The Obama administration is providing both a carrot and a stick to encourage lenders to help rescue those on the cusp of foreclosures, the chairwoman of the Federal Deposit Insurance Corp. says. People who aren't facing foreclosure may resent having to help others, but the severity of the economic crisis merits taking such action, Sheila Bair says.
"This really is a housing-led recession," the banking regulator tells host Michele Norris. "We recognize that a lot of people are at fault here — mortgage brokers, lenders, mortgage owners, mortgage investors and borrowers themselves."
Bair says "unnecessary foreclosures are having significant drag on the economy" and are hurting everyone. She says the administration's plan is one of shared responsibility, with servicers, mortgage investors, borrowers and the government are all working to resolve the housing crisis.
Following are excerpts from the conversation:
What's the carrot and what's the stick for lenders?
"The carrot is agreeing to share some of the costs associated with lowering the payments," Bair says, adding that those subsidies will benefit both homeowners as well as those who service and own the mortgage.
"The stick is really the administration's support for bankruptcy reform, which basically says that if the loan continues to be unaffordable, and the borrower goes to bankruptcy, then a bankruptcy judge has the authority to do a cram-down, which is to reduce the principal amount on that loan to whatever the current appraised value is," she says.
This authority requires congressional action, she says.
At this point, there is some stiff resistance mounting from Republicans in the House. Should people who overstated their income or their assets to obtain their original mortgage be eligible for taxpayer-funded assistance?
"I think it's just simply impractical to try to do a forensic analysis of each and every one of these delinquent loans that may have been originated two or three years back to find out whether income had been appropriately stated at that time," she says.
Bair advocates doing stringent verifications of income and whether a house is a borrower's primary residence.
Should the plan provide money to banks who knowingly wrote bad mortgages?
"There are clearly a lot of loans that should not have been made," she says, adding that "underwriting standards became too lax and unfortunately it was a widespread practice."
Bair says the majority of problem loans occurred with mortgages originated outside of banks, though she adds that plenty of banks were doing this as well.
Bair says mistakes were made by borrowers, lenders and regulators. But, she says: "To try to punish all of those parties now by foreclosing on more homes, putting more families on the street, putting more houses onto the inventory, creating more downward pressure on home prices when you have so much inventory on the market right now. Is that in our collective economic interest to do that? I just don't think that it is."
What do you say to people who played by the rules? Those people say there's no reward for responsibility in the face of hardship.
"I am one of those borrowers — we have a 15-year fixed and we've always been current on our mortgage, but I really don't see how it helps me to take a punitive approach," she says.
Instead, Bair says, getting these loans restructured is the best thing to do for the collective economic interest.