Bair Defends HAMP, Voices Support for Principal Write-Downs

FDIC Chairman Sheila Bair â€" a recognized champion of homeownership preservation whose loan modification model has set the standard for the industry â€" is throwing her support behind the administration's Home Affordable Modification Program (HAMP).

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In remarks made at the Multicultural Real Estate and Policy Conference in Washington, D.C. Thursday, Bair called HAMP ""the most ambitious mortgage modification effort ever undertaken.""

She dismissed charges made by lawmakers and other market observers that HAMP has failed, noting that ""it's still too soon to know how successful it will ultimately be.""

The FDIC chairman said, ""It is true that the numbers of trial and permanent modifications have lagged behind program projections. But at the same time, we saw a slowdown in the pace of new foreclosures in the second half of last year.""

Bair says this suggests servicers are at least looking for alternatives that could minimize their losses and keep people in their homes.

She noted that in order to develop effective policies, the White House and regulators must recognize the evolving nature of the mortgage problem. She explained that the initial phases of the crisis involved poorly structured mortgages that posed an affordability problem, but now it's underwater mortgages that pose the biggest threat.

""That's why we're actively looking at principal write-downs within our loss share agreements and other failed bank programs,"" Bair said. ""We see this as one possible way to encourage borrowers to stick with their mortgages. This could help reduce defaults, keep people in their homes, avoid costly foreclosures, and enhance the value of these loans.""

Bair continued, ""We understand that this will not be the solution for every distressed borrower. And we are approaching this issue strictly by the numbers. But the fact is that deeply underwater mortgages â€" those with loan-to-value ratios of 150 percent or more â€" are very likely to default.""

According to Bair, models show that the odds of default can be greatly reduced if the loan-to-value (LTV) ratio can be brought down a level closer to 100 percent.

""This approach can help mortgage owners cut their losses by avoiding foreclosure costs,"" Bair said. ""Our analysis is ongoing. But I'm committed to doing everything possible along these lines to reduce our resolution costs, minimize foreclosures, and help to stabilize our housing markets.""