The skies around housing seem remarkably clear with economists pointing to further home price appreciation and additional real estate sales in 2013.
But Sheila Bair, the former chairman of the Federal Deposit Insurance Corp., isn’t buying all of the sunny forecasts — at least not without asking a few questions first.
Bair, who joined The Pew Charitable Trusts as a senior adviser after leaving the FDIC, remains strikingly transparent in a world where regulators generally prefer coiffed public relations statements and personas that hide behind data. Bair, on the other hand, has a knack for saying what she thinks and doesn’t hold back when discussing how she believes regulators struck out — missing chances to save more distressed homeowners in the early part of the financial crisis.
But keeping score doesn’t seem to be in Bair’s nature or personality. She is a deep thinker, and one who has established a reputation for firing warning shots prior to a crisis kicking in. Bair stepped into the top FDIC role in 2006.
Appointed by President George W. Bush, she arrived right before the subprime crisis was about to hit, challenging national and local banking institutions and putting herself at the epicenter of financial history. Bair didn’t leave her post until July 2011, making her time at the FDIC one of the most historic tenures at the agency
in decades.
Before the market crashed in 2008, Bair felt regulators failed to adequately check up on banks’ capital thresholds and risky derivatives. Her prescient and cautious forecasts from the sidelines proved to be right. And this is certainly not the first time Bair has sat outside the lines of regulatory conformity, insisting not everything is as it seems in housing or banking.
Jump ahead to 2013, Bair today is frosty on the Federal Reserve’s ongoing zero interest rate policies and the impact of constant low rates on the market and housing demand.
“I am glad to see the housing market recover, but a lot of it doesn’t feel right to me,” Bair said. “I am hearing about some counties with 8% (price) jumps in one month. What is that? I want a housing recovery that is sustainable, and I think it is being distorted somewhat by the interest rate environment.”
Looking at the Fed’s ZIRP policies, Bair finds herself once again playing the role of a respectful, yet skeptical critic.
“I do think it creates distortions,” she said when asked about the impact of the Fed’s aggressively low interest rates and monthly $40 billion in agency mortgage-backed securities purchases.
“In 2009, they were absolutely right, but this has just gone on forever,” she said.
It’s been more than four years since Bair found herself holding the reins at the FDIC in the middle of the nation’s largest banking crisis since the Great Depression.
From the FDIC’s takeover and eventual restructuring of IndyMac Bancorp to its handling of 414 bank failures from 2008 through 2011, Bair led the FDIC through the most trying part of the financial crisis. In 2008, the agency recorded 25 bank failures. By 2009, that number shot up to 140 failed banks, followed up by 157 failures in 2010, according to FDIC data. The numbers did not subside until Bair’s last year at the agency in 2011 when the FDIC reported 92 bank failures.
She gained a public reputation as a regulator who privately, and later publicly, clashed with former Treasury Secretary Timothy Geithner over the lack of aid provided to American homeowners as banks received bailouts. Bair’s disagreement with Geithner over how the Treasury handled the distressed homeowner situation in the wake of the meltdown is well documented in her book, “Bull By The Horns” and in numerous interviews.
Looking back at 2008 and 2009, Bair says, “We should have done more on loan modifications. We had an original proposal to make very cheap loans that would not have to be repaid until five years later and would have amortized (those) over very long periods of time for overleveraged borrowers.”
Bair said the deal would have given more homeowners the “ability to pay down their principal balances,” yet the Treasury refused to bite and the idea died.
“So then we pushed an insurance program against re-defaults once they had the TARP program, and we couldn’t get them to do that,” Bair recalls.
The former FDIC chairman remembers net present value calculations — or the current value of some distressed properties — prevented many borrowers at the time from obtaining loan modifications in the immediate wake of the financial crisis.
“They were putting in artificially high re-default rates into the NPV calculations, which really lowered the value of the loan modifications so a lot of people were not getting a loan mod,” Bair said. “We wanted to provide insurance against re-default to change the NPV calculation to qualify more borrowers for these mortgages, and we estimated that we thought we could save 2.1 million homes by doing this.” The program would have cost about $40 billion, but “the Treasury didn’t want to spend that much money,” Bair said.
Looking back, Bair clearly doesn’t view this situation as the Treasury’s only missed opportunity to focus on housing and underwater borrowers.
“We also should have done a Troubled Asset Relief Program,” Bair added. She remembers her office pushing for the creation of a facility in which banks could place their bad loans to clean up lopsided balance sheets. “Regulators approved it, but not the Treasury,” she says. “I finally gave up. We needed to have it done, but I wasn’t getting support from Tim (Geithner). He was slow-walking it.”
Still, Bair says Geithner deserves credit for the 2009 bank stress tests and for getting more capital into the banking system during a liquidity freeze. Despite this, she remains disappointed that banks had to nurse bad loans, creating drag within the financial system.
“I think we should have tried to get Citigroup restructured into a good bank and bad bank, and I would have liked to see bondholders take more risk and we didn’t do that,” Bair told HousingWire.
Still, she says the “bailouts were necessary,” but “perhaps overly generous” — lacking a push for banks to clean up their balance sheets.
As for Bair’s reputation in the marketplace, Christopher Whalen, executive vice president and managing director for Carrington Investment Services, pretty much credits Bair and the FDIC for changing how zombie banks are treated in the marketplace.
“Sheila and the FDIC board changed the safe harbor on ‘true sale’ to make banks live with the same rules as nonbanks. Huge. She may have ended ‘too big to fail’ just with this change,” Whalen said.
THE HOUSING RECOVERY
Jokingly, Bair points out that she recently bought a second home on the East Coast because, like other investors, she is not sure where to put her money in today’s market.
Bair is warm to the idea of rising home prices, but the skeptic in her awakens when discussing housing and loan servicing.
ZIRP policies “elevated a lot of refinancing activity,” Bair said, “but the benefit of that is slowly leaving us, and these refis have slowed down because interest rates really can’t go any lower.”
Bair also worries that “there seems to be a lot of housing inventory still out there that hasn’t cleared.”
“There is a lot in the foreclosure pipeline. There are many seriously delinquent mortgages out there, a lot of REOs sitting on banks’ balance sheets and an untold number of people who would like to sell their house, but haven’t because the market has been so bad.”
Add into the mix a perceived dysfunction in the mortgage servicing industry, and the potential exists to create drag on housing for years, Bair suggests. Her concern is that, without a true fix to the market, “we are not going to see housing prices hit the real bottom” or have a sustainable recovery.
Whalen seems to support Bair’s skepticism. “Bair is right to be concerned about home prices, especially when they are rising faster than employment and GDP. The Sand States come to mind. But judicial states in the Northeast are not rising at all,” he added.
SERVICING STILL BROKEN
As for the performance of mortgage servicers, Bair is direct in saying, “I’m skeptical. I think some of them are not up to the task.” Although she refuses to name names. “I think people know who the strong ones are and who the weaker ones are,” she said.
But Bair’s critique is not limited to the servicers themselves.
“I don’t really understand … almost all of these big servicers are regulated financial institutions. They are heavily reliant on the government buying their mortgages. I don’t know for the life of me why it is taking the government this long to get these servicers to come up to standard.”
Bair believes the market will not clear unless servicing is up to the job, and she feels servicing capacity is still falling short right now.
Recently, servicers cut a deal to the tune of $9.3 billion to end independent national foreclosure reviews enacted by regulators. In place of individual loan reviews of mortgages that landed in foreclosure, the deal settles with borrowers to speed up the process of compensating homeowners.
“That thing was doomed to begin with,” Bair said, when asked about the end of independent foreclosure reviews. “Those consultants are hopelessly conflicted. It was never a process I had much confidence in.”
Bair had hoped a separate, independent entity with experience processing claims would be chosen to conduct the
independent foreclosure reviews, while providing the appropriate remedies.
“To think bank consultants who rely heavily on these banks as an ongoing source of revenue are going to be independent and thorough in looking at robo-signing problems, it just doesn’t pass the laugh test, so I am glad the OCC cut their losses and ended it.”
Bair would have preferred the creation of an independent entity that could investigate foreclosure-handling issues.
“I would like to see a review of people who had loan mods denied, because I think there were substantial error rates, especially when running the net present value tests.”
Bair recognizes the recent settlement was intent on getting money into distressed borrowers hands expediently, but she says, “maybe for borrowers who want a review, they should provide that type of capacity. But I would not want to see the past process continue, that thing was a mess.”
Bair’s desire to protect homeowners who alleged wrongful foreclosure is balanced by her knowledge of the markets and a desire to eventually see the foreclosure backlog cleared, especially in judicial foreclosure states where default timelines still lag.
She suggests states officials would be best served by getting together and comparing best foreclosure practices, especially with nonjudicial foreclosure states clearing through their inventory backlogs at a faster pace.
“I think the foreclosure process and the rules concerning foreclosure should stay at the state level,” Bair said, but added, “Some of it is going on for years and that is bad for the economy and bad for the neighboring homeowners.”
While still supporting due process for borrowers and loan modifications when possible, Bair asserts that an ending to the process is needed. “If you drag this on, it is going to impede the ability of the housing market to clear.”
As for getting the parties back into the private-label residential mortgage-backed securities market, Bair said the focus needs to be on putback risk and making sure representations and warranties tied to RMBS contracts are “simple and clear.”
She suggests implementing rules where the speed of how quickly a loan defaults after origination is a factor in determining whether an issuer or investor takes the risk.
A NEW ROLE
Bair is no longer at the FDIC watching banks stumble over legacy mortgage issues, but mentally the former banking regulator is still in the game, searching for solutions.
As a Pew adviser, she recently took the time to edit a paper from the Boston Consulting Group on how to fix housing. The study not only advocates for the creation of best foreclosure practices for the states, it also suggests the market should lean more heavily on private investors and land banks to get the glut of REO properties, as well as the overall real estate market, moving again.
The paper, which does not reflect the positions of Pew, also recommends more rent-to-own initiatives.
Bair is not a fan of what she calls “sugar-high stimulus,” a term she threw out when asked about how the homebuyer tax credit fared in 2009 when it gave tax incentives to homebuyers in a falling real estate market.
“It was expensive, and it didn’t create new demand, it just accelerated existing demand. We got a short-term pop and no lasting benefit.”
Bair is wishing for something different — namely policymakers that can “focus on real job creation” and not programs that artificially create housing demand.
“The best thing we can do for the housing market is getting people working again.” Whether it’s through repairing the U.S. infrastructure or revamping the tax code, Bair sees a need for efforts in this direction.
As for using more housing stimulus, Bair believes borrowers are already fatigued by cheap credit.
“Low interest rates are designed to provide cheap credit and to get people to borrow and spend,” but, Bair added, “people don’t want to borrow, they need to build up their credit and savings.”
BOND MARKET BUBBLE?
Bair admits, when getting a quick break from housing questions, she still worries about U.S. banks with big trading operations.
“I don’t think they have enough capital,” Bair said. “The way the Fed allows them to risk-adjust their assets on their trading book understates the risk and the capital requirements.”
Bair is doubly concerned about excessive quantitative easing, which includes the Fed buying up $40 billion in mortgage-backed securities each month.
“The bond prices cannot be justified on the fundamentals,” Bair said. “I worry the bond market is in for a correction. The signal the Fed has shown is that it is going to continue MBS purchases. People who own MBS probably like it, but again, it is not based on real economic activity. I would like to see the Fed focus on an exit strategy from all of this,” she said.
“At some point, our market needs to function on its own. We are supposed to be a market-based economy, but the government is pretty much driving everything at this point.”
As for whether financial regulators learned their lessons the last time, Bair is not convinced.
“I think there is still a real problem with regulators being too insular,” Bair told HousingWire. “I do worry that the Fed thinks it can do more than it can in terms of bringing the economy back now and preventing the next crisis. A lot of their own regional bank presidents have the same worry.”
The Dodd-Frank reforms help, but are “very complicated and riddled with exceptions,” Bair said. “I support the regulators — I want them to succeed — we need them to succeed, but they need to take a step back and see how the public is viewing them right now and listen to more people.”
Bair still views traditional homeownership as a “way for lower-income people with the right kind of mortgage to build equity and financial security over time. We got away from that,” she explained.
“There is a difference between promoting homeownership and promoting home finance. What we were really doing is promoting home finance — particularly leverage. We want to encourage people to build equity in their homes and to not use them as ATM machines.”
