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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OBAMA ADMINISTRATION RELEASES DECEMBER HOUSING SCORECARD

WASHINGTON- The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury today released the December edition of the Obama Administration’s Housing Scorecard – a comprehensive report on the nation’s housing market. Data in the December Housing Scorecard show some subtle improvements in the market over the past year, but underscore fragility as the overall outlook remains mixed. For example, new and existing home sales rose compared to the prior month and remain higher than a year ago, and homes are more affordable than they have been since 1971. Median-income families today have nearly double the funds needed to cover the cost of the average home. However, home prices showed a slight dip from the prior month and remain below year ago levels. The full report is available online at www.hud.gov/scorecard.

HAMP Changes: Treasury Increases Incentives for Principal Reduction

The Federal Housing Finance Agency announced on Friday that it was extending
the Home Affordable Modification Program (HAMP) for another year – through December
13, 2013 – and that Freddie Mac and Fannie Mae would continue as financial
agents for Treasury in implementing the changes it then announced.  The press release also said the two GSEs
would “extend their use of HAMP Tier 1 as the first modification option through
2013” and that they were already in alignment with HAMP Tier 2 and no further
changes were necessary.

However, the Treasury Department, which jointly
administers HAMP, simultaneously announced what appear to be some significant
changes in the program.  Perhaps Timothy G. Massad, Assistant Treasury Secretary
for Financial Stability, was merely providing the English translation of
the FHFA press release or perhaps there is a division in the ranks.  In either case, here is the information he
provided in his blog posting.
 

The Treasury Department intends to triple the incentives offered to
investors holding distressed loans to encourage them to participate in reducing
the principal for those loans.  Under the
new guidelines, Treasury will pay from 18 to 63 cents on the dollar to
investors, depending on the degree of change in the loan-to-value ratio of the
individual loans.

While principal reduction has always been
available for modifying proprietary loans under the HAMP program (it even has
its own acronym, PRA) it has not been widely used.  Of over 900,000 permanent modifications
completed since the program began, only 38,300 are classified as utilizing principal
reduction

As we have previously reported,
FHFA has resisted all suggestions that the GSEs also include principal reduction
in their tools for dealing with distressed loans where borrowers are upside
down in their mortgages.  According to
Massad, Treasury has notified FHFA that it will pay principal reduction incentives
to Fannie Mae or Freddie Mac as well if they allow servicers to forgive principal
in conjunction with a HAMP modification. 

In its press release FHFA said of the
Treasury proposal

“FHFA has
been asked to consider the newly available HAMP incentives for principal
reduction. FHFA recently released analysis concluding that principal
forgiveness did not provide benefits that were greater than principal
forbearance as a loss mitigation tool. FHFA’s assessment of the investor
incentives now being offered will follow its previous analysis, including
consideration of the eligible universe, operational costs to implement such
changes, and potential borrower incentive effects.”

Again,
according to Treasury, HAMP will be expanding its eligibility to reach a
broader pool of borrowers.  An additional
evaluation process is being implemented that will allow servicers to recognize that
some borrowers who can afford their first mortgage payments still struggle because
of other debt.  Some analyses of HAMP
have found that many borrowers could not qualify for a modification solely because
their housing expenses were already below the 31 percent ceiling allowed by
HAMP guidelines.  This ceiling will now
be flexible enough to include secondary debt such as medical expenses or second
liens in the evaluation ratio. 

Eligibility
will also be expanded to include properties that are tenant-occupied as well as
vacant properties that the owner intends to rent.  According to Massad, this will serve to
further stabilize communities with high levels of vacant and foreclosed
properties as well as expanding the rental pool as has been suggested by the
Federal Reserve and others.

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Housing Industry Reacts to State of the Union

Housing featured prominently in
President Obama’s State of the Union speech on Tuesday night.  The President made two specific proposals,
one to deal with the ghosts of housing past, the other to provide expanded
credit to homeowners.

In contrast to the settlement with banks
that Obama was widely rumored to announce
at the State of the Union, he instead directed Attorney General Eric Holder to
create a new office on Mortgage Origination and Securitization Abuses.  The President said, “The American people
deserve a robust and comprehensive investigation into the global financial meltdown
to ensure nothing like it ever happens again.”

According to the Huffington Post, the new
office will take a three-pronged approach to the issue, holding financial
institutions accountable for abuses, compensating victims, and providing relief
for homeowners, and will operate as part of the existing Financial Fraud
Enforcement Task Force.  On Wednesday several
news outlets were reporting that the unit will be chaired by State Attorney
General Eric Schneiderman, who has been regarded as among the toughest of state
law enforcement officers with Lanny Breuer, an assistant attorney general in
the Criminal Division of the Department of Justice (DOJ) as co-chair.  Others reported to be in the group are Robert
Khuzami, director of enforcement at the Securities and Exchange Commission,
U.S. Attorney for Colorado John Walsh and Tony West, assistant AG, DOJ. 

The President’s second and more
broad-reaching proposal was for a massive refinancing of mortgage loans that
would reach beyond the current government initiates such as the Home Affordable
Refinance Program (HARP).  While few
details are available, the President said that his proposed initiative would
cut red tape and could save homeowners about $3,000 a year on their mortgage
payments because of the current historically low rates.  Unlike HARP, the program would apply to all
borrowers whether or not their current mortgages are government-backed and
would be paid for by a small fee on the largest financial institutions. Obama
did not mention principal reduction in his proposal.

Bloomberg is reporting that the program is
Obama’s response to a call by Fed Chairman Ben Bernanke in a paper sent to Congress
earlier this month for the administration to offer more aid for housing.   While largely dealing with the need to
convert excess housing inventory to rental property, the paper also touched on
the benefits of easing refinancing beyond the HARP program.

Bloomberg also outlined some of the
tradeoffs of a super-refinancing program saying it may damage investors in
government-backed securities by more quickly paying off those with high coupons
and limited default risk while aiding holders of other home-loan securities and
banks.  Word that such a proposal might be
forthcoming in the President’s speech, Bloomberg said, “Roiled the market for
Fannie Mae and Freddie Mac securities according to a note to clients by Bank of
America Corp.”

The Associated Press quoted Stan
Humphries, chief economist at Zillow as saying the refinancing could allow 10
million more homeowners to refinance and, by preventing foreclosures and
freeing up money for Americans to spend, could give the economy a $40 to $75
billion jolt.  The Federal Reserve, the
AP said, was more cautious, estimating that 2.5 million additional homeowners
might be able to refinance.

The refinancing initiative would require
approval by Congress, however the day after the speech the focus was on other issues
such as tax reform and we could not find any reaction from members of Congress
specific to the refinancing issue.  Even the
Mortgage Bankers Association (MBA) issued a statement from its president David
H. Stevens which did not mention the refinancing program, obliquely addressing
instead the creation of the mortgage fraud office.    

“Like the
President, we believe it is time to move forward with rebuilding this nation’s
housing market and that lenders and borrowers alike contributed to the housing
crisis we are currently in.  Let there also be no mistake, those who
committed illegal acts ought to face the consequences, if they haven’t already.”

Stevens
then called for a clear national housing policy “that establishes certainty for
lenders and borrowers alike.”  This,
according to MBA, requires finalizing the Risk Retention/Qualified Residential
Mortgage (QRM) rule “in a way that ensures access to credit for all qualified
borrowers,” establishing working national servicing standards, developing a
legal safe-harbor for Dodd-Frank QRM/Ability to Repay requirements, and “Move(ing)
quickly to determine the proper role of the federal government in the mortgage market
in order to ensure sufficient mortgage liquidity through all markets, good and
bad.

Creation
of the fraud office generated substantial comment, much of which was
unfavorable.  A lot of the criticism
focused on the lack of prosecutions that have emerged from the existing fraud
task force and there was a strong suspicion voiced by the liberal blogosphere
that the new office was merely a cover for pushing the DOJ/50-state attorneys
general settlement with major banks.  However,
one analysis, written by Shahien Nasiripour in U.S. Politics and Policies pointed out the wider powers of
enforcement available to attorneys general in some states such as New York’s
Martin Act and how the states and federal government might use the new office
to pool their powers and responsibilities to the benefit of each.  

The new
office will not lure California Attorney General Kamala Harris back into the
fold.  Harris and Schneiderman both
withdrew from the national foreclosure settlement last year, feeling that it
did not represent the interest of their respective states.  Despite the appointment of Schneiderman to
head the new office, Harris announced on Wednesday that she would not be
rejoining her fellow AGs
in their negotiations saying that the latest
settlement proposal was inadequate for California.  A spokesman for her office said, “Our
state has been clear about what any multistate settlement must contain:
transparency, relief going to the most distressed homeowners, and meaningful
enforcement that ensures accountability. At this point, this deal does not
suffice for California.”

Here’s the video of the speech beginning at the point discussing housing related issues…

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Consumer Advocacy Group Weighs in on AG Settlement

Rumors have been circulating for some
time that the Obama Administration is pressuring the 50 state attorneys general,
the Justice Department and the Department of Housing and Urban Development to
settle with major banks over issues relating to errors in servicing and
foreclosure abuses including the robo-signing uproar.  The settlement has been controversial and several
attorneys general including those in California, Delaware, and New York have opted
out of the settlement and/or launched independent lawsuits of their own,
claiming the settlement is not sufficient to the offense.  The rumors have intensified over the last few
days based on a theory that the President hopes to announce the settlement
during his State of the Union Address tonight.

Today the Center for Responsible Lending
which has been an early and outspoken critic of mortgage lending came out in
favor of the settlement saying, while it isn’t perfect, it would represent an important
step forward in addressing foreclosure abuses

“The settlement would include key reforms to clean up unfair mortgage
servicing practices,” the statement from the Center said.  “It would also provide an important template
for ways banks can use principal reduction to reduce unnecessary foreclosures
and put the country back on a path to economic recovery.”

While the Center admits that not all
details of the settlement are available as yet, but based on current
information, the key reforms include:

  • The
    elimination of robo-signing as banks would agree to individually review
    foreclosure documents according to the law.
  • Adoption
    of practices that would improve communication with services and end servicer
    abuses including fairer treatment for homeowners who are late on mortgage
    payments.
  • More
    sustainable loan modifications including a requirement that banks “get serious”
    about reducing principal balances.
  • While
    the state AGs would be prohibited by the settlement from pursuing further
    actions against the banks, the Center said that nothing in the settlement would
    prevent homeowners from suing on an individual basis nor would the settlement
    shield the banks from prosecution for criminal activities or from claims based
    on mortgage securities violations, fair lending suits or claims against the
    Mortgage Electronic Registration System.
  • The
    settlement would be enforceable in court by an independent monitor.

The Center said that its research
indicates that the country is only about half-way through the mortgage crisis,
but the proposed settlement would wrap up a year-long investigation into
robo-signing and other abuses and is “crucial to containing the damaging
effects of foreclosures on our economy.” 
It stresses, however, that additional policy actions on multiple fronts
is a necessary addition to the settlement.

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