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| The chairman of the Federal Deposit Insurance Corp. said a national set of subprime standards is being prepared for banks and nonbank lenders. She expressed disappointment over the slow pace of loan modifications and suggested servicers make initial rates permanent.
Some institutions are starting to be more proactive in modifying loans, FDIC Chairman Sheila Bair said at the Clayton Holding Inc. Investor Conference in New York last week, according to a transcript of her presentation. But she noted that the problem is “huge” and a case-by-case approach is inadequate for the millions of loans scheduled for rest. “Frankly, I’m frustrated that the servicing restructuring has not reached the level that I had hoped it would,” Bair said. “We’re strongly encouraging banks, loan servicers, and others to try to find refinancing or restructuring opportunities for people who are trapped in these adjustable-rate mortgages as they reset to higher interest rates.” Bair noted $150 billion in ARMs have reset so far this year while another $300 billion have yet to reset. She explained that writing letters to borrowers is not enough, and servicers must make human contact. The FDIC chief said the agency is focusing on loans backing residential mortgage-backed securities, where loan modifications are more complicated because of the number of players involved. She explained that effective loss mitigation will provide the best scenario for bondholder returns as significant foreclosures could erode subordinate classes and lead to downgrades and price depreciation on more senior bonds. “We’re encouraging servicers to review their PSAs to determine the full extent of their authority to restructure loans that are delinquent, in default or are in clear risk of default,” the regulator said. “We just need to make sure that borrowers whose loans reside within a securitization structure are not significantly disadvantaged compared to borrowers whose loans reside in a traditional loan portfolio.” She called for servicers to make teaser start rates permanent for owner-occupied borrowers with current mortgages, adding that these hybrid loans were designed as short term programs that relied on appreciation. “Keep it at the starter rate,” she said. “Convert it into a fixed rate. Make it permanent. And get on with it.” Bair said progress is being made in stabilizing the secondary market, though she warned credit quality is likely to get worse before it gets better because of the current environment. She added that it may take a few years for the credit losses to roll through the banking system and noted residential delinquency was 1.26 percent in June — the highest level since early 1994. She expressed a desire for more secondary market funding to be directed at traditional 30-year fixed-rate loans. “The next thing we need to do is to come up with national standards for all subprime lenders,” she said. “The Federal Reserve, to its credit, will propose new mortgage lending standards by the end of the year that … for the first time …will include nonbank lenders.” Citing comments from Charles Prince, chairman and chief executive officer of CitiMortgage parent Citigroup, Bair stated such across-the-board standards will eliminate “regulatory arbitrage” and curtail irresponsible practices. “What I’m talking about are those no-money-down … no-doc … no-credit score … no-nothing loan offers,” she said. “Unbelievably … I still see those kinds of offers.” RMBS fueled the growth of nontraditional and subprime mortgage lending, she added. “Let me be clear …regulators support subprime mortgage lending.,” Bair said. |
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