Sheila Bair: Still a Disaster as a Regulator

It’s official. There’s no hope for Sheila Bair. Have you read the speech she gave to the Mortgage Bankers Association last week? Once again, Bair misdiagnoses a key problem related to servicing mortgages, puts forth a wrongheaded solution to the problem she doesn’t understand, and then demonstrates that she doesn’t quite get the basics of contract law, the self-correcting nature of free markets, and the way the real world works generally. How did this woman become a regulator?

You think I’m overreacting. I’m not. Listen to some of the gems she shared with the mortgage bankers last week:

Bair: “Throughout the mortgage crisis . . . the most persistent adversary has been inertia in the servicing and foreclosure practices applied to problem loans.”

My take: The “most persistent adversary” has been servicers’ inertia? Um, no. The biggest adversary has been the borrowers. They’re the ones who borrowed money and committed by contract to a repayment plan-and who have now defaulted. If those borrowers were still current, there would be no problem. What’s more, those same borrowers are having it pretty cushy right now. The last mortgage payment on the average home in foreclosure was made over 18 months ago! That means these people have been living rent-free for a year and a half!

Nearly two years after the housing crisis peaked, a solid consensus has emerged that a major cause of the problem was that people received loans who never should have gotten them in the first place. All right then: they never should have gotten loans in the first place. The borrowers didn’t deserve the first break, and now Sheila Bair says they should get another, in the form of a loan modification? That’s nuts.

Bair: “Prompt action to modify unaffordable subprime loans in 2007 could have help to limit the crisis in its early stages.”

My take: The woman is delusional. Is she not acquainted with the facts? The earliest subprime defaults were the most poorly underwritten loans, taken out by the weakest borrowers. We’re talking about liar loans (wherein the borrower’s income was nowhere close to what he stated it was) and out-and-out fraudulent loans (where, for instance, speculators said they planned to live in the mortgaged property when they had no plan to do so) that were made when home prices were at their very peak.

Blair is dead wrong if she thinks loan mods are going to help these people. A large percentage of them don’t even want a mod. They like living in the properties for free, or (in the case of fraudulent speculators) have likely walked away from the properties entirely. The few cases of successful modifications that did occur did nothing to stop the inevitable tsunami of foreclosures of prime mortgages that followed.

Bair: “Mortgage services have remained behind the curve. . .”

My take: Bair persists in thinking that the defaults are the servicers’ fault rather than the borrowers’, and has conjured up this fantasy that if the servicers just change their practices by order of the FDIC, the problem will go away. It won’t. Fact: mortgage default rates are at virtually unprecedented levels; the nationwide decline in home prices is unprecedented, as well. No one should be surprised that servicers weren’t staffed properly to handle the resulting problem, and have had to hustle to develop new servicing techniques.

Bair: “I would like to talk with you this morning . . . to address the current crisis and prevent such a problem from recurring in the future”

My take: The woman is nothing if not excitable. In her speech to the mortgage bankers last week, Bair used the word “crisis” no fewer than 20 times. Memo to Sheila: the crisis is over. It happened in 2008, when a number of the country’s major financial institutions were on the brink of collapse as a result of a massive panic by investors. By now, everyone has calmed down. We’re in the mop-up phase. A slew of borrowers have defaulted on their mortgages; those defaults and foreclosures need to work through the system. At worst, it’s a backlog. To call this a crisis is unnecessary rhetorical exaggeration.

Blair: “This compensation structure [i.e., mortgage servicing fees] drove automation, cost cutting, and consolidation in the servicing industry in the years leading up to the crisis”.

My take: Oh good lord. Now she’s against automation? Please. Any problems the servicing industry might be having did not come about from the industry’s long-established practices, its fee structure, or its rational consolidation. Just the reverse: the rationalization of the industry has meant lower costs for borrowers who actually pay off their loans. Rather, the problems stem from the huge wave of defaults and the nationwide decline in home prices.

Or-to draw an analogy that’s by no means far-fetched–does Sheila Bair think that the recent record level of losses in credit card lending has come about as a result of the consolidation among credit card services over the last 20 years cause? I certainly hope not!

Bair: “The bottom line is that we need more modifications and fewer foreclosures.”

My take: Who says? We already know that most of these delinquent borrowers were, in retrospect, unqualified for the loans they got. We know that many of them committed fraud. So why should lenders be handing out more loan mods? Bair’s comment represents an amazing overstep of the FDIC’s responsibilities. Mortgage servicers have a fiduciary obligation to represent the financial interest of the owners of the mortgage notes. If servicers should be doing more mods and fewer foreclosures, that’s an issue between the servicers and the owners of the mortgage, not some crazy regulator!

Bair then goes on to describe several practices that she believes servicers should follow.

Bair: “The first such requirement is that servicers must provide a single point of contact to assist troubled borrowers throughout the loss-mitigation and foreclosure process.”

My take: So now the FDIC is telling servicers who should be answering the phones? Bair seems to not be able to control herself. Issues as specific as point-of-contact policies should be determined by the servicer, not dictated by fiat by a regulator on high.

Bair: “Second, servicers must commit to adequate staffing and training for effective loss mitigation.”

My take: The woman has got to get out of the weeds. What is the head of the FDIC doing trying to get involved to this level of management detail? If the servicer doesn’t have staffing or trained employees needed to ensure that the loans are adequately serviced, the owner of the mortgage can change servicers. That’s how the market works.

Bair: “. . .the uncertainty around the treatment of second liens has reduced opportunities for effective foreclosure prevention. As part of any resolution of claims regarding large servicers, a fixed formula should be established to govern the treatment of first and second mortgage when the servicers or its affiliate owns the second lien. At a minimum, this formula should require that the subordinate lien be reduced pro rata to any change in the first mortgage.”

My take: A “fixed formula should . . . govern the treatment of first and second mortgage.”? Really? I’ve got a better idea. How about abiding by the contracts as written and signed by informed, consenting adults? I don’t care how much the media loves her, Sheila Bair doesn’t have the power to overrule contracts between two private parties. She’s wrong to even suggest the contracts be changed. The owners of the first mortgage and the second mortgage have their own rights; they each employ a servicer to best represent them. The head of the FDIC should have nothing to do with suggesting that new mortgage servicing practices be adopted ex post facto.

Bair: “We also need independent reviews of loss-mitigation denials. Borrowers should have the right to appeal any adverse denial of a loan modification requisition to an independent party. . .”

My take: Since when do delinquent borrowers have a special right of appeal? Should current borrowers have such a right, too, or just the deadbeats? The woman is nuts! The borrowers had an obligation to make timely mortgage payments. They didn’t make them. According to the contract they signed, they’re in default. This is not hard. The servicer, acting on behalf of the owner of the contract, has no legal obligation to offer a modification. It’s crazy for Bair to propose that a third party review any denied modifications. (I don’t need to tell you, by the way, what the availability of a mandated loan mod offer and appeal would do to the price and availability of mortgage credit.)

Bair: “. . . we need to provide remedies for borrowers harmed by past practices. A foreclosure claims commission, modeled on the BP or 9/11 claims commission.”

My take: Sheila, just stop, okay? The few borrowers who were actually hurt by industry shortcuts such as robo-signing are few and far between. Few (if any) borrowers who were current were improperly foreclosed on-and those folks have no shortage of avenues for redress. You don’t need anything like a BP fund to make them whole. And borrowers who were delinquent and then foreclosed on, even if the foreclosure had some paperwork issues, suffered no harm and deserve nothing.

Bair: “. . . every time servicers have delayed needed changes to minimize their short-term costs; they have seen a deepening of the crisis that has cost them–and the rest of us–even more.”

My take: Where’s my aspirin? Bair has succeeded in including everything she’s gotten wrong about the problem in this one sentence. No, it’s not a crisis. No, the servicers aren’t the source of the problems. And, no, nothing the servicers are doing is costing “the rest of us” even more. The woman is on another planet.

Last week President Obama said he wanted his administration to look at the negative impact that unnecessary ineffective federal regulations have on our growth prospects. I am biased, but if he is serious (which I don’t think he is) he should start with financial services regulations. Specifically the Dodd-Frank legislation should be dramatically cut back, the Consumer Financial Protection Bureau should be eliminated, a new, reasonable, permanent head of the OCC should be named–and Sheila Bair should be shown the door. As she’s demonstrated again and again, Bair is destructive to the U.S. banking industry and U.S. economic growth.

What do you think? Let me know!