IndyMac solutions offer a possible glimpse of bailout

By Legal News Line | Sep 25, 2008

Lisa Madigan (D)

Jerry Brown (D)

PASADENA, Calif. (Legal Newsline)-Tucked within the legal twists and turns of lawsuits filed by the government against Countrywide Financial Corp., struggling homeowners have perhaps been given a snapshot of how the future of the $700 billion proposed bailout might directly impact them.

The key players gathered in Boston on Thursday for a federal jurisdiction hearing over the Countrywide lawsuits filed by the California and Illinois attorneys general, among others.

Illinois Attorney General Lisa Madigan and San Diego City Attorney Mike Aguirre, two of the plaintiffs represented at the hearing, have pushed for Countrywide to begin a voluntary moratorium on foreclosures as a first step toward negotiating a settlement.

The pair, along with California Attorney General Jerry Brown, and other states that have since followed with suits of their own, have sued Countrywide for its predatory lending practices.

Brown has not offered to support a moratorium, and Bank of America, parent company of Countrywide has said it does not support such a move.

Aguirre has spent the last month touting the model used to help IndyMac's customers avoid foreclosure, put in place by Federal Deposit Insurance Co. Chair Sheila Bair. When the federal government seized IndyMac, Baer issued a moratorium on foreclosures as roughly 60,000 of the failed lending company's 742,000 customers were in a delinquent status, according to published reports.

The IndyMac model could soon shifting center stage, following President Bush's national address last night urging support for a $700,000 billion bailout designed to save the foundation of America's economy. The money will largely be used to purchase failed mortgage securities, thus strengthening the nation's lending institutions.

As lawmakers gathered today, including both presidential candidates, John McCain and Barack Obama, to hammer out the final details of the bailout plan, some consideration of a temporary freeze on foreclosures patterned after Bair's IndyMac model is believed to be part of the equation.

The parallels between the FDIC's efforts with IndyMac customers and the problems the nation is considering now on much larger scale are strikingly consistent.

Bair said earlier this week that she hoped the FDIC's approach might be part of the final bailout package.

In August, Bair announced a 38-percent solution, which puts a cap at 38 percent of a borrower's income that can be applied to mortgage, tax and insurance payments. It includes a step-by-step process of evaluating mortgages and reducing payments below the 38-percent threshold and thereby avoiding foreclosure.

If the bailout passes as it is expected to in the next few days, or even the next few hours, many troubled homeowners could be dealing with the federal government in an attempt to keep their homes. A nationwide temporary moratorium on foreclosures could result, with borrowers given options to modify their loans and reduce their payments.

The IndyMac model seeks to lower homeowners' payments to 38 percent of their income, by first lowering the interest rate to a set fixed amount (about 6.5 percent, according to FDIC officials). The terms of the loan could also be extended as much as 10 more years. Finally, the IndyMac model offers a forbearance on the principal that would be repaid when the home is eventually sold or refinanced.

This is in essence what Aguirre sought to have happen in San Diego when he made a high-profile request of City Council earlier this month to declare a foreclosure emergency and advocate that lenders adopt a model based on Bair's plan, including a temporary ban on foreclosures. The council did not vote to approve Aguirre's resolution.

In the weeks that followed as Freddie Mac and Fannie Mae also wilted under the pressure of defaulting home loans, four Democratic senators urged the lending institutions to adopt some facets of Bair's IndyMac model.

Now the solution provides perhaps a test case for Congress as it hammers out the details of a bailout that Bush touted as vital for saving America's economy and avoiding a depression.

Bank of America may soon also face increased pressure to institute a foreclosure moratorium depending on the results of Thursday's hearing. Should the federal panel side with the attorneys general, who want the cases sent back to their respective state or local jurisdictions, Aguirre and Madigan are likely to pursue an injunction on foreclosures.

Every struggling homeowner can only sit back and watch these next few days as the decisions made will very likely impact one way or another their ability to save their homes.

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