By Sarah Borchersen-Keto and Paula Cruickshank, Washington Staff Writers
In response to recent troubles in a small sector of the subprime mortgage market, federal officials of all stripes--from banking regulators to lawmakers to the White House--are developing plans to help reduce the number of potential future foreclosures, and thereby soften any blow to the national economy.
President George W. Bush on August 31, 2007, announced measures to help those homeowners facing foreclosure because they financed homes using subprime, adjustable-rate mortgages (ARM) with ultra-low introductory interest rates, and now are unable to make their monthly payment when the loans reset to a higher rate after the introductory period ended. Approximately 7 percent of all outstanding mortgages in the U.S. are subprime ARMs, according to the Mortgage Bankers Association, and one-in-seven of those mortgage holders are making late payments.
The President urged Congress to modernize the Federal Housing Administration (FHA) to help more homeowners qualify for FHA insurance by lowering downpayment requirements, increasing loan limits and providing more flexibility in pricing. The administration wants to increase the loan limit from $362,000 to $414,000, to conform to the maximum loan amount allowable under Fannie Mae and Freddie Mac, noted White House Deputy Press Secretary Tony Fratto.
The President announced a new administrative initiative, called FHA-Secure, to give FHA the flexibility to offer homeowners with good credit who have not been able to meet their monthly house payments the option to refinance their existing mortgage. Under the new program, the FHA will charge mortgage insurance premiums based on the individual risk of each loan, using traditional underwriting standards, so it can expand access and help additional families.
"These reforms would allow the FHA to reach families that need help, those with low incomes and less-than-perfect credit records or little savings," Bush said.
Bush also proposed temporary tax relief for homeowners who are facing foreclosure because the value of their homes is less than the worth of their mortgage. Under the president’s proposal, if the value of a home declines and, for example, $20,000 of the homeowner's loan is forgiven, the tax code treats that $20,000 as taxable income. The Bush initiative, which requires legislation, would temporarily change a key provision of the tax code to ensure that canceled mortgage debt on a primary residence is not counted as income, according to a White House document.
The president pledged to work with Congress to enact legislation to temporarily revise the tax code provision. He expressed his support for a bipartisan House bill introduced by Reps. Rob Andrews (D-N.J.) and Ron Lewis (R-Ky.), and Senate bill by Sens. Debbie A. Stabenow (D-Mich.) and George Voinovich (R-Ohio) designed to protect homeowners from paying taxes on canceled mortgage debt.
The president asked Treasury Secretary Henry M. Paulson, Jr. to head a working group on financial markets. Members of the group include Federal Reserve Board Chairman Ben S. Bernanke, Securities and Exchange Commission Chairman Christopher Cox, and Commodity Futures Trading Commission Acting Chairman Walter Lukken. The task group will examine the role of credit rating agencies and how their ratings are used in lending procedures, and how securitization--the repackaging and selling of assets--has changed the mortgage industry and related business practices, according to a White House document.
Bush also tasked Paulson and Housing and Urban Development Secretary Alphonso Jackson to launch a new "foreclosure avoidance" outreach program enlisting outside groups, such as community organizations, mortgage lenders, and government-sponsored enterprises like Fannie Mae and Freddie Mac. In addition, Bush plans to establish a presidential council on financial literacy made up of private-sector leaders.
Feds Also Urge Private-Sector Action
Federal banking regulatory agencies and the Conference of State Bank Supervisors said September 4 that mortgage lenders should identify borrowers at risk of default and pursue appropriate strategies in order to preserve homeownership.
The statement said companies that service securitized residential mortgages should determine the full extent of their authority under pooling and servicing agreements to identify borrowers at risk, and pursue strategies including loan modifications, deferral of payments, or a reduction of principal. Financial institutions should also consider referring appropriate borrowers to qualified homeownership counseling services that may be able to work with all parties to avoid unnecessary foreclosures, regulators said.
"Where appropriate, servicers are encouraged to apply loss mitigation techniques that result in mortgage obligations that the borrower can meet in a sustained manner over the long term," regulators stated.
Regulators noted that a significant number of adjustable-rate mortgages are scheduled to reset in the coming months, and that these resets "may result in a significant payment shock to the borrower, which can increase the likelihood of default." Loss mitigation techniques that preserve homeownership are generally less costly than foreclosure, the regulators said.
Banking System "Safe" Despite Subprime Problems
The national banking system remains "safe and sound," despite current conditions in the mortgage and credit markets, Comptroller of the Currency John C. Dugan told the House Financial Services Committee September 5. At the same time, the Treasury warned that other financial market participants will see their balance sheets impacted by the crisis, which is still "far from over."
Dugan told members that unlike many non-bank lenders, national banks generally have strong levels of capital, stable sources of liquidity, and well diversified lines of business, which have allowed them to weather adverse market conditions. Consequently, "national banks remain active in major markets and continue to extend credit to corporate and retail customers, including mortgage credit," he said.
National banks originated less than 10 percent of all subprime mortgages in 2006, and have experienced default rates that are significantly lower than the national average, Dugan told the hearing. He added that while recent actions by the Federal Reserve and other central banks to restore liquidity are "encouraging," the situation remains fluid and it may take some time before markets fully stabilize. "We are therefore continuing to watch conditions very closely to address issues that may arise," he added.
Treasury Under Secretary for Domestic Finance Robert Steel told the hearing that "risk is being repriced," and that this will lead to a "reevaluation of assets" which will impact the balance sheets of financial market participants. Steel added that early next year the Treasury will be releasing a blueprint of structural reforms to make financial services industry regulation more effective, taking into account consumer and investor protection and the need to maintain U.S. capital markets competitiveness.
Meanwhile, committee chairman Rep. Barney Frank (D-Mass.) said his initial reaction to events in the subprime market was that "financial innovation outstripped regulation," noting that the regulatory structure is essentially unchanged from 10 years ago. "What should we do in our regulatory structure to catch up?" Frank asked.
Separately, Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd (D-Conn.) announced September 5 that he intends to introduce legislation to reform mortgage lending practices that have led to the current problems in the subprime market. "My bill will help keep Americans in their homes while also helping to restore public confidence in our mortgage and capital markets," Dodd said.
- Related items:
- Feds Move To Address Mortgage Market Worries
Added to the news October 3, 2007.
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