Bringing Up the Rear: FDIC Chair Sheila Bair

by 07 Jul 2009
Destroying Home Value... One Neighborhood at a Time For the record, I waited for 18 months for some sort of housing rescue plan from someone in the White House. I watched President Bush threaten to veto the housing bill for 10 months before signing it into law on July 30, 2008, if memory serves. That plan had a $300+ billion price tag, which might have bothered some people, but soon everyone saw that there was no possibility of that money being spent, as the plan could only help a dozen or so homeowners tops. So, I went back to waiting. Back then I read the comments made by FDIC Chair Sheila Bair about how we needed to modify mortgages and I?d think... ?Wow? a Bush appointee with a brain. Who would have ever thought? Go figure.? So, when I saw that my gal Sheila was sticking around for the Obama administration, I have to admit my hopes were high that something would finally be done about the free fall in housing values that was sapping prosperity from every corner of our economy. So, I waited. I watched the celebrations on election night. I listened to how the transition team was handling the transition, and I watched the president-elect vacation in Hawaii. Then I waited while we argued over whether re-seeding the grass on the National Mall constituted economic stimulus. It was sheer torture, but I hung in there. Finally, Obama?s Making Home Affordable plan was ready. I was excited. Surely, Sheila had her hand in this. Surely this plan would be more effective than Bush?s insipid attempt. I watched the speech with rapt attention. When it was over, I placed my fingers in my dresser drawer and slammed it shut just to take my mind off the pain that Obama?s speech had caused. The plan, according to the president, was going to save nine million homeowners, or some such drivel, and I thought to myself? ?Damn? maybe I was too quick to judge Sarah Palin.? So, the meltdown in the housing market would continue unabated? the banks would continue to bleed cash they didn?t really have? and homeowners would continue to be blamed for breaking the financial markets. Crackerjack work, Barack. Bang-up job so far. Of course, that?s all in the past now. Water under the shovel-ready bridge project, as it were. And as expected, the foreclosure crisis has spread from the sub-prime to the prime, and is now fueled by unemployment as opposed to nonexistent underwriting standards and triple ?A? rated junk bonds. If you haven?t seen the foreclosure crisis up close, stay tuned because it?s coming to a theater near you. So, I took a look at the Making Home Affordable plan one more time. Surely it would have some redeeming qualities. It was modifying some mortgages, after all. I needed good news and I was willing to find it anywhere. And that?s when I realized what the Making Home Affordable plan was about to do, thanks to Sheila Bair?s Net Present Value analysis, put in place to protect the banks, which as the Chair of the FDIC is her job, we might all remember. You see, the Making Home Affordable plan tells the banks to conduct a Net Present Value analysis, which is a fancy phrase that means comparing the cost of foreclosure with the cost of modification. If it costs less to modify than it does to foreclose, the banks are supposed to modify the loan instead of foreclosing, and thus save another home from being lost to foreclosure. So, yea! When the foreclosure crisis was primarily affecting sub-prime loans, that seemed like a good idea? modification costs less than foreclosure, because no one had any equity and no one was buying homes in these, for the most part, overbuilt neighborhoods. But look at what happens when the crisis spreads to prime loans, as it started doing last fall, and now is doing as a matter of course. In the prime loan neighborhoods, prices haven?t fallen as far, and people have more equity, so now when the banks conduct their net present value analysis, can you guess what?s going to happen? While in the sub-prime neighborhood, the cost of modification was often less than the cost of foreclosure, in the prime neighborhoods the relatively higher values and greater equity will cause the reverse to be true. Modification will cost more than foreclosure, and the banks will be free to foreclose. And what will happen next, boys and girls? Come on? didn?t anyone do the reading assignment? Christopher? Barney, keep your hands to yourself and pay attention. Nancy? put away that make-up and spit out that gum. What happens to housing prices when homes in a given neighborhood start being lost to foreclosure? No, you don?t get to raise taxes, Mr. President, but thank you for playing. Anyone? Anyone? Well, the values of homes in that neighborhood start to drop, remember class? Foreclosures place downward pressure on housing prices, right? Very good, boys and girls, and then what happens? That?s right class? it leads to a downward spiral and more people lose their homes to foreclosures? bravo! Very well done, assuming your goal was to destroy the last remaining neighborhoods with equity, and without vacant homes lining the streets? you?ve done a very nice job indeed. When I realized how this teensy-weensy design flaw would soon affect our neighborhoods, I struggled to find the right analogy, and then it came to me: It?s a bit like closing the barn door after the horses have run out, and then reopening it and shooting the horses that remained inside. I used to think quite highly of FDIC Chair Sheila Bair, I really did. But then I used to think a lot of things that I no longer think today, so I suppose I?ll just have to get used to a whole new way of thinking. In a press release issued by the FDIC last September Sheila Bair stated, ?On the whole, the commercial banking system in the United States remains well capitalized.? See what I mean? this isn?t going to be easy. Just promise me one thing. Let?s make a pact: Nobody tell Obama what comes after a trillion, okay? I just don?t think I could Bair it. Martin Andelman is a staff writer for The Niche Report. He also writes an almost daily column on called Mandelman Matters. You can email him at


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