Regulator Endorses GSE Subprime Help

James B. Lockhart III, the director of the Office of Federal Housing Enterprise Oversight, made his comments at the ICBA Policy Summit today in Washington, D.C., according to a copy of the transcript released today.

Three goals the director outlined were enhanced supervision of the two government-sponsored housing enterprises, statutory reforms strengthening its regulatory powers and continued support of a national secondary mortgage market policy, according to the transcript.

While problems in the subprime market, which represents 15 percent of the overall mortgage market, are not good news, “I believe the problems will be manageable within existing markets, mortgage servicer’s practices and financial institutions including community banks and the GSEs,” Lockhart said. “We are going through a typical end of credit cycle correction.”

Noting that the subprime sector is bearing the brunt of the correction, the director said the problems aren’t surprising given the rapid increase in subprime share — from 10 percent in 2003 to 28 percent in 2006.

He blamed looser underwriting guidelines, including soaring debt ratios and stated-income lending, for subprime problems.

“Mortgage lenders not regulated at the federal level contributed to that deterioration in standards,” Lockhart said. “Some of this recent lending supported unsustainable speculation by investors and, at the same time, put some people into mortgages that they could not afford.”

Subprime defaults had been concentrated in the rust belt and Gulf states but are now rapidly growing in California and Florida, the transcript said. These markets, which have the highest share of subprime loans, have experienced the most rapid home price decline.

Last week, Fannie’s and Freddie’s chief executives told the House Financial Services committee they were each taking steps to help prevent an expected surge of foreclosures.

Fannie’s chief talked about HomeStay — a new initiative with relaxed credit requirements that will help borrowers facing imminent payment shock refinance without first having to clear up unpaid bills that show up on their credit reports. The Washington, D.C.-based secondary lender said it will increase the number of lenders able to offer the program from 500 to 2,000.

Freddie’s chief testified that the company will this summer offer consumer-friendly subprime mortgages that may include 40-year fixed-rate mortgages and ARMs with reduced margins and longer fixed-rate periods.

“I was especially pleased to hear that they are going to roll out their existing programs to many more lenders,” Lockhart commented on the companies’ commitments.

The two secondary lenders have the funding capacity and capital positions to buy, guarantee and sell additional mortgages packaged as residential mortgage-backed securities, the regulator added.

“They have enough excess capital above the current regulatory requirements to securitize over $1 trillion in additional MBS,” he said. “They also have room within the caps to buy new subprime loans and hold them. Their combined excess retained portfolio capacity could fulfill their tens of billions of dollars of commitments over the next several years.”

Lockhart noted Fannie and Freddie can also sell over $700 billion of their own RMBS they currently hold — providing even more available capital for a subprime mission.

In addition, both can approach OFHEO for relaxation of standards in times of market turmoil, he concluded.