President Bush Plan On Subprime Mortgages; Bank Regulators’ Statement

President Bush Offers Plan On Subprime Mortgages; Bank Regulators’ Joint Statement

September 6, 2007

FEI Summary

On Aug. 31, 2007, President George W. Bush offered a plan to address the subprime mortgage crisis which some allege has spilled over into the broader financial markets. See the President’s remarks and the White House Fact Sheet.

Some key points in the President’s plan include:

• a call for Congress to move forward on previously proposed legislation to modernize and expand the FHA mortgage insurance program, including raising the ceiling on size of mortgages that can be insured, and a new initiative called the “FHA Secure” program, and a call for HUD Secretary Alphonso Jackson to “pursue important administrative changes to give FHA the flexibility to help more families stay in their homes during this time of transition in the mortgage market.”  
• a call for Congress to provide ‘temporary relief’ by changing the Federal Tax Code “so it does not punish families who are forced to sell their homes for less than their mortgage is worth.” The change which has already been proposed by a number of Senators and Congressmen would be to not count as taxable income any reductions in the principle amount of mortgages offered by the lender.
• a new “Foreclosure Avoidance Initiative” to be led by HUD Secretary Alphonso Jackson and Treasury Secretary Henry M. Paulson, whose agencies “will reach out to a wide variety of groups that offer foreclosure counseling and refinancing for American homeowners.
• a request that Treasury Secretary Henry M. Paulson, in his role as leader of the President’s Working Group on Financial Markets (which also includes Fed Chairman Ben Bernanke, SEC Chairman Christopher Cox, and CFTC Acting Chairman Walter Lukken) in “examining some of the broader market issues underlying the recent mortgage problems,” including:

•  “The role of credit rating agencies and how their ratings are used in lending procedures,” and 
•  “How securitization, the repackaging and selling of assets, has changed the mortgage industry and related business practices.”

• a reminder that federal agencies are aggressive in their pursuit of fraud and predatory lending.
• creation of a Presidential Council on Financial Literacy, “composed of leading private sector individuals…[to] work closely with the Treasury Department, HUD, and the Department of Education to make sure that we are raising awareness of these complicated issues”

Bank Regulators Joint Statement Encourages Loan Modifications; Discusses Accounting

Separately, on September 4, the federal bank regulatory agencies together with the Conference of State Bank Supervisors, announced the issuance of a "Joint Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages earlier this week.

The purpose of the Joint Statement, say the regulators in their press release, is to “encourag[e] federally regulated financial institutions and state-supervised entities that service securitized residential mortgages to review to determine the full extent of their authority under pooling and servicing agreements to identify borrowers at risk of default and pursue appropriate loss mitigation strategies designed to preserve homeownership.”

“Prudent loss mitigation strategies,” the bank regulators stated, “may include loan modifications; deferral of payments; extension of loan maturities; conversion of adjustable-rate mortgages into fixed-rate or fully indexed, fully amortizing adjustable-rate mortgages; capitalization of delinquent amounts; or any combination of these. As one example, servicers have been converting hybrid adjustable-rate mortgages into fixed-rate loans. Where appropriate, servicers are encouraged to apply loss mitigation techniques that result in mortgage obligations that the borrower can meet in a sustained manner over the long term.”

“Servicers of securitized mortgages should review the governing documents for the securitization trusts to determine the full extent of their authority to restructure loans that are delinquent or in default or are in imminent risk of default,” the bank regulators add. “The governing documents may allow servicers to proactively contact borrowers at risk of default, assess whether default is reasonably foreseeable, and, if so, apply loss mitigation strategies designed to achieve sustainable mortgage obligations.

Accounting Implications

Accounting implications are also discussed in the federal banking regulators' Joint Statement, which references SEC guidance issued earlier this year in the form of a letter dated July 24 from SEC Chairman Christopher Cox to House Financial Services Committee Chairman Barney Frank. Frank had asked Cox if FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, precluded modifications of terms of loans for which default was reasonably foreseeable.

The Joint Statement says: “The Securities and Exchange Commission (SEC) has provided clarification that entering into loan restructurings or modifications when default is reasonably foreseeable does not preclude an institution from continuing to treat serviced mortgages as off-balance sheet exposures.” However, Footnote 2 in the Joint Statement also references back to the “attachment” to Cox’ letter; the ‘attachment’ is a detailed memorandum from Chief Accountant Conrad Hewitt to Cox, which discusses specifics relating to Qualified Special Purpose Entities (QSPEs) and other matters.

Further details can be found in the Joint Statement.

Other summaries from:

Center for Audit Quality (CAQ)

Deloitte