Oct

25

Government Bailout is Not the Answer

Filed Under Lenders With Problems 2007, Mortgage Implosion, Mortgage Layoffs, Mortgage News, Mortgage Video 
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Focus on Subprime: A Government Bailout is Not the Answer. Interview with FDIC Chairman Sheila Bair: Poor Lending Standards and Weak Consumer Protections Led to Problems.

Transcript:(Transcripts are offered as an alternative and we do not guarantee accuracy.)

Merrill Lynch estimates a quarter of sub-prime loans are in danger of going into default. the FDICand other banking regulators have been urging mortgage lenders to do more to contain the mortgage crisis. joining us in our studios to talk about the problems is Sheila Bair, the chairman of the federal deposit insurance corporation or FDIC. thanks for joining us today. my pleasure. let’s talk about where we stand with the create crisis. it will get worse before it gets better. we have a resetting problem and will probably peak in the second quarter of 2008. unfortunately because of poor underwriting standards a lot of borrows are in adjustable-rate mortgages set to rates that they cannot form. the subprime hybrid arm with a two or three-year starting rate jumping up to 30% payment increases and more after the initial starter rates. these are the mortgages that we are focused on and concerned about, that servicers restructure the loan. if they foreclose on the properties it will not help anyone. you wrote an op-ed piece saying that, that the servicers should come in and especially with people who are paying on their loans. that’s right. they lower rate and help them adjust to a fixed rate. we are suggesting a targeted approach. certainly those current at the starter rate and have proven ability to pay they starter rate for two or three year-period and are in the homes, they should be prioritized for fixed-rate mortgages. over half of the origination the starter rate is above 8% and can bring it unto 12% after the reset. even keeping them at the starter rate in a fixed-rate mortgage provides a healthy return for investors. what is the response from the industries to the approach you are talking about? we have gotten a mixed response. a couple of servicers say they are fast-tracking the borrows that we are talking about, those that are only pied into the figured-rate mortgages. others is more mixed. some are approaching me on an ad hoc basis and we need systematic basis. some are extending the starter rate for a short time and that is kicking the can down the road. whether six months or two years they cannot make the reset payment, most of them. we need a system mat particular approach to restructuring. talking about what is happening in the industry you say there should not be a bailout of the industry overall. that’s right. I think a bailout would be — we want an industry-led solution. I am engaging in dialogue to get them more focused on this. we are talking with them for several months and are sure modification would occur on a broad scale for foe closures and that’s the last thing we want. it needs to be industry-led. and investors have to deal with it and servicers have to deal with it. for the government to come in and say we will try to rescue the loans I think would do terrible damage to market discipline. investors and lenders and those who secure the loans did not do the scrutiny they needed to on the underwriting standards and need to understand they will suffer some losses, at least reduce the future returns because of that. but for the government to come in would really do a lot to dampen the market discipline. we need more not less in this mortgage space right now. we will take a break. after that I talk to you about the Citigroup, JP Morgan bank of America getting together to buy some of the structured investment vehicles. right. and was that a good idea.

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