Aug. 22 (Bloomberg) -- The Federal Deposit Insurance Corp.'s plan to have IndyMac Federal Bank FSB rework mortgages for troubled homeowners is ``dangerous'' for bondholders, according to Barclays Capital.

Investors in mortgage-backed securities may be worse off if enough loans default after they're modified because recoveries may be lower as home prices decline, analyst Sharon Greenberg wrote yesterday in a report. Loan changes also cost bondholders by reducing borrower payments, their collateral or both.

``We think IndyMac, under FDIC's watchful eye, will interpret the MBS agreements more loosely and err on the side of modifications over other solutions, including foreclosure,'' wrote Greenberg, who is based in New York. ``This can be dangerous.''

FDIC Chairman Sheila Bair, who has led regulators in pressing mortgage-servicing companies to rework loans amid surging foreclosures, two days ago announced plans to have the failed lender modify more loans to keep ``tens of thousands'' of borrowers in their homes and avoid the effects of foreclosures on the economy. The FDIC took over Pasadena, California-based IndyMac Bancorp Inc. on July 11, making it the third-largest federally insured bank to be seized by federal regulators.

Harm Other Banks

The FDIC said that IndyMac would only modify loans underlying mortgage-backed securities or owned by other investors if doing so improves their value and meets contract guidelines. About 30 percent of IndyMac modifications last year failed, with a third of those representing borrowers missing their first revised payments, Greenberg wrote.

``The reason it is beneficial for bondholders is we're talking about delinquent loans, loans where the borrower's not paying, and we're creating an obligation that now will continue to pay for the long-term,'' Michael Krimminger, special adviser for policy to the FDIC chairman, said in a telephone interview. Any analysis on whether to foreclose or allow a sale for less than the homeowner's debt will require assumptions on the directions of the housing market and broader economy, he said.

IndyMac mortgage modifications may harm other banks under the FDIC's watch because they own some of the securities, Julian Mann, a mortgage- and asset-backed bond manager at First Pacific Advisors LLC in Los Angeles, which oversees $11 billion, said earlier this week.

``It hurts the bondholders that are off any shelf of any bank that is perceived as weak and potentially seizure bait, because the collateral is now in question,'' Mann said.

`Common Sense'

IndyMac Federal has about 740,000 mortgages that it owns or services for other companies, according to the FDIC, which earlier suspended foreclosures on the bank's $15 billion in loans. On March 31, the company was the eighth-largest home-loan servicer, overseeing $200 billion of mortgages, according to newsletter National Mortgage News. The company services loans in mortgage securities other than ones it issued, Barclays said.

Modifications may also hurt investors in ``senior,'' or more highly rated, mortgage bonds by reducing their interest payments, Greenberg wrote. That's partly because trustees may fail to use ``common sense'' to reduce payouts to junior bonds after principal forgiveness for homeowners, she said, citing the experience of investors when West Palm Beach, Florida-based Ocwen Financial Corp. stepped up balance reductions earlier this year.

``We've talked to MBS investors, we've talked to trustees on deals and they want to monitor how we perform as I would expect them to,'' Krimminger said.

Preventing foreclosures may be bad for some borrowers because they would be better off in more affordable rental housing, according to Joshua Rosner, the managing director at New York-based research firm Graham Fisher & Co. Delaying inevitable defaults also may hide problem loans at banks and prevent prices from tumbling quickly to levels that would make homes cheap enough to allow for a housing recovery, he has said.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: August 22, 2008 18:16 EDT