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    TESTIMONY OF BERNANKE –MORTGAGES, SECURITIZATION & FORECLOSURE

    TESTIMONY OF BERNANKE –MORTGAGES, SECURITIZATION & FORECLOSURE

    September 2007 

    Testimony from Federal Reserve Chairman Ben S. Bernanke before the Committee on Financial Services, U.S. House of Representatives:

    BERNANKE STATES THE RIGHT TO CASH FLOWS WERE SOLD–

    NOT THE LOANS!

    “regulatory changes and the ongoing growth of the secondary mortgage market increased the ability of lenders, who once typically held mortgages on their books until the loans were repaid, to sell many mortgages to various intermediaries, or “securitizers.” The securitizers in turn pooled large numbers of mortgages and sold the rights to the resulting cash flows to investors, often as components of structured securities.

    BERNANKE STATES HOMEOWNERSHIP ONLY INCREASED BY 4% – WAS IT ALL WORTH IT?

    This “originate-to-distribute” model gave lenders (and, thus, mortgage borrowers) greater access to capital markets, lowered transaction costs, and allowed risk to be shared more widely. The resulting increase in the supply of mortgage credit likely contributed to the rise in the homeownership rate from 64 percent in 1994 to about 68 percent now—with minority households and households from lower-income census tracts recording some of the largest gains in percentage terms.

    BERNANKE REDUCES THE PROBLEM TO BORROWER WITH WEAK CREDIT – IGNORES HOW THEY WERE SET UP TO FAIL WITH UNSUSTAINABLE LOANS

     Not surprisingly, given their weaker credit histories and financial conditions, subprime borrowers default on their loans more frequently than prime borrowers.

    NO SHIT SHERLOCK – FIXED LOANS PERFORM BETTER –THE LOANS ARE THE PROBLEM – NOT THE BORROWERS

    During the past two years, serious delinquencies among subprime adjustable-rate mortgages (ARMs) have increased dramatically. (Subprime mortgages with fixed rates, on the other hand, have had a more stable performance.)

    About 320,000 foreclosures were initiated in each of the first two quarters of this year (just more than half of them on subprime mortgages), up from an average of about 225,000 during the past six years. Foreclosure starts tend to be high in states with stressed economic conditions and to rise where house prices have decelerated or fallen.

    HOMES HAD SHARP DECELERATION – FAILS TO DISCUSS WHY

     In addition, the sharp deceleration in home prices since 2005, including outright declines in some markets, left many of these more-recent borrowers with little or no home equity. In this situation, some borrowers (particularly owner-investors) may have found that simply walking away from their properties was their best option. Moreover, low home equity has made refinancing—the typical way for many subprime borrowers to avoid large scheduled interest rate resets—difficult or impossible for many.

    BERNANKE ADMITS THE BANKS JUST ORIGINATE LOANS TO SELL THEM AND CARED LITTLE WHAT THE OUTCOME WOULD BE

    The originate-to-distribute model seems to have contributed to the loosening of underwriting standards in 2005 and 2006. When an originator sells a mortgage and its servicing rights, depending on the terms of the sale, much or all of the risks are passed on to the loan purchaser. Thus, originators who sell loans may have less incentive to undertake careful underwriting than if they kept the loans. Moreover, for some originators, fees tied to loan volume made loan sales a higher priority than loan quality. This misalignment of incentives, together with strong investor demand for securities with high yields, contributed to the weakening of underwriting standards.

    LOTS OF “PRETTY PLEASE” WILL YOU HELP HOMEOWNERS –

    NO CONSEQUENCES

    …….. many homeowners who took out mortgages in recent years are in financial distress. To help those borrowers, the Federal Reserve, together with the other federal supervisory agencies, has issued two statements—in April, to mortgage lenders; and earlier this month, to mortgage servicers—to encourage the financial industry to work with borrowers to arrange prudent loan modifications to avoid unnecessary foreclosures. The Conference of State Bank Supervisors (CSBS) joined the federal agencies in the second statement. Often, loan workouts are in the interest of all parties.

    NEIGHBORWORKS & THE FEDERAL RESERVE  SAY CONTACT YOUR LENDER – RIGHT…YEAH RIGHT THAT’S THE ANSWER

    In addition, a member of the Federal Reserve Board serves as a director of NeighborWorks America, which encourages borrowers facing payment difficulties to seek help by contacting their lenders, services, or trusted counselors. Recently, NeighborWorks America launched a nationwide advertising campaign to increase awareness of available support from their 24-hour hotline, and they are now responding to 2,000 calls a day, almost double the number in June.

    TOO LITTLE TOO LATE – DEFEND AGAINST IMPROPER LENDING – WHAT ABOUT PROSECUTE BANKS FOR IMPROPER LENDING – MAYBE INSTEAD OF FORECLOSURE HOMEOWNERS SHOULD GET GUIDANCE AND A FEW BILLION FROM THE FED WINDOW

    Last year, in coordination with other federal supervisory agencies, we issued principles-based guidance describing safety-and-soundness and consumer-protection standards for nontraditional mortgages, such as interest-only and negative-amortization mortgages. We subsequently issued illustrations to help institutions clearly communicate information to consumers. In June of this year the agencies issued supervisory guidance on subprime ARMs.

    The Board also is committed to providing more-effective disclosures to help consumers defend against improper lending……. In addition, we are developing two sets of proposed changes to TILA rules—one to address concerns about incomplete or misleading mortgage loan advertisements and solicitations and a second to require lenders to provide mortgage disclosures more quickly so that consumers can get the information they need when it is most useful to them…… We are looking closely at some mortgage lending practices, including prepayment penalties, escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the evaluation of a borrower’s ability to repay.

    ENFORCEMENT –HUH- WHERE’S THE ENFORCEMENT?

    To achieve strong and uniform enforcement, interagency cooperation among a variety of federal and state agencies is essential. As I noted in my testimony in July, the Board has launched a pilot program with the CSBS, AARMR, the Office of Thrift Supervision, and the Federal Trade Commission. The goal of this program is to expand and improve consumer protection by strengthening compliance reviews at selected nondepository lenders with significant subprime-mortgage operations. The Board will review nonbank subsidiaries of bank holding companies, and the other agencies will conduct similar reviews of nondepository institutions of thrift holding companies, independent mortgage lending companies, and mortgage brokers doing business with these entities. The reviews will include an evaluation of the companies’ underwriting standards and senior-management oversight of the practices used for ensuring compliance with consumer protection regulations and laws.

    THIS ONE CONFUSES ME – DID BERNANKE NOT KNOW THE FANNIE WAS TAKING THE WORST SUBPRIME CRAP OFF THE BANKS BOOKS AS LATE AS AUGUST OF 2007 BY FORMING 3 BILLION DOLLAR CDO’S – WAS THAT IN THEIR CHARTER?

    The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are, to a limited extent, assisting in subprime refinancings and should be encouraged to provide products for subprime borrowers to the extent permitted by their charters. However, the GSE charters are likely to limit the ability of the GSEs to serve any but the most creditworthy subprime borrowers.

    Some have suggested that the GSEs could help restore functioning in the secondary markets for non-conforming mortgages (specifically jumbo mortgages, those with principal value greater than $417,000) if the conforming-loan limits were raised. However, in my view, the reason that GSE securitizations are well-accepted in the secondary market is because they come with GSE-provided guarantees of financial performance, which market participants appear to treat as backed by the full faith and credit of the U.S. government, even though this federal guarantee does not exist. Evidently, market participants believe that, in the event of the failure of a GSE, the government would have no alternative but to come to the rescue. The perception, however inaccurate, that the GSEs are fully government-backed implies that investors have few incentives in their role as counterparties or creditors to act to constrain GSE risk-taking.

    Implications for Financial Markets and Monetary Policy FULL ARTICLE

    http://www.npr.org/templates/story/story.php?storyId=14560229

     

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