There is little evidence in Sheila Bair's downtown Washington, D.C. office-the typical chambers of a high-level bureaucrat-that she is sitting on a hot seat under the glare of the national spotlight. She has thrust herself into the debate over the housing and resultant economic crises, an uncommon position for the chair of the Federal Deposit Insurance Corp. (FDIC). After all, can anyone other than a banker name the person who held that position before Bair?
In fact, when she first accepted the job, Bair recalls being promised regular hours, no weekends, and that her "only headache would be whether Wal-Mart should own a bank."But today, all that has changed.
"Until we address the foreclosure problem at the borrower level, this downward cycle will continue," says Bair in a mid-December interview with Big Builder. "Mounting foreclosures continue to drive home depreciation-creating higher credit losses at FDIC-insured institutions and disruption in the broader economy."
Bair's strategy, which she implemented at IndyMac Federal Bank in July shortly after the FDIC took it over, is to modify delinquent borrowers' mortgages to a housing cost-to-income ratio of 31 percent to 38 percent and lower mortgage interest rates to as low as 3 percent for five years; rates would then increase at an annual rate of 1 percent until they hit market rate. As of Dec. 1, 7,200 mortgages had been modified.
Bair believes this model could be taken to a national level. She would add a $1,000 incentive to servicers for each loan modification processed and hold the government responsible for sharing 50 percent of losses if a borrower were to redefault-a rate that the FDIC forecasts to be around 33 percent. As of press time, the plan called for a $24 billion expenditure to halt 1.5 million foreclosures in 2009.
Bair's plan has become something of a political football, tossed around like a wounded duck among supporters and detractors as they debate both its merits and efficacy. The administration that appointed her has only recently begun to come around to accepting her plan. Most recently, Treasury Secretary Henry Paulson required Citigroup-as part of the federal bailout the company took-to implement Bair's program. However, just weeks before, he had refused to use Troubled Asset Relief Program (TARP) funds to aid Bair's program.
Democrats on the Hill also are lining up behind her efforts. Representatives Barney Frank (D-Mass.) and Maxine Waters (D-Calif.) have voiced support. Frank, who chairs the House Financial Services Committee, has said that any new proposals involving bailout funds must include foreclosure prevention programs. In early December, Waters proposed the Systematic Foreclosure Prevention and Mortgage Modification Act of 2008, which called on Congress to implement Bair's loan modification program on a grander scale.
Bair has, however, apparently run afoul of President-elect Barack Obama's nominee to succeed Paulson as Treasury secretary, New York Federal Reserve president Timothy Geithner. Press accounts reported that Geithner hardly considers Bair a team player and speculates that Obama may seek to oust her, even though her term extends through 2011. Any such move might prove politically dangerous for the new administration, given the congressional Democrats' support of Bair.
Home builders mostly have been supportive of her efforts, but they question whether addressing foreclosures solve the problem. Bair's plan fails to account for an increasingly prominent belief that many homeowners who are in foreclosure do not want to keep their homes; instead they simply wanted to use them as a source of cash. Nor does it acknowledge that many homes in foreclosure are located in less-than-desirable neighborhoods where rampant speculation drove prices wildly up during the easy credit days.
"She has been a visible advocate for doing more on the fore-closure front and has stood up against the administration that appointed her," says Dave Ledford, NAHB senior staff vice president of housing finance and land development.
Holiday Builders president and CEO Kim Shelpman concurs, saying the Bair plan "creates a safe haven for borrowers and a safety net for servicers." However, she adds, "I don't think this is a cure-all. It gets to equilibrium on pricing, but there needs to be a stimulus to get people to buy homes." Shelpman points to the Fix Housing First coalition's plan-which would give home buyers a tax credit of $10,000 to $22,000 as well as a government-subsidized 30-year fixed rate mortgage at 2.99 percent-with a six-month introductory rate of 1.99 percent-as a way to achieve that.
"[Bair's program] alone will not save the industry or pull us out of the doldrums, but it is a brick in the wall," says Choice Homes CFO Steve Garza. This is a notion that Bair echoes herself, saying that loan modifications are not a "silver bullet" for economic recovery.
Industry stakeholders interviewed for this story say they believe anything the government can do to step in and stop foreclosures from flooding the market will have a positive effect for home builders. However, some assert that while the program may look good on paper, in reality the execution may only delay the inevitable. The Office of the Comptroller of the Currency (OCC) chair John Dugan reported Dec. 8 that 58 percent of borrowers who modified their loans eight months prior had redefaulted.
"[Loan modifications] will keep people in homes they can't afford or don't want," explains Ely & Co. economist Bert Ely, a banking consultant and outspoken critic of Bair. He points to the fact that some borrowers would rather foreclose than work out a deal to stay in a home that was out of their price range from the beginning. "The best thing will be for prices to hit bottom and the market to clear out; then the overhang [of inventory will drop]."
However, Bair disputes the OCC's analysis, saying the numbers raise more questions than answers. "It fails to define, in any meaningful way, the modifications that have redefaulted," she says. "Because of this lack of granularity, it's impossible to make any judgment about the redefault rates of sustainable modifications versus cosmetic modifications that, by their nature, are more likely to redefault."
She continues: "We are under no illusions that a systematic modification program is going to prevent every foreclosure or end the recession on its own. We know it won't. But what we can do is address the root cause of our economic problem-and do so quickly-and thereby limit the downward pressure on home prices and hasten the eventual economic recovery."
Ely contends that loan modifications "make sense" in principle, but he argues that they are better left to the private sector. "People act more responsibly with their own money."
Bair would agree under normal circumstances. She calls herself a moderate Republican and a capitalist and says that government involvement is not the answer. This is something Lesley Deutch, a vice president at John Burns Real Estate Consulting, thinks those in the housing industry like to hear: "Bair trying to get government involved in foreclosures is a huge issue for builders. But government backing might bring confidence faster."
The home building industry is sizing Bair up on two fronts: how successful her loan modification program could be in reducing foreclosure inventory, and how she will leverage her role as FDIC chair to ease the tension as banks work with struggling home builders. That latter point is critical; if banks won't lend to builders, not only will those companies be unable to build their way out of the slump, but they may not make it that far.
For many builders, it is the issue of bank lending, or the lack thereof, that matters most right now. While free-marketeers debate the wisdom of government intervention in home mortgage adjustments, their own urgencies may tip the balance in favor of asking for help from Capitol Hill.
NAHB senior officers and staff met with Bair and her team Dec. 17 at the FDIC's Washington, D.C., offices to discuss "arbitrary criteria" used to judge whether or not builder loans continue to receive funding; the near impossibility of finding credit for viable projects; and the inability to secure current lines of credit after the FDIC has taken over a bank.
The meeting was positive on most notes, according to Ledford, with the NAHB heralding Bair's work on foreclosure mitigation before digging into the credit issues.
Pointing to the FDIC's most recent steps to address bank credit through a record-keeping requirement, Bair told NAHB staff that it recently established a system to monitor and evaluate risks of the certain financial institutions using TARP funds. This record-keeping requirement also ensures preparedness on both fronts, if the institution fails in the future, Bair said.
She added that the FDIC has existing guidance for these insitutions to follow when opening up lending standards. In October, Bair implemented the Temporary Liquidity Guarantee Program, guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies and providing full coverage of non-interest bearing deposit transactions accounts, regardless of dollar amounts. She also sent out an interagency statement on meeting the needs of creditworthy borrowers in November.
Mick Pattinson, CEO of Barratt American, knows all too well the hardships of builders dealing with banks of late. After a quarter of a century of operations with many of the same lenders in Southern California, in August 2007, the banks told Pattinson that two of his loans would most likely not be renewed; instead, the bank would "work something out," he says. Seven months later, after Pattinson had reduced the debt on the frozen credit line by $30 million, the bank eventually foreclosed on the properties.
Says Pattinson, "This is a pattern we now see with builders all across the country." The pattern prompted him to organize the Building Industry Coalition for Economic Recovery.
The situation in which Pattinson found himself was with an established bank; he notes that the problem gets even worse when the FDIC steps in, saying the builders have no one they can contact to find out about their line of credit. "[Bair's] influence so far has not been positive," he says.
The Florida Home Builders Association (FHBA) also took a stand by lobbying elected officials to join the fight in requesting the government to implement regulations giving leeway to residential real estate construction loan borrowers who are current and have loans with financial institutions that are participating in any financial rescue program."We are asking for a time-out, not a bailout," says Jay Carlson, FHBA president.
Early Snyder, a Florida builder who is a key voice in the FHBA's efforts, calls the FDIC's bank takeover practices "atrocious." On Oct. 31, the FDIC took over one of his lenders, Freedom Bank, where he had a $2.5 million line of credit, and a $42,000 draw coming. "The Feds shut everything down," he says. A meeting the following week drained Snyder of any remaining hope for any credit easing. "Hell had broken open," he recalls. The situation is mind boggling for a man who states he has an 800 FICO score and has never missed a payment.
"They treated me like a criminal, like I was the one who took the bank down," Snyder says. FDIC representatives asked that he repay the loan within 60 days, he says.
Snyder says he went back about a week later and laid a million-dollar check on the table. "They wouldn't accept it. Now you have the FDIC packaging my loan with bad loans, which they will sell for $0.30 on the dollar, when I am offering to pay $0.50 on the dollar.
"Sheila Bair has no idea what is going on out in the real world," Snyder adds.
Snyder went to 15 other banks to offset the loan from which he could no longer draw, but at each, he was told they were not allowed to lend to home builders. "I don't think [Bair] realizes that while one arm of the law is trying to help banks, the other arm of the government is shutting them down," he says.
Bair did not directly respond to Big Builder's questions regarding the relationship between banks and builders. However, during the meeting with the NAHB, Bair acknowledged that better communication needs to take place between FDIC headquarters and field workers when FDIC places an institution into receivership. In most cases, this hopefully will be addressed by bringing the institution's loan officers onto the FDIC's payroll to manage the existing accounts; it's a standard practice, although it's one that is not highly publicized to borrowers.
"These are not answers that will solve the issues," says Ledford. "But FDIC is sensitive to the issues and is trying to get a system on the same wavelength [as home builders]."
Ledford says the NAHB is taking a productive role by agreeing to communicate to its members the procedures that take place after a lender has entered into FDIC receivership.
On the future role of the FDIC, Bair tells Big Builder: "The FDIC will do what it has always done: continue to be a source of confidence and stability in the banking system. We are dealing with unique challenges in the current environment, but our experience is serving us well in helping to navigate through this crisis. I have been promoting public policy positions that I believe have value in an open and transparent way. I will continue doing so as long as I am chairman."