Sheila Bair Told Administration Its Housing Programs Would Bomb

Sheila Bair Told Administration Its Housing Programs Would Bomb, Was Rebuffed on Better Solutions

by Yves Smith, Naked Capitalism

No wonder Geithner and the other financial regulators complained about Sheila Bair not being a team player. If you want to do what is expedient and you are confronted with someone who cares about fixing the problem, then yes, they aren’t on your side. And bully for them.

Bair, in an interview in the National Journal (hat tip Amanda F), describes how it was clear even before it was launched that the embarrassingly bad HAMP program wouldn’t work (HAMP not only fell well short of its goals but was a cesspool of consumer abuses, with many participants losing their homes after being incorrectly told they had to be delinquent to be considered and to ignore the notices they received as their foreclosures moved ahead). This is a big deal. It’s one thing for outsiders to have said the incentives for servicers were too small to get them to play ball; quite another for a senior banking regulator with experience on that beat to see that as a big problem in advance. From the interview:

NJ: You have been critical of the administration’s efforts to address the housing crisis. What’s wrong with its approach?

Bair: They had academics and theoretical economists designing it who may have been well-intentioned, but didn’t have any practical understanding of the market or servicers or operationally what would make sense. Everything the administration has done has only helped at the margin. The timidity and incrementalism have been real problems. They just don’t want to spend money on it. They are conflicted.

NJ: You warned against the incentives for industry that the administration created around the Home Affordable Modification Program, which provides payments to lenders and investors over time for successfully modified loans. Why?

Bair: You get what you pay for. Trying to do this on the cheap just didn’t work and the complexity of the program, if anything just compounded the problem. The bottom line is the financial incentives were not enough. The program was too complicated and the sense of urgency we saw, and I think that frankly the president saw, I don’t think translated into a program that could be operationalized. They were relying on a voluntary program with weak economic incentives and the big servicers were not putting the resources that were needed into these big servicing operations…

It was just frustrating to us because the FDIC had all these people from the savings and loan [crisis] days. We had a lot of people who understand securitization. We had a lot of people who understand loan restructuring. We deal with troubled assets day in and day out. What we saw from IndyMac mainly really gave us the frontline view. We knew the problems with these servicers and what they were capable of and what they weren’t capable of. We talked to our economists and we had a good analysis and I think we had a program that promised to work. We could never get our hands on it and it was very frustrating to me. We were one voice of many and frequently not the voice they listened to.

The Administration refused to consider bolder ideas because they believed you couldn’t design mods that would get low redefault rates (this after Wilbur Ross was getting good results on a pretty drecky portfolio he bought, and Judge Annette Rizzo in Philadelphia has redefault rates of only 15% after 18 months for borrowers in the program she runs in her courtroom, which is in a lower income area). But the Administration is apparently so convinced that borrowers are deadbeats that it refused to believe that a mortgage mod program could be designed so as to be pretty effective. Again from the interview:

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