Stabilize House Prices, Part 3

“It’s the borrowers defaulting. That is what’s causing the distress at the institution level. So why not tackle the borrower problem?” – Sheila Bair

Damian Paletta has written a series of excellent articles in The Wall Street Journal on the beyond-the-scenes negotiations of the government’s $700 billion bailout/rescue plan. His October 16, 2008 article FDIC Chief Raps Rescue for Helping Banks Over Homeowners is another argument strongly in favor of addressing the more immediate problems of declining property values, defaulting mortgage loans and subsequent foreclosures, which are at the very core of the financial crisis.

Federal Deposit Insurance Corp. Chairman Sheila Bair on Wednesday criticized the federal government for failing to take more aggressive steps to prevent Americans from losing their homes, highlighting a rift between her and other senior U.S. officials over terms of the $700 billion rescue package.

The government plan will help stabilize financial markets but it doesn’t do enough to address home foreclosures, the root of the crisis, she said in an interview with The Wall Street Journal.

“Why there’s been such a political focus on making sure we’re not unduly helping borrowers but then we’re providing all this massive assistance at the institutional level, I don’t understand it,” she said. “It’s been a frustration for me.”

Ms. Bair’s comments are expected to provide new fodder for critics of the government’s response to the financial crisis, especially among those who say it has done too little to help families falling behind in their mortgage payments.

“I support all the measures; I’ve been a part of all the measures that have been taken,” she said. “But we’re attacking it at the institution level as opposed to the borrower level, and it’s the borrowers defaulting. That is what’s causing the distress at the institution level. So why not tackle the borrower problem?”

The agency’s growing role has given her views a more prominent platform after spending much of this year arguing her point from the sidelines.

Ms. Bair, a one-time Republican congressional candidate and children’s book author, had suggested direct action to modify mortgages en masse before many other regulators in Washington. In April, she pitched a plan that would authorize the Treasury Department to make loans to as many as one million homeowners to minimize foreclosures. In July, after failed thrift IndyMac Bancorp Inc. reopened its doors under FDIC control, the agency said it would halt foreclosures on the mortgages it owned and would try to modify loans for struggling homeowners.  

Ms. Bair is scheduled to be on The Charlie Rose TV program this evening.