FDIC's Bair warns investors fighting loan changes

WASHINGTON - Investors in mortgage securities who are challenging home-loan modification programs aimed at avoiding foreclosures could provoke a "backlash" from Congress, the head of the FDIC said Thursday.

Sheila Bair, the chairman of the Federal Deposit Insurance Corp., made the comments in response to a question following a speech to a consumer group gathering.

Two companies that invested in mortgage-backed securities recently sued Countrywide Financial Corp. over its plans to make as much as $8.4 billion in loan modifications as part of a settlement with attorneys general in 15 states.

Their lawsuit maintains that Countrywide, now owned by Bank of America Corp., sold most of the loans to trusts that turned them into securities, and that Countrywide intends to pass the cost of reducing the mortgages to the trusts.

For lenders and companies servicing loans held by struggling borrowers, Bair said, "There is an obligation to modify, not to foreclose."

"Investors should be taking a hard look at what they're advocating," she said. The harder investors push, "the more there's going to be backlash here."

Congress may step in and change the legal obligations of mortgage servicers toward investors, she suggested.

Bair also said banks so far had issued about $37 billion in debt under the FDIC's program to guarantee debt issued by U.S. banks and savings and loans through mid-2012, part of the government's massive financial rescue package.

Noting that the premiums the FDIC is charging banks under the guarantee program are relatively high, Bair told a banking industry audience Thursday night, "We expect to make a profit on this program, and we'll put the proceeds into the deposit insurance fund."

Elsewhere Thursday, two Countrywide subsidiaries agreed to repay $11.5 million to nearly 4,800 North Carolina borrowers who were overcharged on their mortgages, the state banking commission said. Countrywide Home Loans and Countrywide Mortgage Ventures will refund the money to close an investigation.

Bair was the leading architect behind a loan modification program at IndyMac Bank, a big thrift that failed in July and was taken over by the FDIC. Under the program, thousands of struggling home borrowers pay interest rates of about 3 percent for five years. Rates are reduced so that borrowers aren't paying more than 38 percent of their pretax income on housing.

Bair was asked Thursday about an industry-backed proposal being considered by the Treasury Department to lower the rate on 30-year home loans to 4.5 percent by buying mortgage-backed securities from government-controlled Fannie Mae and Freddie Mac.

"Getting mortgage rates down is ... positive, but it doesn't help people that currently have unaffordable mortgages because it doesn't help them refinance," Bair said. "Low interest rates help some consumers, but the ones that really need help and can't refinance are not helped."

Bair has been pushing for the government to use $24 billion in bailout funds to help 1.5 million borrowers avoid foreclosure by guaranteeing modified mortgages — a move opposed by Treasury Secretary Henry Paulson and the Bush administration.

In her remarks to the Consumer Federation of America conference, Bair disputed the notion that the Community Reinvestment Act — the 1977 law requiring banks to make loans in low-income areas where they operate as a condition for opening new branches — was a cause of the subprime mortgage debacle and ensuing financial crisis.

Critics of the law, notably conservative Republicans, recently have blamed the crisis on the lending law, saying it forced banks to make home loans to borrowers who were bad credit risks. Champions of the law, known as CRA, credit it with having boosted the renewal of inner-city areas in recent years.

"I think we can agree that a complex interplay of risky behaviors by lenders, borrowers and investors led to the current financial storm," Bair said in her speech. "To be sure, there's plenty of blame to go around. However, I want to give you my verdict on CRA: Not guilty."

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