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I realize I ranted quite a bit yesterday on loan modifications, and thank goodness I did because the right people were reading. I'm pleased and honored to post a reply to yesterday's blog, from none other than the Chairman of the FDIC, Sheila Bair:

Diana,

I read your piece yesterday on loan modifications on the CNBC Realty Check blog. I know that you are following this issue closely and have been in contact with our public relations office at the FDIC. Many of the concerns that you raise in your article are the same ones that I had as we thought through solutions to the massive hybrid arm resets that we are facing in the coming months. Like you, I believe it would be unfair to craft an inequitable “blanket” plan.

My loan modification proposal targets a specific set of borrowers: those that are in subprime hybrid adjustable rate mortgages (2/28s and 3/27s) who have been current on their payments at the starter rate but are unable to make their resets. If it is determined that they can make the reset payment, then they will be bound to the terms of their contract. Because of weak underwriting, however, we believe that the overwhelming majority will not be able to make the reset, which typically results in a payment shock increase of 30 – 40%. The FDIC currently estimates that 1.2 million borrowers who are facing resets in the next five quarters may be eligible for this proposal.

These are individuals who have been in their homes for years and will eventually default if their loans are not modified. These are not speculators, but disproportionately working class and minority borrowers. There is always an issue of equity in any loan modification, but many of these borrowers were led to believe that they would be able to refinance before the payment shock occurred. While modifying these loans will keep the borrowers in their homes, it will also protect home values of surrounding properties. Foreclosed homes typically sell at steep discounts, having a significant negative impact on neighboring properties.

One last important point I would make is that this category of borrowers is typically already paying between 7 – 9% at their starter rate. This is well above prime rates for a typical 30 year fixed mortgage. The vast majority of borrowers who took the conservative route will still be paying a lower interest rate than the targeted borrowers receiving this modification.

Regards,

FDIC Chairman Sheila Bair

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