Should the Gov’t Anchor Its Economic Rescue to the Middle-Class Homeowner?
Question: I remember a person, whom I believe was an economics professor at Columbia University, who during the financial crisis proposed that the government anchor their financial rescue strategy to the middle class homeowner, rather than government investment in ‘too big to fail’ commercial banks. Have you heard of any such proposal? Whatever became of it?
Paul Solman: Many many people have made this argument, Mr. Morrissey. Indeed, many continue to make it. We put the question of so-called “loan modifications” to the head of the FDIC just last week. (This was in a section that didn’t make air.)
Paul Solman: Has the administration done enough on loan modification? On helping the homeowner?
Sheila Bair: Well, I think they’re doing what they can do. They are looking, as we are now, as to whether more relief needs to be provided for folks who are having trouble with their mortgages because they’ve lost their jobs. When this started, it was the mortgage itself that was creating the problem – they were bad mortgages. They were unaffordable mortgages. So you could restructure them into an affordable product.
Now, if somebody loses their job, it’s much more difficult to fix that through loan modification. But providing some lower payments or suspension for some period of time is something, I think, we should pursue. We try to encourage that in the loan modification programs we [at the FDIC] have as part of our failed bank sales. I think the protocol that they use now, which is one we developed at IndyMac, is really focused on the affordability of the payment.
PS: This is at IndyMac, which the FDIC took over.
SB: Right, IndyMac.
PS: The FDIC took over IndyMac, a California Bank and then -
SB: And started restructuring the stress loans, right [because] we then owned them…And we did that because it was also a good business thing to do. Because if we could restructure the loans and getting them performing again, we felt we could get a better price for them than if we just let them go into foreclosure. But that protocol was based on affordability. I think, now, some of these loans are so deeply under water that more has to be done in terms of principal reduction.
And that’s harder because a lot of them are still on these securitizations. And the securitizations – they allow you to reduce payments through interest rate reductions or extending the amortization, which is what we did at IndyMac. Many of them prohibit though, prohibit the servicer from actually reducing the principal amount. [The servicer is one of the dozen or fewer major financial institutions that collect payments on mortgages – the company you and I make our payments to.] So that’s a harder thing to do.
PS: So there’s a mortgage.
PS: It’s in a pool. People own shares of the pool.
SB: Yes, yes.
PS: Then people even own shares of those shares.
SB: That’s exactly right.
PS: And so you can’t go to all of them and say, hey, wait a second, can we renegotiate this?
SB: Right. Well, that’s right. Some of the servicing agreements, what they call the pooling and servicing agreements, do give servicers the ability to reduce principal payments. But most do not. So yes, you would have to go get all the investors to agree – the majority of the investors to agree, which would be hard to do.