Why Sheila Bair is Showing Up Hank Paulson

The FDIC on Friday released the details of agency chairman Sheila Bair’s new plan to prevent foreclosures. Under the terms of the program, the Feds would reduce mortgage payments for distressed borrowers and share losses if modified mortgages redefault. The agency is hoping that such loan guarantees will entice lenders and servicers to modify loans in greater numbers than they have in the past. The FDIC believes--at a cost of roughly $24 billion to taxpayers--the plan can prevent 1.5 million foreclosures.

Here’s the catch: both Treasury Secretary Henry Paulson and Neel Kashkari--the agency official overseeing the TARP--have recently expressed opposition to the proposal. So why would a Republican member of the administration continue to push a policy initiative that the Bush team has rejected?

Two reasons:

1. Substantive differences:

A substantive disagreement with the administration about how to tackle the current economic challenges is at the heart of her decision. Bair has been leading the charge for more-aggressive foreclosure prevention efforts--and this certainly isn’t the first time she’s clashed with Bush’s team. In short, she thinks it’s the right thing to do. Beyond that, with a new administration taking over in a couple of months, Bair is in a position to create a lunching pad for Barack Obama’s efforts to keep Americans in their homes. “She’s laying the groundwork for foreclosure relief 3.0,” says Howard Glaser, a mortgage industry consultant and a U.S. Department of Housing and Urban Development official during the Clinton administration. “We’ll still be in the midst of this foreclosure crisis when the new sheriff comes riding into town.”

2. Career ambitions:

But Bair’s career ambitions are likely to be playing a factor as well. The Obama administration is expected to get much more aggressive in its foreclosure-prevention efforts when it takes over next year. By championing foreclosure mitigation and standing up to the Bush Administration, Bair is raising her public profile and boosting her credibility with the Democrats--who have already been praising her efforts. That puts her in a good position for a promotion; her name has been kicked around as a candidate for Treasury secretary. While she’s a long-odds possibility for that post, Bair could easily end up in a senior level position in the new administration. (Who knows? Maybe she wants to take a run at Congress a few years down the line?)

But here’s something I found really interesting: one industry observer told me that Obama could possibly create a position in his administration for a “mortgage modification czar.”

“I think she’s angling for that,” the source said.

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