PLUS ÇA CHANGE: MORTGAGE LENDING CRISES - 1980s AND 2007
A side-by-side comparison of the unfolding of the S&L meltdown and that of the subprime crisis is instructive. For further comparisons with 1929 and 2000-2003, the reader is referred to a September analysis by the BBC - Lessons from Financial Crises of the Past.
THE S&L CRISIS, 1980S
The following sketch is abstracted from the FDIC History of the crisis and annotated [in square brackets] by John Tepper Marlin. [1967-1979. MARKETS CREATE CHALLENGES FOR MORTGAGE LENDERS] Inflation increased during the 1970s and market interest rates rose along with them. Deposit-rate ceilings prevented S&Ls from paying competitive interest rates on deposits. Funds therefore flowed from S&L savings accounts to money market funds. [This disintermediation occurred in the 1970s because oil was made scarce by the war in Iran and by OPEC controls on suppy. Inflation of commodity prices meant that in line with the Fisher equation buyers of bonds required compensation not only for giving up use of their money but also for the loss of value from inflation.] In fairness to the S&Ls, they had difficulty competing with money market funds because S&Ls were prohibited by regulatory bodies from entering into any business other than accepting deposits and granting home mortgage loans. 1967. The State of Texas allows S&Ls more powers, such as making property-development loans up to 50 percent of the S&Ls' net worth. 1978. The Financial Institutions Regulatory and Interest Rate Control Act of 1978 allows S&Ls to invest up 5 percent of assets in each of land development, construction, and education loans. 1979. With doubling of oil prices, inflation moves into double digits for second time in five years.
[1980-1982. GOVERNMENT AGENCIES ACCOMMODATE LENDERS] Statutory and regulatory changes give the S&L industry new powers in hopes of their entering new areas of business and subsequently returning to profitability. March 1980. Congress passes the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980. [The full law, Pub. L. No. 96-221, Stat. 132 (1980) is here.] This Carter Administration initiative eliminated many distinctions among depository institutions and removed the deposit interest-rate ceiling. Federal S&Ls allowed to make more ADC (acquisition, development, construction) loans. Deposit insurance limit raised, without debate, to $100,000 [the FDIC limit for commercial banks] from $40,000. November 1980. Federal Home Loan FHLBB [FHLBB] reduces net worth requirement for insured S&Ls from 5 to 4 percent of total deposits and removes limits on the amounts of brokered deposits an S&L can hold. August 1981. Tax Reform Act of 1981 provides individuals with powerful incentives to invest in real estate and contributes to over-building.
September 1981. FHLBB permits troubled S&Ls to issue "income capital certificates" that are purchased by the FSLIC and included as capital. Hides an institution’s insolvency.
[1982-1985. ACCOMMODATION FAILS - S&Ls AND DEPOSIT INSURANCE FUNDS FACE INSOLVENCY.] The FHLBB staff was reduced after deregulation. In 1983, S&L examiners are paid $14,000 a year to start and remain on staff an average of two years. Industry assets grew 56 percent between 1982 and 1985. Between 1982 and 1986; 40 Texas S&Ls triple in size, many growing 100 percent/year. California S&Ls follow a similar pattern. January 1982. FHLBB reduces net worth requirement for insured S&Ls from 4 to 3 percent of total deposits. S&Ls are allowed to meet the low net worth standard not in terms of GAAP, but of more liberal regulatory accounting principles (RAP). April 1982. FHLLB ends requirement that S&Ls have at least 400 stockholders of which at least 125 had to be from "local community", with no individual owning more than 10 percent of stock and no "controlling group" more than 25 percent. A single owner now permitted. Purchases of S&Ls could now be made using land and other real estate as collateral. December 1982. Garn-St Germain Depository Institutions Act of 1982 enacted. This Reagan Administration initiative is designed to complete the process of giving expanded powers to federally chartered S&Ls and enables them to diversify their activities with the view of increasing profits. Major provisions include: elimination of deposit interest rate ceilings; elimination of the previous statutory limit on loan to value ratio; and expansion of the asset powers of federal S&Ls by permitting up to 40 percent of assets in commercial mortgages, up to 30 percent of assets in consumer loans, up to 10 percent of assets in commercial loans, and up to 10 percent of assets in commercial leases. December 1982. As many state chartered S&Ls defect the federal system, the Nolan Bill in California allows S&Ls chartered in the state to invest 100 percent of deposits in any kind of venture. Texas and Florida follow suit. 1983. Lower market interest rates [following a brief recession induced by drastic anti-inflationary measures by the Fed under Paul Volcker] return many S&Ls to health. However, 35 percent of institutions sustain losses and 9 percent of all S&Ls, with 10 percent of industry assets, are insolvent using GAAP standards. March 1983. Edwin Gray becomes Chairman of the FHLBB. Beginning in 1984 and continuing throughout his tenure, regulatory and supervisory measures passed by the FHLBB begin the reversing of deregulation. November 1983. FHLBB raises net worth requirement for newly chartered S&Ls to 7 percent. March, 1984. Failure of Empire Savings of Mesquite, TX. "Land flips" and other criminal activities are a pattern at Empire. This failure would eventually cost the taxpayers approximately $300 million. April 1984. FHLBB moves jointly with the FDIC to attempt to eliminate deposit insurance for brokered deposits. Federal court rejects this attempt in mid-1984 as overstepping statutory limits. July 1984. FHLBB requires S&L management to adopt policies and procedures for managing interest rate risk. January 1985. FHLBB limits the amount of brokered deposits to 5 percent of deposits at FSLIC insured institutions failing to meet their net worth requirements. FHLBB also limits direct investment (equity securities, real estate, service corporations, and operating subsidiaries) to the greater of 10 percent of assets or twice the S&L's net worth, provided the institution meets regulatory net worth. March 1985. Ohio bank holiday. Anticipated failure of Home State Savings Bank of Cincinnati, OH and possible depletion of Ohio state deposit insurance fund cause Governor Celeste to close Ohio S&Ls. Eventually, those that are able to qualify for federal deposit insurance are allowed to reopen. May 1985. S&L failures in Maryland eventually cause loss to state deposit insurance fund and Maryland taxpayers of $185 million. The Ohio and Maryland S&L failures helped end the concept of state deposit insurance funds. July 1985. Chairman Gray begins transfer of federal examiners to the twelve regional Federal Home Loan Banks so that they are no longer overseen by OMB and their salaries are paid directly by the FHLBB. August 1985. Only $4.6 billion is left in the FSLIC insurance fund. Chairman Gray tries to gain support in Congress for recapitalizing the FSLIC. In 1986, GAO estimates the loss to the insurance fund to be around $20 billion. December 1985. FHLBB allows S&L examiners to "classify" questionable loans and other assets for the purpose of requiring loan loss reserves.
[1986-1989. S&L AND DEPOSIT INSURANCE MELTDOWN, SCANDAL, BAILOUT, REORGANIZATION.]
Losses continue and grow as insolvent institutions are allowed to remain open and expand.
August 1986. FHLBB raises net worth standard gradually to 6 percent with up to 2 percentage points offset for reduced interest-rate risk. 1987. Losses at Texas S&Ls are more than half of all S&L losses nationwide. Of the 20 largest losses, 14 are in Texas. The Texas economy is in major recession: crude oil prices fall by nearly 50 percent, the office vacancy rate exceeds 30 percent, and real estate prices collapse. January 1987. GAO declares FSLIC fund has a negative net worth, in the red by at least $3.8 billion. Recapitalization has stalled on Capitol Hill until now by the claims of powerful S&L lobbyists that FHLBB regulations are too harsh and arbitrary. February 1987. FHLBB requires prior supervisory approval for S&Ls, making direct investment in excess of 2.5 times their tangible capital. April 1987. Edwin Gray, about to end his four-year term as FHLLB chairman in June, is summoned to the office of Sen. Dennis DeConcini who with four other Senators (John McCain, Alan Cranston, John Glenn and Donald Riegle) quizzes Gray about FHLBB investigations into the Lincoln Savings and Loan. The senators all had received campaign contributions from Keating and would become known as the "Keating Five". The subsequent Lincoln failure cost taxpayers more than $2 billion. May 1987. The FHLBB begins phasing out what’s left of the liberal RAP accounting standards. S&Ls must now conform like banks to GAAP accounting standards, effective (after an extension by incoming FHLBB Chairman M. Danny Wall) January 1, 1989. August 1987. The Competitive Equality Banking Act of 1987 authorizes a $10.8 billion recapitalization of the FSLIC with a maximum of $3.75 billion to be paid out in any 12-month period. It also contains forbearance measures designed to postpone or prevent S&L closures. February 1988. The FHLBB introduces the Southwest Plan to consolidate and package insolvent Texas S&Ls and sell them quickly to the highest bidder, thereby conserving cash for the FSLIC. The FHLBB uses a number of strategies to pay for the difference between assets and liabilities of the failed institutions: FSLIC notes, tax incentives, and income, capital value and yield guarantees. The FHLBB disposes of 205 S&Ls through the Southwest Plan with assets of $101 billion. November 1988. George Bush elected President. S&L problem not an election issue. 1989. President Bush unveils S&L bailout plan in February and in August the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) abolishes the FHLBB and FSLIC, and switches S&L regulation to newly created Office of Thrift Supervision. The deposit insurance function is shifted to the FDIC. The Resolution Trust Corporation is created to handle insolvent S&Ls. Also, the Act adds $50 billion of new borrowing authority, financed mostly from general revenues and the industry; meaningful net worth requirements and regulation by the OTS and FDIC; and funds for the Justice Department to finance prosecution of S&L crimes. Additional bank crime legislation (the Crime Control Act of 1990) mandates a study by the National Commission on Financial Institution Reform, Recovery and Enforcement to uncover the causes of the S&L crisis, and make recommendations to prevent future debacles.
THE SUBPRIMECRISIS, 2007
The following chronology is based in part on the subprime timeline of the Joint Economic Committee of the U.S. Congress. The JEC Chair is Senator Charles Schumer (D-NY) and the Vice Chair is Representative Carolyn Maloney (D-NY). Abbreviations, hyperlinks and additional text [in square brackets] are by John Tepper Marlin.
[2003-2005. RISING HOUSING PRICES CREATE CHALLENGES FOR MORTGAGE LENDERS]
[The instigating event for the subprime loan problems was the rise in the prices of houses. Buyers were eager to get as much housing as they could. Many would have been priced out of owning a home if it were not for creative financing by mortgage lenders. As housing rpices rose, so did monthly payments. Eager to generate volume (and commissions for themselves), mortgage lenders sought ways to accommodate prospective borrowers by arranging mortgage loans that by the standards of ten years earlier were unorthodox. For example, they offered interest-only loans, meaning that the principal would remain to be repaid at the end of the period (a "balloon" mortgage), so that the borrower built up equity in the house only if the price continued to go up. Or they offered teaser interest rates, i.e., low rates (or zero interest) for a few years, after which the postponed interest would be added to the principal and the rates would go to a variable market rate with a high risk premium. These types of loans were marked as subprime. The lenders were often not very concerned about repayment, because they were able to sell off the loans in groups to be included in mortgage-backed bonds, and they made perfunctory efforts (or none at all) to confirm the incomes of the borrowers. Subprime loans were bundled in Collateralized Debt Obligations as the bottom tier of a package that was topped up with AAA-rated mortgages. This gave the purchasers of the bonds the confidence that some portion of the bonds was of excellent quality. The quality of what lay below was not in retrospect fully understood, a situation reminiscent of Billy Sol Estes and his oil silos or, to use a housing image, a pretty home with termites in the basement.]
[2006 THROUGH JULY 2007. HIGHER VARIABLE RATES MEAN NON-PAYMENTS AND FORECLOSURES. AGENCIES NOT CONCERNED, ACCOMMODATE MORTGAGE LENDERS.]
December 2006. Ownit Mortgage Solutions files for bankruptcy.
February 2007. The Senate Banking Committee holds the first hearing of the 110th Congress addressing legislative solutions to predatory lending in the subprime sector. ResMae Mortgage files for bankruptcy. Nova Star Financial reports a surprise loss. March 2007. Fremont General stops making subprime loans and puts its subprime business up for sale. The Federal Reserve announces draft regulations to tighten lending standards. Lenders would be required to grant loans on a borrower's ability to pay the fully indexed interest rate that would apply after the low, initial fixed-rate period of two or three years. New Century Financial, the second largest subprime lender in 2006, stops making loans. People’s Choice files for bankruptcy. The Senate Banking Committee holds a hearing to investigate the sharp increase in defaults and foreclosures, questioning banking regulators, a Federal Reserve representative, industry executives and two homeowners. Both Democrats and Republicans criticize banking regulators for failing to respond more quickly to curb the growth in risky home loans to people with weak credit. At a Joint Economic Committee hearing, Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System, says housing market weakness "does not appear to have spilled over to a significant extent."
April 2007. New Century Financial files for bankruptcy. American Home Mortgage writes down the value of risky mortgages rated one step above subprime. JEC chair Senator Charles Schumer releases a report analyzing the subprime mortgage foreclosure problem and its economic impact on the most vulnerable communities. The report, entitled “Sheltering Neighborhoods from the Subprime Foreclosure Storm,” argues that foreclosure prevention is cost-effective and presents policy suggestions for curbing future subprime foreclosures. According to the Los Angeles Times, Tony Fratto, Spokesman for the White House, said “individuals need to make smart decisions in taking on debt, and there has to be some responsibility for making those decisions.” He also said that any federal action would be unwelcome and would encourage “risky behavior.” Senator Schumer calls on the Federal Government to intervene on behalf of homeowners in response to a National Association of Realtors report showing falling home prices due to rising foreclosures and a Los Angeles Times story in which the White House blamed homeowners for signing up for deceptive subprime mortgages. Freddie Mac announces plans to refinance up to $20 billion of loans held by subprime borrowers who would be unable to afford their adjustable-rate mortgages at the reset rate. Senator Dodd hosts the Homeownership Preservation Summit, bringing together some of the largest subprime lenders, securitizers, and servicers, as well as consumer and civil rights groups, to discuss ideas and develop solutions to the subprime mortgage market crisis. Following the summit, Senator Dodd states, “I am not overly anxious to legislate… We think there may be enough laws on the books.” The National Association of Realtors announces that sales of existing homes fell 8.4% in March from February, the sharpest month-to-month drop in 18 years. May 2007. Senator Schumer introduces the first comprehensive plan to help homeowners avoid foreclosures. The plan includes a request for $300 million in federal funds for community non-profits to help homeowners refinance current mortgages through personalized financial counseling. Schumer calls on banks and lenders to also provide funding for nonprofit counselors. Senator Schumer, along with Senators Brown and Casey also introduce the “Borrower’s Protection Act of 2007,” which proposes federal regulation for mortgage brokers in order to avoid future defaults on subprime loans. The bill seeks to regulate mortgage brokers and originators under the Truth in Lending Act (TILA) by establishing on behalf of consumers a fiduciary duty and other standards of care. In addition, the bill outlines standards for brokers and originators to assess a borrower’s ability to repay a mortgage and holds lenders accountable for brokers and appraisers. The House Financial Services Committee passes the “Expanding American Home Ownership Act”. The bill would allow Fannie Mae and Freddie Mac to purchase and securitize larger mortgages (up to $625,500 or the region’s median home price) in high-cost areas of the U.S. where the median price exceeds $417,000 (the current loan limit). The bill would also authorize zero down payment loans and direct the Department of Housing and Urban Development (HUD) to serve higher risk borrowers who would otherwise turn to predatory and high priced mortgage loan alternatives. The Federal Open Market Committee meets and leaves rates unchanged. The FOMC states in their minutes, “The correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year, somewhat longer than previously expected.” However, the FOMC continued to refer to the housing crisis as a “correction”. At the Federal Reserve Bank of Chicago’s Forty-Third Annual Conference on Bank Structure and Competition, Chairman Bernanke reiterates his March statement by saying the Fed does not foresee a broader economic impact from the growing number of mortgage defaults. The National Association of Realtors reports that sales of existing homes fell by 2.6 percent in April to a seasonally adjusted annual rate of 5.99 million units, the slowest sales pace since June 2003. The number of unsold homes left on the market reached a record total of 4.2 million.
June 2007. Housing and Urban Development (HUD) Secretary Alfonso Jackson endorses counseling and financial education as the best way to tackle the subprime foreclosure boom in a speech at the National Press Club. In a speech on "Housing and Supprime Lending," at an International MonetaryConference in Cape Town, South Africa, Chairman Bernanke endorses the basis of a proposal made by Schumer to increase federal funds for community non-profits engaged in helping families in unsuitable subprime loans avoid losing their homes to foreclosure. ZipRealty Inc., a national real-estate brokerage firm, announces that the number of homes listed for sale in 18 major U.S. metropolitan areas at the end of May rose 5.1% from April, surprising because Credit Suisse Group reports that U.S. inventories of listed homes are typically been little changed in May during the past two decades. RealtyTrac announces that U.S. foreclosure filings were 90 percent hgiher in May compare with May 2006. Foreclosure filings were up 19 percent from April. There were 176,137 notices of default, scheduled auctions and bank repossessions in May. The median price for a U.S. home dropped 1.8 percent the first three months of 2007. According to Freddie Mac, typically more than half of all home sales occur in the second quarter. Goldman Sachs reports flat profit from a year earlier because of mortgage market problems. Bear Stearns pledges up to $3.2 billion to bail out one of its hedge funds because of bad bets on subprime mortgages. Senator Schumer convenes housing experts to examine how to protect homebuyers from subprime lending and other mortgage industry abuses in a Banking Subcommittee hearing. The hearing focuses on the mortgage origination process, abuses in mortgage lending industry, responsible solutions to protect consumers in home-buying process and the impact of these proposed solutions on the market as a whole. The hearing also examines the Borrower’s Protection Act of 2007 (S. 1299), which seeks to address many of the abuses that have taken place in the mortgage process by creating new regulations and requirements for various mortgage originators. July 10-17. Standard and Poor’s and Moody’s downgrade bonds backed by subprime mortgages. Fitch follows suit. The Senate Appropriations Committee approves $100 million of the requested $300 million for HUD Housing Counseling programs in the Transportation, Housing, and Urban Development, and Related Agencies FY08 Appropriations Bill. With these funds, non-profit agencies are able to provide individual counseling by working one-on-one with borrowers stuck in unaffordable subprime loans. The Federal Reserve announces a pilot program to monitor brokers, joining the Board of Governors of the Federal Reserve with the Office of Thrift Supervision, the Federal Trade Commission, and state agencies represented by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, to conduct targeted consumer-protection compliance reviews of underwriting standards, oversight, and risk-management practices within non-depository lenders with significant subprime mortgage operations.
July 18-19. The Commerce Department announces housing starts are down 19.4 percent over the last 12 months. Also announced is a 7.5 percent plunge in permits to build new homes, the largest monthly decline since January 1995. Permits are 25.2 percent below their level a year ago, reflecting continued pessimism among builders over the near-term outlook for new homebuilding. Bear Stearns announces its two hedge funds that invested heavily in the subprime market are essentially worthless, having lost over 90% of their value, equal to over $1.4 billion. In two days of testimony in Congress, Chairman Bernanke said there will be “significant losses” due to subprime mortgages, but that such losses are “bumps” in “market innovations” (referring to hedge fund investments in subprime mortgages). Bernanke reiterated that problems in the subprime mortgage market have not spilled over into the greater system. Bernanke also said the problems “'likely will get worse before they get better.” He forecasts that the economy is poised for moderate growth, but continuing problems in the housing market prompt the Fed to slightly reduce its growth expectations. chairman Bernanke testifies in front of the House Financial Services Committee and the Senate Banking Committee in his Second Monetary Report to Congress in 2007. On July 19, the DJIA closes above 14,000 for the first time.
July 25-31. The JEC examines the impact of the subprime lending crisis on Cleveland, Ohio, one of the hardest-hit communities in the nation. The hearing reveals the individual faces of the subprime mortgage crisis. Local residents and city council members testify. IKB Deutsche Industriebank, a German bank, is bailed out because of bad bets on U.S. mortgage-backed securities. Home prices continue to fall, marking the 18th consecutive decline, beginning in December 2005, in the growth rate of housing prices, according to the monthly S&P/Case-Shiller's Home Prices Indices, which tracks housing prices in metropolitan areas and is considered a leading measure of U.S. single-family home prices. The 10-City Composite index showed an annual decline of 3.4% (its biggest since 1991) and the 20-City Composite reported an annual decline of 2.8%.
August 1-7. Two hedge funds managed by Bear Stearns that invested heavily in subprime mortgages declare bankruptcy. Investors in the funds file suit against Bear Stearns, alleging that the investment bank mislead them about the extent of the funds’ exposure. American Home Mortgage files for bankruptcy. Senator Clinton introduces a plan to address mortgage lending abuses, including new regulations on brokers, strong state licensing standards, and federal registration for brokers. The plan also proposes a $1 billion fund to assist state programs that help at-risk borrowers avoid foreclosure. Senators Schumer and Dodd separately write to James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight (OFHEO), urging him to consider temporarily raising the limit on purchases of home loans by Fannie Mae and Freddie Mac in response to increasing concerns of a credit crunch spilling into the broader mortgage market. The Federal Open Market Committee leaves the overnight federal funds rate at 5.25%, referring to tightening in the credit markets and ongoing housing market crisis as a “correction”. Despite financial market turmoil, the FOMC forecasts that “the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in the employment and incomes and a robust global economy.”
August 8-10. Treasury Secretary Hank Paulson says, “Borrowers weren't quite as disciplined as they should be... Lenders clearly weren't as disciplined as they should be. We've seen some excesses. We've seen it in the subprime area, and that will be with us for a while.” Senator Schumer writes to Federal regulators, urging them to devise an action plan to deal with the current liquidity crunch in the mortgage markets that threatens to spread across the economy as a whole. Schumer expresses his concerns that regulators are underestimating the spillover effects of the housing market crisis. "Nobody, including me, wants or expects the Federal regulators to step in and lend a hand to the private sector players who took risky gambles in the subprime market,” says Schumer. “But when millions of Americans who have good credit now face the real possibility of not being able to purchase a home because of spillovers from the subprime market, we need the regulators to play a leadership role to preserve market liquidity and minimize the damage.” European Central Bank and Federal Reserve intervene in markets by pumping billions of dollars of liquidity into the markets. American International Group, one of the biggest U.S. mortgage lenders, warns that mortgage defaults are spreading beyond the subprime sector. With delinquencies becoming more common among borrowers in the category just above subprime. BNP Paribas, a French bank, suspends three of its funds because of exposure to U.S. mortgages. President Bush addressing the housing market crisis, saying, “The fundamentals of our economy are strong…I'm told there is enough liquidity in the system to enable markets to correct.” Bush also said, “The conditions for the marketplace working through these issues are good. My hope is that the market, if it functions normally, will be able to yield a soft landing.” John Edwards responds to President Bush’s comments, calling on the Administration to act to moderate the housing crisis. Edward’s a plan to protect homeowners and fight predatory lending includes strong national legislation to regulate mortgage abuses and prohibit predatory mortgage lending based on North Carolina’s state law and a Home Rescue Fund to work with local non-profits, government agencies and community financial institutions to help struggling homeowners renegotiate or refinance their mortgages. In regards to lifting the caps on Fannie Mae and Freddie Mac, President Bush said he would like to see Congress get GSEs “reformed, get them streamlined, get them focused, and then I will consider other options”. The federal regulator for Fannie Mae denies the mortgage finance company's request to grow its investment portfolio, but did not close the door on the possibility of lifting the cap in the future.Aegis Mortgage files for bankruptcy. Rep. Barney Frank (D-MA) announces plans to hold hearings in the House Financial Services Committee investigating credit rating agencies role in the subprime mortgage crisis. ountrywide Financial, the nation’s largest mortgage lender, draws down $11.5 billion from its credit lines. All three major stock indexes were 10% lower than their July peaks – a marker indicating a correction of the stock market, due to tightening in the credit markets. The Federal Reserve cuts the discount rate by half a point. Stocks rally.
August 22-31. RealtyTrac Inc announces foreclosures were up 93% in July 2007 from July 2006. The national foreclosure rate in July was one filing for every 693 households. There were 179,599 filings reported in July, approximately twice the number (92,845) in July 2006. In letters to more than 40 major market players, and federal financial regulators including Chairman Bernanke and Secretary Paulson, Senator Schumer cautions that regulators’ efforts to bring liquidity to tightened credit markets have so far overlooked the harrowing situation in the underlying mortgage market that stoked the credit crunch in the first place. Schumer urged banks, lenders, and loan servicers to direct resources to the non-profits on the frontlines of the mortgage crisis in the same vain as the Senate Appropriations Committee, which has set aside $100 million for nonprofits that work with homeowners to prevent foreclosure. In a response letter to Senator Schumer, Federal Reserve Chairman Ben Bernanke writes: “The Federal Reserve, in cooperation with other federal agencies, is closely monitoring developments in financial markets,” and the twelve Federal Reserve Banks “are working closely with community and industry groups dedicated to reducing the risks of foreclosure and financial distress among homebuyers.” But Chairman Bernanke opposes Senator Schumer’s proposal to raise GES portfolio caps and instead calls upon the private and public sectors to develop new “mortgage products” more suited for “low-and moderate-income borrowers, including those seeking to refinance.” National Association of Realtors reports that existing home sales declined by 0.2 percent in July, leaving the level of sales 9.0 percent below the level 12 months prior. Senator Schumer calls for greater federal action “to address the subprime mortgage mess and to restore confidence in the housing market.” President Bush holds a press conference to highlight the growing problems in the subprime mortgage market. He says the “government has a role to play” in the growing crisis and calls upon the Federal Housing Administration to help subprime borrowers refinance into loans insured by the federal agency. The modest FHA program is expected to assist 60,000 delinquent borrowers. President Bush announces an additional program expected to help another 20,000 homeowners by reducing insurance premiums for those who pose less of a credit risk. Reaching out to Democrats, the President also expresses support for Michigan Senator Debbie Stabenow’s Mortgage Relief Act, which will exempt homeowners from paying taxes on home loans forgiven after foreclosure. At Fed meeting in Jackson Hole, Wyoming, Federal Reserve Chairman Ben Bernanke reassures investors on Wall Street by stating that the Fed will “act as needed” to contain the spreading mortgage crisis and discourage predatory lending practices. Representative Barney Frank (D-MA) responds to President Bush’s press conference: “I welcome the Administration’s recognition that a greater public response is required and I look forward to working with them because I agree with a number of specific things that they propose . . . However, there are some points of difference that we will need to work out going forward . . . I continue to believe that the portfolios of Fannie Mae and Freddie Mac can play a bigger role than they currently are playing, particularly in helping the refinancing of subprime mortgages that are about to experience significant interest rate increases.”
September 4-7. The six banking regulators, including the Federal Reserve, call on mortgage companies to work with struggling homeowners likely to lose their homes as their adjustable rate mortgage interest rates escalate. Citing the benefit to both lenders and borrowers, Fed Governor Randall Kroszner says: “Keeping families in their homes is a matter of great importance to the Federal Reserve.” The Federal Reserve releases its Beige Book, a largely anecdotal report on the economy based on interviews with business leaders throughout the country. Counter to investor sentiment, the findings do not indicate that the housing crisis is expanding into the general economy. The Dow Jones industrial average drops nearly 200 points. Senator Christopher Dodd, chairman of the Senate Banking Committee, announces his intention to introduce a bill that would make it illegal for mortgage brokers to steer borrowers eligible for standard mortgages into subprime loans. The bill also aims to eliminate additional predatory lending practices, such as hidden fees and prepayment penalties. The National Association of Realtors releases statistics on pending sales for existing homes. The figures reveal a 16.1 percent decline in July from a year ago and a 12.2 percent decline from the prior month. The July 89.9 level is the second lowest in the history of the index and its lowest since the September 11th terrorist attacks that severely disrupted the national economy. The House Committee on Financial Services holds a hearing to examine the troubled credit and mortgage markets and potential “implications for U.S. Consumers and the Global Economy.” Chairman Barney Frank (D-Mass) expresses hope that the administration and Congress will collaborate to counter the “severe lack of investor confidence.” Renewing his call for increased funding to community groups that provide financial expertise to floundering homeowners seeking to refinance, Senator Schumer says: “A third straight quarter of record mortgage payment delinquencies is likely to mean record levels of foreclosures unless the Bush administration and Congress act quickly to help families keep their homes. Non-profits groups that are on the front lines of this fight to help homeowners are the best defense against the coming storm of foreclosures throughout the country." Concerned by the exploding subprime mortgage crisis, Federal Reserve Governor Randall Kroszner says fallout may spread beyond housing market into general economy. Kroszner says: “A healthy banking system generally contributes to strong economic growth, and banking crises can present a substantial drag on the real economy.” The Mortgage Bankers Association releases a quarterly report showing that the delinquency rate (the number of people who are behind in their payments but have not yet entered the foreclosure process) for mortgage loans on one-tofour-unit residential properties was 5.12 percent of all loans outstanding in the second quarter of 2007, up 28 basis points from the first quarter of 2007, and up 73 basis points from one year ago. The delinquency rate for subprime loans was up from 13.77 in the first quarter to 14.82 percent in the second quarter. The delinquency rate for prime loans rose from 2.58 percent to 2.73 percent. Compared with the same time in 2006, the seriously delinquent rate is 23 basis points higher for prime loans and 304 basis points higher for subprime loans. September 7: The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) releases figures [revised upward by 93,000 jobs a month later] showing that employers cut 4,000 jobs from payrolls in August, the first net decrease since 2003. Twenty-two thousand construction jobs were lost in August, with most related to the housing downturn, in particular among residential specialty trade contractors. Nearly 100,000 construction jobs have been lost since September 2006. Following the release of the report, the Dow Jones Industrial Average dropped 200.87 points. In response to the BLS figures, Senator Schumer calls on the Administration to act: “The combination of an economy turning down on its own and fears, mostly based on reality, that the mortgage crisis will get worse, demands strong leadership by the President, Secretary Paulson, and Chairman Bernanke.” House Financial Services Committee Chairman Barney Frank sends a letter to Federal Reserve Board Chairman Ben S. Bernanke challenging his opposition to increasing the portfolio caps of Fannie Mae and Freddie Mac. "Raising the caps is important for the reason that you implicitly acknowledged – so that we can get the GSEs into the business of helping us with the refinancing of current subprime mortgages that must be part of a response to this situation.”
September 10-14. Representative Barney Frank, chairman of the House Financial Services Committee, implores Federal Reserve Chairman Ben Bernanke to raise investment caps on Fannie Mae and Freddie Mac. In a letter to Bernanke, Frank writes: “The unpersuasive nature of this argument against raising the portfolio caps leads me to believe that the objection to an increase in the cap is ideological.” Frank also proposes to raise the Federal Housing Administration loan limit for single-family homes from $362,000 to $417,000. Senator Schumer introduces legislation to increase investment caps at Fannie Mae and Freddie Mac in order to alleviate the credit crunch that continues to plague the housing market. Schumer also proposes increasing the maximum for home mortgages – from $417,000 to $625,000 – that Fannie Mae and Freddie Mac are allowed to hold on their books. James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight (in charge of regulating Fannie Mae and Freddie Mac) writes to Senator Schumer that OFHEO would “reevaluate circumstances, including the caps on mortgage portfolios, as necessary.” In regards to lifting the caps on Fannie Mae and Freddie Mac, President Bush said he would like to see Congress get GSEs “reformed, get them streamlined, get them focused, and then I will consider other options”. Speaking to reporters at a breakfast held by The Christian Science Monitor, Secretary Henry M. Paulson reiterates the Administration’s opposition to lifting the caps of the government-sponsored entities Fannie Mae and Freddie Mac. Secretary Paulson instead expresses support for more stringent regulation of the GSEs. According to the quarterly Anderson Forecast by the University of California at Los Angeles, the spreading housing crisis will push the national economy to the brink of recession but growth in other sectors of the economy could lead to a moderate recovery by 2009. David Shulman, senior economist for the forecast, lowers his forecast for housing starts to an annual rate of 1 million to 1.1 million, down from a range of 1.2 million to 1.3 million. Speaking to representatives of leading financial firms, Treasury Secretary Henry Paulson says that the turbulence that has hit financial markets will take some time to be resolved, especially in the area of subprime mortgages. He urges the large firms to work with the administration to help ensure that subprime homeowners get assistance in dealing with sharply rising mortgage payments as their initial low adjustable rate mortgages now reset to higher levels. The U.S. Senate gives final approval to a measure proposed by U.S. Senators Charles E. Schumer (DNY), Sherrod Brown (D-OH), and Robert P. Casey (D-PA) to grant $100 million in funding to housing nonprofits on the front lines of the fight to prevent a national foreclosure crisis from the subprime lending fallout. The measure—which provides resources to government-approved agencies that help negotiate between borrowers and lenders to keep families in their homes—was contained in the Transportation and Housing and Urban Development (HUD) spending bill that passed the full Senate this morning. “For the millions of Americans at risk of losing their homes, these nonprofits can provide shelter from the foreclosure storm," said Schumer, the Chairman of both the Joint Economic Committee and the Senate Banking Subcommittee on Housing. Merrill Lynch & Co., the biggest underwriter of collateralized debt obligations, signals that the subprime mortgage crisis may hurt third-quarter earnings. The New York-based firm reports that it made ``fair value adjustments'' for potential losses to date on unspecified holdings and financing commitments
September 17-18. Merrill Lynch & Co. Inc.'s $1.3 billion bet on subprime lending takes a turn for the worse when the world's largest brokerage confirms job cuts at its First Franklin Financial Corp. unit. Merrill Lynch declines to say how many jobs are being cut. Recently filed reports with U.S. banking regulators show that Merrill Lynch Bank & Trust Co., where a lot of the First Franklin franchise is housed, lost $111 million through the first half of 2007. NovaStar Financial Inc gives up its real estate investment trust, effectively abandoning the lending business, because it cannot pay a $157 million dividend. RealtyTrac Inc. announces that home foreclosure filings surged to 243,000 in August, up 115 percent from August 2006 and 36 percent from July, marking the highest number of foreclosure filings since RealtyTrac began tracking monthly filings. The foreclosure filing rate nationally is now one in every 510 homes. The mortgage lending crisis intensifies as Impac Mortgage Holdings Inc. says it will quit most lending activities, while Accredited Home Lenders Holding Co. posts a major quarterly loss and says its survival remains in doubt. Federal Reserve cuts target federal funds rate by a half point to 4.75 percent. It is the first rate reduction in four years and the steepest in nearly five years. The Fed openly admits that the housing downturn is much more severe than initially anticipated. In response to the rate cut, the Dow Jones industrial average jumps 200 points and closes up 335 points at 13, 739.39. The U.S. House of Representatives overwhelmingly passes H.R. 1852, the “Expanding American Homeownership Act of 2007,” which expands funding for housing counseling, authorizes lower down payments for borrowers who can afford mortgage payments, and directs the Federal Housing Administration to offer mortgage loans to higher risk – but qualified – borrowers.
September 19-20. The JEC holds its second hearing on the subprime mortgage crisis to examine the continuing threat the crisis poses to the broader economy. Opening the hearing, entitled “Evolution of an Economic Crisis?: The Subprime Lending Disaster and the Threat to the Broader Economy,” JEC Chairman Senator Schumer says: “Our policy responses are not matching the magnitude of the risk that still lies ahead.” Testifying before the committee, Yale University economist Robert Shiller warns that the residential real estate downturn could spiral into “the most severe since the Great Depression” and could lead to a broader economic recession. The Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of Fannie Mae and Freddie Mac, agrees to relax restrictions on the mortgage finance companies’ investment holdings, enabling Fannie Mae and Freddie Mac to buy $20 billion more in subprime mortgages. But OFHEO Director James Lockhart reaffirms the administration’s stance that he will not allow “any major increases in the (investment) portfolio levels.” The Commerce Department reports that construction of new homes fell by 2.6 percent in August to the slowest pace in 12 years. The House Financial Services Committee holds a hearing entitled “Legislative and Regulatory Options for Minimizing and Mitigating Mortgage Foreclosures.” The hearing examines President Bush’s recently announced plan to expand FHA programs and considers other possibilities for aiding troubled homeowners facing foreclosure. The Committee hears testimony from Treasury Secretary Henry Paulson, Housing and Urban Development Secretary Alphonso Jackson, Federal Reserve Chairman Ben S. Bernanke, as well as from consumer advocates and industry insiders. Testifying before the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke says that the credit crisis has created “significant market stress” and that the Fed is “committed to preventing problems from recurring, while still preserving responsible subprime lending.” Treasury Secretary Henry Paulson adds that the administration is considering raising the Fannie Mae and Freddie Mac loan limits so that they can temporarily buy, bundle, and sell as securities any loans exceeding $417,000. But Secretary Paulson emphasizes that any changes to include so-called jumbo loans must include stricter regulations for oversight. HSBC Holdings announces its plans to close its U.S. subprime unit, Decision One Mortgage, and record an impairment charge of about $880 million. HSBC states that it no longer believes the mortgage business is sustainable. Approximately 750 U.S. employees are expected to be affected by the decision.
September 27. Luminent Mortgage Capital, a home-loan investment company, downgrades its second-quarter profit as the company struggles to gain access to credit and bankers seize assets. The Commerce Department reports that sales of single-family homes decreased by 8.3% in August, the lowest level in seven years. The median price of a new home declined by 7.5% to $225,000 in August 2007 as compared with the same month in 2006. The National Association of Realtors releases new housing statistics that reveal sales of existing single-family homes dropped by 4.3 percent in August, compared to July. It is the sixth straight decrease, pushing sales to the lowest point in five years. The fall in sales pushes the inventory of unsold homes to a record 4.58 million in August. According to the S&P/Case-Shiller’s Home Prices Indices, which track housing prices in metropolitan areas, home prices continue to fall at an increasing rate. The 10-City Composite index shows an annual decline of 4.5 percent – the largest in 16 years. In response to declining home sales and housing prices, Senator Schumer, Chairman of the Joint Economic Committee and the Senate Housing Subcommittee calls upon the White House to take action to combat the housing crisis. “The spillover of the subprime mortgages mess into the larger housing market deserves a strong, decisive response from the administration to protect homeowners, consumer spending, and the overall economy before things get worse.”
October 1-4. Former Federal Reserve Chairman Alan Greenspan says the housing crisis is far from over. “As in similar situations of inventory excess, I would expect home prices declines to continue until the rate of inventory liquidation reaches its peak.” Greenspan adds that the consumer and broader economy will suffer as a result. UBS reports its first quarterly loss in nine years. The largest wealth manager in the world plans to write down $3.4 billion in its fixed-income portfolio and other departments and to cut 1,500 jobs in its investment bank. The loss is attributed to the spreading credit crisis stemming from the emerging housing depression. Congressional Democratic leaders, House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid, and Vice Chairman of the Democratic Caucus Senator Charles E. Schumer hold a press conference to urge the Bush administration to step up its efforts to stem the tide of foreclosures. The Democratic leaders call for the appointment of a “Mortgage Czar” to coordinate federal efforts to stop foreclosures and for Fannie Mae and Freddie Mac to expand their loan portfolios with more than $100 billion in troubled, high-cost loans to help struggling borrowers hold onto their homes. The Democrats also call on the White House to supplement Senator Schumer’s $100 million in aid to non-profits specializing in housing counseling. Residential foreclosures in New York City hit 698 during the third quarter. It represents a 64% increase from the same period last year. Yet the spike in New York pales in comparison to the third quarter increases in Los Angeles (247%) and Miami (168%). Miami’s foreclosure rate per household is 116% higher than Los Angeles and 852% higher than New York City. The credit ratings agency, Moody’s Investors Service, reports that subprime mortgage bonds originated in the first half of 2007 include loans that are going delinquent at the fastest recorded rate. The Moody’s report predicts that accelerating delinquencies from 2007 bonds are likely to surpass the number of delinquencies in 2006, which hit a peak not seen since 2000.
October 9-12. The SEC announces its intention to review potential conflicts of interest in the credit rating agencies due to questionable practices associated with the ratings given to mortgage-backed securities that have contributed to the spreading housing crisis. SEC Chairman Christopher Cox says: “We have underway right now the beginnings of examinations that are focused on conflicts of interest, and books and records examinations, and whether the agencies are following their own procedures.”The National Association for Realtors revises down its outlook for home sales. It lowers its prediction for existing home sales for the year from 5.92 million to 5.78 million. Although demand for applications to purchase homes and refinance existing mortgages rose during the preceding week, consumers continue to have trouble getting loans approved. New home sales are projected to fall to 805,000 this year and to 752,000 next year. The Bush administration announces a new mortgage industry coalition to help homeowners stay in their homes. Treasury Secretary Henry M. Paulson Jr. estimates that the new initiative, dubbed Hope Now, will assist 2 million homeowners whose initial mortgage rates are resetting to higher and often unaffordable rates. The coalition includes 11 of the largest mortgage service companies, which represent 60 percent of all mortgages in the nation. They will be joined by mortgage counseling agencies, investors, and large trade organizations.October 11: Senator Charles E. Schumer, Chairman of the Joint Economic Committee, announces that Representative Barney Frank, chairman of the House Financial Services Committee, supports his plan to allow Fannie Mae and Freddie Mac to raise their portfolio caps by 10 percent in a six-month window. Of the total $147 billion increase, 85 percent ($125 billion) is designated to aid subprime borrowers. Senator Schumer says: “This bill provides a lifeboat for the millions of homeowners left stranded by the Bush administration amid a sea of subprime turmoil.” Countrywide Financial Corp reports that September mortgage lending was down 44.3 percent from a year ago. Funding for adjustable-rate mortgages fell 76 percent, which was still lower than the 92 percent decline in nonprime loan funding. Delinquencies as a percentage of unpaid principal balances rose 1.81 percent to 5.85 percent from a year earlier. Paulson & Co., which has made money by betting on increasing foreclosures this year, announces its intention to donate $15 million to the Center for Responsible Lending and the National Association of Consumer Advocates. The two groups plan to use to the funding to establish an institute that offers legal aid to homeowners fighting foreclosure.
October 15-18. Representative Barney Frank, Chairman of the House Committee on Financial Services, holds a committee field hearing entitled “Mortgage Lending Disparities.” The hearing focuses on mortgage lending disparities in the Boston area, especially the subprime targeting of Black and Latino borrowers who were much more likely than whites or Asians living the same area to receive higher-priced loans. Strongly urged to act by the Treasury Department, Citigroup, JPMorgan Chase, and Bank of America announce the creation of a new entity, called a Master Liquidity Enhancement Conduit, to raise $200 billion in order to purchase securities that are otherwise likely to be dumped on the market and further depress the housing debt crisis. Citigroup acknowledges that its risk management models failed during this summer’s credit crisis, leading to the company’s 57 percent drop in third-quarter profit. Citigroup was forced to write off $3.55 billion and set aside $2.24 billion to cover anticipated losses stemming from failing mortgages and consumer loans. Federal Reserve Chairman Ben Bernanke says that the housing crisis is far from over and will create a “significant drag” on domestic economic growth into next year.October 16: The National Association of Home Builders reports that its housing market index, which tracks builders’ perceptions of conditions and expectations for home sales over the next six months, dropped to 18, its lowest level since the inception of the index in 1985. The housing market index has declined for eight straight months. Builder confidence increased in the Midwest by two points, but the region still has the lowest overall rate in the nation. The National League of Cities releases a report in which 7 out of 10 finance officers from major cities throughout the country offer pessimistic predictions for the economic future of their cities. They report that the housing downturn is causing a major decrease in city tax revenue and is only likely to worsen in the coming months. The Commerce Department reports that U.S. home construction starts fell 10.2 percent last month to their lowest level in more than 14 years. Building permit activity, an indicator of future construction plans, declined 7.3 percent, the largest drop since January 1995. The Fed’s “Beige Book,” a survey of businesses, indicates that the housing crisis is intensifying and that businesses are concerned that other areas of the economy are likely to suffer as a result. Standard & Poor’s cuts the credit ratings on $23.35 billion of securities backed by pools of home loans that were offered to borrowers during the first half of the year. The downgrades hit securities that had been rated AAA, the highest of the 10 investment-grade ratings and the rating of government debt. The Labor Department reports a surge in lay-offs with unemployment benefit claims far surpassing expectations. Applications increased 28,000 from the previous week, the largest one-week jump since February 10th. The distress in the labor market is attributed to the housing downturn and credit crisis. Senator Charles E. Schumer (D-NY) calls upon the Securities and Exchange Commission (SEC) to investigate Countrywide Financial Corporation along with its chief executive Angelo Mozilo.
[NOVEMBER 2007. PROBLEMS SPREAD OVERSEAS - TO BARCLAYS, ROYAL BANK OF SCOTLAND.]