FDIC loan mod plan flawed

Negative equity, repayment among key worries

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"Do you have an opinion about the FDIC plan to jumpstart loan modifications as a way to reduce foreclosures?" Yes, I admire FDIC, under the leadership of Sheila Bair, for taking the lead in attacking the root source of the financial crisis: the vicious cycle of declining home prices and foreclosures. I share FDIC's view that the way to break that cycle is to modify mortgage contracts in ways that enable borrowers in distress to return to good standing and stay there -- AND to do enough of them to make a difference. The FDIC plan has two major provisions: (1) a risk-sharing arrangement where the government would absorb up to 50 percent of the losses in the event of a re-default; and 2) a modification that would reduce the borrower's monthly payment to 31 percent of income. In my view, the FDIC model falls short because a) it does not target negative equity, b) it is unlikely to induce servicer/investors to modify more loans, and c) it provides no way for governme...