FDIC Loan Modification Plan Too Optimistic?

Sheila Bair has continued to push the FDIC's Loan Modification Plan as the solution to the current crisis. Today, she told Congressional leaders that "the failure to deal effectively with unaffordable loans and unnecessary foreclosures is the root cause of the current economic crisis."

Bair detailed the steps taken at IndyMac where 40,000 of 60,000 delinquent loans were targeted as loan mod candidates. So far more than 5,000 loans have been modified under the program.

What has not been revealed is the re-default rate on IndyMac loans which have been modified. The FDIC plan assumes a re-default rate of 33%, which many view as far too optimistic.

According to figures for the broader industry gathered by Loan Processing Services, an astounding 25% of modified loans become delinquint after just one post-modification payment. Over half of the modified loans become delinquint after several payments.

With the state of the economy and housing still in flux following an unprecedented boom, it's probably much too early to make accurate predictions about long term redefault rates and the consequences of implementing a widespread loan modification program. The data available so far is less than inspiriging.

FDIC Loan Modification Plan

The Federal Deposit Insurance Corp, the federal agency that insures most US bank deposits, unveiled a plan Friday that it believes will prevent 1.5 million foreclosures. The plan give mortgage servicing companies incentives to provide loan modifications using a "systematic and sustainable process."

The incentives include $1,000 per modified loan to cover expenses and sharing up to 50% of losses incurred in the event that a modified loan subsequently re-defaults.

To be eligible, borrowers need to have missed at least two payments for a home that they occupy. Servicers would be expected to lower monthly payments to 31% of the borrower's month income. The FDIC has projected that the program would reduce the number of foreclosures by 1.5 million at a projected cost of $24.4 billion. Full details of the plan are posted on the FDIC website.

The plan was unveiled by FDIC chairwoman Sheila Bair. She has already used a similar plan at Indy Mac, which the FDIC took over this July. Bair wants to use some of the $700 bailout approved by Congress to fund broad implementation of her loan modification plan.

So far the Treasury Department has backed away from supporting Bair's plan on the premise that the $700 billion should be invested with the hopes of getting the money back. The plan proposed by the FDIC is fundamentally different than the purpose of the bailout.