Point of View: Servicers Must Help Borrowers Recover

Ms. Bair is chairman of the FDIC. This viewpoint is an excerpt of her remarks at a recent investors conference hosted by Clayton Holdings Inc. in New York.

This is a very complicated market. There's a lot of money at stake. It's hurting housing. It's tightening credit conditions. It's affecting the U.S. and global economies.

And worse yet, millions of peoples' homes are on the line.

I think we're making progress in developing solutions that promote a stable secondary market, and that benefits most market participants and borrowers. But we need to do more, and do it faster.

We're strongly encouraging banks, loan servicers, and others to try to find refinancing or restructuring opportunities for people who are trapped in these adjustable-rate mortgages as they reset to higher interest rates.

Last month, the federal banking agencies along with the National Credit Union Administration and the Conference of State Bank Supervisors formally urged servicers to work with borrowers to mitigate losses and keep people in their homes.

Our main target is loans held in securitization structures, where restructuring can be more complicated given the many players involved in these transactions.

We're encouraging servicers to review their PSAs to determine the full extent of their authority to restructure loans that are delinquent, in default or are in clear risk of default.

We believe that the contacts may allow servicers to proactively connect with borrowers at risk of default, and assess whether default is reasonably foreseeable. And if so, apply loss mitigation strategies designed to achieve sustainable mortgages.

Such flexibility is a positive. Loss mitigation techniques that preserve homeownership are generally far less costly than foreclosure, particularly when applied before default.

The agencies took a proactive position in getting out the word given the surge in ARM resets. So far this year, over $150 billion have been reset. And there's another $300 billion in the pipeline.

As you know, these resets may result in significant payment shock to borrowers, which can increase the likelihood of default.

You were involved in meetings we held earlier this year. And the American Securitization Forum's statement in June was very helpful in bringing some order to a confusing situation. These efforts by the agencies and the industry appear to be taking root. We're beginning to see institutions taking a more proactive approach on loan modifications. Some have said publicly that they plan to work with borrowers to modify their loans and avoid foreclosure.

But more needs to be done, and done sooner rather than later.

Frankly, I'm frustrated that the servicing restructuring has not reached the level that I had hoped it would.

Moody's recently reported that less than 1% ... less than 1% ... of subprime mortgages that are having problems were being restructured in any meaningful way.

We have a huge problem on our hands. We can't just sit here doing this kind of case-by-case, laborious restructuring process with all these millions of subprime hybrid ARMs.

I think some categorical approaches are needed, and needed urgently. We think the flexibility is there for this.

For instance, for owner occupied housing where the loan is current ... just convert that subprime hybrid ARM into a fixed-rate mortgage. Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it.

And get proactive. Passive letter writing won't get the job done. You need to get on the phone with borrowers. Make human contact.

And work with community groups to help build trust with borrowers.

It's in everyone's best interest to avoid massive foreclosures.

Lenders and investors will ultimately benefit. You'll come out ahead of the game with a performing mortgage that's being paid versus having a loan that's in foreclosure.

Foreclosure costs a lot of money, and it will have a depressing impact on many communities.

We're already seeing it in a number of areas around the country ... not to mention the impact that a slumping housing market is having on the broader economy. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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