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On the Hot Seat

Problem-solver

FDIC chief says her strategy to ease housing crisis needs White House backing

(Brendan Smialowski for The Boston Globe)
November 30, 2008
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It's the mortgages, stupid. That's the mantra repeated by Federal Deposit Insurance Corp. chairwoman Sheila Bair, who has been at the forefront of the debate about solving the housing crisis. Bair's plan to systematically modify 2.2 million loans for defaulting borrowers has drawn widespread support - except from the Bush White House. The 54-year-old former University of Massachusetts at Amherst professor spoke to the Globe's Jenifer B. McKim.

You were one of the first government officials to speak out about the housing crisis. Did you feel alone?
I did feel a little out there. I just think the whole system broke down. It is hard to acknowledge that mistakes were made. The originators, the investors, the rating agencies, the regulators, and in many cases the borrowers made mistakes as well. There was a lot of push back. I think that was very unfortunate. We needed the industry to respond. The lack of willingness to initially acknowledge mistakes was unfortunate and has put us behind the curve.

What was the tipping point when you started to have traction?
The foreclosure rates became so problematic and housing declines so dramatic that everyone had to acknowledge we had a very serious problem already. At that point, a lot of the damage had already occurred. There are a lot of borrowers that still can be helped. It is in our collective economic interest to get these loans restructured.

You still haven't been able to persuade the Bush administration to fund $25 billion for the FDIC program. Why not?
I don't know. We've made our best case. We are supportive of all these measures. You really need to tackle the problem at the loan level. These are back- end efforts to assist the securitization markets without trying to fix the underlying problem. People are still looking for the perfect solution. It is not there. Our experts helped devise the [FDIC] program. We think it is a good program to get these loans modified. It has been a frustration for me that we haven't been able to come to grips with the underlying problem, which is the mortgages.

What do you think about the Federal Reserve's announcement last week that it plans to buy up mortgage-backed securities?
We support it. It will pump more liquidity into the secondary market and hopefully will help reduce mortgage interest rates. Any tools that can be used to ease the stress in housing finance are still good.

You wrote a children's book about money: "Rock, Brock, and the Savings Shock." It tells a story about how twin brothers each receive $1 a week as a lesson in handling money. One squanders and the other saves, and in the end is able to buy a telescope and gifts. What lessons does this story tell us at this time in history?
The values of thrift and brotherhood and sisterhood are values we need to reacquaint ourselves with. When we come out of this, and we will come out of this, we will be stronger as a nation. Remember the days when we lived within our means? That is what the book is about: The rewards of thrift and savings and making meaningful purchases. It is a simple lesson and it's something we can all bear remembering.

In 2007, the Bush administration announced what was called the "teaser freezer" plan to lock in subprime resets for five years to help troubled homeowners avoid foreclosures. Clearly it didn't work. What do you think went wrong?
I don't think it was broadly used. Voluntary measures are just that. The idea of having a freeze of starter rates was to free up resources for servicers to try to spend more time modifying loans that were harder to modify. I think that unfortunately, the economic incentives are skewed. Servicers have no economic incentives to modify loans. Too many loans are unnecessarily going into foreclosure.

We've heard housing experts say the reason servicers often foreclose rather than modify loans for struggling homeowners is because they have liability issues with investors.
We don't buy that. I think that is an excuse. The legal standard is clear. The servicer has an obligation to maximize values to the securitization pools as a whole. So if the value of the modified loan exceeds the foreclosure value, the servicers are obliged to modify the loan. Our experience is that the vast majority of servicing contracts give servicers wide authority to modify the loan.

In your much-praised plan to systematically modify loans of homeowners in default, you estimate that as many as 33 percent of borrowers will redefault even with affordable 30-year fixed loans. Why such a big percentage?
We think that is a conservative number. I would suggest more in the teens. All too often, servicers don't verify current income when they modify a loan. We think we can get those redefault rates down because our program requires a truly affordable long-term modification. It requires verification of income and it also requires that the borrowers make six monthly payments under the modification before the loan would qualify for loss sharing.

What do you tell people who feel that it's unfair that neighbors who signed up for bad loans through the FDIC program now get a 3 percent interest rate for five years?
I would tell them I'm paying a higher rate on my own mortgage and I didn't get into this trouble either. We kept our house in Amherst. We have a 15-year fixed rate. At this point we need to look at what is in our best economic interest. Our overall economy cannot withstand millions more unnecessary foreclosures.

Your job expires in 2011. Some say you are auditioning for a job in the Obama administration. Is there any truth to that?
I am quite happy where I am. I am so proud of this agency. I have said the president should have flexibility on his economic team. I think we've been doing a good job. We are dealing with a very difficult situation. I think depositors feel good about the FDIC. They know their money is safe.

Are you working with the incoming administration?
We've briefed the transitional team just as we briefed the current administration. We are hopeful there is a lot of interest in foreclosure prevention with the new administration. We will share our program with them and other ideas we have. I welcome their interest. Tackling the mortgage issue is really essential, and something we haven't done adequately.

Is this a good time to buy a house?
I never give out financial advice. But I think your question gets to a larger policy issue: The more we can get the market stabilized, the better we will all be.

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