ULI Fall Meeting Keynote speaker Sheila Bair, chairman of the Federal Deposit Insurance Corporation (FDIC), was introduced by ULI CEO Patrick L. Phillips as a key player in helping the real estate industry survive the downturn through FDIC innovation. Warning of the need to tighten standards, her leadership, foresight, and efforts to shape a strong system played a central role. Of the various topics she addressed, Bair was quite clear about her preference for restructuring loans rather than “dumping” them all on the market in distressed sales, and getting them “over with.”
High unemployment will persist for some time, she said, but home prices have stabilized in most markets, and tax credits for new buyers and other government policies have played an important role—60 percent of mortgages have government backing. Federal involvement in mortgage financing is necessitating a “hard look” at all housing policies, Bair said.
Eleven million U.S. homeowners are underwater and lax underwriting standards have a new villain: robo-signers. The FDIC is monitoring foreclosure activities, she said, but foreclosure should be a last resort. Bair does not endorse an across the board moratorium on foreclosures and would rather see loans restructured. What is encouraging foreclosures are poorly aligned incentives. New FDIC rules will require servicers to act on behalf of all parties, and reform of the servicing process will include strong disclosure requirements and high documentation.
Commercial real estate is down 30 to 40 percent with rents continuing to drop. Recovery will take time and a sounder set of market practices, including more clarity and better management of reporting restructured loans. The Dodd-Frank Act is committed to transparency and input from the public, said Bair. We need to restore the viability of real estate finance, and if the federal government is going to be involved, then how it’s involved should be sound, and if it’s not going to be involved, then it shouldn’t be involved at all and get out, she emphasized.
There will be more bank failures this year and smaller, regional banks are closing. From 14,000 banks there are now 7,800, but Bair doesn’t see it going down a whole lot more. Smaller banks are seeing less loses and their loan balances are holding steady. The banking sector will continue to heal, but it’s not out of the woods yet. We may still need large banks if they’re well run; we need diversity, she said.
Two concerns she voiced were how to increase liquidity in the debt market, and potential interest rate risk down the road.
Bair advocated credit extension and balanced regulatory policies and is looking at alternatives to credit rating agencies. New consumer protection rules will help promote clarity to the market and robust supervision, she felt—it’s a good thing for the real estate industry and for consumers, after all, short-term profit and shortsightedness is what drove the current recession.