Bernanke Urges Banks to Forgive Portion of Mortgage Debt

Bernanke Urges Banks to Forgive Portion of Mortgage Debt

Assessment: The Fed's remarks predicts further distress in residential real estate and mortgage markets. The Fed's recommendations will negatively impact mortgage backed securities and derivatives markets. Expect credit markets to be tighten and become increasingly illiquid. Long term interest rates will have higher risk premiums. Long term borrowing costs will increase even as the Fed reduces the Fed Funds and/or Discount Rate.

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Federal Reserve Chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.

``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' Bernanke said in a speech in Orlando, Florida today. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''

Bernanke's call goes beyond the stance of the Bush administration and previous Fed comments. By comparison, the central bank's Feb. 27 report to Congress called for lenders to ``pursue prudent loan workouts'' through means such as modifying mortgage terms and deferring payments.

The Fed chief highlighted the threat posed by home values falling below mortgage balances, something Treasury Secretary Henry Paulson played down yesterday. Bernanke said the ``recent surge'' in delinquencies has been ``closely linked'' to the slide of home equity.

Paulson said in an interview with Bloomberg Television yesterday that ``almost too much'' has been made out of concerns about homeowners whose house prices have dropped below their mortgages. He also said the administration's strategy of encouraging lenders to modify loans is ``the right approach and we are making substantial progress.''

Democrats' Push
Democrats in Congress, by contrast, have said relying on lenders to alter loan terms hasn't yielded enough progress and are pushing for a stronger government response.
Bernanke warned today that the housing crisis may deepen.

``Delinquencies and foreclosures likely will continue to rise for a while longer,'' Bernanke said in the comments to the Independent Community Bankers of America. A surfeit of homes for sale indicates ``further declines in house prices are likely,'' he said.

Subprime borrowers are about to see their mortgage rates increase more than 1 percentage point, he said. ``Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest-rate resets will nevertheless impose stress on many households.''

In the past, homeowners could refinance, though that option is now ``largely'' gone because sales of bonds backed by subprime mortgages ``have virtually halted,'' Bernanke said. ``This situation calls for a vigorous response.''

Interest Rates
Bernanke didn't comment in his speech text on the outlook for the economy or interest rates. Traders expect the Federal Open Market Committee to lower the benchmark rate by 0.75 percentage point by or at the panel's next meeting on March 18, based on futures prices.

``Lenders tell us that they are reluctant to write down principal,'' Bernanke said. ``They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.''

The Fed chairman countered that by reducing the amount of the loan, this ``may increase the expected payoff by reducing the risk of default and foreclosure.''

Bernanke also urged investors in mortgage bonds to accept ``short payoffs'' of loans by allowing borrowers to refinance at a lower principal.

OTS Plan
For investors, a reduction in principal that's ``sufficient to make borrowers eligible for a new loan would remove the downside risk'' of further writedowns or defaults, Bernanke said. Investors may be able to share in future gains in home prices under some plans, he said, citing a proposal by the Office of Thrift Supervision.

Paulson, by contrast, has declined to endorse the OTS plan. John Reich, director of the OTS, last month proposed a program where borrowers would refinance mortgages at current home values. The lender would receive a ``negative equity'' certificate that could be redeemed if the house is sold.

The number of U.S. homeowners entering foreclosure rose 75 percent in 2007, with more than 1 percent in some stage of foreclosure during the year, according to RealtyTrac Inc. of Irvine, California. For the year, more than 2.2 million default notices, auction notices and bank repossessions were reported on about 1.3 million properties.

Yesterday, the Fed and other regulators sent letters to institutions they supervise, encouraging the banks to report on their efforts to modify mortgages at risk of default.

``This will make it easier for regulators, the mortgage industry, lawmakers and homeowners to assess the effectiveness of these efforts,'' Fed Governor Randall Kroszner said in a statement yesterday.

Bernanke spoke in a state that's among the worst affected by the housing collapse. Miami home prices have dropped 17.5 percent in the past year, the most of 20 large U.S. cities, according to the S&P/Case-Shiller index. Foreclosures in Florida jumped at more than double the nationwide pace, rising 158 percent in the past year, according to RealtyTrac.
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Fed to consider new lending regulations to curb abuses

Fed to consider new lending regulations to curb abuses

In a letter to Senate Banking Committee chairman Christopher Dodd, Federal Reserve Chairman Ben Bernanke said the regulatory agency would consider new regulations to curtail abusive lending, but wanted to make sure to avoid issues with legitimate credit. "With respect to the recent problems in the subprime mortgage market, the Board plans to consider how it might further use its rulemaking authority ... to address particular lending practices," Bernanke wrote.

"We are mindful, however, that loan terms that may be harmful to some borrowers may provide benefits in other transactions."

Fed chief vows to review lending rulesBernanke says he'll consider rulemaking authority amid problems in the subprime mortgage market.

May 25 2007: 12:03 PM EDT WASHINGTON (Reuters) --
The Federal Reserve will consider whether new regulations could curtail lending practices that have contributed to a rise in mortgage delinquencies, Fed Chairman Ben Bernanke said in a letter released Friday.

"With respect to the recent problems in the subprime mortgage market, the Board plans to consider how it might further use its rulemaking authority ... to address particular lending practices," Bernanke said in a May 18 letter to Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.

At the same time, the Fed will tread carefully to avoid choking off legitimate credit, Bernanke said.

"We are mindful, however, that loan terms that may be harmful to some borrowers may provide benefits in other transactions," he wrote.

"Accordingly, any rules should be tailored to avoid the unintended and undesirable consequences of limited credit availability in legitimate transactions," he said.
The Fed is due to hold a hearing June 14 on rules governing lending.

A slowdown in house price gains and rising interest rates have led to a jump in delinquencies and foreclosures in the United States, particularly among borrowers with weak credit who took out loans with adjustable rates.

The rise in delinquencies and the failure of numbers of lenders in the subprime mortgage sector, as the market for loans to borrowers considered greater credit risks is called, exposed loose lending practices.

Dodd, a presidential candidate, has criticized the Fed's oversight of subprime mortgage lenders. The Fed is required to write rules to protect borrowers from unfair or deceptive practices, he has said.
The Connecticut lawmaker urged the Fed to issue rules that would require lenders to fully evaluate a borrower's ability to repay and to restrict lending with little or no documentation of the borrower's income or ability to make payments.

"These protections, while not comprehensive, will stem some of the most abusive practices we see in the marketplace today," he said Friday in a statement.

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mortgage backed securities, subprime, real estate

Subprime Mortgages - The Glory Days Are Over

Mortgage market unstable?

Surprise was the key word Monday at the Mortgage Bankers Association's National Secondary Market Conference & Expo in New York, as many were shocked at the quick collapse of the subprime-mortgage market. The quick market sell-off has led to the demise of many lenders in the industry, and many loans are no longer even possible for clients.

Speed of subprime bust surprises lenders
Many mortgage lenders expected a subprime meltdown, but not one that came so fast and strong.
By Les Christie, CNNMoney.com staff writerMay 23 2007: 8:18 AM EDT

The subprime mortgage meltdown has been a shock to industry insiders, but now they say it's hitting harder and faster than expected - even to those who predicted the crisis in the first place.That was the message Monday from a panel of leading industry executives on the state of the mortgage lending industry at the Mortgage Bankers Association's National Secondary Market Conference & Expo in New York.

Michael Marriott, a panelist and managing director for Credit Suisse, said, "Last October, I predicted the subprime market would collapse and many issuers would go out of business. But the violence and speed of the market sell-off surprised people."

David Lowman, a panelist and chief executive of JPMorgan Chase & Co.'s global mortgage business, said, "35 percent of what once could be done, can no longer be done," referring to mortgage loan products that have effectively been taken off the shelves.

And speaking separately from his Atlanta office, Duane LeGate, president of House Buyer Network, a specialist in short sales and foreclosure prevention, said one of the real estate agents he works with had six deals blow up within four days because, "The loan originator told him, 'We're not offering [these products] anymore.'"

According to LeGate, this kind of thing just started to happen in the past month or so.Allen Hardester, director of business development for mortgage broker Guaranteed Rate, said many once-common subprime loans products are now almost impossible to find.

Mortgage lenders get creative "Anything that smacks of no-income and no-documentation is history," he said. "Anything above 85 percent to 90 percent loan-to-value, anything non-owner occupied, anything ludicrous as to value - like someone stepping up from a $1,000 a month payment to a $6,000 a month - is history."

Lenders are also scrutinizing applications much more carefully, and many don't like what they find. Lowman said he had recently looked at a low-documention application for a UPS driver who earned a quarter of a million dollars last year - or so the application stated. Fictional claims, often involving outside income, are far from unusual.

"If you took into account every person with a lawn care service on the side, there wouldn't be a blade of grass left in the United States," he said.

Investors who buy and sell bonds backed by the mortgage payments of ordinary homeowners have seen bad loans rise and have told lenders and brokers they will no longer buy whole classes of securitized mortgages, which can quickly pull the plug on a prospective home buyer.

Lauren Pephens, managing principal of financial services advisory firm, Pephens & Co., called it the "push-down effect" at a session on loss mitigation at the MBA conference. She said that some buyers have gone to close the deal only to be told that their financing had fallen apart.
All the fudging, the lax underwriting, the push for loans that went on during the housing boom were facilitated by the rapid rise of home prices. Outsized increases in home equity in many U.S. housing markets covered a multitude of sins and encouraged lenders to extend loans to poor risk borrowers.

If an owner couldn't afford to pay the monthly mortgage bill when her hybrid adjustable rate mortgage reset at a much higher interest rate, well, that was just fine. Latest home prices Her home had gone up in value from $200,000 to $300,000 in the interim, and she could tap that extra $100,000 in home equity to pay her bills. If worse came to worse, she could sell her house at a big profit and pay off the entire bill. But when homes became unaffordable for too many buyers starting in 2006, "The people who were driving up prices couldn't drive them up further," said Hardester.

The speculators, the flippers and rehabbers fled. Houses went on the market and just sat. Inventories lengthened, home builders started pulling back and foreclosures climbed.A drop is seen before recoverySo far the turnaround on prices has not been huge - unless you compare it with what immediately came before. In 2006 the median U.S. home price rose 13.6 percent, and in 2005 it climbed 8.8 percent, according to the National Association of Realtors. Now the industry group has forecast a drop in home prices this year.

MBA's chief economist, Doug Duncan, who was at the conference, predicted his own housing-price decline of 2.7 percent for 2007. Factoring in inflation of about 2 percent, the decline in real dollars is between 4 percent and 5 percent.

Duncan had said a recovery would begin mid-year but he's revised that forecast, delaying his predicted rebound until the fourth quarter of 2007.

Despite their surprise at the speed and depth of the subprime meltdown, Marriott, Lowman and their fellow panelists expected a quicker recovery than Duncan.

The group, which also included Patti Cook, an executive vice president with Freddie Mac, and Thomas Lund, an executive vice president with Fannie Mae, cited a strong economy, low unemployment and favorable demographic growth for their optimistic stance that recovery will come soon.

The recovery will "play out quicker than in the past," according to Lowman, "because [the fall] happened faster than in the past."

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subprime, mortgages, mortgage backed securities,