WASHINGTON—When it comes to Fannie Mae and Freddie Mac, the maverick chair of the Federal Deposit Insurance Corp. believes the Obama administration must either fish or cut bait.
While she refused to say which step she favored—"I’m not going to stick my neck out," Sheila Bair said during a lively question-and-answer period after her keynote speech to the Urban Land Institute last week—the FDIC chair said that if the government decides to support a secondary mortgage market, that support "should be explicit and charged for and be actuarially sound."
But if it chooses to do away with the two government-sponsored agencies, both of which are currently under government conservatorship, then it should cut ties to the secondary market altogether, she told the ULI, which was meeting here for its annual fall conference.
"In retrospect, the model of the past is broken obviously. A halfway house (for Fannie Mae and Freddie Mac) was a huge mistake," Bair said."
The question was in response to a comment in the regulator’s speech in which she said that "in hindsight, the implicit government backing enjoyed by the mortgage GSEs, where profits were privatized and the risks were socialized, was an accident waiting to happen."
In response to another question, Bair also defended the Community Reinvestment Act saying that it was "unfair to tag CRA" as the cause for the mortgage debacle. The law requires depository institutions to lend in communities where they have branches.
"I don’t think the CRA fed this crisis," she said. "Most of the high-risk subprime loans where done outside banking. Money is what did this, not the CRA. A lot of people made a lot of money off [toxic] loans."
In her speech, Bair said the growing “robo-gate” scandal was caused by loan servicers who rushed to foreclosure because it is less expensive for them to try to work out problem loans with financially strapped borrowers.
Revelations that servicers rubber-stamped foreclosure documents without reading them to make sure they were accurate reflect "the poorly aligned incentives that have existed in the mortgage servicing business," she told the ULI, a nonprofit, 30,000-member education and research organization dedicated to responsible land use.
Noting that servicers must continue to remit principal and interest payments to investors long after borrowers stop paying, she explained that it is often "more profitable" for servicers to move as quickly as possible to foreclose than it is to spend months working with borrowers in an attempt to modify their mortgages.
Although Bair said an "initial review" of FDIC-supervised institutions indicates they are not part of the problem, she called the issue a "serious matter."
The FDIC has attempted to address servicer incentives through a recent rule restricting use of a safe harbor in failed-bank scenarios for securitized assets.
In addition to requiring bank originators to retain a piece of securitized loans in order to get the safe harbor, the rule also deals with how servicers are compensated. Under the rule, servicers need not remit any more than three payments to investors on loans that are in default.
Bair expressed hope coming regulations to implement the risk retention requirements in the Dodd-Frank bill will likely make similar improvements for all financial players. "While the FDIC's new rule will help create positive incentives for servicing, it is, by the nature of our authority, limited to banks," she said.
She also reiterated her support for workouts, but said she is "not sure" an across-the-board moratorium on foreclosures "would help anyone."
"I think it would forestall a process that necessarily has to take place," she said.
— Joe Adler contributed to this report
