Geithner Outlines Accomplishments, Future of Financial Reform

Treasury Secretary Timothy Geithner told
the Financial Stability Oversight Council that the financial system is getting
stronger and safer and that much of the excess risk-taking and careless
financial practices that caused so much damage has been forced out.  However, he said, “These gains will erode
over time if we are not able to put our full reforms into place.”

He outlined the basic framework has been
laid, with new global agreements to limit leverage, rules for managing the
failure of a large firm and the new Consumer Financial Protection Bureau (CFPB)
up and running, and the majority of the new safeguards for derivatives markets proposed.  Geithner ticked off the major accomplishments
of reform.

First, banks now face much
tougher limits on risk which are critical to reducing the risk of large
financial failures and limiting the damage such failures can cause.  The focus in 2012 will be “on defining the
new liquidity standards and on making sure that capital risk-weights are
applied consistently.”

 The new rules are tougher on
the largest banks that pose the greatest risk and are being complemented by
other limits on risk-taking such as the Volcker Rules and limits on the size of
firms and concentration of the financial systems.  These will not apply only to banks but to
other large financial institutions that could pose a threat to financial system
stability and this year the Risk Council will make the first of these
designations.

Second, the derivatives market will,
for the first time, be required to meet a comprehensive set of transparency
requirements, margin rules and other safeguards.  These reforms are designed to move
standardized contracts to clearing houses and trading platforms and will be
complemented with more conservative safeguards for the more complex and
specialized products less amenable to central clearing and electronic
trading.  These reforms, the balance of
which will be outlined this year, will lower costs for those who use the
products, allow parties to hedge against risk, but limit the potential for
abuse, the Secretary said. 

Third, is a carefully designed set
of safeguards against risk outside the banking system and enhanced protections
for the basic infrastructure of the financial markets: 

  • Money market funds will have new
    requirements designed to limit “runs.”
  • Important funding markets like the
    tri-party repo market are now more conservatively structured.
  • International trade repositories are
    being developed for derivatives, including credit default swaps.
  • Designated financial market utilities
    will have oversight and requirements for stronger financial reserves;

Fourth; there will be a stronger set
of protections in place against “too big to fail” institutions.  The key elements are:

  • Capital and liquidity rules with
    tough limits on leverage to both reduce the probability of failure and prevent
    a domino effect;
  • New protections for derivatives,
    funding markets, and for the market infrastructure to limit contagion across
    the financial system;
  • Tougher limits on institutional size;
  • A bankruptcy-type framework to
    manage the failure of large financial firms.
    This “resolution authority” will prohibit bailouts for private
    investors, protect taxpayers, and force the financial system to bear the costs
    of future crisis.

Fifth, significantly stronger
protections for investors and consumers are being put in place including the
CFPB which is working to improve disclosures for mortgages and credit cards and
developing new standards for qualified mortgages.  New authorities are being used to strengthen protections
for investors and to give shareholders greater voice on issues like executive
compensation.

Geithner pointed to the failure of
account segregation rules to protect customers in the MF Global disaster as proof
of the need for more protections and said that the Council will work with the
SEC and the Commodity Futures Trading Council on this problem.   

Moving forward, reforms must be
structured to endure as the market evolves and to work not just in isolation
but to interact appropriately with each other and the broader economy.  “We
want to be careful to get the balance right-building a more stable financial
system, with better protections for consumers and investors, that allows for
financial innovation in support of economic growth.” 

First, he said, we have to make sure
we have a level playing field at home; that financial firms engaged in similar
activity and financial instruments that have similar characteristics are
treated roughly the same because small differences can have powerful effects in
shifting risk to where the rules are softer. 
A level field globally is also important, particularly with reforms that
toughen rules on capital, margin, liquidity, and leverage, as well as in the
global derivatives markets.  “In these areas we are working to discourage
other nations from applying softer rules to their institutions and to try to
attract financial activity away from the U.S. market and U.S. institutions.” 

It is necessary to align the
developing derivatives regimes around the world; preventing attempts to soften
application of capital rules, limiting the discretion available to supervisors
in enforcing rules on risk-weights for capital and designing rules for
resolution of large global institutions.  Also, because some U.S. reforms are different
or tougher from rules in other markets, there needs to be a sensible way to
apply those rules to the foreign operations of U.S. firms and the U.S.
operation of foreign firms.

 The U.S. also needs to move
forward with reforms to the mortgage market including a path to winding down
the government sponsored enterprises (GSEs.) 
The Administration has already outlined a broad strategy, Geithner said,
and expects to lay out more detail in the spring.  The immediate concern is to repair the damage
to homeowners, the housing market, and neighborhoods.  The President spoke this week about the range
of tools he plans to use.  Our ultimate goals
are to wind down the GSEs, bring private capital back into the market, reduce
the government’s direct role, and better target support toward first-time
homebuyers and low- and moderate-income Americans.

Geithner said the new system must
foster affordable rentals options, have stronger, clearer consumer protections,
and create a level playing field for all institutions participating in the
system.  For this to happen without
hurting the broader economy and adding further damage to those areas that have
been hardest hit, banks and private investors must come back into the market on
a larger scale and they want more clarity on the rules that will apply. 

Credit availability is still a problem
and there is a broad array of programs in place to improve access to credit and
capital for small businesses.  As
conditions improve, it is important that we remain focused on making sure that
small businesses, a crucial engine of job growth, have continued access to
equity capital and credit.

Many Americans trying to buy a home
or refinance their mortgage are also finding it hard to access credit, even for
FHA- or GSE-backed mortgages.  The Administration has been working closely
with the FHA and FHFA to encourage them to take additional measures to remove
unnecessary barriers and they are making progress.  They will probably outline additional reforms
in the coming weeks.

Bank supervisors, in the normal
conduct of bank exams and supervision, as well as in the design of new rules to
limit risk taking and abuse, must be careful not to overdo it with actions that
cause undue damage to the availability of credit or liquidity to markets.

Geithner said the U.S. financial
system is getting stronger
, and is now significantly stronger than it was
before the crisis.  Among the achievements:

  • Banks have increased common equity
    by more than $350 billion since 2009.
  • Banks and other financial
    institutions with more than $5 trillion in assets at the end of 2007 have been
    shut down, acquired, or restructured.
  • The asset-backed commercial paper
    market has shrunk by 70 percent since its peak in 2007, and the tri-party repo
    market and prime money market funds have shrunk by 40 percent and 33 percent
    respectively since their 2008 peaks.
  • The financial assistance we provided
    to banks through TARP, for example, will result in taxpayer gains of
    approximately $20 billion.

The Secretary said the strength of
the banks is helping to support broader economic growth, including the more
than 3 million private sector jobs created over 22 straight months, and the 30
percent increase in private investment in equipment and software.  
Broadly, the cost of credit has fallen significantly since late 2008 and early
2009.  Banks are lending more, with commercial and industrial loans to
businesses up by an annual rate of more than 10 percent over the past six
months.  

He concluded by saying that no
financial system is invulnerable to crisis, and there is a lot of unfinished
business on the path of reform.  The reforms are tough where they need to
be tough.  “But they will leave our financial system safer, better able to
help businesses raise capital, and better able to help families finance safely
the purchase of a house or a car, to borrow to invest in a college education,
or to save for retirement.  And they will protect the taxpayer from having
to pay the price of future crisis.”

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Refinancing Continues to Drive Application Volume

The
Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey
reported that mortgage applications as measured by its Market Composite Index
were down 2.9 percent on a seasonally adjusted basis during the week ended
January 27 but increased 9.0 percent from the previous week on an unadjusted
basis.

The
seasonally adjusted Purchase Index was down 1.7 percent while it increased 17.1
percent on an unadjusted basis from the week ended January 20 and was 4.3
percent lower than during the same week in 2011.  The Refinance Index decreased 3.6 percent
from the previous week.

All
of the four week moving averages were higher for the week.  The seasonally adjusted Market Index rose
4.11 percent, the seasonally adjusted Purchase Index was up 2.48 percent and
the Refinance Index increased 4.22 percent.

Applications for
refinancing represented 80.0 percent of all applications, down from 81.3
percent the previous week.  Applications
for adjustable-rate mortgages (ARMs) had a 5.6 percent market share compared to
5.3 percent a week earlier.

Refinancing
applications in December increased in every U.S. state according to MBA and,
despite multiple holidays only 12 states had fewer purchase applications than
in November.  In Connecticut refinancing
applications increased 80.1 percent from November and Maine saw a 30.8 percent
increase in applications for home purchase mortgages.

Purchase Index vs 30 Yr Fixed

Click Here to View the Purchase Applications Chart

Refinance Index vs 30 Yr Fixed

Click Here to View the Refinance Applications Chart

Rates fell for all
fixed rate mortgages (FRM) compared to the previous week.  The average contract interest rate for
30-year conforming FRM (balances under $417,500) decreased to 4.09 percent with
0.41 point from 4.11 with 0.47 point. Rates for jumbo mortgages (those with
balances over $417,500) decreased from 4.39 percent to 4.33 percent while
points increased from 0.40 to 0.41.  This
is the lowest rate for the 30-year jumbo mortgages since MBA started tracking
them one year ago. 

FHA backed 30-year
FRM rates decreased one basis point to 3.96 percent with points increasing to
0.61 from 0.57.  Rates for the 15-year
FRM were down from 3.40 percent with 0.40 point to 3.36 percent with 0.41
point.  The effective rate of all of the
mortgage products listed above also decreased.

The sole rate increase was for the 5/1 ARM which increased on average to 2.94 percent with 0.39 point
from 2.91 percent with 0.41 point.  The
effective rate also increased. 

Follow what drives changes in mortgage rate each day with Mortgage Rate Watch from MND.

All rates quoted
are for 80 percent loan to value loans and points include the origination fee.

Michael
Fratantoni, MBA’s Vice President of Research and Economics said of the week’s
results, “The Federal Reserve surprised the market last week by indicating
that short-term rates were likely to stay at their current low-levels until the
end of 2014.  Longer-term treasury rates dropped in response, and mortgage
rates for the week were down slightly as a result.  Although total application volume dropped on
an adjusted basis relative to last week, refinance volume remains high, with
survey participants reporting that the expanded Home Affordable Refinance
Program (HARP) contributed to roughly 10 percent of their refinance
activity.”

MBA’s weekly
survey covers over 75 percent of all U.S. retail residential mortgage
applications, and has been conducted since 1990.  Respondents include
mortgage bankers, commercial banks and thrifts.  Base period and value for
all indexes is March 16, 1990=100.

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OCC: Mortgage Performance Best Since 2008

Mortgage performance during the
first quarter of 2012 was the best in three years according to the Office of Comptroller
of the Currency’s (OCC’s) Mortgage
Metrics Report
.  Percentages of
mortgages that were 30 to 59 and 60 to 89 days delinquent were at the lowest
level since at least the first quarter of 2008 when Metrics was first published. 
The percentage of mortgages current and performing at the end of the
quarter was 88.9 percent up 1.1 percent from the previous quarter and 0.3
percent from a year earlier. OCC attributed the improvement in performance to
several factors including strengthening economic conditions, seasonal effects,
servicing transfers, and the ongoing effects of both home retention programs
and home forfeiture actions.

The quality of government guaranteed
mortgages
improved during the quarter with current and performing mortgages at
85.9 percent of the portfolio compared to 84.2 percent in the previous quarter but
down from 87.0 a year earlier.  Mortgages
serviced for the two government sponsored enterprises (GSEs) Fannie Mae and
Freddie Mac made up 59 percent of servicer portfolios and 93.7 percent of these
loans were current and performing, a percentage that has changed little over
the past year.

New foreclosures initiated during
the quarter were down 1.8 percent to 286,951 which OCC said reflected the
emphasis on home retention actions as well as a decrease in delinquencies.  Many servicers have also slowed new
foreclosures in response to changing servicing standards and requirements.  

Completed foreclosures increased to
122,979-up 5.9 percent from the previous quarter and 2.7 percent from the first
quarter of 2011.  The inventory of foreclosures in process increased from
the previous quarter to 1,269,921, but is down from 1,308,757 a year ago.  Deeds-in-lieu of foreclosure, and short-sales
brought the total number of home forfeiture actions to 185,781 during the
quarter, an increase of 1.9 percent from the fourth quarter of 2011 and 8.3
percent from a year earlier.

Servicers initiated 352,989 home
retention actions
during the quarter and have initiated more than 2.2 million
such actions including modifications, trial-period plans, and payment plans
over the last five quarters.  At the end
of the first quarter of 2012, 50.7 percent of modifications remained current or
were paid off.  Modifications made since 2008 that reduced borrower
monthly payments by 10 percent or more performed better (57.6 percent remained
current) than those that reduced payments by less than 10 percent (36.8
percent.)

On average, modifications
implemented in the first quarter of 2012 reduced monthly principal and interest
payments by $437, which is 31 percent more than modifications implemented
during the first quarter of 2011. HAMP modification reduced payments by $588 on
average and those modifications performed better than others, with 68.2 percent
remaining current compared to 53.4 percent of modifications done by others.  OCC said HAMP’s performance reflects the
significantly reduced monthly payments, the program’s emphasis on affordability
relative to borrower income, required income verification, and the successful
completion of a required trial period.

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Pending Home Sales Rise; NAR Sees Tight Inventory Leading to Price Increases

Pending home sales in May bounced
back to match March numbers which were the highest seen in two years. The
improvement was broad-based, affecting every region in the country according to
the National Association of Realtors® (NAR). 

NAR’s Pending Home Sales Index (PHSI)
rose 5.9 percent in May from 95.5 in April to 101.1, equaling the index level last
March.  This was an increase of 13.3
percent from May 2001 when the index was 89.2. 
The last time the PHSI was higher than the March and May number was in
April 2010 when buyers were rushing to beat the deadline for the home buyer tax
credit.

The PHSI is a forward indicator
reflecting signed contracts for home purchases. 
The index does not include closing transactions which are generally
expected to occur within 60 to 90 days.

Lawrence Yun, NAR
chief economist, said longer term comparisons are more relevant.  “The
housing market is clearly superior this year compared with the past four
years.  The latest increase in home contract signings marks 13 consecutive
months of year-over-year gains,” he said.  “Actual closings for
existing-home sales have been notably higher since the beginning of the year
and we’re on track to see a 9 to 10 percent improvement in total sales for
2012.”

The national
median existing-home price is expected to rise 3.0 percent this year and
another 5.7 percent in 2013.

On a regional
basis, May pending sales in the Northeast increased 4.8 percent to 82.9, 19.8
percent above May 2011.  The pending sales number in the Midwest was 98.9
up 6.3 percent from April and 22.1 percent from a year ago.  The index for
the South increased 1.1 percent month over month and 11.9 percent year over
year to an index of 106.9.  In the West
the index jumped 14.5 percent in May to 108.7 and is 4.8 percent stronger than
a year ago.

Yun said that
low inventory could negatively impact some contract activity.  “If credit
conditions returned to normal and if we had more inventory, especially in the
lower price ranges, more people would become successful buyers.  In an
environment of historically favorable housing affordability conditions, it’s
frustrating to see some consumers thwarted in the process,” he said.

The low
inventory in some cases is because of the numbers of homeowners who are unwilling
to list their homes for sale because they are underwater on their mortgages.  Selling underwater homes requires that sellers
either bring cash to the table or undergo a lengthy and often frustrating short
sale process.  NAR estimates 85 percent
of homeowners have positive equity, with 15 percent in an underwater situation.

“Low inventory
can be cured by increasing new home construction,” Yun said.  He projects
housing starts to rise by 26 percent this year and another 50 percent in 2013.  “If housing starts do not rise in a meaningful
way over the next two years due to the difficulty in getting construction
loans, and barring an unexpected shift in the economy, the steady shedding of
inventory could lead to shortages where home prices could get bid up close to
10 percent in 2013,” Yun said.

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Mortgage Suspicious Activy Reports (SARs) Continue to Emerge from Pre-2008 Loans

Suspicious Activity Reports (SARs) related
to suspected mortgage loan fraud (MLF) filed by depository institutions decreased
sharply in the first quarter of 2012 compared to the first quarter of 2011 even
as SARs increased overall.  Data on these
MLF SARs filings was released Tuesday by the Treasury Department’s Financial
Crimes Enforcement Network (FinCEN).

There were 17,651 MLF SARs filed during
the quarter compared to 25,484 one year earlier, a decrease of 31 percent.  At the same time there were 205,301 SARs of
all types, an increase of 10 percent from 186,331 in the first quarter of
2011.  MLFs represented 14 percent of all
SAR filings in that earlier period compared to 9 percent in the January-March
2012 period.

FinCEN said there was an unusual spike
in MLF SARs
filings during the first three quarters of 2011.  These arose primarily out of mortgage
repurchase demands on banks which prompted a review of loan origination
documents and subsequent detection of suspected fraud.  Filings in early 2012 show that problems
continue to emerge from loans originated in the pre-2009 period which accounted
for the majority of delinquencies and foreclosures experienced since 2008.

Of the MLF SARs filed in the first
quarter, 28 percent related to loans that were four to five years old and 44
percent to loans that were more than five years from their origination data.  One year ago 79 percent were three or more
years old. 

While only a minority of filers included
loss totals and fewer did so in 2012 than in 2011, more than 80 percent of the
losses reported were for amounts under $500,000.  Very few filings (51 in 2012) reported any recovery
of losses.

Numbers of SAR were logically the
largest in the largest states – California, Florida, New York, and
Illinois.  On a per capita basis California
was in first place as it was during all of 2011.  Nevada ranked second, rising from fifth place
in 2011 and Florida was third.  Los
Angeles had the highest number of MLF SARs of any of the large metropolitan
areas both by volume and on a per capita basis. 
Two other California MSAs, the Riverside area and San Jose-Sunnyvale
were second and third on a per capital basis followed by Las Vegas and Miami.

To determine the latest trends in
suspected mortgage fraud FinCEN examined a subset of MLF SARs filings reporting
activities that were less than two years old.  Nineteen percent of 3,354 MLF SARs filed during
the first quarter met this criterion and FinCEN examined a sample of 334 or ten
percent.  The largest category of
suspected fraud was defined as income followed by occupancy, employment, and
debt elimination.  Compared to the Q1
2011 report, debt elimination fraud increased as did foreclosure rescue scams
while appraisal fraud was down. 

FinCen reported an increasing number of
SARs that appeared to involve “repeat subjects.”  For example, several foreclosure rescue scam
reports
noted that numerous borrowers had complained about the subject
organizations.  The same was true of some
SARs related to proposed debt relief services. 
Filers also noted several short sale SARs subjects who had been involved
in numerous fraudulent transactions. 
This information could provide useful information to law enforcement.

FinCen also identified fraud patterns not
noted in other reports.  One was homeowners
insurance fraud where borrowers pocketed insurance payments after home fires
and another, “Keys for Cash” where persons moved into bank owned properties
claiming to have long term leases.  Their
true objective appeared to be inducing lenders into paying them to vacate the
properties.

In a related matter, the Department of
Justice and the offices of the Inspector General for both the Department of Housing
and Urban Development and the Federal Housing Finance Agency held mortgage
fraud summits
in two cities on Tuesday to help protect homeowners in areas
hardest hit by mortgage scams.  A third
summit slated for Tallahassee, Florida is being rescheduled because of severe
weather in the area.  The summits were
organized by President Obama’s Financial Fraud Enforcement Task Force’s (FFETF)
Mortgage Fraud Working Group of which FinCEN is a member.  

“Preventing, detecting and
prosecuting mortgage fraud is a top priority of the Financial Fraud Enforcement
Task Force and its Mortgage Fraud Working Group members,” said FFETF Executive
Director Michael Bresnick. “It’s more important than ever that we arm
homeowners with the information they need to recognize the predators up front
and empower them to avoid falling victim to these devastating scams. That’s why
the task force is holding these summits in states hit hardest by the
foreclosure crisis.”

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