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This speech makes a number of very sensible suggestions and we must hope that the Obama team can work to bring them about. I have reproduced what I believe are the main points below, but the speech is well worth a full read.
http://www.federalreserve.gov/newsev...e20090211a.htm
"The Current Weakness in Housing Markets
Housing activity remains extraordinarily weak. Sales of new and existing homes have been running at a pace that is 60 percent of that seen at the peak in 2005. Single-family housing starts are now less than one-quarter of their peak level. With the cutbacks in construction, inventories of unsold new homes have declined, but the months' supply--that is, inventories relative to sales--is still very high by historical standards. The inventory of existing homes for sale is also quite elevated--and it would be even higher if not for would-be sellers that have withheld or withdrawn their homes from the market amid poor selling conditions.
A key factor inhibiting recovery is that the adverse conditions in the housing and mortgage markets have been, and continue to be, mutually reinforcing. As I am sure you are painfully aware, delinquencies on mortgages have risen sharply in recent years.
As house prices boomed in the middle part of this decade, mortgage originators relaxed underwriting standards and extended mortgages with low or no down payments to households with weak credit histories or that did not fully document their income. Many of these loans had low initial interest rates that reset to market rates after a couple of years, which resulted in a significant increase in the monthly payment. Had house prices continued to rise, many borrowers would have been able to refinance to avoid higher payments and perhaps to extract accumulated home equity to use for future payments. However, the downturn in house prices meant that many borrowers did not have sufficient equity to refinance. Payment problems began to rise, which, in turn, led lenders to tighten standards and made it even more difficult for borrowers to obtain new loans, which put even more upward pressure on delinquencies. Eventually, investors became unwilling to fund high-risk mortgages at any price.
According to the latest data, 25 percent of subprime loans and 13 percent of near-prime loans are now seriously delinquent--that is, more than 90 days past due or in foreclosure. The serious delinquency rate for prime mortgages, at between 3 percent and 4 percent, is much lower than for nonprime loans, but it has almost doubled over the past year. Foreclosures have also risen sharply. The available data suggest that lenders initiated 2-1/4 million foreclosures last year, more than double the number seen in 2006.2
Addressing the Problems in Housing and Mortgage Markets
Several considerations underscore the need for policymakers to take further actions to address the problems in housing and mortgage markets. To begin, the weakness in the housing sector remains a significant drag on the macroeconomy and is reinforcing the strains in the financial system. Moreover, the wave of foreclosures has the potential to exacerbate the problems going forward.
The potential for an overcorrection of house prices in this cycle seems particularly acute, given the potential for foreclosures to create a glut of properties for sale. And, of course, further large declines in house prices would accentuate the broader problems in the macroeconomy and financial system through the channels that I just discussed.
In addition, foreclosures cause significant distress among the families that lose their homes. Whether the foreclosure is the result of inadequate underwriting by the mortgage lender, irresponsibility on the part of homeowner, or uncontrollable life events such as job loss, the result is the same: Displaced families with depleted resources and impaired credit have difficulty finding a new place to live. They may have to move significant distances, which may affect their ability to retain their jobs and disrupt other aspects of their lives as well as the lives of their family members.
Reducing Preventable Foreclosures
To help distressed households for which foreclosure can be prevented, servicers must implement effective and sustainable modifications. Key private and public steps toward preventing unnecessary foreclosures have already been taken. For example, the industry-led Hope Now Alliance--a coalition of mortgage servicers, lenders, housing counselors, and investors--has produced loss mitigation guidelines for servicers. In addition, Hope Now members have agreed to adopt a streamlined modification program for certain loans that they service for the GSEs. Among government efforts, the FHASecure program provided long-term fixed-rate mortgages to borrowers facing a rise in payments due to an interest rate reset. The more recent FHA "HOPE for Homeowners" (H4H) program, on whose oversight board I sit, allows lenders to refinance a delinquent borrower into an FHA-insured fixed-rate mortgage if the lender writes down the mortgage balance to create some home equity for the borrower and pays an up-front insurance premium. In exchange for being put "above water" on the mortgage, the borrower is required to share any equity created through the refinancing and any subsequent appreciation of the home with the government.
While speed and volume in modifications are important, in my view, it is equally essential that the new obligations be sustainable in the long run. By "sustainable" I mean that the payment should be fixed for the life of the loan, it should be affordable, and it should be based upon verified income. In changing the terms of the mortgage, servicers may start with changing the interest rate or adjusting the maturity to make the payments more affordable, but they also need to consider whether writing down loan principal amounts make sense. Doing the latter may be more effective at reducing the probability of redefault.6 These design principles for modifications are all included in the Homeownership Preservation Policy recently adopted by the Federal Reserve Board.7 The Federal Reserve will apply this policy to the residential mortgage assets held by the special purpose vehicles established by the Federal Reserve to facilitate the acquisition of Bear Stearns by JPMorgan Chase and to assist the American International Group, Inc.
The last credit cycle primarily involved loans secured with commercial property. The properties liquidated by banks and the Resolution Trust Corporation weighed on commercial property values for years. This time we are talking about homes, and we are talking about neighborhoods. Whether mortgage assets are taken off banks' balance sheets, ring fenced, or left alone, the REO problem remains the same. Regardless of which entities actually own the loan assets--be they financial institutions, investors, or government entities--the servicers who represent them are going to have to deal with large real estate inventories. Wholesale dumping of those inventories that leads to sharply lower prices and recovery rates will not serve the interests of the public or the investors. "
http://www.federalreserve.gov/newsev...e20090211a.htm
"The Current Weakness in Housing Markets
Housing activity remains extraordinarily weak. Sales of new and existing homes have been running at a pace that is 60 percent of that seen at the peak in 2005. Single-family housing starts are now less than one-quarter of their peak level. With the cutbacks in construction, inventories of unsold new homes have declined, but the months' supply--that is, inventories relative to sales--is still very high by historical standards. The inventory of existing homes for sale is also quite elevated--and it would be even higher if not for would-be sellers that have withheld or withdrawn their homes from the market amid poor selling conditions.
A key factor inhibiting recovery is that the adverse conditions in the housing and mortgage markets have been, and continue to be, mutually reinforcing. As I am sure you are painfully aware, delinquencies on mortgages have risen sharply in recent years.
As house prices boomed in the middle part of this decade, mortgage originators relaxed underwriting standards and extended mortgages with low or no down payments to households with weak credit histories or that did not fully document their income. Many of these loans had low initial interest rates that reset to market rates after a couple of years, which resulted in a significant increase in the monthly payment. Had house prices continued to rise, many borrowers would have been able to refinance to avoid higher payments and perhaps to extract accumulated home equity to use for future payments. However, the downturn in house prices meant that many borrowers did not have sufficient equity to refinance. Payment problems began to rise, which, in turn, led lenders to tighten standards and made it even more difficult for borrowers to obtain new loans, which put even more upward pressure on delinquencies. Eventually, investors became unwilling to fund high-risk mortgages at any price.
According to the latest data, 25 percent of subprime loans and 13 percent of near-prime loans are now seriously delinquent--that is, more than 90 days past due or in foreclosure. The serious delinquency rate for prime mortgages, at between 3 percent and 4 percent, is much lower than for nonprime loans, but it has almost doubled over the past year. Foreclosures have also risen sharply. The available data suggest that lenders initiated 2-1/4 million foreclosures last year, more than double the number seen in 2006.2
Addressing the Problems in Housing and Mortgage Markets
Several considerations underscore the need for policymakers to take further actions to address the problems in housing and mortgage markets. To begin, the weakness in the housing sector remains a significant drag on the macroeconomy and is reinforcing the strains in the financial system. Moreover, the wave of foreclosures has the potential to exacerbate the problems going forward.
The potential for an overcorrection of house prices in this cycle seems particularly acute, given the potential for foreclosures to create a glut of properties for sale. And, of course, further large declines in house prices would accentuate the broader problems in the macroeconomy and financial system through the channels that I just discussed.
In addition, foreclosures cause significant distress among the families that lose their homes. Whether the foreclosure is the result of inadequate underwriting by the mortgage lender, irresponsibility on the part of homeowner, or uncontrollable life events such as job loss, the result is the same: Displaced families with depleted resources and impaired credit have difficulty finding a new place to live. They may have to move significant distances, which may affect their ability to retain their jobs and disrupt other aspects of their lives as well as the lives of their family members.
Reducing Preventable Foreclosures
To help distressed households for which foreclosure can be prevented, servicers must implement effective and sustainable modifications. Key private and public steps toward preventing unnecessary foreclosures have already been taken. For example, the industry-led Hope Now Alliance--a coalition of mortgage servicers, lenders, housing counselors, and investors--has produced loss mitigation guidelines for servicers. In addition, Hope Now members have agreed to adopt a streamlined modification program for certain loans that they service for the GSEs. Among government efforts, the FHASecure program provided long-term fixed-rate mortgages to borrowers facing a rise in payments due to an interest rate reset. The more recent FHA "HOPE for Homeowners" (H4H) program, on whose oversight board I sit, allows lenders to refinance a delinquent borrower into an FHA-insured fixed-rate mortgage if the lender writes down the mortgage balance to create some home equity for the borrower and pays an up-front insurance premium. In exchange for being put "above water" on the mortgage, the borrower is required to share any equity created through the refinancing and any subsequent appreciation of the home with the government.
While speed and volume in modifications are important, in my view, it is equally essential that the new obligations be sustainable in the long run. By "sustainable" I mean that the payment should be fixed for the life of the loan, it should be affordable, and it should be based upon verified income. In changing the terms of the mortgage, servicers may start with changing the interest rate or adjusting the maturity to make the payments more affordable, but they also need to consider whether writing down loan principal amounts make sense. Doing the latter may be more effective at reducing the probability of redefault.6 These design principles for modifications are all included in the Homeownership Preservation Policy recently adopted by the Federal Reserve Board.7 The Federal Reserve will apply this policy to the residential mortgage assets held by the special purpose vehicles established by the Federal Reserve to facilitate the acquisition of Bear Stearns by JPMorgan Chase and to assist the American International Group, Inc.
The last credit cycle primarily involved loans secured with commercial property. The properties liquidated by banks and the Resolution Trust Corporation weighed on commercial property values for years. This time we are talking about homes, and we are talking about neighborhoods. Whether mortgage assets are taken off banks' balance sheets, ring fenced, or left alone, the REO problem remains the same. Regardless of which entities actually own the loan assets--be they financial institutions, investors, or government entities--the servicers who represent them are going to have to deal with large real estate inventories. Wholesale dumping of those inventories that leads to sharply lower prices and recovery rates will not serve the interests of the public or the investors. "