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:
NJ: Tell us about the insurance-redefault subsidy proposal that the FDIC developed which you suggested to Obama’s advisers in late 2008 and early 2009. You said the idea was to encourage servicers to modify delinquent loans by providing insurance against some of the losses if the mortgage later went into foreclosure. Why this approach?
Bair: Economic incentives were skewed because of securitization. The incentives worked in favor of foreclosures, even when loan mods would have preserved greater economic value. Normal market incentives were not working to mitigate losses because those servicing the loans did not own the loans and the investors themselves were conflicted. The rush to foreclosure, which we saw in 2008 and on, was against the public interest — that is what we were trying to fix with our insurance-redefault program. We were trying to counter that by putting some real money on the table.
NJ: You said the FDIC predicted from the beginning of 2009 through mid-2010 that 3.2 million borrowers would qualify for modifications and about one-third would redefault, leaving about 2.1 million permanent modifications over that time period at a cost of about $38 billion. What was the administration’s reaction?
Bair: It was going to cost real money to counter these incentives and they just didn’t want to spend it. At the end of the day that is what the problem has been and to a large extent what the problem still is. They thought it was too expensive. They said we were paying for failure instead of paying for success. They insisted that the redefault rates were going to be high, even though we had data showing them that redefault rates were going to be about a third.
This is the Obama approach to middle class interests in a nutshell. Opt for initiatives that are clearly going to fail over ones that have good odds of success but cost real money. Obama seems to be getting his wish of being a transformative president. Everything he touches turns to dross.