Outgoing Federal Deposit Insurance Corporation Chairwoman Sheila C. Bair's revealing exit interview by the New York Times' Joe Nocera has generated plenty of buzz. But while the interview provided a comprehensive look at Bair's role from 2006 to 2011, what caught our attention was her characterization of the foreclosure crisis.
Bair said that the mortgage's industry's reluctance to provide mortgage modifications stems in part from the industry's "disdain for borrowers."
"I think some of it was that they didn't think borrowers were worth helping," she said.
While Bair said that President Barack Obama's "heart is in the right place," she criticized his economic team for taking controversial steps to aid banks while, in Nocera's words, being "utterly unwilling to take any political heat to help homeowners."
We have been tracking Obama's struggling home loan modification program since 2009. Bair's analysis of the government's approach is very much in line with what we've reported. From the beginning, the program was watered down and stripped of key enforcement measures, after President Obama backed away from his campaign promises to force banks to modify mortgages. Treasury's oversight of the program has been lax and characterized by deference to banks.
The government has only recently begun to penalize several major banks for their byzantine, error-prone modifications. As we've reported, homeowners have often been forced to deal with lost documents, poor communication and mistaken denials. As of May, approximately 730,000 homeowners had received permanent loan modifications—a fraction of the millions of homeowners that the Obama administration promised to help.
In criticizing the industry's approach, Bair became the first regulator to speak so frankly about the issue.
In her interview, Bair, a moderate Republican appointed by President George W. Bush, described a long-standing industry resistance to granting home loan modifications—a resistance that she first tried to overcome, unsuccessfully, just before the housing bubble burst in 2007.
After she took over the FDIC in 2006, Bair said, she realized that "predatory" loaning practices—like adjustable rate mortgages whose rates jumped steeply after an introductory period—had become mainstream. Bair held a series of meetings with mortgage industry executives. The goal was to forestall wide-scale foreclosures by convincing debt servicers to modify loan payments when homeowners went into default.
"After doing some arm-twisting," Nocera wrote, "Bair felt she had extracted a commitment" that servicers would try to restructure mortgages—in particular, that they would be willing to freeze adjustable-rate mortgages at the original payment level, rather than the higher "reset rate," as Nocera reported in 2007.
But later that year, after the housing market had crashed, Bair learned from a survey of mortgage servicers that those conversations had been ignored.
"It showed that like 1 percent of those reset mortgages were being restructured," Bair told Nocera. "They would just push people into foreclosure."
She told Nocera that she felt that she had been lied to, and that what mortgage servicers had promised in their meetings with the FDIC had simply been "happy talk."
As we've reported, part of the problem with the home loan modification process is that mortgage servicers have few incentives to help homeowners—or to save investors money. The servicers, the largest of which are the nation's biggest banks, don't own the vast majority of the loans they handle. That means that they don't bear the loss if the loan goes to foreclosure. In fact, servicers often make money from foreclosure fees.
Bair pointed out this same problem in an op-ed in the Washington Post last week that echoed her address to the National Press Club in June. She noted that the servicers' short-term incentives to foreclose on homes were wildly out of line with everyone's long-term benefit—including their own:
[Mortgage servicers'] under-investment in servicing has led to a huge inventory of foreclosed properties and mounting litigation that is likely to cost them far more than any savings they achieved by cutting corners.
In Bair's account, the Treasury's prioritization of the well-being of financial institutions over the well-being of homeowners has hobbled the government's foreclosure response since the beginning of the crisis. As we reported in February, Geithner's Treasury undermined a 2009 attempt to put more pressure on servicers to modify mortgages.
Bair told Nocera that when she went to the Treasury in 2007 to encourage them to put pressure on mortgage servicers, she received little response. The government, she said, "thought maybe I was overstating the problem and that it wasn't going to be that big a deal." Instead, Bair gained a reputation as "difficult."
In her recent Washington Post op-ed, Bair wrote:
Government efforts to promote modifications ... have gradually moved in the right direction but have remained behind the curve. At the height of the crisis in the fall of 2008, when fear over where the bottom was ruled the markets, policymakers were supremely focused on the short-term priority of preventing the failure of the nation's largest financial companies. Government assistance to financial institutions took a variety of forms, amounting to a total commitment of almost $14 trillion by the spring of 2009. While those actions were necessary to prevent an even bigger economic catastrophe, we still have not addressed the No. 1 cause of both the crisis and the subpar recovery we are in: a stubborn refusal to deal head-on with past-due and underwater mortgages.
Starting in September, Bair will be working for Pew Charitable Trusts (a ProPublica supporter)—a move that earned her plaudits from the Wall Street Journal's Deal Blog, which noted, "Here's a bit of shocking news: A Washington regulator is NOT going to work for the industry she used to rule over." She has also secured a book deal for her own account of the financial crisis, "Bull by the Horns: What Main Street Must Do To Fix Wall Street."