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FDIC Chief Urges Lenders To Avoid Foreclosure When Possible

Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, told CNBC’s “Squawk Box” that it’s in lenders’ best interest to keep as many people with adjustable rate mortgages in their homes as possible.

She’s meeting with representatives of the mortgage industry Monday in Washington to urge them to convert adjustable-rate mortgages to fixed-rate loans when possible.

“There’s a recent report by Credit Suisse that notes if you put a home into foreclosure, the loss can be 40% or higher,” Bair said Monday. “Loss mitigation, whereby you reduce the interest rate paid, convert it into a fixed-rate as opposed to these ‘payment shock mortgages’ that are creating a lot of the credit distress, maybe you’ll get a two or three basis point reduction in the return, but that’s still better than taking a 40% loss on foreclosure.”

FDIC Subprime Meeting

She said foreclosure is “very stressful” for the borrower, often bad for the neighborhoods and widespread foreclosures could flood the housing market at a time when sales are slow in many parts of the country.

“So in most cases--not all--the alternatives to foreclosure through loss mitigation and loan mitigation terms will be a much more favorable outcome for everybody,” Bair said.

Bair said the problem of adjuatable-rate mortgages re-setting to a higher rate is large and will grow this year.

“(Many borrowers) are current on their starter rates,” she said. “The payment shock when the interest rates re-set can result in a payment increase of 30% or higher. We’ve got about a million of these borrowers who are going to re-set this year and about 800,000 next year. We’re just getting started with this.”