The continuing spike in delinquencies and foreclosures has caused the topic of loan modifications to receive renewed attention and focus. In testimony before Congress, Federal Deposit Insurance Corp. (FDIC) Chairwoman Sheila Bair recently unveiled a plan designed to entice servicers to reduce the monthly mortgage payments and debt-to-income ratios of numerous delinquent borrowers.
The critical question facing Congress and the incoming Administration is whether this program, or any initiative, will substantially reduce the ranks of homeowners in or approaching foreclosure. The record of "homeowner aid" plans is not encouraging. Most of the plans (from FHASecure through Hope 4 Homeowners) have helped relatively few borrowers, reflecting the difficulty in instituting large-scale efforts to modify assets that were routinely structured and sold into the capital markets. The FDIC plan also has a number of flaws. Aside from being quite complex, it attempts to qualify borrowers using income ratios; since many problem loans were made without income documentation, such ratios are necessarily suspect.