HuffPo: Fed Reverses Position, Prepared to Rein in Mortgage Abuses

I don’t want to jinx it, but the age of miracles may not be past. Huffington Post has been reporting on the split between the FDIC and other regulators on getting tough with mortgage, more specifically, securitization, abuses. The FDIC has been serious about putting serious securitization reforms in place; it launched a well-thought-out proposal early last year. By contrast, other banking regulators, the Fed in particular, have been taking up the sell side industry’s point of view, which is that any meaningful change would be detrimental. But of course, this is yet another case where what is good for the banking industry is not so hot for a lot of other constituencies, such as investors, homeowners, and communities.

Huffington Post has learned the Fed is in the process of reversing its position on this issue. As Zach Carter writes:

The Federal Reserve has reversed its opposition to new rules reining in foreclosure abuses, and will support stronger regulations on the nation’s largest banks…

The FDIC has been pushing hard to ensure that new regulations on the mortgage bond market include clear instructions for how banks handle mortgages– and under what circumstances they can evict delinquent borrowers…

The Fed had opposed using the mortgage bond rules to crack down on foreclosure abuses, despite pressure from the FDIC. But FDIC General Counsel Michael Krimminger recently told the Fed his agency would not support any new mortgage bond regulations that do not include strong rules forbidding foreclosure abuses. Krimminger told HuffPost that other regulatory agencies are “moving in our direction on the issue.”

Krimminger would not specify which agencies were coming around. But a separate source close to the discussions told HuffPost that the Fed has come on board, with systemic risk watchdogs at the central bank sympathetic to Krimminger’s position.

The article also mentions various measures that put more focus on this issue in recent weeks, such as an open letter signed by 50 experts, a push from House Democrats led by Brad Miller, as well as the StopServicerScams petition.

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  1. Anjon Roy

    Matt/GW/Yves (there’s an all star lineup!)
    – What are your thoughts (or guesses) on intra-Fed dynamics?
    For instance, the article here says that the “Systemic Risk Watchdogs were sympathetic”, implying that these guys helps flip the Fed’s position. Do you think the Systemic people at the Fed may (1) gain more influence (2) not be as captured by the Wall Street – Treasury – Fed complex as the Examination folks, or other players inside the Fed?

  2. kravitz

    This may be why the Fed decided it had to act.

    Massachusetts is about to blow up the securitization issue.

    Timmy might be bald by now. Ben’s beard may look a little spotty.

    Foreclosures May Be Undone by Massachusetts Ruling on Mortgage Transfers
    “Massachusetts’s highest court is poised to rule on whether foreclosures in the state should be undone because securitization-industry practices violate real- estate law governing how mortgages may be transferred.”

    And hello to that Ally bank ad on the right!

  3. Bill Kay

    Sheila Bair had a great solution for this mess… nearly 3 years ago…

    Just think, how many familes could have been better off, had anyone took her advice…

    FDIC chief floats “short refis”

    Thursday, Jan. 31
    Posted 5 p.m. EDT

    YOU READ IT HERE FIRST: Mortgage servicers should streamline a way to offer refinances that include debt forgiveness, the chairman of the Federal Deposit Insurance Corp. told the Senate today.

    FDIC Chairman Sheila Bair told the Senate Banking Committee that 2009 will bring a wave of resets and recasts of so-called “nontraditional” mortgages — interest-only and pay-option ARMs. These borrowers are going to suffer from astounding payment shock. Not only will the interest rates increase, but a lot of these borrowers are going to find that they owe tremendously more than their houses are worth — and suddenly, they’ll be forced to pay interest and principal.

    The solution: Allow those borrowers to refinance those loans for less than the outstanding balances, with the difference forgiven.

    “… In today’s market, servicers should carefully consider whether some writedowns of part of the principal balance to the value of the home or forgiveness of arrearages of principal and interest are better options than foreclosure or even short sales in appropriate circumstances,” Bair told the Senate today.

    Bair is the first government official to talk about refinances with debt forgiveness — what I call “short refis.” I wrote about it two weeks ago in an article headlined “Will your lender let you do a short refinance?” You might have seen me mention it in the blog, too.

    This idea, originated by Jeff Lazerson, president of the online brokerage Mortgage Grader, is worthy of attention. I’m glad that someone is promoting it, besides Lazerson and me.

    Here’s a situation in which a short refi might be used: In 2004, Joe Blow got a pay-option ARM for $300,000 to buy a house for $330,000. He has been making minimum payments since then that didn’t even cover all of the interest charged. A year from now, Joe will discover that he owes $350,000, and the house is worth $275,000, and his interest rate just shot up, and now he has to pay principal and interest amortized over 25 years. His monthly payment could double or worse. And he won’t be able to refinance because he will owe far more than the house is worth.

    In this situation, there are three possible solutions. First: foreclosure or deed-in-lieu of foreclosure. Second: a short sale. Third: a short refi. Bair argues that the short refi will, in many cases, result in less of a financial loss to the lender than the other two options. And I think she’s right.

    Mortgage Matters is a blog on housing and mortgage issues written by Senior Reporter Holden Lewis.

    Posted: Jan. 31, 2008

    1. Ron

      Over 55% of these options Arms are located in burbs of Calif.
      The issue will be how these mortgage reductions will be reduced to reflect market conditions. The government with its FHA easy down payment terms(loan limits to 729K 3 1/2 percent down) have attempted to maintained much of the prior bubble conditions in the mid to upper tier priced markets and in fact by making these loans have generated a wave of new buyers who are immediately upside down homeowners based on normal selling cost so they are susceptible to a wave of new foreclosure if market pricing continues to decline.
      So now after creating this wave of mid to high tier homeowners that had good credit and jobs but have little or no skin in the game the government is going to officially mark down the value of their homes to try and save their neighbors that already are significantly upside down. What a clusterfu*k.

    2. Ron

      300K are you joking! Here in Calif think more like 600K to 900K and up. If there are option ARMs for 300K its in the Latino and Black neighborhoods and those the banks foreclosure on quick and sell off cheap to the investor crowd.
      Before any meaningful longterm principle debt reduction or refi for homeowners who are current but there property doesn’t fit the current 80/20 model, the government has to stop propping up the market with cheap interest rates and low down payments. The RE market needs to reflect current household incomes levels before these reductions will have any meaningful longterm benefit otherwise this is just a waste of time and money.

  4. Dikaios Logos

    I don’t want to jinx it either, but I do think making serious noise about what appears to be a very technical proposal has helped. Big thanks to Yves et al. on pushing the petition.

    I’ve been telling people for a while: if 5% of the population knew half the stuff commonly discussed on this blog, it would be game over for the banksters. That is to say, the impacts of getting just a few more people on board will be huge. Don’t stop making noise!

    1. readerOfTeaLeaves

      I’m sure the banks are giving the PR firms plenty of business.
      But the stories are so shocking on an individual level, that I give it six more months or so before the banks are revealed as insolvent, and when that happens there won’t be an iota of public support to save them.

      The irony 8^}

  5. Francois T

    Nothing the powers that be (and that sure includes “top officials at the Fed”) hate more than the disinfecting power of sunlight shining on their questionable behavior.

  6. pjwrites

    This can’t be good.
    When the Fed turns around on this, we must be getting set-up for even scarier monetary machinations.

  7. Eugene Villarreal

    One grain of sand next to other grains of sands makes a beach. Isn’t this a beach! Let’s all enjoy this day and give thanks to everybody who is making this tide turn to the right direction.

  8. Non Democracy

    What ever happened to cram down? That was a fantastic idea, – to modify bankruptcy law to give the lower classes a serious weapon against the organized crime of Wall Street, and vicious corporate exploiters.
    – and why is the Maryland Attorney General Doug Gansler such a bureaucratic dim wit, in a redneck infested State Government, known for it’s high levels of corruption?

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