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

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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.

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30 comments

  1. Glen

    Obama seems to be getting his wish of being a transformative president. Everything he touches turns to dross.

    Well let’s not sell Greenspan, Bernanke, Paulson, Geithner and Summers short.That was an amazing amount of Toxic Waste they gifted to the America people after it was done generating RECORD BONUSES on Wall St. It does take a certain amount of talent to concoct a toxic brew that gives the whole world the Tijuana Two Step.

    1. different clue

      It only turns to dross for we the 99 per cent. So far it all turns to gold for Obama’s sponsors, owners, and patrons. Not for nothing has he been called “The Fresh Prince of Wall Street”.

      Oh . . . he hasn’t? Well, if anyone here thinks the phrase is fitting and would make a good meme, feel free to use it.

    2. Mark P.

      Bair frames HAMP in too benign a light, nonetheless. I grant you, anything more critical would be beyond the pale for a Washington insider.

      Nevertheless, to the extent that HAMP was anything more than political kabuki designed to show the American public that the administration was doing the bare minimum, the truth is that the program was a scam designed explicitly to favor the banks as servicers and originators, and to feed their balance sheets wherever possible at the expense of homeowners, taxpayers and the rest of the body politic.

      In this, of course, it is like every other domestic policy undertaken by the Obama-Geithner administration.

  2. middle seaman

    It’s the academics. After all same people did quite well in other administrations. It’s Obama.

    1. C

      No I disagree. To take Larry Summers as an example his career with Clinton he:

      1) Advocated for invading Indonesia.
      2) Encouraged the bailout of Russia during their currency crisis on the advice of investors deeply invested in russia making for a transfer of wealth to them and the oligarchs that did little to help russia.
      3) Pushed an austeirity plan for Korea during a recession.
      4) Argued against greenhouse gas reductions.
      5) Worked to convince California governor Grey Davis, with the help of Ken Lay and Alan Greenspan, that the causes of California’s energy crisis was “excessive regulation”.

      and Oh yes!

      6) He supported the Gramm-Leach-Bliley Act of 1999 which tore down the last of Glass-Steagall.

      Between that and the Obama administration all he really did was tank Harvard by gambling on derivatives and losing more than 1 billion dollars.

  3. SidFinster

    Incentives work! I can see the cheerleaders touting this as another triumph of unfettered market economix.

  4. Jim A

    OTOH, I wouldn’t call a redefault rate of 15% in 18 months low. When you consider how quickly RE prices were falling at the time a foreclosure 18 months later than the initial possibility of foreclosure means greater losses to the lender. And of course making a foreclosure vs mod decision requires judgement. From servicers who seem to be unable to simply keep files in order and current.

    1. Yves Smith Post author

      Jim,

      You really don’t know what you are talking about. Wilbur Ross, who is an investor with a lot of skin in the game in his funds, was very happy with a 12 month redefault rate of something like 30%

      First, when a house is foreclosed on, it drives down property values of all the other homes in the neighborhood. If you don’t think preventing the foreclosure of 2 million plus homes wouldn’t reduce the damage to the housing market, you need your head examined.

      Second, investors recoup very little when houses are foreclosed on. Loss severities on subprime are 70% and rising, and with contested foreclosures, go way over 100% fast. I’ve seen 400% loss severities.

  5. Blissex

    «Opt for initiatives that are clearly going to fail over ones that have good odds of success but cost real money.»

    Obama has two buig problems:

    * The Republican House won’t appropriate spending on programmes that make a Democrat president look good.

    * His political advisors tell him that median swing voters want lower spending, period; but also they obviously hate deadbeat borrowers.

    The usual quote from an article by Nancy Drew:

    http://www.nybooks.com/articles/archives/2011/aug/18/what-were-they-thinking/
    «It all goes back to the “shellacking” Obama took in the 2010 elections. The President’s political advisers studied the numbers and concluded that the voters wanted the government to spend less. This was an arguable interpretation.
    Nevertheless, the political advisers believed that elections are decided by middle-of-the-road independent voters, and this group became the target for determining the policies of the next two years.
    That explains a lot about the course the President has been taking this year. The political team’s reading of these voters was that to them, a dollar spent by government to create a job is a dollar wasted.
    The only thing that carries weight with such swing voters, they decided — in another arguable proposition — is cutting spending.
    »

    1. Min

      It goes back to before the 2010 election. Obama was talking austerity in 2009, saying that the gov’t was out of money. Also in 2009 Pelosi was calling for shared sacrifice. Economic recovery was not on the plate.

    1. Jimbo

      It would not be possible for Romney to be worse since while often appears the fool, he’s not a liar.

      1. Synopticist

        What????

        Romneys not a liar???
        I’ve been following global politics for a good 20 years, and until Romney came around, the 2 most dishonest, senior political figures i’ve ever seen were Binyam Netanyahu and Silvio Berlusconi.
        But Romney takes it to another level. Every time he opens his mouth he tells a lie. His normal stump speech is a series of lies about Obama and the economy. The guys the least authentic, dishonest, flip-flopping dissmebler i’ve ever heard. He’d convert to Budhism if he thought it would help him get elected.

  6. polistra

    Not a team player? Au contraire, she was an excellent team player. She didn’t go public with her knowledge, apparently didn’t even take it to Congress. She put her career before national welfare.

  7. Blurtman

    Thank goodness Hank Paulson rammed through TARP to bail out the homeowners, or else we’d be in realy deep shyte by now.

  8. El Snarko

    I see the beginnings of the outline of your second book here……sombody HAS to do this right.

  9. Susan the other

    Bair seems to be thinking that the best solution is the one that takes the entire problem, that is an entire MBS, and resolves the defaulting mortgages in an organized and uncomplicated way. A la Wilbur Ross. I don’t imagine that any approach could be more sensible. The problem, we are left to assume, is that the banks need the custodial fees on this garbage to fudge their books. So they aren’t willing to sell. And they also need an “asset” to trade with the Fed – they are addicted to repo-ing all their MBS crap on a nightly basis for money to keep operating their bankrupt concerns. And if the country is willing to allow all this generosity to the banks, it is unconscionable that homeowners are being foreclosed on at all. And this argument doesn’t even mention securitization and title fraud.

  10. PQS

    “They said we were paying for failure instead of paying for success.”

    Which was apparently perfectly acceptable for TBTF institutions and their wealthy members, but not good enough for the American people.

    At every turn, it is so obvious that the 99% are but inconveniences to this Administration and just about everyone inside the Beltway and on Wall Street.

    1. Jimbo

      Obama is an empty shirt regurgitating other people’s crap, whether it’s the need to set up a turn-key spy on all Americans police state, buy 450 million hollow point bullets for “Homeland Security,” continue a $3 billion per week war that kills hundreds of thousands of innocent people in order that the War/Fear Machine books profits or taking the advice of Weasel Geithner, lying about the fraud crimes and giving the bankster criminals trillions of dollars.
      Obama is making Mitt Romney look really good. Which is disturbing….

      1. TK421

        Every day it’s harder to tell the difference between Obama and Romney. In 2008 Romney proposed forcing people to buy private health insurance, expanding America’s secret prisons, and coddling the wealthy. Whereas Obama…has two young children.

  11. Lambert Strether

    “They are conflicted.” No, they are not conflicted. They actively wish people to lose their homes, just as they actively wish for people to be DISemployed, and just as they actively wish for people to get sick and die without health care. Matthew 7:16. This administration and the last one, both of them, undistinguishably.

    1. Blissex

      «They actively wish people to lose their homes, just as they actively wish for people to be DISemployed, and just as they actively wish for people to get sick and die without health care. [ ... ] This administration and the last one, both of them, undistinguishably.»

      Oh no, it is voters and campaign donors who demand that.

      Most voters and virtually all donors are (deluded) property rentiers, and want asset price to go up but wages and other labor costs to go down.

      If Obama or Romney want to be elected, they have to give voters and donors what they want, and that’s being “severely conservative”, that is as mean as possible to losers (workers) and as generous as possible to winners (rentiers).

      As the quote from Nancy Drew I made earlier makes pretty clear. Another quote about the Republican perception of what voters want, which is I think a realistic one, from Frum:

      http://nymag.com/news/politics/conservatives-david-frum-2011-11/index4.html
      «It’s fine to be unconcerned that the rich are getting richer, but blind to deny that middle-class wages have stagnated or worse over the past dozen years. In the aftershock of 2008, large numbers of Americans feel exploited and abused.
      Rather than workable solutions, my party is offering low taxes for the currently rich and high spending for the currently old, to be followed by who-knows-what and who-the-hell-cares.
      This isn’t conservatism; it’s a going-out-of-business sale for the baby-boom generation.
      »

      And what middle aged middle class swing voters and donors want is asset stripping the USA (“going-out-of-business sale”) in their favour, and “F*CK YOU! I got mine” is their lifestyle.

      The petty bourgeoisie can be even nastier than the bourgeoisie.

    1. lambert strether

      1. Forget 2012. It doesn’t matter and it looks a grateful 1% has fixed it for Obama anyhow. (That’s why the Rs have been let off the leash to freely express the conservative Id.) 2016 might make a difference, if we get started now.

      2. At the national level, don’t give either legacy party your money, your time, your attention, or your vote. Don’t reinforce them. Both parties are brands with the same owner. Support the brand, support the owner of the brand. At the state and local level, vote the individual, not the party.

      3. Vote for third parties whenever you can, or write-ins.

      4. Maximize your civic engagement in anything you’re comfortable with that doesn’t engage the legacy parties. This includes Occupy.

      My $0.02.

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