Chairman of the Federal Deposit Insurance Corporation, Shelia Bair has found religion. She believes that she has found the solution to the foreclosure crisis: loan modifications.
Qualifying homeowners in serious delinquency get a letter from the FDIC offering them a way off the foreclosure highway: more affordable monthly payments!
The Feds can do this through reducing the interest rates on the loans, extending the amortization and deferring principal payments. We commented on this here.
As we mentioned in an earlier post, the FDIC has used this pilot program on more than 5000 formerly Indymac borrowers the corporation inherited when the bank collapsed. In congressional testimony over the last several weeks, Bair has been hailing the success and wants other banks to follow the FDIC’s example.
Of course, all this costs money. Millions so far. Which will make Barney Frank and some of his Democratic colleagues on the Hill very happy. They want some of Paulson’s 700 billion bailout money to be used for homeowner relief instead of the many curious ways the Treasury Secretary has disbursed it so far.
But will this work?
The Wall Street Journal’s MarketWatch does not fill me with confidence. “For the industry in general, after mortgages are modified roughly 25% go delinquent again after just one post-modification payment and more than half end up delinquent after several post-modification payments. . .”
Maybe the solution will need a solution.
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