Fannie Mae Ties 3Q Losses to Alt A Mortgage Market

Over 25% of Fannie Mae’s credit losses in the third quarter came from its book of guaranteed alternative A mortgages, according to the company’s president and chief executive officer, Daniel Mudd.

The giant secondary market agency has guarantees on $324.7 billion in alt A mortgage backed securities, which had a serious mortgage delinquency rate of 1.36% as of Sept. 30.

“Alt A drove about 28% of Fannie Mae’s total credit losses in the most recent period,” Mr. Mudd told a Goldman Sachs investor conference. “this book gets an awful lot of attention”.

Only 40% of its guaranteed alt A loans have credit enhancements, which suggests many are piggy backed with second liens. The weighted average credit score is 719.

Fannie took $1.2 billion in credit related expenses in the third quarter, including a $670 provision for credit losses on delinquent loans it purchased out of Fannie-guaranteed MBS.

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Bear Stearns Hedge Fund Losses Lead to Arbitration Claims, According to Law Firms Representing Investors — BSC

NEW YORK, Dec. 5, 2007 (PRIME NEWSWIRE) — A four-law firm legal team, with nationally recognized securities law experience, has filed investor claims against two subsidiaries of Bear Stearns Companies, Inc. (NYSE:BSC) — Bear Stearns & Co., Inc. and Bear Stearns Securities
Corp. — over the recent collapse of a Bear Stearns hedge fund.

Arbitration claims were filed this week with Financial Industry Regulatory Authority (FINRA) by the law firms of Maddox, Hargett & Caruso, P.C., of New York, New York and Indianapolis, Ind.; Aidikoff, Uhl & Bakhtiari, of Beverly Hills, Calif.; Page Perry, LLC, of Atlanta, Ga.; and David P. Meyer & Associates Co., LPA, of Columbus, Ohio.

The Bear Stearns hedge fund at issue in the FINRA claims is the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund.

Three weeks ago, Massachusetts Secretary of State William Galvin charged Bear Stearns with improper trading in the failed hedge fund as well as the Bear Stearns High-Grade Structured Credit Strategies hedge fund. In late July, both funds filed for bankruptcy protection in the
Southern District of New York, wiping out nearly all investor capital.

According to Steven B. Caruso of Maddox Hargett & Caruso’s office in New York City, “Bear Stearns did not properly disclose related party transactions, the true nature of the risk of the illiquid securities in the investment portfolio and failed to protect the interests of their clients. Our investigation indicates that officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at both of these hedge funds for an extended period of time before they imploded.”

Added Ryan Bakhtiari, of Aidikoff, Uhl & Bakhtiari, “Given Bear Stearns’ dominance in the mortgage backed securities underwriting market, they knew or should have known how much subprime exposure both of these hedge funds faced. We’re finding, in our investigation of these funds, that many investors in these funds simply were unaware of what was being held in their portfolios because it was not adequately disclosed.”

The legal team pursuing the arbitration claims includes the immediate past president and several current and former directors of the Public Investors Arbitration Bar Association (PIABA), the co-chairman of the American Bar Association Securities Arbitration Subcommittee, the current chair and past members of the FINRA National Arbitration and Mediation Committee (NAMC), a former general counsel of a national brokerage company, a former state securities commissioner, and a past member of the NASD Securities Arbitration Policy Task Force.

For more information, please visit www.subprimelosses.com.

More information on this and other class actions can be found on the Class Action Newsline at www.primenewswire.com/ca.

-0-
CONTACT: Maddox, Hargett & Caruso, P.C.
New York, New York; Indianapolis, Indiana
Steven B. Caruso
(800) 505-5515
(212) 837-7908
sbca...@aol.com

Aidikoff, Uhl & Bakhtiari
Beverly Hills, California
Ryan K. Bakhtiari
(800) 382-7969
(310) 274-0666
rbak...@aol.com

Page Perry, LLC
Atlanta, Georgia
J. Boyd Page
(877) 673-0047
(770) 673-0047
jbp...@pageperry.com

David P. Meyer & Associates Co., LPA
Columbus, Ohio
David P. Meyer
(866) 827-6537
dme...@dmlaws.com

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Interview with Janet Tavakoli of Takvoly Structured Finance: Accounting Not a Useful Tool for Estimating Risk Exposure

Transcript:
>> want to show you how a few financial stocks are doing today. citigroup, bank of america, wachovia are up. what about investment banking stocks? they are also up. goldman sachs is up. merrill lynch’ s up. j.p. morgan cases up. in the past two weeks, the kdd bank index is up in the past few weeks. — kbw bank index is up. it is up 4.5%. investors have expressed some optimism that the worst is behind these financials. there are a few individuals who know more about this complex world then janet, with over 18 years of trading, structuring and selling. she has also been the manager of two fortune 500 companies. she joins us from chicago. welcome back. the market says that maybe things are getting better. are they? >> i hope they’ re getting better. as you know, i have been one of the biggest critics of some of the hidden risks popping up. the reason it has been happening is because accounting is insufficient. they are telling you very much about the actual exposure and the actual risk. we saw the market decline last week. that was mainly due to confusion and speculation. it was not due to any hard facts. this week, the market is improving because oil prices are down. we see people taking constructive steps. like hank paulson who says maybe we shouldn’ t freeze the rates on adjustable rate mortgages, to ive homeowners a chance to pay down as mortgages. — he says we should freeze the rates. i do not know if they will be able to accomplish it. in order to do it, they would have to declare a state of mortgage emergency in order to do that. technically he does not have the authority to do with. >> when you hear something like what we’ re hearing, the rescue and freezing a mortgage rates, and transferring people into fixed-rate loans, somebody is going to take it on that, right? >> yes, they are. i think the right people will take the hit if you freeze the mortgage rate — you would be passing on any potential future lack of increase to the investors and invest more banks — and investment banks. this ended up being the largest steam in the history of the capital markets. the mortgage mess. asically, there were lent money by secure kaisers, who were buying the loans — securitize rs, who were buying these loans. it may not have an obvious at first. there came a point when a lot of mortgage lenders started dropping like flies. then it was clear that the high dividends they were paying, and the high fees they were expecting, they basically were not possible on the mortgages they were underwriting. without the borrowing from new investors, who were pouring money into the system, the mortgage lenders would not have been able to stay in business. there came a point when investment banks wanted to put that bad loans back to the mortgage lenders who were not able to honor the puts. there was a break-even point when people should have started pulling the plug on these deals. that began happening in 2006, n it was clear that these mortgage lenders were pretty shaky. >> the thing about that is that there will be someone at the end of it. somebody at the end of it gets left holding the bag. who is that’ s going to be? >> banks, investment banks, and investors overall. they’ re taking the hits on these products. in the old days, investment banks would underwrite the entire deal. people got a little bit greedy. instead of underwriting the deal, they ended up keeping more and more of the risk, either on their own balance sheets in related bank entities, in related contents. they have a lot of residual risk. here’ s the problem. the children went out into the forest and play with matches. the overseers, the managers and regulators were not paying close attention. now we have a lot of people that got burned. e do not want to reward the behavior of people who ended up getting hurt. >> that is the moral hazard. how much risk is still left on the bank’ s books? wit e talk about things like synthetic cdos — how much more will we see? >> is not clear. in the third quarter, when people were directly estimate exposure they had, they waffled. the problem with accounting is that there are some of the options in the way that you can legitimately account for these things. it is basically fog. you can do transactions like total returns wops with no recourse — you can do total return swaps, nd show a reduction in exposure. the reality is that peace might get put back to you. you do not have recourse for the hedge funds. if they see mark to market they do not like, the only recourse to have is for the as a debate in the first place. — the asset you gave in the first place. the reality is that you still have a significant amount of exposure that may come back to you. it will not show up in accounting statements. >> i wanted done a slightly different issue. without naming names, will any of the big publicly traded bond insurance companies fail? >> yes, i believe they will. unless they get somebody was not paying attention to give them huge capital injections, which is probably not in their interest — >> we have seen that. we saw it with the FDIC, it cut the investment from the French company. >> yes, they did. i was not thinking f them when i made that statement. >> you’ re talking about the bigger ones. >> i am. it is in our interest to fix the situation. here’ s one instance. it will allow some of the larger insurers to raise capital to maintain AAA ratings. there is at least one of the largest AAA answer is that i think basically does not have a clue. they have been running around market like a chicken with their heads cut off. they never had a proper model in the first place. now, after the fact, they’ asking any questions. it suggests that they had no idea what they were underwriting in the first place. some that they were injuring are now trading at 70 cents on the dollar. they’ re counting on those two trade around par — to trade around par. we have had bids on some of those products just 10 cents on the dollar. t is pretty bad. >> always a pleasure to speak with the. thank you very much. have a great weekend. we’ ll continue our discussion on this and talk about that plan from the u.s. government that may keep some subprime borrowers of love. stick around. — subprime borrowers of afloat.

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Forseeing Subprime: State-Run Investment Pools Hit by Mortgage Contagion. Analysis and Discussion with Mike Verano of PFM Asset Managment: Disposed of $3 Billion of Commercial Paper Before Subprime Implosion.

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Subprime in the Schoolhouse. Interview with Hal Wilson, CFO of Jefferson County School Board; Mortgage Contagion Hits State Run Investment Pools, Nobody Has Told Taxpayers; Wilson Placed $2.7 Million Taxpayer Funds in Florida Local Government Investment Pools.

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Barclays Bank reports a $2.7 billion write down.

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Citigroup – Citi Sold $4 Billion of 10 Year Notes, Highest Relative Yield in Bank’s History; Investors Cash Out of GE Bond Fund After Subprime Mortgage Implosion.

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HSBC Takes $3.4B Hit

HSBC Holdings is taking a larger than expected $3.4 billion third quarter loan impairment charge, $700 million of which is related to unanticipated U.S. real estate secured declines, but the company says the negative developments would be “more than offset” by revenue growth in other areas. U.S. subsidiary HSBC Finance, said in a Nov. 14 report that it has seen a “marked increase in delinquencies” in mortgages originated by its retail branches.

The non-mortgage portion of HSBC Holdings’ overall loan impairment charge was “largely due to branch unsecured loan and cards portfolios,” according to the company.

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Merrill Lynch Officially Names John Thain as New Chairman/CEO. Thain Coming From Outside, Must Build Broker Consensus; O’Neal Sacked for Not Understanding Firm’s Risk; Reaction with Benjamin Wallace of Grimes.

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More Credit Writedowns for Financials Arena. Financials Group and Credit Risk – Analysis and Discussion with Daniel Castro of CSG Group

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E*Trade Financial which on Friday admitted that it has $450 million in “exposure” on its asset backed securities portfolio saw its stock price crumble 55% Monday morning after an analyst at Citigroup said there’s a 15% chance the depository could go bankrupt.

As of Friday, E*Trade’s shares were trading down $4.71, at $3.89. Its 52-week high is $26.

In a recent public filing, the New York-based company said it has set aside $240 million to cover “deterioration” in its home equity portfolio. Its ABS portfolio totals $3 billion.

Even though E*Trade could take more hits on the portfolio in the quarters ahead, the company said in a statement that it “expects to remain well capitalized based on regulatory standards.” In September, E*Trade closed its residential wholesale division.

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Stocks to Watch: Wachovia. Wachovia to Raise Loan Loss Allocation to $500 Million to $600 Million in 4Q; World’s Biggest Banks Have Written Down $40 Billion of Assets.

Wachovia became the latest banking giant to warn that it sees bigger losses as a result of the continued deterioration in the mortgage market.

Wachovia stated in a filing to the Securities and Exchange Commission that it’s anticipating loan losses between $500 million and $600 million in the fourth quarter, citing anticipated loan growth and the impact of continuing credit deterioration in its loan portfolio.

“The expected credit deterioration will likely be focused in certain geographic areas that have recently experienced dramatic declines in housing values,” according to the filing.

Wachovia shares were off nearly 4% in premarket trading Friday morning. Due to the October market deterioration, its asset-backed collateralized debt obligations, or CDOs, experienced further declines in value in the month of October 2007 by an amount it currently estimates to be approximately $1.1 billion pre-tax.

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Citi Tackles Multi-Billion Dollar MBS Hit

Reeling from a multi billion dollar decline in U.S. subprime mortgage related exposures that forced its chief executive to step down, Citigroup has made plans to start a new unit to focus on the problem and repositioned its leadership.

The new unit will be solely focused on Citi’s approximately $55 billion in subprime mortgage backed securities and related exposures and be run separately from the other mortgage related capital markets and banking units, according to a statement issued by Sir Win Bischoff, chairman of Citi Europe and Citi’s new acting CEO.

Mr. Bischoff and executive committee chairman Robert Rubin, Citi’s new chairman of the board, are replacing departing chairman and chief executive officer Charles Prince. Mr. Prince resigned Sunday, citing the large scope of MBS related losses that are expected to cut Citi’s revenue roughly $8 billion-$11 billion and reduce net income approximately $5 billion-$7 billion on an after tax basis.

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Governor Randall S. Kroszner At the Consumer Bankers Association 2007 Fair Lending Conference, Washington, D.C.
November 5, 2007

The Challenges Facing Subprime Mortgage Borrowers

I am delighted to have been invited to speak to you about the important and pressing problems in the subprime mortgage industry. My remarks today will address those problems, with particular focus on how they are affecting borrowers. The sharp increases in subprime mortgage delinquencies and foreclosures this year have created personal, economic, and social distress for many homeowners and communities. I will discuss first the forces that caused that distress and then turn to the prospects for troubled borrowers. Finally, I will address the critical question of what can be done to keep the affected families in their homes and alleviate the other difficulties they and their communities will face.

Background on the Subprime Mortgage Market

Subprime mortgages are associated with high credit risk because the borrower lacks a strong or lengthy credit history or has other characteristics that are associated with high probabilities of default. The expansion of subprime lending since the mid-1990s has been quite substantial, with the number of subprime mortgage loans now totaling 7-3/4 million, or 14 percent of the overall mortgage market. Technological advances and financial innovations that reduced the costs of lending to higher-risk households contributed importantly to the expansion of the subprime market. In particular, improvements in information processing allowed lenders to standardize their underwriting techniques and to better manage risks by adjusting the terms of loans to reflect the expected probability of default. Ongoing growth in the secondary market for mortgage loans also contributed to the growth of subprime lending by lowering transactions costs for investors and by spreading risk more broadly, especially through the process of securitization. That process allows intermediaries to pool large numbers of mortgages and sell the resulting cash flows to investors, often as components of structured securities.

Despite the positive aspects of the longer-term expansion of access to mortgage credit, it came with features that increased risks to households, the financial system, and the broader economy. Not surprisingly, subprime loans are more likely to default; for the borrower, this can mean the loss of a home and reduced access to future credit. Such outcomes can be even more likely if loan products have complex repayment terms that are not fully understood, or if the borrowers have unrealistic expectations of their future income or house prices. On the lender side, the originate-to-distribute model can leave lenders with weaker incentives to maintain strong underwriting standards. In particular, originators who securitize may inadequately screen potential borrowers unless investors provide oversight and insist on practices that align originator incentives with the underlying risk. The originate-to-distribute system is thus not only a potential source of risk to the financial system but also raises concerns regarding consumer protection.

Sources of the Recent Problem

With this background in mind, let me turn now to the recent problems in the subprime mortgage market. As is widely known, delinquency rates on subprime mortgages have increased sharply over the past year. The distress has been concentrated among the two-thirds of subprime borrowers who have variable-rate mortgages; more than 17 percent of those mortgages are in serious delinquency, about a tripling of the share since mid-2005.1 Near-prime loans are showing a rise in serious delinquencies as well, although it is much smaller than for subprime. Serious delinquencies encompass foreclosures, and those are also up sharply–lenders initiated foreclosure proceedings for an average of 320,000 mortgage loans per quarter in the first half of this year, up from 240,000 loans per quarter over the preceding two years.2 This increase in foreclosures has been largely associated with subprime mortgages.

Many factors contributed to the sharp increases in subprime delinquencies and foreclosures, both separately and in combination. First, the unemployment rate in an area can significantly undermine the ability of people in that area to repay their mortgages. States in the Midwest hit hardest by job cuts in the auto industry, such as Michigan and Ohio, are among the states with the highest rates of new foreclosures.

A second key factor has been the slowing of house prices: One national index, which rose at close to a double-digit pace from 2000 through 2005, has slowed to show only small gains for the past several quarters, and some areas are seeing outright price declines. By damping the growth of home equity, sluggish house-price appreciation makes it harder for homeowners struggling with payments to obtain better terms through refinancing or to withdraw accumulated equity to finance their obligations. In addition, borrowers with mortgages “under water”–that is, the house is worth less than the mortgage balance–may be tempted to walk away from their loans. That outcome may be particularly likely for those who purchased properties purely for investment purposes; indeed, the Mortgage Bankers Association has found that a disproportionate share of serious delinquencies are associated with non-owner-occupied properties in some of the states that have seen the largest increases in delinquencies.

A third factor that contributed to the sharp rise in payment problems among subprime mortgages appears to have been a loosening of underwriting standards for such mortgages in late 2005 and 2006. Investors, having seen several years in which mortgages showed extremely strong performance, apparently did not demand sufficient information from sellers of mortgages and related products during this later period.3 As I already noted, inadequate monitoring can leave originators with weak incentives to maintain strong underwriting standards under the originate-to-distribute model.

Many subprime originators, for example, engaged in so-called risk-layering–in which they made loans to borrowers not only with weak or short credit histories but also with other risk factors. More than one-third of subprime mortgages originated in the second half of 2005 and 2006, for instance, carried a second lien, up from an average of only about 10 percent over the preceding three years.4 The greater prevalence of such “piggyback loans” contributed to higher initial cumulative loan-to-value ratios. In addition, the share of subprime mortgages with full documentation fell to about 60 percent in late 2005 and 2006 from about 70 percent over the preceding three years. Another underwriting practice in the subprime mortgage market that can add to risk is the failure to escrow taxes and insurance, which can result in payment shock to the borrower if the borrower did not fully anticipate the costs of taxes and insurances on the property.

These and other shifts in underwriting standards, coupled with slowing house price appreciation or even depreciation, are the most likely explanation for the pronounced rise we have seen in defaults occurring within a few months of origination–before most borrowers would have experienced significant changes in their payment obligations or in their financial situations.

Finally, another factor that could affect subprime delinquencies is the substantial payment increase often experienced at the first interest rate reset. For the most common type of subprime variable-rate loan, the so-called “2/28″ loan, this reset occurs after two years, before which payments are typically based on a fixed below-market rate. In early 2007, the typical subprime mortgage experiencing a first reset had its rate increase from 7 percent to 9-1/2 percent, producing an increase of 25 percent to 30 percent in the monthly payment. This increase translates into an additional monthly debt obligation of $350 per month for the average subprime variable-rate mortgage.

In the past, many subprime borrowers have avoided such payment increases by refinancing; for example, about two-thirds of subprime 2/28s originated in 2003 and 2004 were terminated through a refinancing or home sale by the time of the first scheduled reset. Prepayments on subprime variable-rate loans originated in late 2005 and 2006, however, have occurred at a slower pace, likely in part because the combination of sluggish house price appreciation and high initial cumulative loan-to-value ratios has left some borrowers with too little equity to qualify for new loans.

Prospects for Subprime Borrowers

Looking ahead, two considerations suggest that conditions for subprime borrowers have the potential to get worse before they get better. First, all indications are that housing activity is continuing to weaken. Incoming data in recent weeks show that sales and new residential construction have declined further. In such an environment, house prices in the aggregate are likely to remain sluggish for some time. Second, the bulk of resets is yet to come: On average, in each quarter from now until the end of next year, monthly payments for more than 400,000 subprime mortgages are scheduled to undergo their first interest rate reset. That number is up from roughly 200,000 per quarter during the first half of 2007. Delinquencies and foreclosures are therefore likely to continue to rise for a number of quarters.

Many of the borrowers facing resets will still have solid payment records and enough home equity to refinance. But others will face challenges from not only low levels of home equity but also from considerably tighter credit conditions. The Federal Reserve’s recent surveys of senior loan officers at banks have showed a significant tightening of standards on subprime loans. In addition, many lenders that dealt only in subprime loans have gone out of business, and other large lenders have cancelled some subprime lending programs. The issuance of new securitized pools of subprime loans has dwindled in the past couple of months, and judging from the few deals that are being placed, spreads are extremely wide. The supply of funds for subprime loans is likely to remain low for some time as investors gather information and reevaluate the risks.

Helping Borrowers and Mitigating Losses

These circumstances call for a high degree of collaboration and innovation to identify solutions that can keep borrowers confronting foreclosure in their homes. The loss of a home to foreclosure is distressing to families and communities and can cause significant financial and social difficulties. We should also pay particular attention to communities that may face more challenges than others, such as African-American families, who, according to data collected under the Home Mortgage Disclosure Act, account for a disproportionate share of higher-price (and thus more likely to be subprime) loans.5

It is imperative that we work together as a financial services community to look for ways to help borrowers address their mortgage challenges, particularly those who may have fewer alternatives, such as lower-income families. Toward this end, the Federal Reserve’s Community Affairs Offices have been convening lenders, community leaders, and government officials around the country over the past two years to help identify strategies to provide resources to assist borrowers confronting foreclosure. Most recently, the Federal Reserve Bank of Chicago sponsored symposiums in Chicago, Indianapolis, and Detroit to discuss factors contributing to increasing foreclosure rates and to highlight innovative intervention programs. Another meeting will be held in Waukesha, Wisconsin, in December.

In addition, the Federal Reserve and other banking supervisory agencies have issued statements in recent months urging both lenders and servicers to look for ways to work with borrowers having difficulty in meeting their mortgage loan obligations.6 These statements note that prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term interests of both the financial institution and the borrower. The September statement identifies prudent strategies for loss mitigation for servicers, including loan modifications, deferral of payments, extension of loan maturities, capitalization of delinquent amounts, and conversion of adjustable-rate mortgages into fixed-rate mortgages or fully indexed, fully amortizing adjustable-rate mortgages.

Lenders and servicers generally would want to work with borrowers to avoid foreclosure, which, according to industry estimates, can lead to a loss of as much as 40 percent to 50 percent of the unpaid mortgage balance. Loss mitigation techniques that preserve homeownership are typically less costly than foreclosure, particularly when applied before default. Borrowers who have been current in their payments but could default after reset may be able to work with their lender or servicer to adjust their payments or otherwise change their loans to make them more manageable.

Comprehensive data about how many loan workouts and modifications have actually occurred are not available, but some reports suggest that the numbers may be limited thus far. One possible contributing factor is that many borrowers are not seeking help or advice from their lenders because they believe that lenders cannot or are not willing to help them. Industry and consumer advocates who testified at our hearings on the home equity lending market last year told us that the greatest barrier to working with troubled borrowers is in simply making contact with them. These witnesses told us that lenders can reach troubled borrowers through trusted community advocates and that partnerships between community groups and lenders can reduce the number of homes lost to foreclosure. In addition, the analysis necessary to identify the best sustainable workout solutions that take into account the specific circumstances of individual borrowers can require a great deal of time and resources. Trusted counselors can also help here.

One national nonprofit organization, NeighborWorks America (NeighborWorks), is making important strides in helping facilitate loan workouts and modifications.7 As a member of the board of NeighborWorks, I have the privilege of seeing firsthand how this organization has mobilized its national network of affiliates and partners to respond to the threat of foreclosures in various communities throughout the country. Through its Center for Foreclosure Solutions, NeighborWorks has partnered with mortgage and insurance companies to help train and develop foreclosure counselors, conduct outreach to borrowers in trouble, and promote research to help inform strategic solutions for families and communities. A primary tool of the center is a hotline–1-888-995-HOPE (4673)–that borrowers in financial distress can contact any time–twenty-four hours a day, seven days a week–to seek assistance from a mortgage counselor.

So far this year, the hotline has received more than 100,000 calls, with more than half of those calls received in the third quarter alone. As more subprime ARMs reset over the course of coming quarters, services aimed at preventing foreclosures will continue to be strained, and all stakeholders will need to be innovative in identifying strategies to help preserve sustainable homeownership.

A recent collaborative initiative that may help to alleviate some of the resource challenge is the Hope Now alliance. This collaboration among counselors, servicers, investors, and other mortgage market participants aims to increase outreach efforts to contact at-risk borrowers through a national direct-mail campaign, encouraging them to either call their lender or a credit counselor. The alliance will work to expand the capacity of an existing national network to counsel, refer, and connect borrowers to servicers. Participating servicers have agreed to work toward cross-industry technology solutions to more effectively link servicers and counselors to better serve the homeowner.

A promising effort started by the states is the new Foreclosure Prevention Working Group. Consisting of eleven state attorneys general plus the Conference of State Bank Supervisors and the state bank regulatory agencies, the Working Group has held conversations with mortgage servicers and will continue to pursue opportunities for preventing foreclosures and encouraging increased loan modifications.

All these efforts are important, but there is more to be done to deal with the significant challenges ahead. First, at this point, we are hearing that many modifications are done on a case-by-case basis. That is understandable given the complexity of the products and the unique circumstances of each borrower. Given the substantial number of resets from now through the end of 2008, however, I believe it would behoove the industry to join together and explore collaborative, creative efforts to develop prudent loan modification programs and other assistance to help large groups of borrowers systematically.

Second, I believe that modernization of programs administered by the Federal Housing Administration, which has considerable experience helping low- and moderate-income households obtain home financing, could also help avoid foreclosures. FHA modernization could give the agency the flexibility to work with private-sector lenders to expedite the refinancing of creditworthy subprime borrowers and to design products that improve affordability through such features as variable maturities or shared appreciation.

Third, we must pursue initiatives to prevent these problems from recurring, and the Federal Reserve is making strides in this direction. We are engaged in a rigorous review of the mortgage-related rules under Regulation Z, which implements the Truth in Lending Act (TILA), and we intend to issue proposals before the end of the year to ban several deceptive advertising practices and require important consumer disclosures earlier in the mortgage process to better enable consumers to compare and shop among loan products.

We also plan to issue proposed regulations under the Home Ownership and Equity Protection Act to address unfair or deceptive mortgage lending practices that would apply to subprime loans offered by all mortgage lenders. We will address some practices associated with subprime lending, such as prepayment penalties, failure to offer escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the failure to give adequate consideration to a borrower’s ability to repay. For example, as I mentioned earlier, failure to escrow for taxes and insurance can lead to a situation akin to payment shock for borrowers. It is a common practice for these payments to be escrowed in the prime markets, and I see no reason that escrows should not be standard practice in the subprime markets too.

All told, the spirit of innovation is essential to addressing the issue that is before us now as lenders, investors, regulators, community leaders, and borrowers. As stakeholders and beneficiaries of the mortgage market, we all share an interest in working together to implement solutions that maintain a robust, transparent credit environment that promotes access to responsible mortgage lending.

Footnotes
1. Seriously delinquent mortgages are more than ninety days in arrears or in foreclosure. Estimates are based on data from First American LoanPerformance. Return to text

2. Foreclosure estimates are based on data from the Mortgage Bankers Association, adjusted to reflect the limited coverage of the association’s sample. Return to text

3. For a more comprehensive treatment of the causes and results of the failure of investors to exercise due diligence, refer to my recent speech to the Institute of International Bankers, in which I noted that the episode underscores the importance of the Russian proverb: “Trust but verify” (Randall S. Kroszner, 2007, “Recent Events in Financial Markets,” speech delivered at the Institute of International Bankers Annual Breakfast Dialogue, October 22). Return to text

4. The estimates in this paragraph are based on analysis of loan-level data from LoanPerformance by Federal Reserve Board staff. Return to text

5. Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner (2007), “The 2006 HMDA Data,” Federal Reserve Bulletin, vol. 93. Return to text

6. Board of Governors of the Federal Reserve System (2007), “Working with Mortgage Borrowers,” Division of Banking Supervision and Regulation, Supervision and Regulation Letter SR 07-6 (April 17); and “Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages,” Supervision and Regulation Letter SR 07-16 (September 5). Return to text

7. NeighborWorks America is a registered service mark. Return to text

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• Global Market Contamination And Tumble On Credit/Subprime Mortgage Woes
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Loan quality deteriorates
Change in bad loans/chargeoffs.*

1. Washington Mutual 284% (This appears to be the reason they are making so many foolish mistakes.)
2. Zions Bancorp 486%
3. Keycorp 234%
4. Fifth Third 140%

*Source: Punk Ziegel

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