Courtesy of the FDIC
FDIC head Sheila Bair says it's in the country's collective economic interest to fix mortgages and keep people in their homes. "Let's have some compassion, too," she says. "We all make mistakes."
FDIC head Sheila Bair says it's in the country's collective economic interest to fix mortgages and keep people in their homes. "Let's have some compassion, too," she says. "We all make mistakes." Courtesy of the FDIC
You may remember that the global financial crisis started out as trouble with subprime mortgages in the U.S.
Many of those loans had adjustable interest rates that turned out to be a big problem when home values started falling last year.
Now, foreclosure rates are up sharply around the country. And many people say preventing further foreclosures is key to getting the economy back on track.
Federal Deposit Insurance Corp. Chairwoman Sheila Bair has been urging banks to rework troubled home loans and cut their losses for years.
Two years ago that was a rather radical stance that put her at odds with many investors, banks and other government officials. But now she says the administration shares her view, which is why she was confused when she opened the paper on Thursday morning.
"I was a little surprised by that Wall Street Journal headline," Bair says. It said "FDIC Chief Criticizes Rescue."
The front-page story cast Bair as critical of recent moves to shore up financial institutions while not helping struggling homeowners. It suggested that had become a source of tension between Bair and Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. That is inaccurate, she says.
"I'm not criticizing anyone. I'm just expressing a general frustration that we haven't been able to find a political consensus to coalesce behind more aggressive measures to help borrowers," Bair says.
"But I think the president, Secretary Paulson, Ben Bernanke are all committed to doing more to help borrowers. They see the need there as well."
Getting more aggressive means making lenders and financially shaky homeowners come to a painful truce.
Bair says just deferring payments, which is what often happens now, is no fix. She advocates resetting troubled mortgages at no more than 38 percent of the borrower's income. She talks of insuring banks if a reworked loan defaults a second time. She says some of the $700 billion rescue package can and should be spent to give lenders financial incentives to rework loans.
Bair says she recognizes these — and other possible measures — might not be popular with lenders, politicians or to people who have responsibly paid their mortgages. But, in effect, she says: Life's not fair.
"I think that's really what's in everybody's economic interests right now," she says. "We're never going to dig out of this unless we accept the fact that a lot of these loans should not have been made."
John Taylor, president of the National Community Reinvestment Coalition, agrees with Bair.
"I'm really pleased with Sheila Bair's guts and stand on this thing. Because she really is trying to focus the leadership on where it needs to be, in addition to bailing out Wall Street," Taylor says.
"And I think what she's doing is she's encouraging others in the administration to shift their focus in the area of foreclosure prevention."
But essentially reworking some 4 million troubled home loans is an extreme financial challenge.
"I think the basic issue of fairness here is going to be a big problem," says Karen Weaver, global head of Deutsche Bank's securitization research.
If Uncle Sam steps in to reduce one homeowner's mortgage payment, what's to prevent a neighbor from skipping payments in hopes of getting the same deal?
"If you are too generous with modifications or give them too easily, then you're really discouraging people from trying to fulfill their obligation on their own," Weaver says.
Bair says any way out is going to be imperfect.
Yes, her solution may end up helping those who perhaps should have known better, she says.
"But at the end of the day, it's in our collective economic interest to get those mortgages fixed and keep those people in their homes," she says.
"Let's have some compassion, too. We all make mistakes."
Bair says many lenders, brokers and homeowners all screwed up. But, she says, at this point it helps no one to point fingers.