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.