I Heart Sheila Bair

My love of regulators is newly found. After all, I work in an industry that is often at odds with the folks who are supposed to oversee us. I have been frustrated in the past because sometimes these folks make a huge deal out of something pretty puny, but then miss the elephant in the room. Not so with my most favorite regulator of all, Sheila Bair, the Chairman of the Federal Deposit Insurance Corp (FDIC). Ms. Bair is the cream of the crop and I want to be the first to say it in public: I heart Sheila Bair.

My infatuation developed when she spoke articulately about what she perceived as the problem with TARP: it did not go to the root of the problem at hand, that is, the collapsing real estate market and the rapid advance of foreclosures. She noted in an interview with the Wall Street Journal (10/22/08) that she was frustrated that the government was providing “massive assistance at the institutional level” to the lenders (i.e. the financial institutions) but not enough help to the borrowers who were in trouble and potentially facing foreclosure. Ms. Bair had hoped for relief to come in the form of how she managed the loans that failed IndyMac Bancorp Inc. held. After the FDIC took over that bank in July, Ms. Bair said it would halt foreclosures on the mortgages it owned and would try to modify loans for struggling homeowners.

Well it only took four months, but it looks like there are others who are seeing the wisdom in Ms. Bair’s approach. Yesterday Fannie Mae and Freddie Mac, along with U.S. officials, announced plans to modify hundreds of thousands of loans held by the massive entities in order to prevent foreclosures. The effort will be available to those borrowers who meet certain criteria: the homes must be owner-occupied, escrows for real estate taxes and insurance must be established, the loans must be 90 days or more past due; the borrowers would need to owe 90 percent or more than the home is currently worth; and they would have to provide a statement or affidavit showing that they have encountered some sort of hardship that has impacted their ability to pay their mortgage. The program would only apply to loans made on or before Jan. 1, 2008, and borrowers will be disqualified if they file for bankruptcy.

The goal of the program is to reduce the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates, extending the life of the loan and in some cases forgiving portions of principal debt. While officials did
not have an estimate of how many people would qualify, estimates range in the hundreds of thousands. According to the most recent data from the Mortgage Bankers Association at the end of June, more than 4 million American homeowners, or 9% of mortgagees were either behind on their payments or in foreclosure.

The Fannie/Freddie program would augment similar plans announced by Citigroup, JP Morgan Chase and Bank of America. Citigroup plans to not only renegotiate loans that have already reached a critical point, the bank also plans to contact 500,000 homeowners, or 1/3 of all mortgages that it owns, who are on the verge of falling behind. The bank will create a team of 600 salespeople to assist the targeted borrowers by adjusting their rates, reducing principal or increasing the term of the loan. Late last month, JPMorgan Chase & Co expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 customers and Bank of America, meanwhile, has said that starting Dec. 1, it will modify an estimated 400,000 loans held by newly acquired Countrywide Financial Corp. as part of an $8.4 billion legal settlement reached with 11 states last month.

It looks like the industry has caught on and realized that Ms. Bair was right on in her assessment of what needs to get done. Yes, it was important to secure the financial system, but it is equally important to focus on where the problems began and address them head on. The world is catching on to my great admiration of Ms. Bair—on Monday, the Wall Street Journal named Bair the Number One Woman to Watch in 2008. I think that I speak for the WSJ when I say that we all heart Sheila Bair!