FDIC chairman Sheila Bair said the government has been behind the curve when it comes to preventing foreclosures, and she called for regulators to use their authority in creating flexible rules for making free loan modifications a top priority. She also defended the Community Reinvestment Act, a program that critics say was instrumental in creating the subprime crisis.

"I'm fully aware that the subprime debacle has shaken confidence in our ability to protect consumers. This is why bank regulators need to be smarter in using all of our supervisory tools to nip harmful practices in the bud, before they take on the scope and scale we've witnessed with the subprime debacle," she said in prepared remarks before the Consumer Federation of America on Thursday.

Bair said regulators need fast-track, broader-based efforts to help homeowners stay in their homes. She also reiterated that the IndyMac program developed by the FDIC could be a model for such efforts.

Under the plan, people who took out fixed-rate mortgages from IndyMac Federal would be able to seek lower priced loans if they were in, or near, default. The FDIC authorized IndyMac to modify loans that were 60 days or more delinquent, allowing monthly payments to be reduced to a level no greater than 38% of monthly household income.



Bair, a Republican, wants the IndyMac protocol to become a template for a nationwide program that she estimates would cost $24 billion. The idea has received broad support from House Democrats, but Treasury Secretary Henry Paulson has been reluctant to support the idea with TARP funds, and others aren't convinced the program would cost so little.

In Wednesday's Wall Street Journal, an editorial said Bair's plan is "wonderful politics," but it doesn't stand up to evidence. The editorial said the borrower would get lower payments now, but if house prices don't rise the homeowner may have to sell the house to avoid defaulting again.

"Other modifications might create a lower interest rate now that rises over time, again squeezing borrowers at some future date. Sound anything like 'subprime' loans?" the Journal asked.

Bair also used Thursday's speech to argue that the Community Reinvestment Act isn't to blame for the current crisis.

"You've heard the line of attack: The government told banks they had to make loans to people who were bad credit risks, and who could not afford to repay, just to prove that they were making loans to low- and moderate-income people," she said.

Bair said the CRA is "not guilty" of this charge, noting that while the program is far from perfect, it has stayed around for 30 years because it supports FDIC-insured banks lending in a manner that is "consistent with the safe and sound operation of such institutions."

The real culprit is the banks themselves. "[T]he lending practices that are causing problems today were driven by a desire for market share and revenue growth ... pure and simple," she said.

By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008