Someone Please Show Bair the Exit
This woman has lost it. We're already pumping hundreds of billions into banks to take crappy loans of their hands and otherwise fluff up their balance sheets, and now she wants to submit a "treasury" funded plan to have the FDIC guarantee mortgages?
The government may start guaranteeing the mortgages of some homeowners who are heading for default, under a plan meant to convince more lenders to renegotiate the terms of troubled loans and avoid more foreclosures, Federal Deposit Insurance Corp. chairman Sheila C. Bair said today in Congressional testimony.
Bair told the Senate Banking Committee that the recently approved economic bailout package included authority for the Treasury Department to offer government loan guarantees and other incentives as a way to encourage banks and mortgage lenders "to prevent avoidable foreclosures."
On taking over failing banks, Bair has already stopped and slowed foreclosure processes, which makes zero sense because it's the only way to fix the root problem facing banks, lenders, and the entire housing industry. It might make her feel better, and if you believe in fairy tales ("I'm just a little behind, honest," it might sound like good economic sense. Stop a few foreclosures, stop the downward spiral in house prices right?
Ready Sheila? Here's the problem: House prices are still too high.
That means too many people can't service their mortgages no matter how much you try to "help" them. Of course, most of them never ever planned to be able to service those mortgages in the first place (which is why they bought with little or nothing down). They thought they were stepping onto a free equity escalator with upper limit. Unfortunately, it did have a hard stop, and the first step down is a doozy. As the government's previous loan modification attempts have proven, trying to keep greedy or ignorant borrowers in underwater mortgages simply doesn't work. Lowering the water until it's below their chin (from above their eyeballs) is only a temporary reprieve, and it's little incentive to stay in a home that has zero equity. People who risked nothing are not victims, anyway.
Strangely enough, there is an alternative. It's called "the real estate market." In places like California and Florida, where they let the flippers, speculators, and the plain old irresponsible go hang, prices have dropped 30-50% or more in a matter of months, and capital is flowing back in to mop up the mess. This is the way things are supposed to work.
What Bair is proposing is a bleeding-heart socialistic core, wrapped in a specious minimal-market-meddling wrapper, but it will probably amount to a good, old-fashioned, Japonese-style death of one-thousand-bad-debt cuts. Until the bubble prices adjust, the entire housing market will be screwed up, and loan performance will be a crapshoot. That'll mean pricey lending, and all buyers "standing on the sidelines" as the contemptible RE mouthpieces prefer to characterize markets where buyers are simply laughing at the desperate sellers from across town.
Why would anyone pay X for a house, knowing that the neighbors, who paid X+10%, recently had their principal dropped to X-?% There's no upside for people who buy now and pay their bills responsibly. The only financial incentives offered these days go to deadbeats big and small.
If Bair can't wrap her head around this, she shouldn't be regulating lending. Hopefully she'll make her exit in January, though she deserves to be shown the door right now. Because this plan will ultimately cost the rest of us -- who didn't speculate on overpriced housing -- at the expense of thousands who did.