Among the mortgage market risks Federal Deposit Insurance Corp. (FDIC) chair Sheila Bair has her eye on are recent foreclosure concerns, interest rates, mortgage underwriting and government reallocation away from housing—the last being something she sees advantages to but also acknowledges some potential problems with.
Bair has some concerns about recent foreclosure process problems and reviews due to some loss-sharing arrangements the FDIC is in, even though the agency is not the primary regulator in the matter.
She told the Securities Industry and Financial Markets Association (SIFMA) meeting in New York that the matter is a “serious problem” that may go beyond the initial affidavit-related concerns.
Bair, who said she plans to step down from her post when her term ends, said while not all information is in from the file-level reviews major servicers are doing yet, it currently looks like there could be title transfer concerns.
In addition, she said there could be problems with mortgage modifications being consistent with the rules in cases where servicers that participate in the Home Affordable Modification Program (HAMP) are involved.
While the FDIC is not the primary regulator in the matter, Bair said she is suggesting to those that are that the issue be handled in a matter that does not slow the foreclosure process down too much.
“The market does at some point have to clear,” she said.
Bair suggested this could be addressed by a Safe Harbor for servicers that can meet certain standards showing they made a “meaningful effort” to restructure mortgages in question.
State attorneys general, including Iowa AG Tom Miller, may be thinking along these lines, she said.
When asked about this, a spokesman for the Iowa AG told ASR sister publication National Mortgage News: “Members of this multistate effort are conducting discussions among ourselves and with lending institutions and servicers, and we are eager to get to the bottom of this as quickly and as thoroughly as possible and discuss potential remedies.”
The spokesman, Geoff Greenwood, stressed that Miller, while a leader of the effort, is “one component” of it and “doesn’t purport to speak on behalf of everyone.”
FDIC loss-sharing agreements when it comes to purchases of failed banks are less common today but roughly a year and a half ago there were a lot of them, said Mike Brauneis, director of regulatory risk and compliance at global business consulting and internal audit firm Protiviti, Chicago.
Assets from those older deals with loss-sharing agreements are still on the books and being serviced, he said. In those deals, the purchaser agrees to absorb initial losses up to a certain point and thereafter the FDIC participates in that loss.
He said that while these could be affected somewhat by recent foreclosure concerns, the FDIC’s exposure and stake in those concern is not as large as say, the GSEs.
When it comes to the GSEs, Bair said reform can and should be a top priority in the next congress and indicated they should either be out of the market or there should be an explicit charge for them.
Bair said she sees advantages in reallocating government resources into other areas because there has been “too much” given to housing, noting that she thinks such reallocations should be made into other sectors like manufacturing and IT. But she also noted that such reallocations could be painful and disruptive.
Another concern Bair said she is watching is the risk when interest rates rise.
“Banks may have an interest rate risk management problem,” she said, noting that banks should stress their portfolios to make sure they can absorb such a rate shock.
If such a change in the interest rate cycle were to occur, Bair said she is concerned the mortgage industry could return to its “bad habit” of loosening underwriting.
Without effective rules in place, Bair said all the cash in the market looking for a return could lead to overly relaxed underwriting standards.
While she called Dodd-Frank on a net basis, “a good bill,” she also noted that it did require some compromises.
Bair reiterated her support for risk retention, something those who want the FDIC’s securitization safe harbor will need to meet requirements for. These are particularly strict in the period ahead of Dodd-Frank’s effective date.
She acknowledged some industry dissatisfaction with this measure. But she also noted that while she is supportive of securitization as a tool for diversification of funding, a way to make some relatively illiquid assets more liquid, and a means of managing interest rate or credit risk, she believes it is important that it come back “in a sustainable way.”
She continues to largely attribute past problems to the much-cited lack of “skin in the game” and misalignment of incentives.
Bair said that she thinks most of these problems occurred in the nonbank “shadow” sectors. But she added that she had to acknowledge they occurred to an extent in the bank sector, too.
She reiterated that she also continues to believe that these problems can be largely prevented through measures such as risk retention and better aligning compensation.
Bair also noted the FDIC has been working closely with the Securities and Exchange Commission (SEC) on loan-level disclosure requirements, so that investors are not just relying on rating agencies.
On the securities level as well as the origination level, compensation and alignment of incentive concerns are something the regulators are continuing to looking closely at, SEC chair Mary Schapiro told attendees at the SIFMA meeting, citing the Goldman Sachs settlement as an example.
The combination of regulatory pressure, associated costs and the lack of certainty about those costs until Dodd-Frank is fully spelled out—in addition to the cyclical concerns noted by Bair—all probably mean another wave of cost-effective consolidation and increased reliance on private label and outsourced services in the mortgage industry, Brauneis said.
He said some institutions “doing significant volume” have been questions whether it is worth it to stay in the business.
While the use of outsourcing or multiple parties to address compliance and efficiency issues has often been said to be effective, in many cases it also has produced concerns, particularly from consumers.
Borrower Rhonda Rougeau, who said she has been trying for more than a year to get a permanent HAMP modification from her bank, told this publication last week that the use of multiple contacts and third parties working from overseas and/or for unidentified companies has been among her biggest frustrations with the process.
She said these parties often lack authority and in many cases could not be consistently contacted or provide understandable answers about the modification process. What appear to be shifts in her eligibility also have been a concern, she said.
With the compensation, licensing and cyclical changes hitting the origination side of the market in particular, he said he sees more compression in that area ahead. But he also stressed that he believes brokers, nonbanks and others in that market will not be wiped about, but rather may have to reinvent themselves to survive in the market, Brauneis said.