Former FDIC chairman William M. Isaac.

William M. Isaac is managing director in the Vienna, Virginia, office of LECG LLC. Prior to joining LECG, he was chairman of the Secura Group LLC, also based in Vienna, Virginia, a financial institutions consulting firm, and its executive search affiliate, Secura Burnett Co.

Before founding

In that capacity, Isaac played a leading role in addressing many important issues concerning financial institution supervision and regulation that confronted the government, and structured some significant financial assistance transactions in the history of the FDIC. Isaac has also served as chairman of the Federal Financial Institutions Examination Council (FFIEC).

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Isaac, a frequent speaker before banking and other industry groups, currently serves as a member of the boards of directors of MPS Group Inc., Jacksonville, Florida; TransUnion Corporation, Chicago; and the Ohio State University Foundation, Columbus, as well as chairman-elect of Goodwill Industries of Sarasota, Florida.

Isaac received his undergraduate degree from Miami University, Oxford, Ohio, and is a graduate summa cum laude of the College of Law of Ohio State University, Columbus. In addition, he was awarded an honorary doctor of laws degree by Miami University in 1984.

Mortgage Banking recently interviewed Isaac about the subprime mortgage market outlook and about other financial market trends.

Q: How would you summarize the current state of the subprime mortgage market? Do you view this as just a market correction--albeit a painful one--or is the problem more significant?

A: I would view it as a painful market correction, but not terribly significant in the overall scheme.

Q: What is your outlook for subprime for the rest of 2007 and into 2008?

A: Well, credit is drying up for subprime borrowers, but standards are being raised. I believe that the market will come back once the adjustments are made.

Q: How much of a premium are subprime borrowers now having to pay as a result of the perceived mortgage market meltdown and other recent events?

A: I don't know how much of a premium they are paying. I think the biggest price they are paying is that they are not getting approved for loans that, in the past, they would have been approved for. I believe that people are moving more to higher quality.

Q: As rising delinquencies in the subprime mortgage market continue to reverberate throughout U.S. financial markets, reinforcing the view by some that the Federal Reserve will likely hold short-term interest rates steady in the months to come, do you share that view or do you see more Fed tightening or loosening in store in 2007?

A: I'm inclined to believe that the Fed will either hold steady or bring rates down. Any thought that the Fed was going to increase rates--I don't think that's likely.

Q: What would prompt the Fed to further tweak monetary policy?

A: If the Fed believes that the problems in subprime are starting to cause too much turmoil, then I believe they will move to lower rates. But right now, I think the Fed is in a holding pattern.

I don't believe they are going to raise rates. I do believe that any movement will be down, not up.

Q: How would you rate the performance of the Federal Reserve and of new Chairman Ben Bernanke during the past year?

A: I think he's done a terrific job. We've had three Fed chairmen in a row that've just been knocking them out of the park--Paul Volcker, Alan Greenspan and now Ben Bernanke.

I think the Fed has been very well led now for a very long time. Bernanke is just the latest.

Q: What's your reaction to both Freddie Mac's announcement that it will cease to purchase subprime mortgages that it determines have a high likelihood of excessive payment shock and possible foreclosure, and to the joint federal agencies' proposed loan product guidelines for subprime mortgage lending? How do you see those steps impacting the broader market?

A: As I said, I believe that subprime lending got out of hand--that people were not paying enough attention to whether a mortgage was affordable, [and that] there were teaser rates to get people involved in mortgages that they later on would not be able to afford.

So I think that the things that are going on right now--the adjustments that are being made--are good. I believe that there is going to be a healthy subprime loan market for as far as the eye can see.

I believe that some people [got] carried away with excessively generous terms and [were not] being concerned enough about the longer term or whether the mortgage was right for the borrower. So I think people will be making some changes, and I think those changes are going to be healthy and we're going to have a healthy subprime market.

Q: Based on your experience with the FDIC and the fact that the guidance is proposed in concert with four other agencies and is subject to a comment period, how much of what was proposed do you expect will remain in the final rule? Is there room for significant revisions/alterations in the final rule?

A: There are almost always revisions, but agencies don't put things out that they haven't thought about--so there are not going to be massive revisions.

I think even before the guidance becomes a final regulation, that examiners are already beginning to look harder at the activities [at lending institutions], and they're sort of getting out in front of the guidance.

Q: Also based on your inside insight with previous guidance, what kind of advice or input are the agencies looking for or what would be most helpful to the agencies as they craft a final rule?

A: I think the key to commenting on agency guidance, whatever the subject, is to really make an effort to understand what the agency is concerned about. What's the problem?

If you can come up with better solutions to the problem, suggestions that would be less expensive to implement, more effective and the like, then I think your suggestions have a chance of being adopted.

Where a lot of people make mistakes is they say, "I think this is a dumb idea. There's no problem." That kind of comment is not going to carry any weight at all. It's going to be tossed.

The agency knows there's a problem, and it has an idea of what the problem is and it has an idea of how to fix the problem. What they're looking for is input on how could we fix this problem in a less invasive, less expensive and more efficient way.

Q: So offer a solution; don't just moan about the problem?

A: Exactly. Or [don't] pretend like there is no problem. [The agencies] believe there is a problem.

Q: Senate Banking Chairman Christopher Dodd [D-Connecticut] has taken issue with the federal regulatory agencies--including the FDIC--that "it has taken far too long for regulators to act," both with regard to issuing guidance on nontraditional mortgages and subprime lending, as well as in addressing complaints of alleged predatory lending in the subprime market. Do you see it as a fair or an unfair criticism? How would you rate the performance of the FDIC and the other federal agencies in this regard?

A: I believe the agencies have been on top of subprime lending in insured depository institutions. They've limited the volume of subprime lending that can be made, [and] they've gone after predatory practices with a fair amount of vigor wherever they see it--but you don't see much of that in banking.

But I do not believe there are major problems in the banking system, and I've worked with an awful lot of banks. I don't believe there are major problems in insured depository institutions with respect to subprime lending or predatory lending.

Q: Many in the industry fear unintended consequences resulting from enacted legislation intended to help subprime borrowers--such as what happened in Georgia a couple of years ago. With Congress poised to act and some kind of federal legislation likely, in your view how can lawmakers improve legal oversight without driving lenders from the market or otherwise doing more harm than good?

A: Well, I think it's a delicate balancing act. [House Financial Services Committee Chairman] Barney Frank [D-Massachusetts] put out a "Dear Colleague" letter [recently], and I agreed with most of everything that was in his letter. I think he was taking a balanced approach. For example, he was urging lenders to show some restraint on foreclosures, but he wasn't trying to mandate anything in that area.

I think that if we get into schemes like mandatory forbearance, then I think we're creating some serious, serious problems.

But that's not what Barney Frank was suggesting. He was suggesting that lenders show some restraint before they foreclose, and I think as a matter of fact almost all lenders do because it's in their best interest to show restraint. If they can work with a borrower, they'll be much better off economically than if they foreclose.

So I think lawmakers in this area should take the Hippocratic oath--"first, do no harm."

Q: How likely do you expect it is that Congress will come up with some sort of legislation to address the "problem" with subprime lending?

A: If there is going to be any legislation, it seems to me that where they are headed is toward a national standard--a federal preemption of state laws across the board--and have it apply to not only bank lenders but to non-bank lenders. That's where they seem to be headed.

Q: What do you see as the economic wild card and/or the most likely worst-case scenario for the housing market in 2007 and 2008?

A: I don't have a worst-case scenario. I think the housing market is going through a necessary correction, and I believe that it's already showing signs of leveling out.

I believe that over the rest of 2007 and 2008 we'll be seeing the market stabilize and improve. Now, that's generally. There are some markets that may be terribly overbuilt, and they may have a longer adjustment period--California might be one of those--but generally as a nation as a whole, I don't have any concerns.

It's working through its problems, it's stabilizing and in the next two years we're going to start to see it tick upward.

Charles Wisniowski is a correspondent for Mortgage Banking.