FDIC chief: Banks need to be willing to modify loans

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By Patrice Hill

Banks need to move more aggressively to modify loans for consumers who are having difficulty paying their mortgages, Federal Deposit Insurance Corp. Chairman Sheila C. Bair said in an interview with editors and reporters at The Washington Times on Tuesday.

Despite constant prodding by regulators for months, many banks and investors remain reluctant to offer more lenient terms for borrowers using streamlined programs sponsored by the government, she said, acknowledging that the programs so far have made little headway in preventing a renewed wave of foreclosures, which are expected to mount into the millions this year and next.

"Banks don't want to acknowledge losses," she said. "They need staff. And there's fear of redefault risk," since about 40 percent of loans that are modified end up back in default, she said.

Perhaps the biggest obstacle to resolving delinquent mortgages has been persuading investors who purchased the loans to go along, since many of them would benefit more from letting the bank foreclose on the loans rather than modifying them and reducing the monthly payments, she said.

The investors most reluctant to compromise with borrowers are those who purchased the "AAA-rated" portion of the loans through complex securities transactions that were designed to ensure they received payment, even if some of the loans went into default, she said.

Also, while loan defaults last year were driven mostly by the poor quality of the loans, which became unaffordable for the borrowers usually after a brief period of low monthly payments, most defaults today are being driven by the loss of jobs and escalating unemployment, she said.

"Before, we clearly were dealing with loans that shouldn't have been made," Ms. Bair said. "Now, we're dealing with economic distress" that is beyond the control of the banks or regulators, she said.

"We need a protocol for people with an interruption in employment," which would allow them to keep their homes and keep paying their mortgages, perhaps at temporarily reduced rates while they're looking for jobs, Ms. Bair said.

Another obstacle to resolving loans has been the proliferation of scam artists who charge gullible consumers $4,000 or $5,000 to modify loans that ultimately cannot be worked out with the bank, she said.

"Not everybody can get a loan mod" because the banks must apply strict standards to determine whether the loans can realistically be repaid and take into account the underlying value of the homes, which often has fallen below the outstanding amount of the loan, Ms. Bair said.

The scam artists who prey upon consumers who are desperate for help sometimes are the same people who unscrupulously sold unaffordable and dangerous mortgages to consumers in the first place, Ms. Bair said, adding that targeting such fraud should be a primary goal of the new consumer agency that Congress is preparing to establish to protect borrowers from such fraudulent products.