Fixing Foreclosures: 'How Far Are We Going to Go?'

That may all sound promising, but neither the company nor the government are releasing redefault data. "It's still too early in the game," says IndyMac spokesman Evan Wagner. "As the numbers become a bit more mature that is something we'll be more willing to talk about publicly."

“Out model is something we still stand behind,” says David Barr of the FDIC, which recently agreed to sell IndyMac banking operations to a limited partnership. Barr says preliminary data shows about 1 percent or less are not current, on a 30-past due basis.

David J. Phillip A foreclosed home for sale.

The Mortgage Bankers Association "supports the Bair plan in concept," says its senior VP of government affairs, Steven O'Connor, but is "still waiting to see some of the details."

"We don’t see there being one single solution to help borrowers," adds O'Connor.

The private sector has been trying—and struggling—as well.

The Hope Now program, which includes 70 percent of the nation's major lenders, has modified some 2.2 mortgages since its launch in 2008 and is now helping about 200,000 borrowers a month, including those who have redefaulted.

The group is in the process of trying to calculate a default rate, but its consortium structure makes that "tough", says Scott Talbott, senior VP of The Financial Services Roundtable, the lenders' trade group.

A joint federal agency report in December paints a more detailed and deteriorating picture. According to the Offfice of Thrift Supervision and the Office of the Comptroller of the Currency The number of loans modified in the first quarter that were 30 or more days delinquent was 37 percent after three months and 55 percent after six months

"One very troubling point is that...re-default rates increased each month and showed no signs of leveling off after six months and even eight months," the report said.

“Bankers are doing traditional workouts,” says Pinto, offering an explanation for the unusually high redefault rates.

By contrast, the Depression-era Homeowners Loan Corporation—which many foreclosure relief advocates would have as a model for today’s problem – had an 80-percent success rate with the one million loans in modified. The average loan-to-value ratio was 80-percent, which is much lower than the bulk of today’s cases.

Details And Fine Print

There are other crucial differences between now and then. The number of underwater borrowers—meaning the loan is greater than the market value of the home – is increasing by the day, as home prices continue to sink amid rising inventories.

According to the National Association of Realtors, there are now some 10 million homeowners in that category.

The group’s chief economist, Lawrence Yun, says government subsidized rates to modify loans need to include that group otherwise “some will lose the incentive to make payments” and avoid foreclosure.

Another conundrum is the role of the companies paid to service the loans. It’s generally agreed that they need a financial incentive to agree to modification, which is already the case with foreclosure.

Columbia’s Mayer and others say servicers also need legal protection from the government to act without having to get approval from a variety of partners and thus protect them from lawsuits.

JPMorgan Chase, however, is pushing forward. The bank, which says it has prevented about 330,000 foreclosures since early 2007, just announced it is extending its mortgage modification efforts to some $1.1 trillion of investor-owned loans it services.

Chase believes "it can legally modify the vast majority of mortgages owned by investors consistent with the relevant investor agreements and the best interests of investors," according to a statement.

Mayer and fellow Columbia professors Edward Morrison and Tomasz Piskorski are pushing a plan that both compensates and protects loan servicers, which they estimate would prevent a million foreclosures at a cost of $10.7 billion.

Mayer also wants the government to continue efforts to reduce interest rates because “lower mortgage rates represent the single best way to reduce foreclosures by stabilizing house prices.”

Dean Baker, co-director of the Center for Economic And Policy Research, has been pushing a fairly simple plan, which he says give banks more incentive to negotiate with borrowers.  It would give homeowners legal rights to stay in the property after foreclosure, paying rent at market rates, even if a property was resold.

Baker is among those who oppose any significant government spending on foreclosure relief, partly because too much money “goes to bankers" and the money could be spent else where on such things as health care and education.

"How much money are we willing to spend to keep people in their homes," asks Baker. "How far are we going to go?"

Based on the current political momentum, taxpayers may soon find out.

© 2012 CNBC.com

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