Sheila Bair, the chair of the Federal Deposit Insurance Corporation, has been striking the same note for nearly 18 months now: We have to do something about foreclosures. With the announcement of the Homeowner Affordability and Stability Plan last week her calls were heeded.
Behind the plan is an unlikely trio of officials. Bair, a Republican and former counsel to Bob Dole, Treasury Secretary Tim Geithner, and Secretary of Housing and Urban Development Shaun Donovan all pitched in to craft a plan the administration hopes will shore up the housing markets and help the 9 million homeowners in danger of defaulting on their mortgage. But it's been a long and occasionally contentious two-year process. What began as an internal revolt against the Bush administration's lack of policy response to the economic crisis has become a government-wide strategy that finally addresses the default-ridden mortgage market at the crisis' heart.
The task began in the spring of 2007, when the FDIC -- which monitors bank risk in order to protect the insurance fund it manages -- anticipated problems in the housing market as its staff noticed the number of risky mortgages issued at the height of the housing bubble. Because many of these mortgages were packaged into investment securities and then sold off to other institutions -- these are the so-called "toxic assets" clogging our financial system -- they are difficult to refinance.
Over the summer of 2007, Bair met with stakeholders from across the mortgage industry -- investors, servicers, bankers, and attorneys -- to figure out the best ways to modify the loans. Despite public statements and a New York Times op-ed, Bair had little luck getting attention for the problem while the economy appeared sound. Around the same time, the Obama campaign's housing-policy group sent a memo up the chain of command discussing the housing market and its potential problems, according to an expert involved in those discussions.
But no one was sure how the government could deal with the foreclosure problem until July 2008 when California's Indymac bank failed and the FDIC took over management, as it regularly does during small bank failures (indeed, the Indymac case is an oft-discussed template for temporary nationalization of major financial institutions that are insolvent).
Indymac was the perfect lab to figure out how to stop foreclosures: The bank issued its own home loans, serviced mortgage loans sold to others, and held mortgage-backed securities. Running the bank meant each sector of the complex market could be examined by FDIC staff in an effort to overcome resistance to modifications from lenders, servicers, investors, and government officials concerned about wasting taxpayer dollars. The ultimate mortgage-modification plan developed for Indymac became the template for the national plan announced by President Barack Obama last week. Donovan called it "pioneering."
But there was no national plan during the depths of the economic crisis last fall as the number of foreclosures increased -- there were 2.3 million foreclosures in all during 2008. Bair made waves when she criticized her colleagues in the previous administration for waiting to help out homeowners facing foreclosure, telling The Wall Street Journal, "There's been such a political focus on making sure we're not unduly helping borrowers but then we're providing all this massive assistance at the institutional level, I don't understand it," she said. "It's been a frustration for me."
Bair's foresight and willingness to mix it up on behalf of homeowners -- as well as her reputation for independence -- led to Obama asking her to remain in her post in the new administration, although the transition was not without drama. There were reports that incoming Treasury Secretary Tim Geithner, a career civil servant who had worked most recently with Bair in his job as president of the New York Federal Reserve Bank, attempted to oust the FDIC chair, fearing another bureaucratic rival after the two clashed during the Citigroup bailout. Nothing came of those reports, and Geithner had only good things to say about his colleague at a press briefing when the housing plan was unveiled.
"Sheila, I just want to say, was an early, powerful, pragmatic, creative advocate of action on the housing front," Geithner said.
But the FDIC isn't seeking ownership of the housing plan. FDIC spokesperson David Barr, makes clear that the FDIC has "been involved in discussions that were very productive discussions but overall it is Treasury's proposal and their plan."
Development of the administration's housing response began during the transition, and the intra-agency group that developed the plan included representatives from HUD, Treasury, and the FDIC, among other key agencies, and was coordinated by Larry Summers' National Economic Council. Bair's staff had developed a working template for loan modification, and HUD brought in experts in mortgage finance, including the former head of the Federal Housing Authority and others with experience handling the effects of foreclosure on communities. Treasury, which will be running the plan when it starts on March 4, focused on the lenders and investment side of the strategy.
The resulting roadmap comes in three parts. The first is a mortgage-refinancing program for homeowners who are "underwater" -- they owe more on their mortgage than their house is now worth. This will be run by Fannie Mae and Freddie Mac. The second is a loan-modification program for homeowners delinquent in their loans or close to it and facing foreclosure. Borrowers must meet a number of criteria: They cannot be speculators, must have a loan below approximately $700,000, and must have a manageable level of personal debt. This portion of Obama's plan will include the development of market-wide loan-modification standards to help ensure participation across the industry. The plan also includes legislation to allow bankruptcy judges to modify primary home loans. The final part of the plan is increasing financing to Fannie Mae and Freddie Mac to build market confidence.
Some opponents of the plan have criticized it for offering help to homeowners who made risky decisions in the mortgage market or cashed out home equity for frivolous purchases. The administration is trying to prevent that with the various restrictions on the kinds of borrowers affected by the program, and a senior HUD official emphasized that the main fault of eligible participants "was happening to be in America when housing prices are going down 20, 30 percent a year." People who broke the law and people who failed to manage their credit wouldn't prosper under the plan. Asked about Rick Santelli, the CNBC correspondent who created a minor media sensation with a rant about the plan on the trading floor of a stock exchange, the official noted that Santelli had appeared on TV and been asked what he would do about the foreclosure crisis.
"He didn't have a plan himself," the HUD official said. "He knew what was wrong, but he doesn't know what's right."
But it's not just the plan, it's the people who design and implement it. Bair and Geithner are career civil servants, and Donovan has worked in nearly every quarter of the housing world, from HUD to nonprofits and a brief stint in the private sector. Ultimately, they're problem solvers, not politicians -- though they're not lacking in political skills, as their press conference glad-handing shows. Though the buck stops with Obama, the three officials will have to work together to see the housing crisis through to a healthy market.
