Bair: The Goal of This Pain is a Sustainable Securitization Market

WASHINGTON, DC-Measures that the government has taken to repair the
 real estate finance markets are, in fact, having an impact--but
 more work needs to be done, FDIC chairperson Sheila Bair told the 
audience at ULI’s annual conference, being held here.

“Yes, we have achieved stability in the housing market, but at the price of unprecedented government backing,” she said. Going forward the US will have to decide which measures to continue to 
emphasize--and which need to be discarded.

The implicit guarantee of government backing that the GSEs received
 almost up until they were taken into conservatorship is an example of
 the latter, Bair said. “We have two choices for GSE reform: either the
 government should provide explicit support, and charge for that
 support, which also must be actuarially sound, or it should be left
 strictly up to the private sector. But the halfway path we took was
 clearly a big mistake.”

As the debate about the GSEs’ future moves 
forward, she said, “everything has to be considered” including tax
 incentives that homeowners hold dear.
 Bair maintained that many measures the government has put in place--even some very recently--are starting to have an impact. She pointed
 to the safe 
harbor rule that addresses the treatment of assets during a potential
 insolvency of an FDIC-backed institution--and
 how it eliminates some of the incentives that motivated servicers to
 move forward with a foreclosure even when the borrower is trying to
 work out a modification.

Previously, a servicer would advance payments
 to investors if the borrower stopped paying. It would then be in the 
servicer’s best interest to move forward with a foreclosure so it
 could get its money back. Under the new rules, though, a servicer
 cannot advance more than three payments, Bair said.
 Not everyone in the industry was happy with the changes--and there
 was dissent over the financial overhaul as well, she acknowledged.
 Also, some pieces are still missing, such as the alternative for
 credit rating agencies mandated under the financial overhaul. “We are 
soliciting proposals now and hope to make a decision by the end of
 this year.”

There has been some good news in the financial markets, Bair also
 said. The banking system is less under siege, and bank losses are
 expected to be less in 2010 compared to 2009. At the same time, the FDIC 
is wringing out the best value of the assets it seizes for taxpayers.
 “The bidding process has become more robust and we are getting better 
pricing,” she said. The end goal to all of this confusion and upheaval, Bair emphasized,
 is to bring the securitization markets back to life, but in a
 sustainable manner.