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.”

…(read more)

Forward this article via email:  Send a copy of this story to someone you know that may want to read it.

Realtors Show Clout, ‘Protecting The American Dream’ in DC Rally

Realtors® massed on the Washington Mall on Thursday to show their strength in a year in which their trade organization, The National Association of Realtors (NAR) seems anxious on several levels.  An estimated 15,000 Realtors gathered at the foot of the Washington Monument to, in the words of NAR President Moe Veissi “protect the American Dream of homeownership.”

According to a press release regarding the Rally to Protect the American Dream as the event was characterized, “Realtors® are working to ensure that people who want to own a home or invest in real estate and can responsibly afford to do so will continue to have the opportunity to do that.”

NAR is currently concerned about discussions to include a requirement for a 20 percent downpayment in the proposed definition of Qualified Residential Mortgage and proposals being floated to  eliminate or limit the current tax deduction for home mortgage interest.  The association also wants reform of the secondary market and improved liquidity in both commercial and residential lending.

The rally also helped NAR demonstrate its political clout.  The association, at one time the largest trade group in the country before the housing collapse drove many of its members out of the business, has been concerned about its influence especially since the Supreme Court ruled in the Citizens United case.  Last year it raised the political action portion of its dues by $40, a move that did not sit well with many members, citing  the need to compete against the millions in soft money for political advocacy the ruling was expected to unleash.  NAR hoped to raise $80 million with the increase.

According to the Center for Responsive Politics NAR is number four on its list of “Heavy Hitters” with 41.9 million in political donations since 1989.  They were a major force in electing Isaacson to the Senate in 2004 and in his 2010 re-election.

Those who attended the rally heard from former Realtor and Senator Johnny Isaacson (R-GA) and Representative Steny Hoyer (D-MD).  Isaacson told the crowd that homeownership has always been part of the American dream, “It is my hope that this rally encourages Congress and the president to move forward with policies that are supportive of housing, which is vital to job creation and the recovery of our economy,” he said.

Hoyer said, “Stabilizing the housing market remains a central issue for Democrats, who understand we will not have robust economic growth without a vibrant housing market and that access to homeownership remains a critical component of the American Dream.”

…(read more)

Forward this article via email:  Send a copy of this story to someone you know that may want to read it.

Ending Uncertainty is Prescription for Housing Recovery

Federal Reserve Governor Elizabeth A. Duke told attendees at a break-out session of the National Association of Realtors® (NAR) Midyear Legislative Meetings that she wished she had, as the session title suggested a “Prescription for Housing Recovery.”  “I do see policies that I believe will help reduce the shadow inventory of houses in the foreclosure pipeline,” she said.  “I also see policy actions that could be taken to improve credit availability for potential homebuyers and, in turn, demand for houses.”

Duke briefly recounted the toll that the housing market had taken on homeowners and the nation’s housing stock and some of the signs of recovery such as improving delinquency rates, and declining inventories of unsold and foreclosed homes. 

She said there have also been signs that home prices are stabilizing and even improving.  These modest improvements, she said, can only continue if the demand for homes strengthens or the supply fails to meet the weak demand.  “My Realtor friends,” she said, “have taught me that when inventories of houses for sale reach a level equal to six months of sales, then markets are usually in rough balance. And, indeed, just as the inventory of existing homes for sale nationally has approached six months of sales, we have seen a leveling of prices suggesting that some equilibrium is being achieved, albeit at low levels.”

The national data, of course, masks differences in regional markets.  She pointed to Miami and Phoenix where there is actually an undersupply of homes while delinquencies and foreclosures are still high.  “For me, this calls into question the notion that housing prices cannot stabilize until the foreclosure pipeline is worked off. I believe that this reduction in inventory, even in the face of a steady supply of foreclosed homes, is a result of a sharp contraction in normal homeowner activity and an equally sharp expansion of investor activity”. This could mean that discouraged homeowners have pulled homes off the market or that a significant portion of inventory has been absorbed by investors.

Despite some signs of improvement, demand for owner-occupied housing remains what Duke called “stubbornly tepid.”  One driver of demand is household formation which typically falls during economic downturns but has been especially weak in this cycle, running at three-quarters of the normal rate since 2007.  At the same time some homebuyers are delaying home purchases because of uncertainty, others because they expect prices might fall even further.

Some who would like to buy cannot because they are unable to obtain a mortgage.  She pointed to the Feds most recent Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS)  showing that underwriting standards for residential mortgages tightened steadily from 2007 to 2009, “and they do not appear to have eased much since then.” 

Obviously lenders are trying to correct for the lax and problematic lending standards in the years leading up to the crash, but Duke listed other factors causing the problem.

Lenders apparently lack adequate capacity. Some lenders have gone out of business and others have cut staff at the same time that requirements for documentation have increased and lenders have become more cautious over fear they might have to repurchase loans.  This has increased the processing time for mortgages from about 4 weeks in 20008 to around 6 weeks in 2010.   Of course if lenders were eager to originate mortgages they could increase staff and invest in systems but Duke believes uncertainty is inhibiting these investments.

Uncertainty is impacting lenders in other ways. Turning first to macroeconomic uncertainty, Duke said so long as unemployment remains elevated and further house price declines remain possible, lenders will be cautious in setting their requirements for credit.  The continuing effects on house prices of the large number of underwater mortgages and of the mortgages still in the foreclosure pipeline remain unclear. In one recent survey, house price forecasts for 2012 ranged from a decline of 8 percent to an increase of 5 percent.

House price uncertainty and the high volume of distressed sales make the job of residential appraisers and lenders more difficult.  Appraisers may lean toward the conservative in setting a home’s value and, as long a house prices continue to decline lenders may lean toward more conservative underwriting which, taken together could discourage or even disrupt sales and Duke said she hears of that happening.  

Lenders have tended to be conservative in making some mortgages that are guaranteed by government-sponsored enterprises (GSEs)–loans in which lenders do not bear the credit risk in the event of borrower default–which suggests that issues other than macroeconomic risk are affecting lending decisions.

In the April SLOOS  lenders said they are less likely today to originate loans to borrowers in several different categories than several years ago and when asked why about 80 percent cited the difficulty of obtaining affordable private mortgage insurance.  More than half the respondents cited risks associated with loans becoming delinquent as being at least somewhat important–in particular, higher servicing costs of past due loans or the risk that GSEs would require banks to repurchase or putback delinquent loans, their right when lenders are thought to have misrepresented their riskiness. If lenders perceive that minor errors can result in significant losses from putback loans, they may respond by being more conservative in originating those loans. If technology and data standardization can be used to enhance quality control reviews at the time of purchase rather than after the loans became delinquent, it would allow errors to be corrected much earlier, resulting in better outcomes for taxpayers, borrowers, investors, and lenders.

There is also uncertainty about future standards for delinquency servicing and the associated costs.  This was partially resolved by the $25 billion servicing settlement and the consent orders entered into by 14 large servicers. However these agreements cover only about two-thirds of all mortgages and the new Consumer Financial Protection Bureau (CFPB) has declared it will develop servicing rules for all mortgage loans, The conservator of the GSEs are developing a set of servicing protocols for GSE loans and federal regulators are doing the same for banks they regulate.  Also affecting decisions about investing in servicing are new approaches to servicer compensation under consideration by the FHFA and new international capital standards that change the capital treatment of mortgage servicing rights

Two major areas of uncertainty arise out of regulations being written under the Dodd-Frank Act;  rules that will set requirements for establishing a borrower’s ability to repay a mortgage including a definition of a “qualified mortgage” or QM. Mortgages that meet the definition would be presumed to meet the standards regarding the ability of the borrower to repay.  Regulators are also developing a definition for “qualified residential mortgages,” or QRMs, a subset of QM that would be exempt from risk retention requirements in mortgage loan securitizations. Each one of these rules will affect the costs and liabilities associated with mortgage lending and thus the attractiveness of the mortgage lending business.

Other big uncertainty is the potential role of the government in the mortgage market, especially the future of Fannie Mae and Freddie Mac still unreserved more than three years after they were put into conservatorship.  Private capital might be reluctant to enter the market until their future is settled.  

Duke concluded by returning to the theme of the session, writing a prescription for housing recovery which she said would include resolving uncertainty about the strength of the economic recovery, especially the labor market which is affecting both homeowners’ willingness to buy and lenders willingness to lend. The Federal Reserve remains committed to fostering maximum employment consistent with price stability, which should help reduce some of the macroeconomic uncertainty.

The efforts underway to reduce foreclosures and distressed sales will stabilize home prices and mortgage loan modifications and short sales will cut the homes in the foreclosure pipeline as will reallocating some properties to rental use.  Policy changes that increase opportunities to refinance and neighborhood stabilization efforts are other solutions.   

But, she said, perhaps the most important solution is that policymakers move forward with the difficult decisions that will affect the future of the mortgage market.  She listed the future of the GSEs, how to promote a robust secondary market, the form of crucial regulations, “and it is unlikely that anyone will fully agree with the final decisions that are made. Nevertheless, until these tough decisions are made, uncertainties will continue to hinder access to credit, the evolution of the mortgage finance system, and the ultimate recovery in the housing market. I don’t want to diminish the importance of any individual policy decision, but I do believe that the most important prescription for the housing market is for these decisions to be made and the path for the future of housing finance to be set. It’s time to start choosing that path.


…(read more)

Forward this article via email:  Send a copy of this story to someone you know that may want to read it.

Mortgage Rate at Record Low of 3.84%

Mortgage rates are continuing to plumb record lows, as signs of slowing economic growth raised doubts about the strength of the economic recovery.

Mortage Rate at Record Low of 3.84%

Mortgage rates are continuing to plumb record lows, as signs of slowing economic growth raised doubts about the strength of the economic recovery.