In the Wilderness with Sheila Bair

In Sheila Bair’s world, loan modification is the panacea that will solve our nation’s mortgage problems.

“Panacea” is certainly the operative word here.

Loan modifications, as it turns out, stink — for lack of a more diplomatic term. By and large, they don’t keep people out of foreclosure, they just postpone the inevitable, according to data released today by the Office of the Comptroller of the Currency. That’s not going to solve anything.

You want ugly performance numbers? How about these:

* After three months, nearly 36% of the borrowers with modified loans had re-defaulted by being more than 30 days past due;

* After six months, the rate was nearly 53%; and

* After eight months, 58%.

Ouch!

In a speech today, the Comptroller of the Currency John C. Dugan asked what these numbers meant.

“Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers?” he asked attendees at the FDIC’s National Housing Forum today. “Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?”

His answer? He had none.

How about this answer: deadbeats don’t get a heartbeat just because you shock them with a financial defibrillator. Or put another way, the unemployment rate is 6.7%.

We all know that Sheila Bair of the FDIC has been touting loan modifications as the cure-all for the mortgage crisis. At least today’s data shows Bair is barking up the wrong financial program. I certainly hope she goes back to square one to figure this all out. Welcome to the Wall Street wilderness, Ms. Bair.