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FDIC Subprime Summit

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FDIC Subprime SummitRegulators, investment bankers meet in capital

April 17, 2007

By MICHAEL KLING

In an attempt to control rising foreclosures, federal regulators hosted a subprime summit with Wall Street executives and other mortgage industry leaders yesterday.

The Federal Deposit Insurance Corporation hosted the summit, which was closed to the public, at its headquarters in Washington, D.C.

“The goal is to find workable solutions and strategies to address the rising delinquencies and defaults and provide an alternative to foreclosures,” said David Barr, an FDIC spokesman.

The meeting included a broad-based sampling of mortgage industry players, including investors, lenders, mortgage bankers, mortgage insurers, rating agencies, servicers, and consumer advocates.

“We have all players involved,” Barr said. “Everyone who has some type of role in the process is here.”

He estimated the number of non-government attendees at 30 to 50. Representatives from federal agencies, such as the Fed, FDIC, Comptroller of the Currency, Office of Thrift Supervision, and Office of Federal Housing Enterprise Oversight, also attended.

According to the agenda, topics of the summit, Subprime Mortgage Securitizations: Issues and Solutions, included industry perspectives on issues and concerns facing subprime securitization, the role of the servicer and trustee, the role of rating agencies, investor expectations, innovative approaches to resolving issues, as well as the accounting, legal and tax implications associated with modifications. The session ended with an attempt to develop solutions and reach a consensus.

“It was very positive and focused on solutions and what’s in the best interest of everyone,” said Michael Stevens, senior vice president, regulator services, for the Conference of State Bank Supervisors. “There’s widespread agreement that foreclosure is not in the best interest of anyone.”

While agreeing to a specific action, summit attendees agreed that one of the biggest challenges is getting borrowers to communicate with their servicers in order to reach a workout solution, Stevens said. “For various reasons, you hunker down and are afraid to engage and don’t’ think the servicer can help. You have to be willing to engage in this dialogue. If you can’t do that, no one can help. That’s a message that has to get out from all parties.”

Servicers have some flexibility to modify loan terms, although they must follow the loan’s governing documents and those restrictions vary from loan to loan. Some attendees, Stevens said, proposed pushing for more standardized servicing documents.

In a follow-up to the summit, federal bank, thrift and credit union regulatory agencies issued a joint statement today encouraging financial institutions to work constructively with borrowers unable to make loan payments.

For instance, mortgage companies can modify loan terms, convert variable-rate loans to fixed-rate products, and refer delinquent borrowers to homeownership counselors.

“Prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interest of both the financial institution and the borrower,” they stated. “However, there may be instances when workout arrangements are not economically feasible or appropriate.”

The agencies will continue to examine and supervise financial institutions according to existing standards, but they will not penalize financial institutions that pursue reasonable workout arrangements, the agencies stated. Institutions granting workout arrangements for low- and moderate-income borrowers may also receive favorable Community Reinvestment Act consideration.

Kenneth D. Wade, CEO of NeighborWorks America, a Washington, D.C.-based home counseling nonprofit, said the capital markets need to create a product to help those in danger of foreclosure, according to Doug Robinson, a NeighborWorks America spokesperson.

In testimony to the House Financial Services Committee today, Wade suggested that a small fee on mortgages could fund home counseling to all homeowners, Robinson said. Many homeowners are unaware of their mortgage terms. Many don’t even know they have adjustable rates. In addition, many who obtained loans with small down payments are finding they don’t have enough equity for a refinance because of falling home values.

Lenders must offer a product to help those homeowners, Wade argued. Speaking before the House committee, he also urged a national consumer awareness campaign on foreclosure solutions and the lending process, Robinson related.

The flexibility of forbearance options vary widely between lenders. Workouts are a better option for lenders. Workouts may cost $3,000 to $5,000, versus $30,000 to $40,000 for a foreclosure.

“We were encouraging the people in the room to think about the long-run benefit of more flexible solutions,” Robinson said.

“The forum was very constructive. We’re appreciative of the opportunity to participate,” said James Jockle, a spokesperson for Fitch Ratings, giving the rating agency’s only comment on the event.

Regulators aren’t the only ones holding or planning mortgage summits.

Concerned about rising delinquencies, Senator Christopher Dodd (D-Conn.), who chairs the Senate Banking Committee, last week announced that he plans to hold a summit “in the coming days” between leaders of all the stakeholders.

Presidential candidate and Senator Barrack Obama (D-Ill.) has also called for a summit between lenders, consumer advocates and federal regulators to stop the pending foreclosure increase.

Summits are evidentially becoming popular at the state level as well.

After holding one late last year, bankers, lenders and government officials in Massachusetts recently recommended criminalizing mortgage fraud and ceasing unfair and deceptive advertising practices. The groups also urged beefing up licensing standards for brokers and lenders, increasing homebuyer counseling and creating a Web site devoted to improving financial education. Massachusetts saw 19,497 foreclosures last year, a record high, according to ForeclosureMass.com.

And out in California, Coachella Valley will hold a housing summit next month on affordable housing. Lending products are also seen as a factor in that issue.

Pre-foreclosures and notices of pending foreclosures reached 253,803 during the first quarter 2007, up from 207,128, according to ForeclosureS.com. In addition, a report released by the Joint Economic Committee last week said that foreclosures in the subprime sector – prompted by the resets of almost two million hybrid ARMs- are expected to rise over the next two years.

The study recommends increasing aide to nonprofit groups and enacting anti-predatory lending legislation at the federal level. Senator Charles Schumer (D-N.Y.), who chairs the joint committee, said he will introduced legislation calling for “hundred of millions of dollars” be sent to community groups to help borrowers in trouble.

Participants in yesterday’s summit also touched on lending regulations, with some cautioning against regulations that too far, Stevens said. The Conference of State Bank Supervisors is preparing a nationwide originator licensing system with the American Association of Residential Mortgage Regulators and is urging states to adopt nontraditional mortgage guidance — 30 have so far.

“There is an ongoing concern that regulatory efforts need to be coordinated,” he said.

 

Michael Kling is a seasoned mortgage journalist and the former editor of Secondary Marketing Executive.

e-mail: Michael@KlingPublications.com

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