A More than Bairable Book

“Sheila Bair, the ex-head of the Federal Deposit Insurance Corporation, has written the obligatory apologia pro vita sua (regulatory, that is). Only this book, ‘Bull by the Horns,’ is worth reading; it is actually revelatory.” Sanford Rose

Dolors & Sense

By Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—1/14/2013—Sheila Bair, the ex-head of the Federal Deposit Insurance Corporation, has written the obligatoryapologia pro vita sua (regulatory, that is).

Only this book, “Bull by the Horns,” is worth reading; it is actually revelatory.

It is well known, of course, that Bair tried unsuccessfully to get the Fed to enforce its mandate to set nationwide standards for mortgage lending—standards that would have prevented the collapse of the mortgage market and the ensuing recession.

It is less well known that her viable plan for ameliorating the crisis, once it broke, was sabotaged by the Treasury Department, which was so eager to keep her off its regulatory turf that it was content to work against the national interest.

In 2008, Bair had a plan for reducing monthly mortgage debt service to 31 percent of family income by taking three steps: first, interest-rate reductions; second, extending the term of loans and, third, principal “forbearance”—a device that allowed the borrower to defer a portion of  principal payments until the house was sold or the mortgage re-financed. (“Forbearance” is different from “forgiveness.” In the former case, the borrower eventually repays the full principal; in the latter case, some portion of the principal is reduced irrevocably.)

Bair’s plan had had some success in remediating borrowers from depository institutions that she was forced to close. But the Office of the Comptroller of the Currency, the national bank regulator housed in the Treasury, fought its widespread adoption by issuing a study filled with spurious data.

The OCC study suggested that it made no sense to modify mortgages because the borrower re-defaulted in over 50 percent of the cases. In arriving at this figure, it included as mortgage modifications those cases, rather common a few years ago, where the lender actually increased the amount of the monthly payment by including late fees as well as other delinquency charges.

It also defined as a re-default a 30-day delinquency, despite evidence that most of these shorter-term delinquencies “cure” spontaneously, as the borrower catches up in the subsequent month. Indeed, the industry standard for default is 60 not 30 days delinquency.

Using such a standard, a contemporaneous study by Credit Suisse found only a 15 percent re-default rate, even if the mortgage modification involved only an interest-rate reduction. With adjustment of principal, one could have anticipated an even lower percentage.

Bair soon discovered, however, that Treasury was not in the least interested in the facts or, indeed, in helping home owners. Treasury personnel even promulgated the bizarre notion that defaults and foreclosures had little impact on the downward spiral of the real estate market. It followed therefore that preventing them could not be an especially high priority.

Bair’s book illustrates the pivotal role of second-level, or career, well-entrenched bureaucrats in either determining or, for that matter, undermining policy. Obama came into office with the avowed objective of helping home owners. But he was no more successful than his predecessor. The bureaucrats prevailed, as they do nearly always.