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Weekly UpdatesSheila C. Bair was sworn in as chairman of the Federal Deposit Insurance Corporation (FDIC) on June 26, 2006, for a five-year term. As FDIC chairman, she has presided over an exceedingly tumultuous period in the nation's financial sector. She has helped transform the agency with programs that provide temporary liquidity guarantees, increases in deposit insurance limits and systematic mortgage loan-modification relief for troubled borrowers.
Before joining FDIC, she was Dean's Professor of Financial Regulatory Policy for the Isenberg School of Management at the University of Massachusetts at Amherst from 2002 to 2006. While there, she served on the FDIC's Advisory Committee on Banking Policy.
Prior to taking the helm at FDIC, Chairman Bair had considerable experience in government. She was assistant secretary for financial institutions at the Department of the Treasury from 2001 to 2002; senior vice president for government relations at the New York Stock Exchange from 1995 to 2000; a commissioner and acting chairman of the Commodity Futures Trading Commission from 1991 to 1995; and research director, deputy counsel and counsel to Senate Majority Leader Robert Dole from 1981 to 1988.
During her FDIC tenure, Bair has received a number of prestigious honors. In 2008, for example, Forbes magazine named her the second-most powerful woman in the world after Germany's Chancellor Angela Merkel. In 2009, she has been awarded the John F. Kennedy Profile in Courage Award by a bipartisan committee named by the John F. Kennedy Library Foundation, Boston, and was also named one of TIME magazine's "TIME 100" most influential people.
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At FDIC she has championed the creation of the Advisory Committee on Economic Inclusion, research on small-dollar loan programs and the formation of broad-based alliances in regional markets to bring underserved populations into the financial mainstream. In 2009 she also received the Hubert H. Humphrey Civil Rights Award, presented annually by the Leadership Conference on Civil Rights, Washington, D.C.
Bair received a bachelor's degree from Kansas University, Lawrence, Kansas, and a juris doctorate from Kansas University School of Law.
Mortgage Banking interviewed Chairman Bair in mid-July to get her thoughts about the progress that has been made in addressing the fallout from the financial crisis.
Q: Where do you think we are in addressing the financial crisis that emerged in 2007 and which grew dramatically worse after the failure of Lehman Brothers in September 2008? Broadly speaking, what has been accomplished so far? What remains to be done?
A: Since the financial crisis began, government and industry together have taken extraordinary steps to maintain the stability of our financial system. All of the government measures put in place over the past several months have been taken to restore confidence in the nation's financial institutions, including a substantial expansion of guarantees for bank liabilities by the FDIC, injections of capital by the Treasury in many institutions both large and small, and Federal Reserve programs to provide liquidity to financial institutions and support the normalization of key credit markets.
These efforts averted serious threats to global financial stability last fall and have contributed to gradual improvement in key credit markets, though many markets remain stressed.
As a result, we've moved beyond the liquidity crisis of last year, and we're cautiously optimistic that the industry as a whole is getting on a better footing. But there is still more pain ahead because of the problems in housing, which is still looking for a bottom. At the FDIC, we've aimed our policy initiatives at preventing a destructive overcorrection in housing that could further damage our economy and our financial institutions. While we've had to close nonviable institutions (and closings are expected to keep rising into next year), the FDIC and other regulators are working to improve the ability of other institutions to keep making loans to creditworthy borrowers.
Q: One of the largest bank failures you have handled is the one for Indymac, Pasadena, California. Could you give us an update on what is happening with Indymac? To what extent have the loan modifications at Indymac been successful in preventing foreclosures? What has been the re-default rate on the early modifications done with the loans from the Indymac portfolio? Has the re-default rate improved on Indymac's more recent modifications and what has been key to that performance improvement if one has occurred?
A: On March 19, 2009, all deposits of Indymac Federal Bank FSB were transferred to OneWest Bank FSB [Pasadena, California]. OneWest Bank continues to apply the FDIC loan-modification protocol to all delegated first-lien mortgage loans it services. Through June 24, 19,924 borrowers have accepted the modification offer, returned the appropriate documentation and were approved for modification.
The approval process includes income verification via recent pay stubs and/or tax returns. This is an important step in the modification process, as it minimizes re-default and ensures the affordability standard is uniformly implemented. An additional 1,873 have recently responded to a loan-modification offer and are currently in process. OneWest Bank is currently applying for the Obama administration's Home Affordable Modification Program (HAMP).
As of April 30, the re-default rate (defined as loans classified as 60 days or more delinquent) for all modified loans was 13.5 percent. Modification activity through April reduced the expected loss given foreclosure by an estimated $525 million.
Modified loan performance has improved significantly since the first modifications were mailed in August. This is attributed to several factors. First, the modification process has become a fully operational business function, with trained loss mitigators and call-center staff, systems for recording and processing modifications, income-documentation processes and an early re-default calling campaign. In addition, the initial population eligible for modification at Indymac was largely populated by seriously delinquent borrowers; this group of borrowers is less likely to perform than borrowers recently entering the delinquency pipeline. Finally, the FDIC loan modification program reduced the target front-end debt-to-income (DTI) ratio from 38 percent to 31 percent.
Given improvements in operations and the characteristics of borrowers receiving loan-modification offers, performance has improved significantly since program inception. Initial modifications had a 60-day delinquency rate of 22.7 percent after three months' seasoning. This figure declined rapidly in ensuing months to around 14.5 percent. Additionally, the decrease in DTI standard notably improved performance. Loans modified to the 31 percent DTI standard are showing a 60-day delinquent rate of 3.9 percent compared to a 10 percent [rate] for loans modified to the 38 percent DTI standard with similar seasoning.
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Q: The Obama administration's Home Affordable Modification Program has been very slow to get off the ground. Why is that? The largest servicers are signed on, so what has been the hold-up in getting more modifications done? Did you think the program you instituted in the wake of the Indymac failure was a better way to go with modifications, and what aspects of that approach were adopted in the Obama administration's mod plan?
A: Questions on implementing HAMP should be directed to Treasury or the program administrator, Fannie Mae. However, it is worthwhile to note insights gained from the Indymac experience. Implementing a streamlined bulk-modification program is a resource-intensive effort. It requires servicers to change their traditional loss-mitigation strategy from one based on customized loss-mitigation solutions to a standardized modification model.
For example, prior to the first modification offer mailing, the servicer must undertake these lengthy initiatives: train loss mitigator and call-center staff; improve servicing systems to effectively record and report on modification activity: review applicable servicing contracts; determine compliance issues; develop marketing materials; and develop an income-verification process.
Meanwhile, servicers are stretched to capacity managing portfolios with growing numbers of delinquencies and foreclosures. The first-lien HAMP was announced March 4, with the final supplemental directive issued April 6. Modification activity will increase in late summer to early fall as servicers develop the required infrastructure to respond to the volume of distressed borrowers requesting loan modifications.
Q: Have investors been the hang-up in preventing banks from doing more loan modifications? Will the newly enacted safe harbor for servicers to modify loans help overcome that problem and produce a wave of new modification activity?
A: Loan modifications affect the cash waterfall in securitized transactions, causing different concerns for different investor classes. Ultimately the servicer must adhere to the Pooling and Servicing Agreement or other legal document governing the transaction. A servicer's best defense against criticism or possible litigation is a uniform modification program with clear eligibility guidelines and a rigorous net present value (NPV) test, which compares the estimated value of modification to the estimated loss given foreclosure, to ensure that the modification results in a lower cost.
The HAMP provides this structure and is reinforced by the safe harbor for servicers. While this will encourage modification activity, the largest gains in modification activity will occur once servicers implement HAMP and put in place internal procedures for evaluating and processing loan modifications.
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