Federal regulators were shocked, shocked I say, to find that 53% of loans modified in the first quarter of this year are now more than 30 days past due on their new loans. Of course, had you asked anyone who had ever been in the mortgage business what to expect when you modify loans they would have quoted you a recidivism rate just about in the range the government is experiencing.

So what’s the problem and the solution. Well, first of all leave it to the politicians to tell us these numbers tell us nothing at all. Sheila Bair, Chairwoman of the FDIC and crusader for loan modifications, said and I quote, “(the data) raises more questions than answers because it fails to define, in any meaningful way, the modifications that have re-defaulted.” Now what she’s driving at here is that these may have been loans that had interest rate modifications and that in her humble opinion that doesn’t count for much because the only thing that will really work is modifications that reduce principal. As an aside, Ms. Bair is famous among other things for his agencies refusal to release meaningful data on its much ballyhooed loan modification program at IndyMac Bank.

As if on cue, the other part of this Mutt and Jeff act, Sheila being Mutt and Barney Frank being Jeff,  piped up.

Dugan’s figures reflect a failed focus on interest rates in loan modifications, House Financial Services Committee Chairman Barney Franksaid today in a Bloomberg Television interview. If companies were to cut the amount owed on mortgages, borrowers would be less likely to default again, Frank said.

“The people who made the bad loans or bought the bad loans from others need to realize” that they would be better off with principal reductions than with foreclosure, the Massachusetts Democrat said.

So round up all of those repeat sinners and tell them that they only get one more chance. This time around we’re going to slash the amount they owe and maybe knock down the interest rate one more time. But this is absolutely the last time, unless of course they still have problems and then we’ll talk some more. Maybe just give them the house. After all, as Barney says. banks are better off writing off loan balances than foreclosing. And as we see, Washington really understands this business. 

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