Will re-default rate sink FDIC rescue plan?

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A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.

John Dugan, head of the U.S. Office of the Comptroller of the Currency, said yesterday that nearly 36 percent of borrowers who received restructured mortgages re-defaulted within three months . That rate jumped to nearly 53 percent after six months and 58 percent after eight months.

This report poses significant challenges for backers of the FDIC’s plan to renegotiate/modify some mortgages as a way to stem the foreclosure tsunami. To qualify for the FDIC plan, borrowers would need to make six consecutive payments. This is to avoid the problem of early-payment defaults (EPD occurs when borrowers loans miss a payment during the first few months of their origination). The FDIC payment requirement clearly requires borrowers to show some solvency. But the 58 percent re-default rate after eight months clearly needs to be addressed before theFDIC plan can be given much credence.

“Industry evidence indicates that in a majority of instances loan modifications simply delay the timeline from default to foreclosure but don’t prevent them from taking place,” Nathaniel Otis and William Clark, analysts at KBW, wrote in a note to investors on Tuesday.

It is also worth noting that while delinquencies continue to rise for subprime, alt-A and prime mortgages, Dugan said the greatest delinquencies were in prime mortgages.