Is Bair Barking up Wrong Housing Recovery Tree?

While FDIC Chairman Sheila Bair continues to push for loan modifications to save homeowners and stabilize banks, the White House seems to be turning a deaf ear to her pleas and warnings. She's been pushing banks and politicians for radical action for an entire year, to no avail.

Although she's a Republican appointed by Bush, FDIC chief Sheila Bair is apparently getting so little backing from the current administration, that she decided to take her case directly to taxpayers. Bair recently broke ranks with the White House by posting her loan modification plan-which the current administration opposes-in clear view on the FDIC Web site for the entire American public to read and consider. The move got attention, and soon the media began to shine their light on the banker versus bank regulator bailout debate. Under the proposed $24 billion FDIC plan, about half of all troubled loans could be modified within one year, saving approximately 1.5 million homes from foreclosure.

Support from Senator Dodd

The loan modifications proposal crafted by Bair and the FDIC has the overwhelming support of leading congressional Democrats, including Connecticut's Christopher Dodd, Chairman of the Senate Banking Committee. Dodd has legislation of his own that he plans to introduce that would let bankruptcy court judges have the authority to do loan modifications, an idea that consumer advocacy groups have long supported but banks vehemently oppose.

Loan modification opposition speaks

Treasury Secretary Paulson is also against the idea of funding the FDIC loan modifications with any of the government's $700 billion financial rescue fund. FDIC officials have been trying to reach some kind of deal with the Treasury, but it's unlikely that they'll make much headway with so much apparent opposition coming from the White House. As some media reports have said, there's an "expiration date" on the policies of the Bush administration-which includes Paulson at the Treasury-and most expect that any significant acceptance of the FDIC strategy will have to wait until at least January, when Obama enters the oval office.

According to Bair's plan, homeowners who've defaulted on at least two payments would be eligible for loan modification. Their new payment would be no more than 31 percent of their monthly income. If the borrower defaults again after the loan modifications, Bair proposes that the FDIC guarantee about half of the mortgage company's losses. In other words, if a lender agrees to loan modifications and still incurs a loss, the FDIC would offer a "backstop" to insure that they only lose a portion of their loan.

Although some call 31 percent a conservative figure, mortgage lenders used to routinely require that kind of strict ratio. But that was back in the days before loose lending, the artificial real estate price bubble, and widespread use of subprimes to sell as mortgage securities on Wall Street. Now, as the global economy deteriorates, many see the wisdom in going back to those old-fashioned underwriting standards and values.