Will a Gov't. Loan Modification Plan Work?

An FDIC spokesman declined to comment, but in testimony before Congress last week, FDIC chairwoman Sheila Bair touted the benefits of loan guarantees and loan modifications.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, has touted the benefits of modifying loans for homeowners who have fallen behind on their mortgage payments.

(AP Photo/Getty Images)
More Photos

The government, she said, "could establish standards for loan modifications and provide guarantees for loans meeting those standards. By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."

She also suggested that the IndyMac program could inspire more loan modifications elsewhere.

"Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country," she said.

Critics have warned that loan modification plans might run afoul of contracts held between mortgage servicers and investors who hold stakes in mortgage securities, but Bair said that didn't hold true for the IndyMac plan. The contracts, she said, "typically provide servicers with sufficient flexibility to apply the IndyMac Federal loan modification approach."

Bair said that the 3,500 homeowners who had accepted IndyMac loan modification offers thus far has seen their monthly loan payments slashed by an average of more than $380.

But a new plan modeled on the FDIC's IndyMac efforts wouldn't help all struggling homeowners. Under the IndyMac plan, loans are only modified when doing so proves less costly than pursuing foreclosure.

Of the 60,000 IndyMac borrowers who were delinquent on their mortgage payments, filed for bankruptcy or in foreclosure, 40,000 qualified for loan modifications, Bair told Congress last week.

Lawrence J. White, an economics professor at New York University's Stern School of Business, said that the IndyMac plan recreates "the kind of decision that [an] old-style banker would have made."

"You don't renegotiate all loans," White said. "There are some loans you decide, the borrower isn't going to be able to repay and you foreclose. ... It's a rational decision."

Sen. Charles Schumer, D-N.Y., expressed confidence in the FDIC's work this week.