentage point each year until reaching the Freddie Mac Weekly Survey rate cap.

Investor Protection Via NPV Tool
Use a financial model with supportable assumptions to ensure investor interests are protected.
  • Input borrower specific income information into the NPV Tool, which provides a real-time workout solution.
  • Perform automated loan level underwriting across large segments of the portfolio to support pre-approved bulk mailings.
  • Verify income information the borrower provided via check stubs, tax returns, and/or bank statements. protected. NPV Tool
  • Compare the cost of the modified concessions to the estimated cost of foreclosure to mitigate losses.
  • Mandate that the cost of the modification must be less than the estimated foreclosure loss.
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