Bair Dissatisfied With Pace of Mortgage Modifications (Update2)

By Alison Vekshin

Jan. 17 (Bloomberg) --

Federal Deposit Insurance Corp. Chairman Sheila Bair said mortgage companies aren't modifying subprime loans quickly enough, one month after the government brokered a deal with the industry aimed at averting foreclosures.

``We must see a pickup in the pace, and the sooner the better,'' Bair said today at a Bear Stearns mortgage and structured products conference in New York. The industry's progress on modifications is not going ``as well as it should be,'' and regulators will be ``closely watching'' its progress, Bair said.

Bair has been the strongest voice among U.S. regulators in pressing mortgage servicers to modify loans for cash-strapped borrowers as foreclosure rates reach record levels. In recent months, she has advocated allowing borrowers with adjustable-rate subprime mortgages to continue making payments at the ``starter'' rate if they can't afford an increase.

Treasury Secretary Henry Paulson last month announced an agreement with mortgage lenders to freeze rates on some subprime loans for five years, a move that the Treasury Department said could affect as many as 1.2 million homeowners.

``Working with Treasury and government regulators, the industry has tools to address this on its own,'' Bair said in her speech. ``And the key is to quickly get borrowers who can afford their homes into long-term loans they can afford to pay.''

`Way Behind'

Lawmakers at all levels of government will explore additional steps if foreclosures keep rising and the economic fallout continues, she said.

``I very much believe in the market,'' Bair said. ``But if market solutions fail to solve the problem, government will step in.''

Bair cited a November Moody's Investors Service report that showed 3.5 percent of loans that reset in the first eight months of 2007 had been modified.

``That puts us way behind the curve going into the new year,'' Bair said, adding that nearly 2 million subprime borrowers will face resets through the end of 2009.

Lenders helped 235,000 of 33 million homeowners avert foreclosure by modifying loans or setting up repayment plans in the three months ended Sept. 30, 2007, the Washington-based Mortgage Bankers Association reported today.

Adjustable-Rate Loans

Servicers modified 13,000 subprime adjustable-rate loans, those considered at greatest risk of foreclosure, and set up 90,000 repayment plans for those mortgages, the industry group said. The banks started foreclosure proceedings on about 384,000 loans.

``What this shows is that there are certain borrowers obviously that are beyond help,'' Jay Brinkmann, the group's vice president of research and the report's author, said in a telephone interview. ``Modifications are a tool, but it's not going to solve every case.''

The survey's data predates the Treasury agreement, in which participants committed to produce monthly reports on their progress.

Americans behind on mortgage payments in the third quarter reached the highest level in 21 years and foreclosures hit a record, the Mortgage Bankers Association said last month.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net .