When Lenders Fail Foreclosures Stop

August 13th, 2008

It is good news for foreclosure victims that when lenders fail, foreclosures stop. The second largest financial failure in the history of USA is the collapse of IndyMac Bank. This has caused the first moratorium on foreclosures to be announced. The Federal Deposit Insurance Corporation took over IndyMac and declared a halt to all foreclosures. It amounted to $15 billion. The FDIC at one stroke has done what no government or legislative body could do. A hold has been enforced on a sizeable number of foreclosures.

From this drama few lessons can be learnt. The failure of the bank highlights the fact that foreclosures hurt everyone – not merely the borrowers. Similarly helping to stall it benefits all and not merely those who had no share in stoking the fires of the housing boom. Many customers who lost on deposits that were not insured did so not because of their own faults but because of a national foreclosure crisis that slipped out of control.

The foreclosure crisis has cut into government budgets at all levels. The cities as well as the counties and states are desperately looking for ways and means to raise funds. By stopping further foreclosures the economy will get a chance to stabilize and more bank failures will be averted. Thus the fate of the man next door is linked with the fate of all.

The failure of IndyMac gives out a warning to lenders that they must change with the times and modify loans speedily if they do not want to face a similar fate. Sheila Bair, chairperson of FDIC repeatedly stressed that a modified loan is worth much more than a foreclosed one. But not all lenders are waking up to the warning signals.

IndyMac primarily failed because it could not get capital although it badly needed the same. Loans had been given to people with questionable credit scores and no income proof. When such borrowers failed to meet mortgage dues, the bank ran out of funds. This would not have happened if IndyMac had not forged ahead with foreclosures but worked out realistic loan modification schemes with the borrowers. This is exactly what FDIC is now doing. The bank will now be assured of a steady stream of income through modifications and short sales. In the wake of the housing bill passed by the Congress this lesson is invaluable. The bill relies on the voluntary efforts of the lenders for it to be successful.