Banking Law

To Every Day, Spin, Spin, Spin

I recently asked a friend of mine, a D.C. "insider" at one of the national law firms who's one of the "go to" guys when the American Banker or another trade rag needs a quick quote for the latest breathless twist on the same old themes, what this person thought of Sheila Bair. She or he (the name, and even the the sex, of this individual will be disguised to protect the guilty) has been in a number of meetings with Ms. Bair, and is an astute evaluator of all things regulatory. He/she was quite complimentary of Sheila, told me that Ms. Bair is both a smart cookie and an effective inside-the-beltway "playah," who has obviously, and effectively, been trying to stay on the right side of Barney Frank.

"Of course," she/he observed, "as a female, she really doesn't have a side that's attractive to Barney Frank."

That is the kind of comment that rewards my faith that before each day ends, someone, somewhere, will bring a smile to my face.

As part of Ms. Bair's campaign to support Mr. Frank's agenda (and her own consumer advocacy bias), she's been touting for months her "systematic loan modification" approach to easing the credit crisis, and has made a big bet on the FDIC's ability to implement it with IndyMac's owned and serviced loan portfolios. Last week, she testified before Congress about the IndyMac efforts, and alleged that these efforts were paying off.

Bair also noted that 3,500 borrowers have preliminarily accepted the FDIC?s offer for a loan modification, although it?s unclear how many will ultimately end up with a modified loan.

?Through this week, IndyMac Federal has mailed more than 15,000 loan modification proposals to borrowers, and has called many thousands more in continuing efforts to help avoid unnecessary foreclosures,? she said. ?While it is still early in our implementation of the program, over 3,500 borrowers have accepted the offers and many more are being processed.?

Accepting the FDIC?s offer involves signing a modification agreement and mailing in a check for the new payment amount, along with information needed to verify income. It?s unclear how many of the 3,500 that have accepted the offer will ultimately see their loans modified based on verification of their income. Bair did not comment further on the specifics of the modification program in her remarks to the Senate on Thursday.

?Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country,? she said.

It?s a hope clearly shared by some key lawmakers as well, including Housing Financial Services Committee chairman Barney Frank (D-MA), who recently sent a letter to President Bush suggesting that Bair be appointed to a formal role involving foreclosure mitigation under the Emergency Economic Stabilization Act of 2008.

We had previously heard rumors that Ms. Bair has been angling for Hank Paulson's job in an Obama administration, although other rumors indicate that JPMorgan Chase's Jamie Dimon is the early favorite for that position (if he wants it). Publicly, Ms. Bair has stated that she'd be happy to stay on at the FDIC if Obama wants her to stay there and, you know, doesn't have to use her position to pay off a donor. Otherwise, she'll go back to her first love: ivory tower academia, where real life never interferes with a grand intellectual theory of the way the world IS. ("Paging Mr. Greenspan, Mr. Alan Greenspan: Please pick up a white courtesy telephone.")

Speaking of how reality "bites," uber-blogger Tanta at Calculated Risk took a look at Ms. Bair's efforts with IndyMac and could barely restrain a yawn.

So, in two months, just under 40% of borrowers estimated to be eligible have received written mod offers, and of those, just over 20% have responded. We still don't know how many actual modifications that will be, since income verification is still pending on the accepted offers. Nor do we know how many more borrowers have become "eligible" (i.e., 60 days delinquent) since the August estimate.

Certainly 3,500 modifications successfully completed in two months is better than nothing. Then again, I don't think IndyMac's modification rate prior to the FDIC takeover was exactly "nothing," either. Bair doesn't address that, so we still don't know if the FDIC's "expedited" approach has really been measurably better than what IndyMac was already doing. At best, it's probably only marginally better, which wouldn't be so much of a problem if Bair hadn't spent so much time earlier in the year scoring cheap rhetorical points about uncooperative servicers not doing enough to help. In any event, the Bair Plan doesn't seem likely to bring the mortgage crisis to a screeching halt by year-end.

And do note that Bair herself, in her testimony, does not trot out the fashionable line that the delays are all due to securitization rules and red tape...

That suggests to me it isn't the fact that the loans are securitized that is the major problem. It also suggests that the program is moving out of subprime and well into prime territory in order to find borrowers who can and want to arrive at a 38% mortgage-payment-to-income ratio. I guess that's progress; if you apply the program to borrowers who are, as a class, more likely to be able to afford their mortgages anyway, you do get more successful modifications. But something tells me that's not quite what we all had in mind.

Unlike Ms. Bair, Tanta has been involved in the mortgage banking business for decades, and writes with an authority on the subject matter that Ms. Bair can't muster. Moreover, Tanta's not concerned with staying on Barney Frank's "good side."

It's too early to tell whether the systematic approach to loan modifications is real or hype. Time will tell. We won't get out hopes up.

Ms. Bair was interviewed recently by Charlie Rose on PBS. Here's a link to the segment. She continues to hammer on the theme that the bailout must focus on helping delinquent borrowers stay in their homes through loan modifications, although she admits that the qualification for a modification must be determined on a loan-by-loan basis. How a "loan-by-loan" evaluation differs from what loan servicers other than the FDIC must do is left unexplained. In addition, during the twenty-five minute interview, she fails to present any justification for her advocacy of loan modifications in terms of the safety and soundness of the institutions that her agency regulates and/or insures. I know she has offered those justifications, but she never takes the opportunity to explain them to Charlie Rose's viewers. Instead, she speaks of the FDIC's "calling" and makes its employees appear to be seminarians rather than government bureaucrats. One is left with the impression that she believes that the right to a loan modification is a self-evident truth. Perhaps its all wrapped up with the right to "life, liberty and the pursuit of happiness." Finally, watch the clip of Nancy Pelosi at the end, who also praises the pants off of Ms. Bair, and also indicates that the Democrats have not given up their desire to give bankruptcy judges the right to write down principal balances of residential mortgage loans and to rewrite their terms. She alleges that what every delinquent borrower needs to stay in their homes is the right to file for bankruptcy. Great news for bankruptcy attorneys; lousy news for the mortgage business.

Maybe some day, we'll all look back nostalgically at the good old days, when the loan-to-value ratio of a residential mortgage loan was "only" 80% and you didn't have to be Donald Trump to afford the points and interest rate. Then again, by the time the national experiment with the nationalization of the banking business is finished, perhaps we'll be telling out grandchildren about the days when lenders other than the federal government made mortgage loans.

Full post as published by Bank Lawyers Blog on October 26, 2008 (boomark / email).