Sheila Bair’s Mortgage Miracle
What do you do if you’ve spent your career encouraging mortgage loans to people who can’t repay them? Barney Frank’s answer is to grill federal officials on why they aren’t preventing foreclosures. Infuriated at the difficulty of modifying mortgages, the Beltway crowd doesn’t understand that such contracts weren’t designed to let people live in houses they can’t afford.
Still, at a recent hearing of his Financial Services Committee, Mr. Frank received encouraging words from FDIC Chair Sheila Bair. She outlined her ballyhooed plan to prevent an estimated 1.5 million foreclosures by the end of 2009. She plans to accomplish this feat by modifying more than two million loans at what she estimates would be a taxpayer cost of $24 billion. This may be wonderful politics, but the real-world evidence suggests it will be far more difficult and expensive.
The live-fire test has been going on at failed lender IndyMac Bank since August. Readers will recall that IndyMac wounded itself with sloppy underwriting and then was wounded further when Senator Charles Schumer released letters warning that “the bank could face a failure.” A subsequent wave of withdrawals killed IndyMac, and the FDIC took over. The FDIC soon launched a program to modify IndyMac’s troubled mortgages, and this is now the basis for what Ms. Bair would like to do nationwide.
Our colleagues at Marketwatch.com recently reported on the FDIC’s experience at IndyMac as well as industry-wide data from Lender Processing Services, which manages payments for much of the banking industry. Turns out that the FDIC is moving very slowly in modifying loans, but perhaps not slowly enough, because of the likelihood of further defaults.