“I do have a concern about money for loan modifications, particularly with such a high range of re-default,” Reich told participants at a conference in Washington organized by the Office of Thrift Supervision. “Focusing on job creation is a better way to focus federal dollars than on a loan modification process may be only partially effective.”

Reich’s statement clashed with Federal Deposit Insurance Corporation chairwoman Sheila Bair over the best way to use government funds to end the financial crisis.

Reich’s comments were focused, in part, on Bair’s controversial proposal that would use $24.4 billion of a $700 billion government bank bailout program to modify loans. Bair argues that her proposal, which isn’t supported by outgoing Treasury Secretary Henry Paulson, could avert 1.5 million foreclosures. Reich also referred to a job creation stimulus proposal put forward by President-elect Barack Obama.

Reich told MarketWatch that use of government capital to buy large minority stakes in U.S. savings and loan banks is working, but that it is too early to get a sense of how much lending participating institutions are doing.

To back his argument, Reich pointed to statistics released Monday by the Office of Comptroller of the Currency director John Dugan showing a high re-default rate on mortgages that have been modified in the first two quarters of 2008.

“The results were surprising, and not in a good way,” Dugan told a gathering in Washington at the Office of Thrift Supervision’s annual conference.

According to the OCC statistics, which looked at loans modified in the first quarter and second quarter of 2008, 36% of borrowers had re-defaulted by being more than 30 days past due and after six months, the rate was roughly 56%. After eight months, 58% of borrowers had re-defaulted.

The OCC tracked the number of borrowers that re-defaulted on their mortgages after the modification was completed. Dugan acknowledged that not all re-defaulted mortgages go to foreclosure, but he argued that the number was very high. Dugan said he was not sure why there was such a high level of re-default, pointing out that it may be because the modifications were not low enough to be affordable.

Bair contended that the statistics provided by Dugan did not provide enough details about the circumstances surrounding mortgage re-defaults such as whether a borrower’s income has been verified or not. She argued that even with the statistics, a large number of modified mortgages have not led to foreclosure.

“Without more data about whether it was a meaningful reduction in the rate, it’s not clear how successful the modification is,” Bair said. “We do need more detailed reports and more granulated reporting.”

Other bank regulators argued that the government should employ an all encompassing approach that includes a jobs stimulus package, a capital purchase plan for financial institutions and mortgage modification. “I suspect there isn’t any one approach that is clearly superior to any other approach,” said Federal Reserve vice chairman Donald Kohn. “These problems are pervasive enough that we need to focus on a number of different fronts.”

President-elect Barack Obama said on Saturday that he wants to create millions of jobs by investing in a huge new national program to rebuild the nation’s infrastructure.

Dugan agreed that across the board approach should be used. He added that Bair and others should use the statistics the OCC produces to develop a successful loan modification program for 2009.

House Financial Services Committee Chairman Barney Frank reiterated Monday that he wants part of the $360 billion left in the $700 billion Troubled Asset Relief Program to be used to help modify loans.

“The singular latest failure of public policy is to do significant foreclosure relief,” said Frank. “Principle reduction has got to be one of the things we do. There still is money left in the TARP.”

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