Bank of Italy official sees currency war risk
http://jlne.ws/bL2W9E
U.S. Economy Grew 2% as Consumer Spending Rises
http://jlne.ws/cLbWWN
ELX Futures Exceeds 100,000 Contracts Of Open Interest And Sets New Volume Record In Eurodollar Futures
Press Release
ELX Futures, L.P. (ELX) announced today that it has reached a new milestone in open interest (OI) and set a new volume record in its Eurodollar Futures contract, which was launched in June 2010.
http://jlne.ws/cxgbC5
ECB. Still Props Up Banks on E.U.'s Edge
New York Times
Greek, Irish and Spanish banks are falling behind their counterparts across Europe in reducing their dependence on emergency central bank funding because they can't find investors willing to buy their bonds, Bloomberg News reported.
http://jlne.ws/a8ZUqu
Tighter US ban on bank trading urged
Tom Braithwaite, FT.com
A group of senators led by Carl Levin, the Democrat from Michigan, is pushing a new financial oversight council to adopt a strict ban on proprietary trading at banks. The financial reform legislation passed by Congress in the summer included a version of the Volcker rule, named after former Federal Reserve chairman Paul Volcker, which bans banks from trading for their own account.
http://jlne.ws/aIOOI8
Still plenty to play for on the Dodd-Frank bill
By Gillian Tett, FT.com
Could the Republicans throw sand into the wheels of financial reform in America?
http://jlne.ws/9OOQYn
Volcker on His 'Rule'- Keep It Broad
By DEBORAH SOLOMON, WSJ.com
Former Federal Reserve Chairman Paul Volcker, seeking to influence the eponymous rule he helped create, is telling administration officials they should avoid writing narrow regulations that banks can seek to exploit or evade, according to people familiar with the matter.
http://jlne.ws/cbhqor
Citigroup's Medina-Mora Says Grumbling Subsides Amid Customer-Service Push
Bloomberg
Citigroup Inc. 's campaign to repair its U.S. customer-service reputation may be making progress: clients are becoming more likely to recommend the bank, rather than disparage it, an internal memo shows.
http://jlne.ws/cAqmPT
Statement By SIFMA CEO Tim Ryan On Speech By Michel Barnier, EU Commissioner
Press Release
The Securities Industry and Financial Markets Association (SIFMA) today released the following introductory remarks welcoming Michel Barnier, Commissioner for EU Internal Market and Services, to a speech before SIFMA members:
http://jlne.ws/cxgbC5
Jumat, 29 Oktober 2010
Five Minutes Interview With ELX CEO Neal Wolkoff
This article is also posted on the main page of MarketsWiki.
Neal Wolkoff is the CEO of ELX Futures, L.P. He was named to the position on Oct. 6, 2008. Previously, he had been CEO of the American Stock Exchange prior to its acquisition by NYSE. At issue as of late for ELX Futures is that an exchange for futures (EFF) block-trade mechanism offered by ELX Futures allows traders to move their Treasury futures positions from one exchange to the other. CME Group has claimed ELX's EFF violates CME's rules. Both exchanges have petitioned the Commodity Futures Trading Commission (CFTC) to decide the issue. Wolkoff talked with MarketsWiki Senior Editor/ Producer Christine Nielsen.
Q: So I'm trying to get a handle on where things stand with these petitions to the CFTC regarding EFFs. Could you first give me your impressions on that?
A: The submission of information is over, although the CFTC could ask for more information; but I can't speak for the agency. We’ve been pleased that the Commission has been responsive on the EFF issue and has publicly stated that EFFs do not violate any laws or regulations.
Q: Have you had a chance to read the interview we recently did with Foley & Lardner's Scott Early? What about this idea of a natural barrier disadvantage?
A: I would just preface this by saying that he (Scott Early) has been a well-respected regulated futures industry attorney for a number of years. By getting into economic theory and intellectual property, he steered away from his area of expertise. Plus, based on his statement that there is an intellectual property right in a product, the reality is that this does not exist. The reality is that there's nothing to patent or to copyright. We're not doing anything that a normal competitor wouldn't do. The CME is essentially a monopoly. There's nothing about ELX using this EFF mechanism that is illegal and this has never been an argument about intellectual property. The role of the exchanges includes promoting the best interest of the investing public. We're confident that we've been on the right side of this issue.
Q: What type of feedback have you gotten from market participants?
A: People are generally interested, and market participants are interested and have privately told us so, but there’s a conscious resistance to publicly come forward because of the CME’s dominance in the industry.
Q: What does ELX hope to achieve overall - in terms of market share of Treasury products?
A: We've been live now for a year. We've added customers, brought on a successful Eurodollar futures contract. We want to grow to become a company with greater product reach, and increase our market share. We're doing very well and we're in a very good position. We are growing, adding users and I believe we have proven ourselves as a real competitor to the CME. It would be a good thing for market participants and the futures industry if we get the EFF mechanism approved.
Q: How would you see this playing out if the CFTC gives its nod on the use of the EFF mechanism?
A: A number of market participants would use it. What the EFF allows is for market participants to access the best available price across markets without paying a double margin or facing delivery obligations to deliver on one market and take delivery on another.
Q: What is next for the exchange?.
A: [Without giving too much away] we have plans for enhancing liquidity; we plan to add new products, continue to diversify and increase our volume and open interest. Our Eurodollar futures contract was launched four months ago and has been a big success so we hope to keep up the momentum.
Neal Wolkoff is the CEO of ELX Futures, L.P. He was named to the position on Oct. 6, 2008. Previously, he had been CEO of the American Stock Exchange prior to its acquisition by NYSE. At issue as of late for ELX Futures is that an exchange for futures (EFF) block-trade mechanism offered by ELX Futures allows traders to move their Treasury futures positions from one exchange to the other. CME Group has claimed ELX's EFF violates CME's rules. Both exchanges have petitioned the Commodity Futures Trading Commission (CFTC) to decide the issue. Wolkoff talked with MarketsWiki Senior Editor/ Producer Christine Nielsen.
Q: So I'm trying to get a handle on where things stand with these petitions to the CFTC regarding EFFs. Could you first give me your impressions on that?
A: The submission of information is over, although the CFTC could ask for more information; but I can't speak for the agency. We’ve been pleased that the Commission has been responsive on the EFF issue and has publicly stated that EFFs do not violate any laws or regulations.
Q: Have you had a chance to read the interview we recently did with Foley & Lardner's Scott Early? What about this idea of a natural barrier disadvantage?
A: I would just preface this by saying that he (Scott Early) has been a well-respected regulated futures industry attorney for a number of years. By getting into economic theory and intellectual property, he steered away from his area of expertise. Plus, based on his statement that there is an intellectual property right in a product, the reality is that this does not exist. The reality is that there's nothing to patent or to copyright. We're not doing anything that a normal competitor wouldn't do. The CME is essentially a monopoly. There's nothing about ELX using this EFF mechanism that is illegal and this has never been an argument about intellectual property. The role of the exchanges includes promoting the best interest of the investing public. We're confident that we've been on the right side of this issue.
Q: What type of feedback have you gotten from market participants?
A: People are generally interested, and market participants are interested and have privately told us so, but there’s a conscious resistance to publicly come forward because of the CME’s dominance in the industry.
Q: What does ELX hope to achieve overall - in terms of market share of Treasury products?
A: We've been live now for a year. We've added customers, brought on a successful Eurodollar futures contract. We want to grow to become a company with greater product reach, and increase our market share. We're doing very well and we're in a very good position. We are growing, adding users and I believe we have proven ourselves as a real competitor to the CME. It would be a good thing for market participants and the futures industry if we get the EFF mechanism approved.
Q: How would you see this playing out if the CFTC gives its nod on the use of the EFF mechanism?
A: A number of market participants would use it. What the EFF allows is for market participants to access the best available price across markets without paying a double margin or facing delivery obligations to deliver on one market and take delivery on another.
Q: What is next for the exchange?.
A: [Without giving too much away] we have plans for enhancing liquidity; we plan to add new products, continue to diversify and increase our volume and open interest. Our Eurodollar futures contract was launched four months ago and has been a big success so we hope to keep up the momentum.
Kamis, 28 Oktober 2010
October 28, 2010: SIFMA Forecasts US Tsy Issuance To Be $387.0 Bln In Q4
Conversation Starter
Neal Wolkoff is the CEO of ELX Futures, L.P. He was named to the position on Oct. 6, 2008. Previously, he had been CEO of the American Stock Exchange prior to its acquisition by NYSE. As issue as of late for ELX Futures is that an exchange for futures (EFF) block-trade mechanism offered by ELX Futures that allows traders to move their Treasury futures positions from one exchange to the other. CME Group has claimed ELX's EFF violates CME's rules. Both exchanges have petitioned the Commodity Futures Trading Commission (CFTC) to decide the issue. Wolkoff talked with MarketsWiki Senior Editor/ Producer Christine Nielsen.
Q: So I'm trying to get a handle on where things stand with these petitions to the CFTC regarding EFFs. Could you first give me your impressions on that?
A: The submission of information is over. Although the CFTC could ask for more information; but I can't speak for the agency. We’ve been pleased that the Commission has been responsive on the EFF issue and has publicly stated that EFFs do not violate any laws or regulations.
Q: Have you had a chance to read the interview we recently did with Foley & Lardner's Scott Early? What about this idea of a natural barrier disadvantage?
A: I would just preface this by saying that he (Scott Early) has been a well-respected regulated futures industry attorney for a number of years. By getting into economic theory and intellectual property, he steered away from his area of expertise. Plus, based on his statement that there is an intellectual property right in a product, the reality is that this does not exist. The reality is that there's nothing to patent or to copyright. We're not doing anything that a normal competitor wouldn't do. The CME is essentially a monopoly. There's nothing about ELX using this EFF mechanism that is illegal and this has never been an argument about intellectual property. The role of the exchanges includes promoting the best interest of the investing public. We're confident that we've been on the right side of this issue.
Q: What type of feedback have you gotten from market participants?
A: People are generally interested, and market participants are interested and have privately told us so, but there’s a conscious resistance to publicly come forward because of the CME’s dominance in the industry.
Q: What does ELX hope to achieve overall - in terms of market share of Treasury products?
A: We've been live now for a year. We've added customers, brought on a successful Eurodollar Futures contract. We want to grow to become a company with greater product reach, and increase our market share. We're doing very well and we're in a very good position. We are growing, adding users and I believe we have proven ourselves as a real competitor to the CME. It would be a good thing for market participants and the futures industry if we get the EFF mechanism approved.
Q: How would you see this playing out if the CFTC gives its nod on the use of the EFF mechanism?
A: A number of market participants would use it. What the EFF allows is for market participants to access the best available price across markets without paying a double margin or facing delivery obligations to deliver on one market and take delivery on another.
Q: What is next for the exchange?
A: [Without giving too much away] we have plans for enhancing liquidity; we plan to add new products, continue to diversify and increase our volume and open interest. Our Eurodollar Futures contract was launched four months ago and has been a big success so we hope to keep up the momentum.
Related items:
MarketsWiki: Five Minutes With Scott Early - Oct. 18, 2010
Scott Early: None of the public discourse on this [subject] addresses the real issue...The real issue, in economic terms, is a natural entry barrier issue. If somebody is starting a new exchange and they want to come in and try to compete with an existing product at an existing exchange, they are at, as economists would call, a natural entry barrier disadvantage. That being said, traders need liquidity in order to be confident in trading. Liquidity means not just the ability to put on a trade, but more importantly the ability to get it off at a reasonable price - at a time of crisis, so to speak, when blood is running in The Street.
http://jlne.ws/cUL7yA
ELX Press Statement to CFTC on Portfolio Managing Procedures (Dodd-Frank Act)
"ELX believes that any action by the CFTC to permit and foster portfolio margining between swaps and futures must promote competition among execution and clearing alternatives, and choice by market participants. ELX is against any discretionary action, such as the granting of a 4d order, that would allow the CME Group to assure its ongoing monopoly power in futures, and develop monopoly power over the clearing of swaps. CME controls over 96% of regulated futures trading and clearing. Given such dominance, the CFTC should ensure that portfolio margining systems not be used to prevent competition. In addition, any action by the Commission on this issue should be by rulemaking of general applicability and not by individual order or exemption. In order to protect against the CME from gaining further monopoly power as a result of a new statutory scheme - something not intended by the "open access" provisions of the Dodd Frank Act - ELX strongly recommends that the CFTC not adopt a portfolio margining regime unless it adequately protects the ability of other exchanges and DCOs to adopt different market mechanisms for position transfers. including EFF transactions."
http://jlne.ws/cLnh6e
CFTC Shouldn't Allow Margin Rules to Aid CME Group, ELX Says
By Matthew Leising, Bloomberg
The U.S. commodity regulator shouldn't allow proposed rules on margin offsets for futures and swaps trades to be used to cement CME Group Inc.'s monopoly in U.S. markets, according to competitor ELX Futures LP.
http://jlne.ws/9ZDdg4
ELX Futures Exceeds 100,000 Contracts Of Open Interest And Sets New Volume Record In Eurodollar Futures
Press Release
New York, Oct 28, 2010 – ELX Futures, L.P. (ELX) announced today that it has reached a new milestone in open interest (OI) and set a new volume record in its Eurodollar Futures contract, which was launched in June 2010. On Wednesday, October 27th, OI for Eurodollar Futures reached 104,313 contracts, with OI more than doubling every month since launch. Eurodollar Futures also set a new volume record, reaching 20,227 contracts on Tuesday, October 26th. Month over month, market share in Eurodollar contracts increased over 100% since September.
http://jlne.ws/chNf0n
Lead Stories
SIFMA Forecasts US Tsy Issuance To Be $387.0 Bln In Q4
Market News International
The Securities Industry and Financial Markets Association (SIFMA) today issued its quarterly government securities issuance and rates forecast for the fourth quarter of 2010.
Highlights of the forecast include:
- SIFMA forecasts total net Treasury bill, note and bond issuance to be $387.0 billion in the fourth quarter of 2010, slightly under the net $395.8 billion issued ($399.0 billion previously forecast in SIFMA's 3Q'10 issuance survey) in the third quarter (as a reminder, actuals include cash management balances). The median forecast for net new issuance of Treasury coupon securities (notes and bonds) is $364 billion in the fourth quarter, 6.6 percent below 3Q'10's net issuance of $389.9 billion but in-line with 4Q'09's $362.5 billion.
In addition, survey respondents expect Treasury to finish the year with $270 billion in cash (accounting for the $200 billion SFP limit), which is directly in-line with the $270 billion Treasury estimated in August for both end-September and end-December 2010 cash balances.
- Survey participants forecast total gross coupon issuance by the four largest Federal agencies to be $334.5 billion in the fourth quarter, compared to $250.7 billion in 3Q'10, a 33.4 percent increase.
- Survey respondents expect a net bill issuance of $23 billion in the fourth quarter, compared to a net issuance of $5.9 billion in 3Q'10 and a significant net redemption of $203 billion in 4Q'09.
- Survey respondents forecast Treasury will issue $19.5 billion of Treasury Inflation-Protected Securities (TIPS) in 4Q'10, 33 percent below the $29.3 billion issued in 3Q'10.
http://jlne.ws/aWo2mf
Federal Funds Futures: When a Bet Is Not a Bet
By Howard Simons
Has any carnival barker ever drawn a crowd with, “Step right up and refloat your fixed-rate overnight index swaps!”? Probably not; traders are supposed to be risk takers, cool and calculating, skirting along the edge of the road and asking passersby for the telephone number for 1-800-GAMBLER.
http://jlne.ws/cqtn39
Retail appetite helps Goldman sell $1.3bn in 50-year bonds
Goldman Sachs sold $1.3bn in 50-year bonds, benefiting from the voracious appetite of retail investors for higher-yielding securities at a time of historically low interest rates. Goldman, which originally said it would sell $250m in 50-year debt, sold the bonds on Tuesday in lots of $25 to attract individual investors.
http://jlne.ws/aly8mX
Tudor Says Yuan Gains Would Add More Jobs Than Fed Easing
By Saijel Kishan, Bloomberg
Paul Tudor Jones, founder of $11.5 billion hedge-fund firm Tudor Investment Corp., said a revaluation of China’s renminbi would do more to cut U.S. unemployment than asset purchases by the Federal Reserve.
http://jlne.ws/bIRTel
Bill Gross, PIMCO | Investment Outlook - Run Turkey, Run
They say a country gets the politicians it deserves or perhaps it deserves the politicians it gets. Whatever the order, America is next in line, and as we go to the polls in a few short days it’s incumbent upon a sleepy and befuddled electorate to at least ask ourselves, “What’s going on here?” Democrat or Republican, Elephant or Donkey, nothing much ever seems to change. Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.
http://jlne.ws/bfYYKc
***CN: Gross talking up for the Turkey.
U.S. Seeks to Shield Goldman Secrets
By SCOTT PATTERSON, WSJ.com
Goldman Sachs Group Inc. has always closely guarded the secrets of its lucrative high-speed trading system. Now the securities firm is getting a help from an unusual source: federal prosecutors.
http://jlne.ws/8Z6K20
Financial Overhaul Should Help Long-Term Growth, Paulson Says
By Margaret Collins, Bloomberg
The financial overhaul law passed earlier this year should provide greater long-term growth for the economy, former U.S. Treasury Secretary Henry Paulson said.
http://jlne.ws/9kXXUR
Bernanke Asset Purchases Risk Unleashing 1970s Inflation Genie
By Craig Torres, Bloomberg
For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory.
http://jlne.ws/caYAmJ
`Black Swan' Author Taleb Says Financial Bonus Pay Should Be `Symmetric'
By Laura Marcinek, Bloomberg
Nassim Nicholas Taleb, author of the "The Black Swan," said bonuses to financial executives and traders should be "symmetric" with their performance to solve the problem of overconfidence in global markets.
http://jlne.ws/bsLqhY
Robert Shiller And Foreclosuregate: Playing With Systemic Fire? - Street Sweep: Fortune's Wall Street Blog
CNNMoney.com/Fortune
Robert Shiller, the Yale professor who was a leading skeptic of the financial bubbles of the past decade, and New York City Comptroller John Liu, spoke Tuesday at The Economist magazine's annual Buttonwood conference, where they discussed how to manage systemic risk under the new world of regulatory reform.
http://jlne.ws/9O4Beo
Shrinking Bank Revenue Signals Worst Decade of Growth
By Dawn Kopecki and Michael J. Moore, Bloomberg
Shrinking revenue at U.S. banks, led by Goldman Sachs Group Inc. and Citigroup Inc., may continue to fall as the industry heads into what could be its slowest period of growth since the Great Depression.
http://jlne.ws/90OoAv
Basel Could Make Credit Crunches Worse, Pandit Says
BusinessWeek
Citigroup Inc. Chief Executive Officer Vikram Pandit said many of the goals set by the Basel Committee on Banking Supervision are likely to be ineffective or make existing capital inequalities worse.
http://jlne.ws/cRWYAG
Vince Cable orders bankers back down to Earth on bonuses
Guardian Unlimited
Barclays' Bob Diamond mounts defence of the City as business secretary launches government review Vince Cable today warned bankers against embarking on a "self-indulgent bonus round" as he put soaring executive pay and potentially destructive takeovers at the heart of a new government review into the way the City operates. The business secretary's plea at the CBI conference followed an attempt ...
http://jlne.ws/bYS3rr
US Treasury: Oversight Council Taking Next Steps On Nonbank Rules
Dow Jones
The new Financial Stability Oversight Council at its second meeting next month will further discuss the criteria for identifing when a financial firm outside the banking system becomes large or complex enough to threaten markets, Deputy Treasury Secretary Neal Wolin said Monday.
http://jlne.ws/dk4kF8
Greenspan's Niece Fires Back at Hedge Fund
New York Times
It seems one hedge fund employee recently let go from Kingdon Capital wasn't going gently into that dark night.
http://jlne.ws/cFEo37
Treasury Draws Negative Yield for First Time
By Cordell Eddings and Daniel Kruger, Bloomberg
The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Federal Reserve will be successful in sparking inflation.
http://jlne.ws/bEivFI
Wall Street Sold `Tragically Deficient' Product, Angelides Says
By Phil Mattingly, Bloomberg
Wall Street firms such as Goldman Sachs Group Inc. and Citigroup Inc. created products that were "tragically deficient," in the view of the chairman of the panel charged by Congress with identifying the causes of the financial crisis.
http://jlne.ws/d9uzfk
G20 reaches agreement on global banking
The Age
G20 finance ministers have reached agreement on tougher rules for banks and big finance firms blamed for triggering the global economic crisis.
http://jlne.ws/devcz9
President's Working Group On Financial Markets Releases Money Market Funds Report
Press Release
The President's Working Group on Financial Markets (PWG) today released a report detailing a number of options for reforms related to money market funds. These options address the vulnerabilities of money market funds that contributed to the financial crisis in 2008.
http://jlne.ws/cxgbC7
U.S. Treasury Shielding of Citigroup With Deletions Make FOIA Meaningless
Bloomberg
The late Bloomberg News reporter Mark Pittman asked the U.S. Treasury in January 2009 to identify $301 billion of securities owned by Citigroup Inc. that the government had agreed to guarantee . He made the request on the grounds that taxpayers ought to know how their money was being used.
http://jlne.ws/cMOgKB
How Howard Lutnick Is Growing Cantor and BGC
BusinessWeek
The Cantor Fitzgerald chief is on a hiring binge, opening new offices abroad, and moving the firm in new directions
http://jlne.ws/bvu7wI
Events
Greece is Changing
Hellenic Observatory 11th Annual Lecture in association with APCO worldwide
When: Nov. 8, 2010
Where: LSE Campus
Full info: http://www2.lse.ac.uk/publicEvents/events/2010/20101108t1830vLSE.aspx
Details: The Greek sovereign debt crisis of 2010 has received world-wide attention and has elicited unprecedented action by the European Union and its member governments as well as by the IMF. Greece is now obliged to follow the terms of the 'Memorandum' agreed with the 'bail-out' loan it has received. Is Greek economic policy on track? What are its future prospects?
Deutsche Bank Annual Financial Technology Senior Executive Forum
When: Nov. 9-10, 2010
Where: The Pierre in New York
Full info: http://conferences.db.com/americas/fintech10/
Details: Participants will include prominent figures from exchange, FCM / Inter-dealer broker, trading technology, merchant acquiring, payment processing, prepaid, information provider, and financial software companies. Through a series of interactive panels, these senior business leaders will explore the challenges and opportunities as they expand into new markets, face increasing global competition, and respond to an ever-changing regulatory environment. For context, this is not a research analyst conference but rather, a forum that organized to engage senior executives in industry-related discussions. This forum is also an excellent networking opportunity as the individuals who attend are decision-makers within their organizations. Similar to last year, this year's forum will feature panel discussions comprised of senior executives and board members from a variety of industry sub-sectors.
***CN: Deutsche Bank reserves the right to determine which attendees have priority for admission.
The Devil in the Details: Implications of Recent Regulatory Reforms and Other Updates for the Financial Services Industry
When: Nov. 10, 2010
Full info: http://events.mcgladrey.com/forms/RedefiningtheSwapsMarketWebinar111010
Details: You are invited to a lively discussion of recent regulation from three different perspectives – legal, regulatory and accounting. Join leading professionals in the financial services, law, accounting and tax sectors as they identify certain implications of these regulations. In addition, a tax specialist will provide an update on the taxation of carried interest and other important tax issues. Speakers include John W. McPartland, senior financial markets advisor, Financial Markets Group, Federal Reserve Bank of Chicago and John Hague, partner and national director of financial services, McGladrey & Pullen, LLP. The webinar will cover topics such aslegal and regulatory update and impact of Dodd-Frank.
Economic News
UK retail sales growth slowed in October, says CBI
BBC
Retail sales slowed in October from the month before, according to the latest CBI distributive trades survey.
http://jlne.ws/bS75qL
Consumer confidence ticks up in October
By Annalyn Censky, CNN Money.com
Americans got slightly more optimistic about the economy in October, but still have an overwhelmingly gloomy outlook, according to the latest reading on consumer morale.
http://jlne.ws/dli9cN
U.S. home prices fall 0.2% in August: Case-Shiller Economic Report
By Greg Robb, MarketWatch
Home prices fell 0.2% in August, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s, in a report labelled “disappointing” by its compilers.
http://jlne.ws/9sloUm
Exchanges, Clearing Houses & MTFs
MF Global Sees Barrier To CME's Interest-Rate Swap Clearing
By Jacob Bunge Of DOW JONES NEWSWIRES
Brokerage firm MF Global Holdings (MF) charged Monday that exchange company CME Group Inc. (CME) has set too high a threshold for participating in a new service for interest-rate swaps. MF Global, among the biggest independent futures commission merchants, said that tough capital requirements for firms looking to clear interest-rate swap deals at CME ensure that the $349 trillion market will continue to be dominated by big banks.
http://jlne.ws/bkpluW
CME to Begin Trading 'On-the-Run' Treasury Futures Contracts
By Liz Capo McCormick, Bloomberg
CME Group Inc., the world's largest futures market, will begin trading on-the-run Treasury futures contracts next week that will provide investors exposure to benchmark 2-, 5- and 10-year notes.
http://jlne.ws/bJ2l7O
***CN: Learn more about CME Group OTR Treasury Futures contracts here on the exchange's Web site.
Morgan Stanley Clears OTC Derivative Trades at CME
Press Release
Morgan Stanley, a market leader in derivatives trading and clearing, announced today that it has cleared OTC interest rate swap transactions for clients of the firm at the Chicago Mercantile Exchange (CME). Trades were cleared on the first day of operation of the CME Clearing service for interest rate swaps. This follows the previously announced clearing of client OTC Credit Default Swap (CDS) transactions at CME's CDS clearing service.
http://jlne.ws/dcbwGQ
Firms & Banks
Wells Fargo Will File More Foreclosure Affidavits After Lapses
By Donal Griffin and Dakin Campbell, Bloomberg
Wells Fargo & Co., the biggest U.S. home lender, said it will file supplemental foreclosure affidavits to courts in about 55,000 proceedings after finding some statements “did not strictly adhere to the required procedures.”
http://jlne.ws/9MbSS4
Goldman Launches 50-Year Bond Sale
By KATY BURNE, WSJ.com
Goldman Sachs Group Inc. launched a $1.3 billion sale of 50-year bonds Tuesday, its longest senior bond ever. The sale was targeted at private, also known as retail, investors rather than institutions.
http://jlne.ws/bNBaHN
Banks spend $82 million to sell credit cards to students
By Amy Haimerl, CNN Money
The U.S. Marines recruit college students to become one of the few, one of the proud. Bank of America just wants their financial future. The Charlotte, N.C.-based bank spends exponentially more money than any other bank to recruit students for credit cards.
http://jlne.ws/c4ktkF
UBS reports $1.7 bln net; outflows are halted
Market Watch
UBS reports a $1.7 billion profit and halts the outflow of cash from its private- banking arm, though the group's shares drop as its investment-banking unit disappoints investors.
http://jlne.ws/asdYcO
Deutsche Bank's Biggest Deal in Decade May Hurt Profit
BusinessWeek
Deutsche Bank AG's plan to build a German consumer-banking powerhouse with the $8.9 billion purchase of Deutsche Postbank AG, its biggest takeover in a decade, may end up weighing on profitability.
http://jlne.ws/a2aM0O
BankServ's Corporate SWIFT Service Bureau to Be Offered by Bank of America Merrill Lynch
Marketwire
BankServ and Bank of America Merrill Lynch today announced an agreement to create a Global SWIFT Service Bureau solution for the bank's many Fortune 1000 clients worldwide.
http://jlne.ws/bDqUSK
Jefferies Names James Golden Head of Treasury Desk
BusinessWeek
Jefferies & Co., one of the 18 primary dealers that trade U.S. government debt with the Federal Reserve, hired former Royal Bank of Scotland Plc trader James Golden as head of its Treasury trading desk.
http://jlne.ws/dlIpWn
UBS Appoints Miskovic as Chief Risk Officer, Lofts as CEO of the Americas
Bloomberg
UBS AG, Switzerland's largest bank, hired Maureen Miskovic as chief risk officer, the first woman to join its 13-member group executive board.
http://jlne.ws/9eo8K
Auctions & Statistics
Treasury 5-Year Notes Go At 1.330% High Yield
By Gary Siegel, The Bond Buyer
The Treasury Department auctioned $35 billion of five-year notes, with a 1 1/4% coupon, a 1.330% high yield, a price of 99.614432.
http://jlne.ws/aUGqdj
Fannie Mae to sell new 3-yr and 5-yr notes in reopen
Reuters
Fannie Mae (FNMA.OB), the largest U.S. home funding company is planning to sell on Thursday new three-year benchmark notes and $1.0 billion of five-year benchmark notes in a reopening of an existing 1.625 percent issue, said a market source familiar with the transaction on Wednesday.
http://jlne.ws/9cog3l
TIPS auction reflects profound uncertainty
By Mark Hulbert, MarketWatch
How much should you have to pay for an insurance policy that protects you against both severe deflation and hyperinflation?
http://jlne.ws/d9RUw5
Regulators
SIFMA Says It's Not Looking to Roll Back Dodd-Frank Law
Finance Technology Network
A major financial services trade group said Tuesday it is not seeking to roll back key portions of the new U.S. financial reform law regardless of the outcome of the November elections.
http://jlne.ws/aHRfTY
IMF Managing Director Dominique Strauss-Kahn Names Antonio Borges as Director of the European Department of the Fund
Press Release
Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), announced today his intention to name Mr. Antonio Borges to the post of Director of the European Department of the Fund.
http://jlne.ws/96hVFy
Fed Won't Join Banks' Appeal to High Court Over Emergency-Loan Disclosures
Bloomberg
The Federal Reserve won't join a banking industry trade group in asking the U.S. Supreme Court to let the government continue to withhold details of emergency loans made to financial firms in 2008.
http://jlne.ws/9ATM1X
Geithner's Global Central Planning
By JOHN H. COCHRANE, WSJ.com
Economists are full of bad ideas. Terrible ideas seem to emerge when the gurus get together to talk about coordinating their bad ideas. Last week's public letter from Treasury Secretary Tim Geithner to the G-20 finance ministers is a great example.
http://jlne.ws/a0k6jF
ECB revises estimated T2S fees
By Jeremy Grant, FT.com
The European Central Bank has come up with a more precise estimate for how much the planned pan-European settlement system - known as Target2Securities (T2S) - will cost, setting a fee of 15 euro cents per transaction.
http://jlne.ws/dnYnHQ
CFTC aims for middle ground in segregating funds
By Roberta Rampton and Christopher Doering, Reuters
The U.S. futures regulator is aiming to find middle ground between money managers who want their swaps' collateral protected in times of financial crisis, and the clearinghouses and their members who worry new rules will ratchet up costs.
http://jlne.ws/9BbmIX
Fed boss: Regulators looking into foreclosure mess
By JEANNINE AVERSA, AP
Federal banking regulators are examining whether mortgage companies cut corners on their own procedures when they moved to foreclose on people's homes, Federal Reserve Chairman Ben Bernanke said Monday.
http://jlne.ws/cYhES1
Fed's Fisher: Policy Makers Must Be Aware of Dollar Impact
Bloomberg
Federal Reserve officials need to be mindful of the effect their actions are having on the dollar, said Richard Fisher, president of the Fed bank of Dallas and a former deputy U.S. trade representative.
http://jlne.ws/aNG7IT
New York Fed Faces 'Conflict' in Mortgage Buybacks
BusinessWeek
The Federal Reserve Bank of New York's effort to recover taxpayer money used in bailouts during the crisis may be at odds with its mission to ensure the stability of the financial system.
http://jlne.ws/9r22oF
Plosser Says Fed in 'Difficult Spot' on Mortgage-Debt Buybacks
BusinessWeek
The Federal Reserve's effort to recover taxpayer money used in bailouts while also ensuring the stability of the financial system puts it in a "difficult spot," said Charles Plosser, president of the Philadelphia Fed.
http://jlne.ws/c0DQJt
OTC
OTC Derivatives May Face Curbs as FSB Seeks Central Clearing
By Jim Brunsden and Abigail Moses, Bloomberg
Regulators should consider limiting trades in some derivatives that aren't centrally cleared in a bid to cut excessive risk, the Financial Stability Board said.
http://jlne.ws/dl9E7x
Curbing Swaps Correlation Risk Vital, Regulators Told
By Matthew Leising and Shannon D. Harrington, Bloomberg
Regulators need to consider the collective risk of the credit-default swap market when deciding margin requirements for cleared trades, University of Houston finance professor Craig Pirrong said today in Washington.
http://jlne.ws/anJqga
OTC derivatives trade grows in 2010 despite crackdown - ISDA
By Daisy Ku, Reuters
The outstanding amount of over-the-counter derivatives rose during the first half of 2010 despite calls by regulators to move much of the market on to exchanges, the International Swaps and Derivatives Association said on Monday.
http://jlne.ws/aVPeD3
Foreign Banks Selling Swaps in U.S. to Face Dodd-Frank Rules, Gensler Says
Bloomberg
International banks selling derivatives in the U.S. will face higher capital requirements and new business conduct standards under the most sweeping rewrite of Wall Street rules since the Great Depression, according to a top regulator.
http://jlne.ws/d5bgzn
CFTC May Finish Proposed Swaps Rules by Mid-December
By SARAH N. LYNCH, WSJ.com
The Commodity Futures Trading Commission hopes to finish proposing all of its new over-the-counter derivatives regulations by mid-December, but to implement them it may need 400 additional staffers, CFTC Chairman Gary Gensler said Thursday.
http://jlne.ws/aJfgoi
Global News
International Borrowers Take to Islamic Bond Market
The New York Times
Until recently the issuance of Islamic bonds, or sukuk, was confined to the Muslim world. But now a number of international borrowers are tapping the markets, including Nomura Holdings in Japan and Europe's first corporate borrower, International Innovative Technologies.
http://jlne.ws/cw1m0E
Bean explains why Bank forecasts failed
By Daniel Pimlott, FT.com
The Bank of England could not have foreseen the depth of the recession, according to its deputy governor, because downturns following banking meltdowns are so unpredictable. Economists should treat such events the way seismologists approach earthquakes, said Charlie Bean, by remaining alert to a build-up of stresses and vulnerabilities.
http://jlne.ws/9ptB6T
Argentina credit default swaps spreads narrow
Reuters
Argentina's credit default swap spreads narrowed on Wednesday following news of the death of former Argentine president Nestor Kirchner, husband of current president Cristina Fernandez.
http://jlne.ws/aGVH9b
Greece Likely to Default By 2013 as Debts Remain, El-Erian Says
By Susanne Walker, Bloomberg
Greece is likely to default over the next three years because budget-cutting won’t be enough to reduce the nation’s debt burden, Pacific Investment Management Co. Chief Executive Officer Mohamed A. El-Erian said.
http://jlne.ws/9ah6WF
Iceland Wants Failed Banker Criminal Probes Sped Up
BusinessWeek
Iceland's parliamentary committee in charge of probing the country's financial collapse wants to speed up investigations of former bank executives and ensure criminal acts are prosecuted soon.
http://jlne.ws/bgCw9z
Qatar Bourse Expects to Start Bond Trading, Short-Selling in First Quarter
Bloomberg
Qatar Exchange expects to start trading in bonds in the first quarter of next year, Saif Al- Mansoori, deputy chief executive officer, said in Beirut today.
http://jlne.ws/bQQnh9
Barclays named 'Best Bank in Botswana'
Mmegi Online
For the second year running, Barclays Bank of Botswana (BBB) has been named 'Best Bank in Botswana' by emeafinance Magazine.
http://jlne.ws/bTNu0n
Abu Dhabi Islamic Bank Hires HSBC, Barclays, StanChart to Sell Dollar Bond
Bloomberg
Abu Dhabi Islamic Bank PJSC's sale of five-year Islamic bonds in dollars may be priced to yield about 3.625 percent, according to two people with knowledge of the sale.
http://jlne.ws/aJ1Nmb
South Korea's Economic Growth Likely Slowed as Won Surge Endangers Exports
By William Sim and Sarina Yoo, Bloomberg
South Korea’s economic expansion probably slowed last quarter as the nation’s currency surged the most in Asia and global growth cooled, imperiling exports and increasing scope to extend a pause in interest-rate increases.
http://jlne.ws/9bnmYe
Singapore Exchange eyes up a move for ASX
Sydney Morning Herald
The nation's monopoly sharemarket operator, the ASE, is back in talks with its offshore peers.
http://jlne.ws/9s7zkO
Brussels looks to cut settlement times
By Jeremy Grant in London and Nikki Tait in Brussels, FT.com
European regulators are considering ways to cut the time it takes for securities to be processed after trades are done in a bid to reduce risks to the system in the event of defaults and other large financial failures.
http://jlne.ws/c5Q5zj
Spain's Banco Santander wins EU approval to buy RBS assets
People's Daily
Banco Santander of Spain has won approval from the European Union (EU) to buy a number of retail and commercial banking assets of the Royal Bank of Scotland Group (RBS) in Britain.
http://jlne.ws/9pZAE9
Bank levy raises worries over 'double taxation'
Daily Telegraph
Banks face being taxed twice on their balance sheets in the first year of the Government's new L2.5bn levy with Britain unlikely to reach an agreement with other countries on the issue of double taxation before the measure is introduced next year.
http://jlne.ws/d7J0xK
Neal Wolkoff is the CEO of ELX Futures, L.P. He was named to the position on Oct. 6, 2008. Previously, he had been CEO of the American Stock Exchange prior to its acquisition by NYSE. As issue as of late for ELX Futures is that an exchange for futures (EFF) block-trade mechanism offered by ELX Futures that allows traders to move their Treasury futures positions from one exchange to the other. CME Group has claimed ELX's EFF violates CME's rules. Both exchanges have petitioned the Commodity Futures Trading Commission (CFTC) to decide the issue. Wolkoff talked with MarketsWiki Senior Editor/ Producer Christine Nielsen.
Q: So I'm trying to get a handle on where things stand with these petitions to the CFTC regarding EFFs. Could you first give me your impressions on that?
A: The submission of information is over. Although the CFTC could ask for more information; but I can't speak for the agency. We’ve been pleased that the Commission has been responsive on the EFF issue and has publicly stated that EFFs do not violate any laws or regulations.
Q: Have you had a chance to read the interview we recently did with Foley & Lardner's Scott Early? What about this idea of a natural barrier disadvantage?
A: I would just preface this by saying that he (Scott Early) has been a well-respected regulated futures industry attorney for a number of years. By getting into economic theory and intellectual property, he steered away from his area of expertise. Plus, based on his statement that there is an intellectual property right in a product, the reality is that this does not exist. The reality is that there's nothing to patent or to copyright. We're not doing anything that a normal competitor wouldn't do. The CME is essentially a monopoly. There's nothing about ELX using this EFF mechanism that is illegal and this has never been an argument about intellectual property. The role of the exchanges includes promoting the best interest of the investing public. We're confident that we've been on the right side of this issue.
Q: What type of feedback have you gotten from market participants?
A: People are generally interested, and market participants are interested and have privately told us so, but there’s a conscious resistance to publicly come forward because of the CME’s dominance in the industry.
Q: What does ELX hope to achieve overall - in terms of market share of Treasury products?
A: We've been live now for a year. We've added customers, brought on a successful Eurodollar Futures contract. We want to grow to become a company with greater product reach, and increase our market share. We're doing very well and we're in a very good position. We are growing, adding users and I believe we have proven ourselves as a real competitor to the CME. It would be a good thing for market participants and the futures industry if we get the EFF mechanism approved.
Q: How would you see this playing out if the CFTC gives its nod on the use of the EFF mechanism?
A: A number of market participants would use it. What the EFF allows is for market participants to access the best available price across markets without paying a double margin or facing delivery obligations to deliver on one market and take delivery on another.
Q: What is next for the exchange?
A: [Without giving too much away] we have plans for enhancing liquidity; we plan to add new products, continue to diversify and increase our volume and open interest. Our Eurodollar Futures contract was launched four months ago and has been a big success so we hope to keep up the momentum.
Related items:
MarketsWiki: Five Minutes With Scott Early - Oct. 18, 2010
Scott Early: None of the public discourse on this [subject] addresses the real issue...The real issue, in economic terms, is a natural entry barrier issue. If somebody is starting a new exchange and they want to come in and try to compete with an existing product at an existing exchange, they are at, as economists would call, a natural entry barrier disadvantage. That being said, traders need liquidity in order to be confident in trading. Liquidity means not just the ability to put on a trade, but more importantly the ability to get it off at a reasonable price - at a time of crisis, so to speak, when blood is running in The Street.
http://jlne.ws/cUL7yA
ELX Press Statement to CFTC on Portfolio Managing Procedures (Dodd-Frank Act)
"ELX believes that any action by the CFTC to permit and foster portfolio margining between swaps and futures must promote competition among execution and clearing alternatives, and choice by market participants. ELX is against any discretionary action, such as the granting of a 4d order, that would allow the CME Group to assure its ongoing monopoly power in futures, and develop monopoly power over the clearing of swaps. CME controls over 96% of regulated futures trading and clearing. Given such dominance, the CFTC should ensure that portfolio margining systems not be used to prevent competition. In addition, any action by the Commission on this issue should be by rulemaking of general applicability and not by individual order or exemption. In order to protect against the CME from gaining further monopoly power as a result of a new statutory scheme - something not intended by the "open access" provisions of the Dodd Frank Act - ELX strongly recommends that the CFTC not adopt a portfolio margining regime unless it adequately protects the ability of other exchanges and DCOs to adopt different market mechanisms for position transfers. including EFF transactions."
http://jlne.ws/cLnh6e
CFTC Shouldn't Allow Margin Rules to Aid CME Group, ELX Says
By Matthew Leising, Bloomberg
The U.S. commodity regulator shouldn't allow proposed rules on margin offsets for futures and swaps trades to be used to cement CME Group Inc.'s monopoly in U.S. markets, according to competitor ELX Futures LP.
http://jlne.ws/9ZDdg4
ELX Futures Exceeds 100,000 Contracts Of Open Interest And Sets New Volume Record In Eurodollar Futures
Press Release
New York, Oct 28, 2010 – ELX Futures, L.P. (ELX) announced today that it has reached a new milestone in open interest (OI) and set a new volume record in its Eurodollar Futures contract, which was launched in June 2010. On Wednesday, October 27th, OI for Eurodollar Futures reached 104,313 contracts, with OI more than doubling every month since launch. Eurodollar Futures also set a new volume record, reaching 20,227 contracts on Tuesday, October 26th. Month over month, market share in Eurodollar contracts increased over 100% since September.
http://jlne.ws/chNf0n
Lead Stories
SIFMA Forecasts US Tsy Issuance To Be $387.0 Bln In Q4
Market News International
The Securities Industry and Financial Markets Association (SIFMA) today issued its quarterly government securities issuance and rates forecast for the fourth quarter of 2010.
Highlights of the forecast include:
- SIFMA forecasts total net Treasury bill, note and bond issuance to be $387.0 billion in the fourth quarter of 2010, slightly under the net $395.8 billion issued ($399.0 billion previously forecast in SIFMA's 3Q'10 issuance survey) in the third quarter (as a reminder, actuals include cash management balances). The median forecast for net new issuance of Treasury coupon securities (notes and bonds) is $364 billion in the fourth quarter, 6.6 percent below 3Q'10's net issuance of $389.9 billion but in-line with 4Q'09's $362.5 billion.
In addition, survey respondents expect Treasury to finish the year with $270 billion in cash (accounting for the $200 billion SFP limit), which is directly in-line with the $270 billion Treasury estimated in August for both end-September and end-December 2010 cash balances.
- Survey participants forecast total gross coupon issuance by the four largest Federal agencies to be $334.5 billion in the fourth quarter, compared to $250.7 billion in 3Q'10, a 33.4 percent increase.
- Survey respondents expect a net bill issuance of $23 billion in the fourth quarter, compared to a net issuance of $5.9 billion in 3Q'10 and a significant net redemption of $203 billion in 4Q'09.
- Survey respondents forecast Treasury will issue $19.5 billion of Treasury Inflation-Protected Securities (TIPS) in 4Q'10, 33 percent below the $29.3 billion issued in 3Q'10.
http://jlne.ws/aWo2mf
Federal Funds Futures: When a Bet Is Not a Bet
By Howard Simons
Has any carnival barker ever drawn a crowd with, “Step right up and refloat your fixed-rate overnight index swaps!”? Probably not; traders are supposed to be risk takers, cool and calculating, skirting along the edge of the road and asking passersby for the telephone number for 1-800-GAMBLER.
http://jlne.ws/cqtn39
Retail appetite helps Goldman sell $1.3bn in 50-year bonds
Goldman Sachs sold $1.3bn in 50-year bonds, benefiting from the voracious appetite of retail investors for higher-yielding securities at a time of historically low interest rates. Goldman, which originally said it would sell $250m in 50-year debt, sold the bonds on Tuesday in lots of $25 to attract individual investors.
http://jlne.ws/aly8mX
Tudor Says Yuan Gains Would Add More Jobs Than Fed Easing
By Saijel Kishan, Bloomberg
Paul Tudor Jones, founder of $11.5 billion hedge-fund firm Tudor Investment Corp., said a revaluation of China’s renminbi would do more to cut U.S. unemployment than asset purchases by the Federal Reserve.
http://jlne.ws/bIRTel
Bill Gross, PIMCO | Investment Outlook - Run Turkey, Run
They say a country gets the politicians it deserves or perhaps it deserves the politicians it gets. Whatever the order, America is next in line, and as we go to the polls in a few short days it’s incumbent upon a sleepy and befuddled electorate to at least ask ourselves, “What’s going on here?” Democrat or Republican, Elephant or Donkey, nothing much ever seems to change. Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.
http://jlne.ws/bfYYKc
***CN: Gross talking up for the Turkey.
U.S. Seeks to Shield Goldman Secrets
By SCOTT PATTERSON, WSJ.com
Goldman Sachs Group Inc. has always closely guarded the secrets of its lucrative high-speed trading system. Now the securities firm is getting a help from an unusual source: federal prosecutors.
http://jlne.ws/8Z6K20
Financial Overhaul Should Help Long-Term Growth, Paulson Says
By Margaret Collins, Bloomberg
The financial overhaul law passed earlier this year should provide greater long-term growth for the economy, former U.S. Treasury Secretary Henry Paulson said.
http://jlne.ws/9kXXUR
Bernanke Asset Purchases Risk Unleashing 1970s Inflation Genie
By Craig Torres, Bloomberg
For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory.
http://jlne.ws/caYAmJ
`Black Swan' Author Taleb Says Financial Bonus Pay Should Be `Symmetric'
By Laura Marcinek, Bloomberg
Nassim Nicholas Taleb, author of the "The Black Swan," said bonuses to financial executives and traders should be "symmetric" with their performance to solve the problem of overconfidence in global markets.
http://jlne.ws/bsLqhY
Robert Shiller And Foreclosuregate: Playing With Systemic Fire? - Street Sweep: Fortune's Wall Street Blog
CNNMoney.com/Fortune
Robert Shiller, the Yale professor who was a leading skeptic of the financial bubbles of the past decade, and New York City Comptroller John Liu, spoke Tuesday at The Economist magazine's annual Buttonwood conference, where they discussed how to manage systemic risk under the new world of regulatory reform.
http://jlne.ws/9O4Beo
Shrinking Bank Revenue Signals Worst Decade of Growth
By Dawn Kopecki and Michael J. Moore, Bloomberg
Shrinking revenue at U.S. banks, led by Goldman Sachs Group Inc. and Citigroup Inc., may continue to fall as the industry heads into what could be its slowest period of growth since the Great Depression.
http://jlne.ws/90OoAv
Basel Could Make Credit Crunches Worse, Pandit Says
BusinessWeek
Citigroup Inc. Chief Executive Officer Vikram Pandit said many of the goals set by the Basel Committee on Banking Supervision are likely to be ineffective or make existing capital inequalities worse.
http://jlne.ws/cRWYAG
Vince Cable orders bankers back down to Earth on bonuses
Guardian Unlimited
Barclays' Bob Diamond mounts defence of the City as business secretary launches government review Vince Cable today warned bankers against embarking on a "self-indulgent bonus round" as he put soaring executive pay and potentially destructive takeovers at the heart of a new government review into the way the City operates. The business secretary's plea at the CBI conference followed an attempt ...
http://jlne.ws/bYS3rr
US Treasury: Oversight Council Taking Next Steps On Nonbank Rules
Dow Jones
The new Financial Stability Oversight Council at its second meeting next month will further discuss the criteria for identifing when a financial firm outside the banking system becomes large or complex enough to threaten markets, Deputy Treasury Secretary Neal Wolin said Monday.
http://jlne.ws/dk4kF8
Greenspan's Niece Fires Back at Hedge Fund
New York Times
It seems one hedge fund employee recently let go from Kingdon Capital wasn't going gently into that dark night.
http://jlne.ws/cFEo37
Treasury Draws Negative Yield for First Time
By Cordell Eddings and Daniel Kruger, Bloomberg
The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Federal Reserve will be successful in sparking inflation.
http://jlne.ws/bEivFI
Wall Street Sold `Tragically Deficient' Product, Angelides Says
By Phil Mattingly, Bloomberg
Wall Street firms such as Goldman Sachs Group Inc. and Citigroup Inc. created products that were "tragically deficient," in the view of the chairman of the panel charged by Congress with identifying the causes of the financial crisis.
http://jlne.ws/d9uzfk
G20 reaches agreement on global banking
The Age
G20 finance ministers have reached agreement on tougher rules for banks and big finance firms blamed for triggering the global economic crisis.
http://jlne.ws/devcz9
President's Working Group On Financial Markets Releases Money Market Funds Report
Press Release
The President's Working Group on Financial Markets (PWG) today released a report detailing a number of options for reforms related to money market funds. These options address the vulnerabilities of money market funds that contributed to the financial crisis in 2008.
http://jlne.ws/cxgbC7
U.S. Treasury Shielding of Citigroup With Deletions Make FOIA Meaningless
Bloomberg
The late Bloomberg News reporter Mark Pittman asked the U.S. Treasury in January 2009 to identify $301 billion of securities owned by Citigroup Inc. that the government had agreed to guarantee . He made the request on the grounds that taxpayers ought to know how their money was being used.
http://jlne.ws/cMOgKB
How Howard Lutnick Is Growing Cantor and BGC
BusinessWeek
The Cantor Fitzgerald chief is on a hiring binge, opening new offices abroad, and moving the firm in new directions
http://jlne.ws/bvu7wI
Events
Greece is Changing
Hellenic Observatory 11th Annual Lecture in association with APCO worldwide
When: Nov. 8, 2010
Where: LSE Campus
Full info: http://www2.lse.ac.uk/publicEvents/events/2010/20101108t1830vLSE.aspx
Details: The Greek sovereign debt crisis of 2010 has received world-wide attention and has elicited unprecedented action by the European Union and its member governments as well as by the IMF. Greece is now obliged to follow the terms of the 'Memorandum' agreed with the 'bail-out' loan it has received. Is Greek economic policy on track? What are its future prospects?
Deutsche Bank Annual Financial Technology Senior Executive Forum
When: Nov. 9-10, 2010
Where: The Pierre in New York
Full info: http://conferences.db.com/americas/fintech10/
Details: Participants will include prominent figures from exchange, FCM / Inter-dealer broker, trading technology, merchant acquiring, payment processing, prepaid, information provider, and financial software companies. Through a series of interactive panels, these senior business leaders will explore the challenges and opportunities as they expand into new markets, face increasing global competition, and respond to an ever-changing regulatory environment. For context, this is not a research analyst conference but rather, a forum that organized to engage senior executives in industry-related discussions. This forum is also an excellent networking opportunity as the individuals who attend are decision-makers within their organizations. Similar to last year, this year's forum will feature panel discussions comprised of senior executives and board members from a variety of industry sub-sectors.
***CN: Deutsche Bank reserves the right to determine which attendees have priority for admission.
The Devil in the Details: Implications of Recent Regulatory Reforms and Other Updates for the Financial Services Industry
When: Nov. 10, 2010
Full info: http://events.mcgladrey.com/forms/RedefiningtheSwapsMarketWebinar111010
Details: You are invited to a lively discussion of recent regulation from three different perspectives – legal, regulatory and accounting. Join leading professionals in the financial services, law, accounting and tax sectors as they identify certain implications of these regulations. In addition, a tax specialist will provide an update on the taxation of carried interest and other important tax issues. Speakers include John W. McPartland, senior financial markets advisor, Financial Markets Group, Federal Reserve Bank of Chicago and John Hague, partner and national director of financial services, McGladrey & Pullen, LLP. The webinar will cover topics such aslegal and regulatory update and impact of Dodd-Frank.
Economic News
UK retail sales growth slowed in October, says CBI
BBC
Retail sales slowed in October from the month before, according to the latest CBI distributive trades survey.
http://jlne.ws/bS75qL
Consumer confidence ticks up in October
By Annalyn Censky, CNN Money.com
Americans got slightly more optimistic about the economy in October, but still have an overwhelmingly gloomy outlook, according to the latest reading on consumer morale.
http://jlne.ws/dli9cN
U.S. home prices fall 0.2% in August: Case-Shiller Economic Report
By Greg Robb, MarketWatch
Home prices fell 0.2% in August, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s, in a report labelled “disappointing” by its compilers.
http://jlne.ws/9sloUm
Exchanges, Clearing Houses & MTFs
MF Global Sees Barrier To CME's Interest-Rate Swap Clearing
By Jacob Bunge Of DOW JONES NEWSWIRES
Brokerage firm MF Global Holdings (MF) charged Monday that exchange company CME Group Inc. (CME) has set too high a threshold for participating in a new service for interest-rate swaps. MF Global, among the biggest independent futures commission merchants, said that tough capital requirements for firms looking to clear interest-rate swap deals at CME ensure that the $349 trillion market will continue to be dominated by big banks.
http://jlne.ws/bkpluW
CME to Begin Trading 'On-the-Run' Treasury Futures Contracts
By Liz Capo McCormick, Bloomberg
CME Group Inc., the world's largest futures market, will begin trading on-the-run Treasury futures contracts next week that will provide investors exposure to benchmark 2-, 5- and 10-year notes.
http://jlne.ws/bJ2l7O
***CN: Learn more about CME Group OTR Treasury Futures contracts here on the exchange's Web site.
Morgan Stanley Clears OTC Derivative Trades at CME
Press Release
Morgan Stanley, a market leader in derivatives trading and clearing, announced today that it has cleared OTC interest rate swap transactions for clients of the firm at the Chicago Mercantile Exchange (CME). Trades were cleared on the first day of operation of the CME Clearing service for interest rate swaps. This follows the previously announced clearing of client OTC Credit Default Swap (CDS) transactions at CME's CDS clearing service.
http://jlne.ws/dcbwGQ
Firms & Banks
Wells Fargo Will File More Foreclosure Affidavits After Lapses
By Donal Griffin and Dakin Campbell, Bloomberg
Wells Fargo & Co., the biggest U.S. home lender, said it will file supplemental foreclosure affidavits to courts in about 55,000 proceedings after finding some statements “did not strictly adhere to the required procedures.”
http://jlne.ws/9MbSS4
Goldman Launches 50-Year Bond Sale
By KATY BURNE, WSJ.com
Goldman Sachs Group Inc. launched a $1.3 billion sale of 50-year bonds Tuesday, its longest senior bond ever. The sale was targeted at private, also known as retail, investors rather than institutions.
http://jlne.ws/bNBaHN
Banks spend $82 million to sell credit cards to students
By Amy Haimerl, CNN Money
The U.S. Marines recruit college students to become one of the few, one of the proud. Bank of America just wants their financial future. The Charlotte, N.C.-based bank spends exponentially more money than any other bank to recruit students for credit cards.
http://jlne.ws/c4ktkF
UBS reports $1.7 bln net; outflows are halted
Market Watch
UBS reports a $1.7 billion profit and halts the outflow of cash from its private- banking arm, though the group's shares drop as its investment-banking unit disappoints investors.
http://jlne.ws/asdYcO
Deutsche Bank's Biggest Deal in Decade May Hurt Profit
BusinessWeek
Deutsche Bank AG's plan to build a German consumer-banking powerhouse with the $8.9 billion purchase of Deutsche Postbank AG, its biggest takeover in a decade, may end up weighing on profitability.
http://jlne.ws/a2aM0O
BankServ's Corporate SWIFT Service Bureau to Be Offered by Bank of America Merrill Lynch
Marketwire
BankServ and Bank of America Merrill Lynch today announced an agreement to create a Global SWIFT Service Bureau solution for the bank's many Fortune 1000 clients worldwide.
http://jlne.ws/bDqUSK
Jefferies Names James Golden Head of Treasury Desk
BusinessWeek
Jefferies & Co., one of the 18 primary dealers that trade U.S. government debt with the Federal Reserve, hired former Royal Bank of Scotland Plc trader James Golden as head of its Treasury trading desk.
http://jlne.ws/dlIpWn
UBS Appoints Miskovic as Chief Risk Officer, Lofts as CEO of the Americas
Bloomberg
UBS AG, Switzerland's largest bank, hired Maureen Miskovic as chief risk officer, the first woman to join its 13-member group executive board.
http://jlne.ws/9eo8K
Auctions & Statistics
Treasury 5-Year Notes Go At 1.330% High Yield
By Gary Siegel, The Bond Buyer
The Treasury Department auctioned $35 billion of five-year notes, with a 1 1/4% coupon, a 1.330% high yield, a price of 99.614432.
http://jlne.ws/aUGqdj
Fannie Mae to sell new 3-yr and 5-yr notes in reopen
Reuters
Fannie Mae (FNMA.OB), the largest U.S. home funding company is planning to sell on Thursday new three-year benchmark notes and $1.0 billion of five-year benchmark notes in a reopening of an existing 1.625 percent issue, said a market source familiar with the transaction on Wednesday.
http://jlne.ws/9cog3l
TIPS auction reflects profound uncertainty
By Mark Hulbert, MarketWatch
How much should you have to pay for an insurance policy that protects you against both severe deflation and hyperinflation?
http://jlne.ws/d9RUw5
Regulators
SIFMA Says It's Not Looking to Roll Back Dodd-Frank Law
Finance Technology Network
A major financial services trade group said Tuesday it is not seeking to roll back key portions of the new U.S. financial reform law regardless of the outcome of the November elections.
http://jlne.ws/aHRfTY
IMF Managing Director Dominique Strauss-Kahn Names Antonio Borges as Director of the European Department of the Fund
Press Release
Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), announced today his intention to name Mr. Antonio Borges to the post of Director of the European Department of the Fund.
http://jlne.ws/96hVFy
Fed Won't Join Banks' Appeal to High Court Over Emergency-Loan Disclosures
Bloomberg
The Federal Reserve won't join a banking industry trade group in asking the U.S. Supreme Court to let the government continue to withhold details of emergency loans made to financial firms in 2008.
http://jlne.ws/9ATM1X
Geithner's Global Central Planning
By JOHN H. COCHRANE, WSJ.com
Economists are full of bad ideas. Terrible ideas seem to emerge when the gurus get together to talk about coordinating their bad ideas. Last week's public letter from Treasury Secretary Tim Geithner to the G-20 finance ministers is a great example.
http://jlne.ws/a0k6jF
ECB revises estimated T2S fees
By Jeremy Grant, FT.com
The European Central Bank has come up with a more precise estimate for how much the planned pan-European settlement system - known as Target2Securities (T2S) - will cost, setting a fee of 15 euro cents per transaction.
http://jlne.ws/dnYnHQ
CFTC aims for middle ground in segregating funds
By Roberta Rampton and Christopher Doering, Reuters
The U.S. futures regulator is aiming to find middle ground between money managers who want their swaps' collateral protected in times of financial crisis, and the clearinghouses and their members who worry new rules will ratchet up costs.
http://jlne.ws/9BbmIX
Fed boss: Regulators looking into foreclosure mess
By JEANNINE AVERSA, AP
Federal banking regulators are examining whether mortgage companies cut corners on their own procedures when they moved to foreclose on people's homes, Federal Reserve Chairman Ben Bernanke said Monday.
http://jlne.ws/cYhES1
Fed's Fisher: Policy Makers Must Be Aware of Dollar Impact
Bloomberg
Federal Reserve officials need to be mindful of the effect their actions are having on the dollar, said Richard Fisher, president of the Fed bank of Dallas and a former deputy U.S. trade representative.
http://jlne.ws/aNG7IT
New York Fed Faces 'Conflict' in Mortgage Buybacks
BusinessWeek
The Federal Reserve Bank of New York's effort to recover taxpayer money used in bailouts during the crisis may be at odds with its mission to ensure the stability of the financial system.
http://jlne.ws/9r22oF
Plosser Says Fed in 'Difficult Spot' on Mortgage-Debt Buybacks
BusinessWeek
The Federal Reserve's effort to recover taxpayer money used in bailouts while also ensuring the stability of the financial system puts it in a "difficult spot," said Charles Plosser, president of the Philadelphia Fed.
http://jlne.ws/c0DQJt
OTC
OTC Derivatives May Face Curbs as FSB Seeks Central Clearing
By Jim Brunsden and Abigail Moses, Bloomberg
Regulators should consider limiting trades in some derivatives that aren't centrally cleared in a bid to cut excessive risk, the Financial Stability Board said.
http://jlne.ws/dl9E7x
Curbing Swaps Correlation Risk Vital, Regulators Told
By Matthew Leising and Shannon D. Harrington, Bloomberg
Regulators need to consider the collective risk of the credit-default swap market when deciding margin requirements for cleared trades, University of Houston finance professor Craig Pirrong said today in Washington.
http://jlne.ws/anJqga
OTC derivatives trade grows in 2010 despite crackdown - ISDA
By Daisy Ku, Reuters
The outstanding amount of over-the-counter derivatives rose during the first half of 2010 despite calls by regulators to move much of the market on to exchanges, the International Swaps and Derivatives Association said on Monday.
http://jlne.ws/aVPeD3
Foreign Banks Selling Swaps in U.S. to Face Dodd-Frank Rules, Gensler Says
Bloomberg
International banks selling derivatives in the U.S. will face higher capital requirements and new business conduct standards under the most sweeping rewrite of Wall Street rules since the Great Depression, according to a top regulator.
http://jlne.ws/d5bgzn
CFTC May Finish Proposed Swaps Rules by Mid-December
By SARAH N. LYNCH, WSJ.com
The Commodity Futures Trading Commission hopes to finish proposing all of its new over-the-counter derivatives regulations by mid-December, but to implement them it may need 400 additional staffers, CFTC Chairman Gary Gensler said Thursday.
http://jlne.ws/aJfgoi
Global News
International Borrowers Take to Islamic Bond Market
The New York Times
Until recently the issuance of Islamic bonds, or sukuk, was confined to the Muslim world. But now a number of international borrowers are tapping the markets, including Nomura Holdings in Japan and Europe's first corporate borrower, International Innovative Technologies.
http://jlne.ws/cw1m0E
Bean explains why Bank forecasts failed
By Daniel Pimlott, FT.com
The Bank of England could not have foreseen the depth of the recession, according to its deputy governor, because downturns following banking meltdowns are so unpredictable. Economists should treat such events the way seismologists approach earthquakes, said Charlie Bean, by remaining alert to a build-up of stresses and vulnerabilities.
http://jlne.ws/9ptB6T
Argentina credit default swaps spreads narrow
Reuters
Argentina's credit default swap spreads narrowed on Wednesday following news of the death of former Argentine president Nestor Kirchner, husband of current president Cristina Fernandez.
http://jlne.ws/aGVH9b
Greece Likely to Default By 2013 as Debts Remain, El-Erian Says
By Susanne Walker, Bloomberg
Greece is likely to default over the next three years because budget-cutting won’t be enough to reduce the nation’s debt burden, Pacific Investment Management Co. Chief Executive Officer Mohamed A. El-Erian said.
http://jlne.ws/9ah6WF
Iceland Wants Failed Banker Criminal Probes Sped Up
BusinessWeek
Iceland's parliamentary committee in charge of probing the country's financial collapse wants to speed up investigations of former bank executives and ensure criminal acts are prosecuted soon.
http://jlne.ws/bgCw9z
Qatar Bourse Expects to Start Bond Trading, Short-Selling in First Quarter
Bloomberg
Qatar Exchange expects to start trading in bonds in the first quarter of next year, Saif Al- Mansoori, deputy chief executive officer, said in Beirut today.
http://jlne.ws/bQQnh9
Barclays named 'Best Bank in Botswana'
Mmegi Online
For the second year running, Barclays Bank of Botswana (BBB) has been named 'Best Bank in Botswana' by emeafinance Magazine.
http://jlne.ws/bTNu0n
Abu Dhabi Islamic Bank Hires HSBC, Barclays, StanChart to Sell Dollar Bond
Bloomberg
Abu Dhabi Islamic Bank PJSC's sale of five-year Islamic bonds in dollars may be priced to yield about 3.625 percent, according to two people with knowledge of the sale.
http://jlne.ws/aJ1Nmb
South Korea's Economic Growth Likely Slowed as Won Surge Endangers Exports
By William Sim and Sarina Yoo, Bloomberg
South Korea’s economic expansion probably slowed last quarter as the nation’s currency surged the most in Asia and global growth cooled, imperiling exports and increasing scope to extend a pause in interest-rate increases.
http://jlne.ws/9bnmYe
Singapore Exchange eyes up a move for ASX
Sydney Morning Herald
The nation's monopoly sharemarket operator, the ASE, is back in talks with its offshore peers.
http://jlne.ws/9s7zkO
Brussels looks to cut settlement times
By Jeremy Grant in London and Nikki Tait in Brussels, FT.com
European regulators are considering ways to cut the time it takes for securities to be processed after trades are done in a bid to reduce risks to the system in the event of defaults and other large financial failures.
http://jlne.ws/c5Q5zj
Spain's Banco Santander wins EU approval to buy RBS assets
People's Daily
Banco Santander of Spain has won approval from the European Union (EU) to buy a number of retail and commercial banking assets of the Royal Bank of Scotland Group (RBS) in Britain.
http://jlne.ws/9pZAE9
Bank levy raises worries over 'double taxation'
Daily Telegraph
Banks face being taxed twice on their balance sheets in the first year of the Government's new L2.5bn levy with Britain unlikely to reach an agreement with other countries on the issue of double taxation before the measure is introduced next year.
http://jlne.ws/d7J0xK
Rabu, 27 Oktober 2010
Top Interest Rate Headlines 10-27-10: Treasury 5-Year Notes Go At 1.330% High Yield
Federal Funds Futures: When a Bet Is Not a Bet
By Howard Simons
Has any carnival barker ever drawn a crowd with, “Step right up and refloat your fixed-rate overnight index swaps!”? Probably not; traders are supposed to be risk takers, cool and calculating, skirting along the edge of the road and asking passersby for the telephone number for 1-800-GAMBLER.
http://jlne.ws/cqtn39
Retail appetite helps Goldman sell $1.3bn in 50-year bonds
Goldman Sachs sold $1.3bn in 50-year bonds, benefiting from the voracious appetite of retail investors for higher-yielding securities at a time of historically low interest rates. Goldman, which originally said it would sell $250m in 50-year debt, sold the bonds on Tuesday in lots of $25 to attract individual investors.
http://jlne.ws/aly8mX
Treasury 5-Year Notes Go At 1.330% High Yield
By Gary Siegel, The Bond Buyer
The Treasury Department auctioned $35 billion of five-year notes, with a 1 1/4% coupon, a 1.330% high yield, a price of 99.614432http://jlne.ws/aUGqdj
Federal Funds Futures: When a Bet Is Not a Bet
By Howard Simons, Minyanville
Has any carnival barker ever drawn a crowd with, “Step right up and refloat your fixed-rate overnight index swaps!”? Probably not; traders are supposed to be risk takers, cool and calculating, skirting along the edge of the road and asking passersby for the telephone number for 1-800-GAMBLER.http://jlne.ws/cqtn39
Tudor Says Yuan Gains Would Add More Jobs Than Fed Easing
By Saijel Kishan, Bloomberg
Paul Tudor Jones, founder of $11.5 billion hedge-fund firm Tudor Investment Corp., said a revaluation of China’s renminbi would do more to cut U.S. unemployment than asset purchases by the Federal Reserve.
http://jlne.ws/bIRTel
Bean explains why Bank forecasts failed
By Daniel Pimlott, FT.com
The Bank of England could not have foreseen the depth of the recession, according to its deputy governor, because downturns following banking meltdowns are so unpredictable. Economists should treat such events the way seismologists approach earthquakes, said Charlie Bean, by remaining alert to a build-up of stresses and vulnerabilities.
http://jlne.ws/9ptB6T
Bill Gross, PIMCO | Investment Outlook - Run Turkey, Run
They say a country gets the politicians it deserves or perhaps it deserves the politicians it gets. Whatever the order, America is next in line, and as we go to the polls in a few short days it’s incumbent upon a sleepy and befuddled electorate to at least ask ourselves, “What’s going on here?” Democrat or Republican, Elephant or Donkey, nothing much ever seems to change. Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.http://jlne.ws/bfYYKc
Fannie Mae to sell new 3-yr and 5-yr notes in reopen
Reuters
Fannie Mae (FNMA.OB), the largest U.S. home funding company is planning to sell on Thursday new three-year benchmark notes and $1.0 billion of five-year benchmark notes in a reopening of an existing 1.625 percent issue, said a market source familiar with the transaction on Wednesday.
http://jlne.ws/9cog3l
Argentina credit default swaps spreads narrow
Reuters
Argentina's credit default swap spreads narrowed on Wednesday following news of the death of former Argentine president Nestor Kirchner, husband of current president Cristina Fernandez.http://jlne.ws/aGVH9b
Financial industry, regulators facing unprecedented rule-making task: SIFMA
News Investment Executive
Focus must be on safeguarding financial system without constraining economic growth and job creation
The financial industry and its regulators face an unprecedented task over the next few years, as they must write a wide range of important rules to implement regulatory reform, says the head on the U.S. securities industry trade association. Speaking to the National Economists Club on Tuesday, Tim Ryan, president and CEO of the U.S. Securities Industry and Financial Markets Association, said that the industry is facing a huge task as gets around to the detailed work of implementing the reforms passed by the U.S. Congress earlier this year.
http://jlne.ws/bWMWGo
U.S. Seeks to Shield Goldman Secrets
By SCOTT PATTERSON, WSJ.com
Goldman Sachs Group Inc. has always closely guarded the secrets of its lucrative high-speed trading system. Now the securities firm is getting a help from an unusual source: federal prosecutors.
http://jlne.ws/8Z6K20
SIFMA Says It's Not Looking to Roll Back Dodd-Frank Law
Finance Technology Network
A major financial services trade group said Tuesday it is not seeking to roll back key portions of the new U.S. financial reform law regardless of the outcome of the November elections.
http://jlne.ws/aHRfTY
Financial Overhaul Should Help Long-Term Growth, Paulson Says
By Margaret Collins, Bloomberg
The financial overhaul law passed earlier this year should provide greater long-term growth for the economy, former U.S. Treasury Secretary Henry Paulson said.
Bloomberg
http://jlne.ws/9kXXUR
By Howard Simons
Has any carnival barker ever drawn a crowd with, “Step right up and refloat your fixed-rate overnight index swaps!”? Probably not; traders are supposed to be risk takers, cool and calculating, skirting along the edge of the road and asking passersby for the telephone number for 1-800-GAMBLER.
http://jlne.ws/cqtn39
Retail appetite helps Goldman sell $1.3bn in 50-year bonds
Goldman Sachs sold $1.3bn in 50-year bonds, benefiting from the voracious appetite of retail investors for higher-yielding securities at a time of historically low interest rates. Goldman, which originally said it would sell $250m in 50-year debt, sold the bonds on Tuesday in lots of $25 to attract individual investors.
http://jlne.ws/aly8mX
Treasury 5-Year Notes Go At 1.330% High Yield
By Gary Siegel, The Bond Buyer
The Treasury Department auctioned $35 billion of five-year notes, with a 1 1/4% coupon, a 1.330% high yield, a price of 99.614432http://jlne.ws/aUGqdj
Federal Funds Futures: When a Bet Is Not a Bet
By Howard Simons, Minyanville
Has any carnival barker ever drawn a crowd with, “Step right up and refloat your fixed-rate overnight index swaps!”? Probably not; traders are supposed to be risk takers, cool and calculating, skirting along the edge of the road and asking passersby for the telephone number for 1-800-GAMBLER.http://jlne.ws/cqtn39
Tudor Says Yuan Gains Would Add More Jobs Than Fed Easing
By Saijel Kishan, Bloomberg
Paul Tudor Jones, founder of $11.5 billion hedge-fund firm Tudor Investment Corp., said a revaluation of China’s renminbi would do more to cut U.S. unemployment than asset purchases by the Federal Reserve.
http://jlne.ws/bIRTel
Bean explains why Bank forecasts failed
By Daniel Pimlott, FT.com
The Bank of England could not have foreseen the depth of the recession, according to its deputy governor, because downturns following banking meltdowns are so unpredictable. Economists should treat such events the way seismologists approach earthquakes, said Charlie Bean, by remaining alert to a build-up of stresses and vulnerabilities.
http://jlne.ws/9ptB6T
Bill Gross, PIMCO | Investment Outlook - Run Turkey, Run
They say a country gets the politicians it deserves or perhaps it deserves the politicians it gets. Whatever the order, America is next in line, and as we go to the polls in a few short days it’s incumbent upon a sleepy and befuddled electorate to at least ask ourselves, “What’s going on here?” Democrat or Republican, Elephant or Donkey, nothing much ever seems to change. Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.http://jlne.ws/bfYYKc
Fannie Mae to sell new 3-yr and 5-yr notes in reopen
Reuters
Fannie Mae (FNMA.OB), the largest U.S. home funding company is planning to sell on Thursday new three-year benchmark notes and $1.0 billion of five-year benchmark notes in a reopening of an existing 1.625 percent issue, said a market source familiar with the transaction on Wednesday.
http://jlne.ws/9cog3l
Argentina credit default swaps spreads narrow
Reuters
Argentina's credit default swap spreads narrowed on Wednesday following news of the death of former Argentine president Nestor Kirchner, husband of current president Cristina Fernandez.http://jlne.ws/aGVH9b
Financial industry, regulators facing unprecedented rule-making task: SIFMA
News Investment Executive
Focus must be on safeguarding financial system without constraining economic growth and job creation
The financial industry and its regulators face an unprecedented task over the next few years, as they must write a wide range of important rules to implement regulatory reform, says the head on the U.S. securities industry trade association. Speaking to the National Economists Club on Tuesday, Tim Ryan, president and CEO of the U.S. Securities Industry and Financial Markets Association, said that the industry is facing a huge task as gets around to the detailed work of implementing the reforms passed by the U.S. Congress earlier this year.
http://jlne.ws/bWMWGo
U.S. Seeks to Shield Goldman Secrets
By SCOTT PATTERSON, WSJ.com
Goldman Sachs Group Inc. has always closely guarded the secrets of its lucrative high-speed trading system. Now the securities firm is getting a help from an unusual source: federal prosecutors.
http://jlne.ws/8Z6K20
SIFMA Says It's Not Looking to Roll Back Dodd-Frank Law
Finance Technology Network
A major financial services trade group said Tuesday it is not seeking to roll back key portions of the new U.S. financial reform law regardless of the outcome of the November elections.
http://jlne.ws/aHRfTY
Financial Overhaul Should Help Long-Term Growth, Paulson Says
By Margaret Collins, Bloomberg
The financial overhaul law passed earlier this year should provide greater long-term growth for the economy, former U.S. Treasury Secretary Henry Paulson said.
Bloomberg
http://jlne.ws/9kXXUR
Chief of Home Ownership Preservation Office Phyllis Caldwell's Testimony Before the Congressional Oversight Panel: TARP-Funded Housing Programs
October 27, 2010
TG-928
Written Testimony of Chief of Home Ownership Preservation Office Phyllis Caldwell Before the Congressional Oversight Panel
Chairman Kaufman, Members of the Panel, thank you for the opportunity to testify today regarding Treasury's efforts under the Emergency Economic Stabilization Act of 2008 (EESA) and the Troubled Asset Relief Program (TARP) to address the housing crisis.
We recently passed the two year anniversary of TARP, and the end of Treasury's ability to make new commitments of TARP funds. In the context of that anniversary, I would like to discuss the development of the Making Home Affordable (MHA) program and the Administration's other TARP-funded housing programs, and how Treasury's response to the housing crisis has developed as the nature of the housing problems has changed over time. It is also important to analyze the progress of the MHA program and the Administration's efforts at stemming the tide of foreclosures in a broader economic context. In addition, early data indicate that MHA's Home Affordable Modification Program (HAMP) permanent modifications are performing well over time, with lower delinquency rates than those reported by the industry at large.
I also would like to take the opportunity to address the recent reports of faulty documentation and potentially fraudulent affidavits within the foreclosure process, and its relationship to MHA in particular. The reported behavior of these mortgage servicers is unacceptable. Servicers must comply with the law and Treasury is working with other Federal agencies to ensure that servicers improve their foreclosure processes. Because MHA and HAMP intended to keep homeowners out of foreclosure, and are primarily based around the concept of modifying a loan to keep a borrower in their home, it is not directly affected by "robo-signers" or false affidavits. MHA has strong compliance mechanisms in place to ensure that servicers follow our program's guidelines. I will discuss these recent developments, and the Administration's response, in more detail below.
The Development and Expansion of MHA
The impact of MHA should not be measured solely by the number of borrowers who have received modifications, but also by how the program has helped reduce the number of foreclosures and helped transform the way the mortgage industry views the modification of mortgage loans. Just over two years ago, distressed borrowers had few options to stay in their homes – either a "work out" plan that increased payments over time, or foreclosure. Today because of the standards that MHA set, distressed borrowers have more options to avoid foreclosures, including modifications under MHA's first lien modification component, the Home Affordable Modification Program (HAMP), proprietary modifications built on the HAMP model, and short sales. To date, more than 1.3 million borrowers have started HAMP trials. While many of these borrowers did not convert to permanent modifications, they were afforded much needed breathing room. In addition, the majority of borrowers who did not receive permanent HAMP modifications moved into alternative modifications or became current through other means.
It is important to consider how the housing crisis has changed rapidly over time. When EESA was enacted, the housing collapse was primarily considered to have been caused by a collapse in the subprime lending market. Many of these subprime loans were over-leveraged and had adjustable-rates that were re-setting to higher fixed monthly payments, which triggered widespread defaults. But as the recession deepened, unemployment surged and house prices declined, often dramatically. Today, the primary reason the housing crisis continues is due to (1) borrowers becoming unemployed (or under-employed) and (2) the severity with which borrowers find themselves underwater on their homes.
Over the past several months, we have enhanced MHA to address these changes to the housing crisis. Treasury has launched enhancements to MHA that incentivize principal reduction, streamline foreclosure alternatives, provide additional time for unemployed borrowers to stay in their homes while searching for other employment, and simultaneously modify second liens with the first. We will begin to see the full impact of these enhancements early next year, but it is safe to say that MHA will continue to be dynamic in reaching distressed borrowers, and will continue to set standards for the industry in helping homeowners stay in their homes or otherwise avoid foreclosures.
The Initial Response to the Housing Crisis
The Obama Administration took office in the midst of the most serious housing crisis in decades. Home values had fallen by nearly one-third and were expected to fall by another five percent by the end of 2009. Stresses in the financial system had reduced the supply of mortgage credit, limiting the ability of Americans to buy homes. Millions of responsible American families who were making their monthly payments – despite in many cases having lost jobs or income – saw their property values fall, and were unable to sell or refinance at lower mortgage rates. The combination of falling home prices and economic contraction dramatically increased the financial strains on many responsible homeowners.
There was no consensus among loan servicers about how to respond to responsible borrowers who were willing to continue making payments but in need of some mortgage assistance. There were no accepted timeframes for servicer decisions. Servicers were paralyzed by the need to seek approval from investors on an individual, mortgage-by-mortgage basis. And, perhaps most critically, there was no affordability standard for monthly mortgage payments. As a result of the absence of an accepted affordability standard and a systematic process for evaluating modification requests, the solutions offered by servicers often achieved nothing other than adding unpaid interest and fees to the mortgage balance, resulting in higher – not lower – payments for homeowners. Millions of responsible American families simply lost their homes.
During its first month in office, the Obama Administration took aggressive action to address the housing crisis. In February 2009, President Obama announced the Homeowner Affordability and Stability Plan. As part of this plan and through other housing initiatives, the Administration took the following actions to strengthen the housing market:
* Launched the HAMP, which would permanently reduce mortgage payments to affordable levels for qualifying borrowers;
* Provided strong support to Fannie Mae and Freddie Mac to ensure continued access to affordable mortgage credit across the market;
* Purchased over $200 billion in agency mortgage backed securities as part of the combined purchases with the Federal Reserve of more than $1.4 trillion in agency mortgage backed securities and agency debt securities, which helped keep mortgage rates at historic lows, allowing homeowners to access credit to purchase new homes and refinance into more affordable monthly payments;
* Through the Federal Housing Administration (FHA), provided liquidity for housing purchases at a time when private lending had declined, playing an important counter-cyclical role;
* Supported expanding the limits for loans guaranteed by Fannie Mae, Freddie Mac, and FHA from previous limits up to $625,500 per loan to $729,750;
* Expanded refinancing options for Fannie Mae and Freddie Mac loans, particularly for borrowers with negative equity, to allow more Americans to refinance;
* Supported a tax credit for first time homebuyers, which helped 2.5 million American families purchase homes; and
* Through the American Recovery and Reinvestment Act of 2009 (ARRA), provided more than $5 billion in support for affordable rental housing through low income housing tax credit programs and $2 billion in support for a neighborhood stabilization program (bringing the total neighborhood stabilization program funding to close to $7 billion when funding from the Dodd-Frank Financial Reform Act and the Housing and Economic Recovery Act of 2008 is included) to restore neighborhoods suffering concentrated foreclosures.
These efforts are part of a comprehensive approach designed to stabilize the housing market. As Mark Zandi (a former economic adviser for Senator John McCain's 2008 presidential campaign) and Alan S. Blinder (a former economic adviser for President Clinton) noted in a paper released in July 2010, the government's financial and fiscal policies tend to reinforce each other, such that the combined effect exceeds the sum of the parts. For example, Zandi and Blinder observed that providing housing tax credits as part of the stimulus boosted housing demand and therefore house prices - foreclosures decreased, and the financial system suffered smaller losses, which, in turn, enhanced the effectiveness of the government's efforts to stabilize the financial system.
Design of MHA
As part of the Homeowner Affordability and Stability Plan, under the authority granted in EESA, the Treasury Department began work on a program to improve the affordability of mortgages for responsible homeowners, consistent with the mandate of EESA to promote financial stability while protecting taxpayers. Developing the program posed very difficult and challenging policy tradeoffs--how to make meaningful interventions that would yield a high probability of participation and broadly support borrower success while minimizing the cost to the government, moral hazard, adverse selection, and operational and financial risks and complexity.
In addition, legal and other constraints required Treasury to develop a voluntary program that would support servicers' efforts to modify mortgages. EESA authorized certain types of programs to assist homeowners but constrained Treasury's ability to set up a mandatory modification program. Consequently, these legal constraints forced Treasury to seek the voluntary cooperation of mortgage servicers and investors.
Designing a program to improve the affordability of mortgages for responsible homeowners was difficult. Loan servicers were simply not equipped to manage the magnitude of the crisis before them. They did not have the systems, staffing, operational capacity or incentives to engage with homeowners on a large scale and offer meaningful relief from unaffordable mortgages. Moreover, the expansion of private securitizations during the housing boom left servicers in a complicated legal situation; contractual language designed during the heady days of the bubble bound them in general terms to maximize investor returns, but little specific guidance existed on how that might be accomplished if house prices were to fall in conjunction with a rapidly rising number of defaults.
The Administration challenged itself to develop a program that would protect taxpayers at the same time that it broadly offered responsible, but struggling, homeowners the opportunity to remain in their homes at more affordable payment levels. The Administration determined that in order to achieve these objectives simultaneously, it was critical, with respect to the HAMP program, to leave the financial risk of modification re-default with the investors. Ultimately, the program should offer the opportunity to remain in their homes to many borrowers, but the taxpayer will only pay to the extent the distressed borrower is assisted by a permanent modification that remains in effect.
It is important to emphasize that HAMP was not intended to help all borrowers, but was intended to help an important segment of borrowers – specifically, owner-occupants whose mortgages were originated prior to 2009 with conforming loan balances ($729,750 or less), and who were currently at risk of foreclosure or who would be at risk prior to the end of 2012. HAMP was built around four core principles, designed to help the large segment of at-risk homeowners for whom foreclosure is avoidable and who want to stay in their homes.
First, the program focused on affordability -- every modification under the program would be required to lower the borrower's monthly mortgage payment to 31 percent of the borrower's monthly gross income, a level estimated to provide reasonable assurance that the modification would be sustainable. The borrower's modified monthly payment would remain in place for five years, which Treasury expected would provide sufficient time for the housing market and the financial system to recover.
Second, HAMP would protect the taxpayer by employing an innovative pay-for-success structure and requiring the investor in the mortgage to retain the risk of future re-default. This structure aligned the interests of borrowers, taxpayers, investors and servicers and encouraged loan modifications that would be both affordable for borrowers over the long term and cost-effective for taxpayers.
Third, any servicer that signed up for the program would be required to evaluate every eligible loan using a standard net present value (NPV) test. If the test was positive, the servicer would be required to modify the loan.
Fourth, unemployed borrowers would be allowed to participate in the program. Unemployed borrowers who had nine months or more of unemployment insurance remaining would be eligible to include it in their income for consideration in the NPV calculation. Unemployed borrowers would also be allowed to include other sources of passive income like rental income and income from an employed spouse. In addition, in response to the growing problem of unemployment and its impact on borrower incomes, in May Treasury launched UP, the forbearance program for unemployed borrowers. UP requires servicers to provide a minimum of 3 month forbearance to unemployed borrowers.
The basic HAMP terms were as follows: a participating HAMP servicer applies a series of modification steps to reduce the homeowner's monthly mortgage payment to 31 percent of the homeowner's gross (pre-tax) income, in the following order: rate reduction to as low as two percent; term extension up to 40 years; and principal deferral (or forbearance, at the servicer's option). The modified interest rate is fixed for a minimum of five years. Beginning in year six, the rate may increase no more than one percentage point per year until it reaches the Freddie Mac Primary Mortgage Market Survey rate (essentially the market interest rate) at the time the permanent modification agreement was prepared.
Before a mortgage is permanently modified, the homeowner must submit the necessary documentation and make the new, reduced monthly mortgage payment on time and in full during a trial period of three months to demonstrate that the modified monthly payment is sustainable. Homeowners who make payments on permanently modified loans on time accrue an incentive of $1,000 per year to reduce the amount of principal they owe up to a maximum of $5,000.
Any modification offer will provide a binding reduction in payments for borrowers who continue to meet the full terms of the modification, whether in the trial phase or after having converted to a permanent modification.
Measuring Success
The Administration originally projected that the new program would offer help to three to four million families through the end of 2012, expecting most of these families to act on the offer of help and to receive a permanent modification. When a trial modification did not convert to a permanent solution, Treasury developed other strategies to transition borrowers out of homeownership in the manner least disruptive to them or their communities.
Early Success and Challenges
Nearly 1.6 million borrowers were in contact with their servicers and were approved for and extended a modification offer, with more than 1.3 million of these approved offers resulting in modification trials. The run rate of eligible borrowers approved for and starting modifications was at or above the target rate set internally by Treasury of 20,000 – 25,000 per week. To date, borrowers who started HAMP permanent modifications had their payments reduced by a median amount of more than $500 per month.
Conversion challenges
While the overall number of borrowers in permanent modifications rose substantially, the conversion rate to permanent modifications was below anticipated levels. When the program launched in April 2009, servicers were explicitly provided flexibility to approve borrowers for trial modifications without documentation of income in order to reach more borrowers more quickly. They were required to verify the income prior to granting a permanent modification. In the early fall and over the coming months, as the first large numbers of borrowers reached a trial length that would allow them to become eligible for conversion to a permanent modification, servicers experienced substantial difficulty in collecting and processing applications and making decisions based on the limited documentation provided.
Steps Taken to Ensure Greater Conversions
On January 28, 2010, Treasury issued new guidance requiring servicers to begin verifying income upfront no later than June 1, 2010. This was done in direct response to the challenges of collecting documents during the trial period, and to help better ensure that more borrowers who started modifications were able to convert to permanent status.
In the spring of 2010, the move to collect documents upfront to achieve better overall conversions reduced the pace of modification offers materially; however, Treasury expects that over time, requiring documentation up front will substantially improve the success rate of trial modifications and speed determinations.
Cancelled Borrowers still have a Number of Foreclosure Alternatives
A cancelled trial modification does not mean that the program has failed a homeowner or that the borrower will inevitably face foreclosure: HAMP explicitly requires servicers to consider these borrowers for other foreclosure prevention options including proprietary modifications, short sales or deeds-in-lieu of foreclosure that also prevent a foreclosure sale. Based on survey data from the eight largest servicers, it is estimated that a majority of borrowers who are turned down for a trial modification are offered a foreclosure alternative – usually a modification proprietary to the servicer, or a short sale – rather than proceeding directly to foreclosure.
HAMP Permanent Modifications Have Been Performing Well
The overall sustainability of HAMP permanent modifications appears promising. Early data indicate that HAMP permanent modifications are performing well over time, with lower delinquency rates than those reported by the industry at large. At nine months, almost 90 percent of homeowners remain in their permanent HAMP modification and less than 16 percent of permanent modifications are 60+ days delinquent. And while it is still early, so far, there does not appear to be a correlation between back-end debt-to-income ratio (DTI) and the performance of borrowers with permanent modifications. Performance is consistent across all ratios of back-end DTI, including very high end DTI homeowners. In addition, based on early data, there does not appear to be a correlation between how underwater borrowers were on their loans before modification (in other words, their mark-to-market loan-to-value ratio before the modification), and the performance of those borrowers on their permanent modifications. Performance appears consistent across all loan-to-value ratios.
There are a range of important measures of success; keeping in mind the measures mentioned above, as well as others like the effect of HAMP on neighborhood and housing market stabilization, Treasury continues to monitor progress and push for improved results. HAMP has had a substantial impact on avoiding foreclosures so far (under HAMP's guidelines, servicers were always prohibited foreclosure sales while borrowers were being evaluated for HAMP), and very few borrowers that have qualified for HAMP (including the ability to make a reasonable payment on a modified loan as measured by income sufficient to pass an NPV model) have gone through foreclosure sale to date. Recently, Treasury strengthened homeowner protections by (a) requiring servicers to evaluate delinquent borrowers for HAMP before initiating a foreclosure sale, and (b) halting foreclosure proceedings for those borrowers who are already in HAMP trial periods.
MHA has been a Catalyst – Setting the Benchmark for Sustainable Modifications
MHA has transformed the way the mortgage servicing industry treats borrowers in distress. Because of MHA, servicers have developed constructive private-sector options. Where there was once no consensus plan among loan servicers about how to respond to borrowers in need of mortgage assistance, MHA has established a universal affordability standard, a 31 percent debt-to-income ratio. This has enhanced servicers' ability to reduce mortgage payments to sustainable levels while simultaneously providing investors with a justification for modifications.
Taking into account MHA's effect on standardizing and expanding proprietary modifications in the mortgage industry, the number of mortgage modifications has been double the number of foreclosure completions: More than 3.35 million modifications were arranged from April 2009 through the end of July 2010. This includes more than 1.3 million HAMP trial modifications started, more than 510,000 Federal Housing Administration (FHA) loss mitigation and early delinquency interventions, and nearly 1.6 million private sector modifications performed by members of the HOPE Now alliance. Given the complexity of the mortgage modification process and the number of government and non-government modification programs available, homeowners often receive more than one modification arrangement. Therefore it is difficult to determine the exact number of homeowners assisted by multiple programs.
On the measure of neighborhood and housing market stabilization, the substantial number of foreclosure sales avoided has contributed to a material improvement in market expectations for house prices and to many successive months of stability in home prices in much of the country. But, as discussed, efforts must continue to capitalize on early encouraging signs and overcome remaining challenges. There are still a number of risk factors that will challenge the stability of the housing markets, including the potential for mortgage rates to rise, continuing elevated levels of delinquency exacerbated by unemployment and the large number of underwater borrowers, and the associated potential for a substantial increase in the number of foreclosure starts.
Further, it is important to keep in mind that MHA is only one of many Administration housing efforts targeting these challenges: the Administration has also provided substantial support for the housing markets through investment in Fannie Mae and Freddie Mac to help keep mortgage rates affordable; purchase of agency mortgage-backed securities; refinancing opportunities that have allowed more than four million borrowers to refinance since the launch of the MHA; and an initiative to provide support and financing to state and local Housing Finance Agencies. These Housing Finance Agencies provide, in turn, tens of thousands of affordable mortgages to first time homebuyers and help develop tens of thousands of affordable rental units for working families, including those displaced by the housing crisis and foreclosures.
Responding to a Changing Housing Crisis
MHA was designed to be a versatile program. As the mortgage crisis evolved, Treasury enhanced MHA and developed new programs designed to meet the changing landscape. Treasury expanded MHA to include a second lien modification program, a foreclosure alternatives program that promoted short sales and deeds-in-lieu of foreclosures, and an unemployment forbearance program. Treasury expanded HAMP to include FHA and Rural Development mortgage loans through the FHA-HAMP and RD-HAMP program, and also introduced a principal reduction option. Finally, Treasury introduced a program to allow the hardest-hit states to tailor housing assistance to their areas, and worked with FHA to introduce an option for homeowners with high negative equity to refinance into a new FHA loan if their lender agrees to reduce principal on the original loan by at least 10%.
Second Lien Modification Program
A few months after launching HAMP, Treasury rolled out its first major expansion of the program, the Second Lien Modification Program (referred to as 2MP). Under 2MP, when a borrower's first lien is modified under HAMP and the servicer of the second lien is a 2MP participant, that servicer must offer to modify the borrower's second lien according to a defined protocol, which provides for a lump sum payment from Treasury in exchange for full extinguishment of the second lien, or a reduced lump sum payment from Treasury in exchange for a partial extinguishment and modification of the borrower's remaining second lien. Although 2MP was initially met with reluctance from servicers and investors who did not want to recognize losses on their second lien portfolios, as of October 3, 2010, Treasury has signed up seventeen2MP servicers, which includes the four largest mortgage servicers, who in aggregate service approximately 60 percent of outstanding second liens.
Home Affordable Foreclosure Alternatives Program
Any modification program seeking to avoid preventable foreclosures has limits, HAMP included. HAMP does not, nor was it ever intended to, address every delinquent loan. Borrowers not qualifying for HAMP may benefit from an alternative program that helps the borrower transition to more affordable housing and avoid the substantial costs of a foreclosure. On April 5, 2010, the Home Affordable Foreclosure Alternatives (HAFA) Program became effective, pursuant to which Treasury provides incentives for short sales and deeds-in-lieu of foreclosure for circumstances in which borrowers are unable or unwilling to complete the HAMP modification process. Borrowers are eligible for a relocation assistance payment, and servicers receive an incentive for completing a short sale or deed-in-lieu of foreclosure. In addition, investors are paid additional incentives for allowing some short sale proceeds to be distributed to subordinate lien holders.
Unemployment Program
In March 2010, the Obama Administration announced enhancements to HAMP aimed at the unemployment problems by requiring servicers to provide temporary mortgage assistance to many unemployed homeowners. The Unemployment Program (UP) requires servicers to grant qualified unemployed borrowers a forbearance period during which their mortgage payments are temporarily reduced for a minimum of three months, and up to six months for some borrowers, while they look for a new job. Servicers are prohibited from initiating a foreclosure action or conducting a foreclosure sale while the borrower is being evaluated for UP, after a foreclosure plan notice is mailed, during the UP forbearance or extension, and while the borrower is being evaluated for or participating in HAMP or HAFA following the UP forbearance period.
Principal Reduction Alternative
The Administration announced further enhancements to HAMP in March 2010 by encouraging servicers to write down mortgage debt as part of a HAMP modification (the Principal Reduction Alternative, or PRA). Under PRA, servicers are required to evaluate the benefit of principal reduction and are encouraged to offer principal reduction whenever the NPV result of a HAMP modification using PRA is greater than the NPV result without considering principal reduction. The principal reduction and the incentives based on the dollar value of the principal reduced will be earned by the borrower and investor based on a pay-for-success structure. Under the contract with each servicer, Treasury cannot compel a servicer to select PRA over the standard HAMP modification even if the NPV of PRA is greater than the NPV of regular HAMP.
FHA Short Refinance
Also in March 2010, the Administration announced adjustments to existing FHA programs that permit lenders to provide additional refinancing options to homeowners who owe more than their homes are worth because of large declines in home prices in their local markets. This program, known as the FHA Short Refinance option, will provide more opportunities for qualifying mortgage loans to be restructured and refinanced into FHA-insured loans.
In order to qualify for this program, a homeowner must be current on their existing first lien mortgage; the homeowner must occupy the home as a primary residence and have a qualifying credit score; the mortgage owner must reduce the amount owed on the original loan by at least 10 percent; the new FHA loan must have a balance no more than 97.75% of the current value of the home; and total mortgage debt for the borrower after the refinancing, including both the first lien mortgage and any other junior liens, cannot be greater than 115% of the current value of the home – giving homeowners a path to regain equity in their homes and affordable monthly payments. TARP funds will be made available up to $11 billion in the aggregate to provide additional coverage to lenders for a share of potential losses on these loans and to provide incentives to support the write-downs of second liens.
HFA Hardest-Hit Fund
On February 19, 2010, the Administration announced the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest Hit Fund) for state housing finance agencies (known as HFAs) in the nation's hardest-hit housing markets to design innovative, locally targeted foreclosure prevention programs. In total, $7.6 billion has been allocated to 18 states (Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, and Tennessee) and the District of Columbia in four rounds of funding under the HFA Hardest Hit Fund.
Allocations under the HFA Hardest Hit Fund were made using several different metrics. Some of the funds were allocated to states that have suffered average home price drops of more than 20% from their peak, while other funds were allocated to states with the highest concentration of their populations living in counties with unemployment rates greater than 12 percent or unemployment rates that were at or above the national average. In addition, some funds were allocated to all the states and jurisdictions already participating in the HFA Hardest Hit Fund to expand the reach of their programs to help more struggling homeowners. The applicable HFAs designed the state programs themselves, tailoring the housing assistance to their local needs, although $2 billion of the funding is required to be used by states for targeted unemployment programs that provide temporary assistance to eligible homeowners to help them pay their mortgages while they seek re-employment or additional employment or undertake job training. Treasury also required that all of the programs comply with the requirements of EESA, which include that they must be designed to prevent avoidable foreclosures. All of the funded program designs are posted online at http://www.FinancialStability.gov/roadtostability/hardesthitfund.html.
Accomplishments
To date, HAMP has achieved three critical goals: it has provided immediate relief to many struggling homeowners; it has used taxpayer resources efficiently; and it has helped transform the way the entire mortgage servicing industry operates.
HAMP established a universal affordability standard: a 31 percent debt-to-income ratio, which dramatically enhanced servicers' ability to reduce mortgage payments to sustainable levels while simultaneously providing the necessary justification to investors for the size and type of modification. Eighteen months into the program, HAMP has helped more than 1.3 million homeowners by reducing their monthly mortgage payments to more affordable levels. This includes more than 460,000 homeowners who are currently in permanent modifications. These homeowners have experienced a 36 percent median reduction in their mortgage payments--more than $500 per month--amounting to a total, program-wide savings of nearly $3.2 billion for homeowners. In short, hundreds of thousands of American families have been able to avoid foreclosure and keep their homes because of HAMP.
In the year following initiation of HAMP, home retention strategies changed dramatically. Wells Fargo Co-President Michael Heid testified that "HAMP serve[d] as a catalyst...a mobilizing event to push servicers to take broader actions at a more rapid pace" and noted that "it pushed other investors, including Fannie and Freddie, to move in a direction of programmatic home loan modifications." Bank of America Home Loan President Barbara DeSoer noted that "one of the significant advantages of HAMP has been the establishment of standards. And in particular, the debt-to-income ratio that was used, even on our proprietary programs prior to HAMP, was higher than 31 percent." In the first quarter of 2009, nearly half of mortgage modifications increased borrowers' monthly payments or left their payments unchanged. By the second quarter of 2010, 90 percent of mortgage modifications lowered payments for the borrower. This change means borrowers are receiving better solutions. Modifications with payment reductions perform materially better than modifications that increase payments or leave them unchanged.
Moreover, even holding the percentage payment reduction constant, the quality of modifications made by servicers appears to have improved since 2008. For modifications made in 2008, 15.8 percent of modifications that received a 20 percent payment reduction were 60 days or more delinquent three months into the modification. For the 2010 vintage, that delinquency rate has fallen almost in half, to 8.2 percent. The OCC's Mortgage Metrics Report from 2010:Q2 attributes the improvement in mortgage performance to "servicer emphasis on repayment sustainability and the borrower's ability to repay the debt."
Early indications suggest that the re-default rate for permanent HAMP modifications is significantly lower than for historical private-sector modifications--a result of the program's focus on properly aligning incentives and achieving greater affordability. For HAMP modifications made in the fourth quarter of 2009, OCC records show that 7.9 percent of loans were delinquent three months into the modification and just 10.8 percent were delinquent six months into the modification. The comparable delinquency rates for non-HAMP modifications made in the same quarter were 12.1 percent and 22.4 percent, respectively. For modifications made in the first quarter of 2010, the delinquency rates for HAMP and non-HAMP modifications are similar – 10.5 percent and 11.6 percent delinquent at three months, respectively. Convergence between the HAMP and non-HAMP re-default rates going forward may suggest that the industry is adopting the HAMP modification standard.
Borrowers who do not ultimately qualify for HAMP modifications often receive alternative forms of assistance. Approximately one-half of homeowners who apply for HAMP modifications but do not qualify have received some form of private-sector modification. Less than ten percent have lost their homes through foreclosure. Industry representatives testifying at foreclosure prevention hearings before the Committee on Oversight and Government Reform in the United States House of Representatives on June 24, 2010 indicated that many of their private-sector modifications are intended to assist borrowers who are not eligible for HAMP.
HAMP uses taxpayer resources efficiently. HAMP's "pay-for-success" design utilizes a trial period to ensure that taxpayer-funded incentives are used only to support borrowers who are committed to staying in their homes and making monthly payments, and the investor retains the risk of the borrower re-defaulting into foreclosure. No taxpayer funds are paid to a servicer or an investor until a borrower has made three modified mortgage payments on time and in full. The majority of payments are made over a five-year period only if the borrower continues to fulfill this responsibility. These safeguards ensure that spending is limited to high-quality modifications.
The Administration originally projected that HAMP would offer help to three to four million families through the end of 2012, expecting most of these families to act on the offer of help and to receive a permanent modification. From one perspective, counting borrowers who get a HAMP permanent modification or an FHA Short Refinance loan is over-inclusive, because some of the families will re-default and end up in foreclosure in any event, although these programs will increase the odds that they can prevent foreclosure and receive valuable temporary relief (up to $6,000 per year) as long as they remain current.
However from another perspective, the "count" of borrowers who get a HAMP permanent modification is also under-inclusive, because measures to reduce foreclosures help to stabilize housing markets and avoid community-wide costs of foreclosure. The measure is also under-inclusive because every person who is in a temporary modification is getting a significant benefit – the family has several months to remain in the home with a reduced payment to try to remedy the situation and avoid foreclosure. It is under-inclusive because homeowners who are able to take advantage of HAFA will receive significant help transitioning more quickly and less traumatically to new housing they can afford than they would if they suffered foreclosure. Lastly, it is under-inclusive because many of the unemployed homeowners who receive a temporary forbearance through UP are likely to become re-employed and resume mortgage payments. This is especially important in the case of the FHA Short Refinance option, which will encourage lenders and borrowers to work together where appropriate to restructure debts and provide more opportunities for qualifying mortgage loans to be refinanced into a FHA mortgage at today's low rates, and the HFA Hardest-Hit Fund, which helps states provide targeted assistance to combat deteriorating conditions in local markets.
Finally, the projection of three to four million borrowers does not include all of the new mortgages provided to families at reasonable cost because of FHA and government interventions with Fannie Mae and Freddie Mac. In many cases, these mortgages have provided financing to help families purchase foreclosed homes and become homeowners themselves, often for the first time since housing has become so much more affordable as a result of the crisis.
Transparency and Accountability
To protect taxpayers and ensure that every TARP dollar is directed toward promoting financial stability, Treasury established rigorous transparency and accountability measures for all of its programs, including MHA and the other housing programs. In addition, every borrower is entitled to a clear explanation if he or she is determined to be ineligible for a HAMP modification. Treasury requires servicers to report the reason for modification denials in writing to Treasury.
In order to improve transparency of the NPV model, which is a key component of the eligibility test for HAMP, Treasury increased public access to the NPV white paper, which explains the methodology used in the NPV model. To ensure accuracy and reliability, Freddie Mac, Treasury's compliance agent, conducts periodic audits of servicers' implementation of the model. If servicers' models do not meet Treasury's NPV specifications, Freddie Mac will require the servicers to discontinue use of their own implementation of the model and revert back to the NPV application available from Treasury through the MHA Servicer Portal. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Treasury is preparing to establish a web portal that borrowers can access to run a NPV analysis using input data regarding their own mortgages, and to provide to borrowers who are turned down for a HAMP modification the input data used in evaluating the application.
Servicers are subject to periodic, on-site compliance reviews performed by Treasury's compliance agent, Making Home Affordable-Compliance (MHA-C), which is a separate, independent division of Freddie Mac. MHA-C ensures that servicers satisfy their obligations under HAMP requirements. Treasury works closely with MHA-C to design and refine the compliance program and conducts quality assessments of the activities performed by MHA-C. Following these reviews, MHA-C provides Treasury with assessments of each servicer's compliance with HAMP requirements. If appropriate, Treasury may implement remedies for non-compliance. These remedies may include requiring additional servicer oversight, or withholding or reducing incentive payments to servicers, or requiring repayments of prior incentive payments made to servicers with respect to affected loans.
Loss Mitigation versus Foreclosure Activities
I would like to take the opportunity to address the recent reports of faulty documentation and potentially fraudulent affidavits within the foreclosure process. Representatives from Ally Financial, JPMorgan Chase and Bank of America, among other servicers, have stated that they may have filed faulty affidavits in foreclosure cases in the 23 states that have judicial foreclosure proceedings. Based on these statements, these servicers announced voluntary efforts to correct and re-file flawed documents before proceeding with foreclosures.
The reported behavior of these mortgage servicers is unacceptable. Servicers must comply with all applicable laws and regulations and be held accountable if they do not. We are working with our partner agencies to ensure that servicers improve their foreclosure processes.
MHA and Foreclosures
Although the issues around the affidavits and compliance with MHA guidelines are separate issues, I assure you that Treasury, with its federal partners, is monitoring this situation closely and is working to ensure that servicers are adhering to MHA guidelines. The MHA programs are intended to help eligible homeowners avoid foreclosure. Neither MHA nor HAMP requires a judicial process for a homeowner to receive a modification, nor does it require affidavits to be filed with courts. Therefore MHA is not directly affected by "robo-signers" or false affidavits filed with state courts.
However, while these two issues are unrelated, Treasury has stepped up compliance efforts around servicer adherence to HAMP loss mitigation guidelines. These guidelines require servicers to certify to their foreclosure lawyers that all loss mitigation options have been exhausted. This certification is required before servicers can proceed to foreclosure sale. The goal of our compliance program is to ensure all eligible homeowners who qualify for the program receive modifications or other alternatives to a foreclosure.
Under MHA guidelines, participating servicers must evaluate all eligible homeowners for a HAMP modification before referring them to foreclosure. For those homeowners that were already in foreclosure proceedings, Treasury guidelines require servicers to stop the foreclosure proceedings while the homeowners are being evaluated for HAMP. Should a homeowner not qualify for HAMP (or if the homeowner fails or cancels the modification), participating servicers are required to evaluate that homeowner for alternative loss mitigation modifications, such as HAFA, or one of the servicer's own modification programs. If a homeowner proves ineligible for an alternative modification, servicers are required to evaluate that homeowner for a short sale or deed-in-lieu of foreclosure.
If all of these efforts are unsuccessful, participating servicers may not proceed to foreclosure unless they have issued a written certification to their foreclosure attorney or trustee stating that "all available loss mitigation alternatives have been exhausted and a non-foreclosure option could not be reached." Only after these steps are taken and the certification delivered, may the foreclosure process proceed.
On October 6th, Treasury issued guidance to servicers reiterating the fact that they are to comply with all applicable federal and state laws, and are also prohibited from conducting a foreclosure sale until the HAMP-required written certifications to foreclosure counsel or the trustees have been issued.
The compliance agent for MHA, Making Home Affordable -- Compliance (MHA-C), regularly reviews participating servicers' operations to ensure that they are adhering to program guidelines, including the HAMP pre-foreclosure certification requirement. Treasury has recently instructed MHA-C to review the ten largest servicers' internal policies and procedures for completing the pre-foreclosure certifications.
If MHA-C finds incidents of non-compliance during a servicer review, corrective action options include requiring servicers to re-evaluate homeowners, and requiring that foreclosure proceedings be suspended while borrowers are re-evaluated. MHA-C also monitors servicers for compliance with these requirements through the "Second Look" process, which audits loans that were foreclosed without the benefit of a modification. Finally, if instances of systemic non-compliance remain un-corrected, Treasury does have the ability to claw back or withhold incentive payments.
Federal and State Response to the Foreclosure Crisis
Because foreclosure rules and requirements are determined under state law, the attorneys general for all 50 states and the District of Columbia have launched a joint investigation into alleged mishandling of documentation regarding foreclosures. In addition, some of the state attorneys general have launched investigations into other participants in the foreclosure process, including law firms, third party contractors, and process servers. We strongly support the state attorneys general with these investigations.
Treasury is working with other federal agencies and regulators to fully investigate the issues that have been raised, including taking the following actions:
· The FHA has been reviewing servicers for compliance with loss mitigation requirements. These reviews are being broadened to include a larger range of processes, focusing in particular on servicer procedures during the final stages of the foreclosure process.
· The Financial Fraud Enforcement Task Force (FFETF), led by the Department of Justice and with the participation of Treasury's Financial Crimes Enforcement Network (FinCEN), has brought together more than 20 federal agencies, 94 U.S. Attorney's offices and dozens of state and local partners to share information about foreclosure and servicing practices. The FFETF's collaborative efforts are ensuring that the full resources of the federal and state regulatory and enforcement authorities are being brought to bear in addressing this issue. In addition, the FFETF has also been coordinating with state attorneys general in their investigations.
· The United States Department of Justice is also working with regulators to investigate and, if material violations of the law are discovered, litigate against servicers, their law firms, and third-party providers regarding their foreclosure and bankruptcy processes.
· The Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac to remind servicers of their contractual and legal responsibilities in foreclosure processing. On October 13, FHFA directed Fannie Mae and Freddie Mac to implement a policy framework for dealing with possible foreclosure process deficiencies that requires servicers to review their foreclosure processes and fix any processing problems they identify. The FHFA policy framework includes specific steps servicers should take to remedy mistakes in foreclosure affidavits so that the information contained in the affidavits is correct and that the affidavits are completed in compliance with applicable law.
· Treasury's Office of the Comptroller of the Currency (OCC) directed all large national bank servicers on September 29 to review their foreclosure management processes, including file review, affidavit processing and signatures, to ensure that the processes are fully compliant with all applicable state laws.
· The OCC and the Federal Reserve System are jointly examining foreclosure and securitization practices at the nation's largest servicers. The examinations will include intensive review of the firms' policies, procedures, and internal controls related to loan modifications, foreclosures and securitizations seeking to determine whether systematic weaknesses are leading to improper foreclosures. The reviews will also evaluate controls over the selection and management of third-party service providers.
· In coordination with the work of the other agencies, the Office of Thrift Supervision (OTS) is reviewing the mortgage related policies, foreclosure processes and staffing levels of the largest servicers it supervises. The OTS issued correspondence on October 8 to all savings associations involved in servicing residential mortgages requiring the immediate review of their actual practices associated with the execution of documents related to the foreclosure process.
· The Federal Deposit Insurance Corporation (FDIC) is participating in the reviews by the OCC, the Federal Reserve System, and the OTS of the foreclosure and securitization practices of the largest mortgage servicers in its role as back-up supervisor. The FDIC also is verifying that the servicers it supervises do not exhibit the problems that others have identified as well as reviewing the processes used by servicers of loans subject to loss share agreements and other loans from receiverships of failed banks. These regulators are also evaluating foreclosure and securitization practices in electronic registration systems.
· The Federal Trade Commission (FTC) is monitoring servicers under existing public orders to confirm proper servicing and foreclosure processes, is conducting reviews in line with past servicing abuses and monitoring the market closely for any fraud or foreclosure scams.
· The Securities and Exchange Commission (SEC) has issued proposed rules that would provide greater transparency and disclosures in the securitization market and provide investors with additional tools to evaluate actions in the securitization market.
Administration Objectives
The Administration has three primary goals in addressing these issues which have been raised: raising accountability, sustainability for borrowers and clarity for the housing market. First, we seek to hold lenders and servicers accountable while maintaining the stability and functionality of one of our economy's most fundamental economic markets. This must be done while recognizing the differences between different states and different types of lenders, who have varying practices and standards and legal requirements.
Second, the Administration seeks to help struggling borrowers into sustainable housing situations. To that end, as described above, we have created a series of programs designed to benefit responsible homeowners. These include modification programs for homeowners who are facing financial hardship or have lost their jobs, refinancing programs for underwater homeowners, and incentives to promote alternatives to foreclosure such as short sales and deeds-in-lieu of foreclosure.
Third, the Administration seeks to resolve the significant uncertainty that this controversy has raised for borrowers and the housing market. The issues that have been alleged raise significant questions about the accuracy, fairness and even legality of several mortgage processes. We are working to address those issues that are problematic, and to clarify for the public those issues raised that are not in fact problems.
Possible Economic Effects of Suspension of Foreclosure Proceedings
The time required to resolve these recent foreclosure issues by the servicers and state courts, and delays due to the related law enforcement investigations, could delay thousands of foreclosures for several months, which may have both immediate and longer term consequences. Longer foreclosure timelines will likely lead to lower sales prices of houses that are already in the foreclosure process. Vacant houses, in particular, are likely to not only sell for lower prices once they are ultimately put on the market but may also drag down the value of nearby houses in the present as long as they remain unsold. Further, uncertainty about the status of foreclosed houses, including uncertainty with title insurance, and whether based on the documented problems in these banks or not, may discourage purchases of foreclosed houses until the uncertainty is resolved. This would hurt homeowners and home-buyers alike at a time when foreclosed homes make up 25 percent of home sales. Together these two factors may exert downward pressure on overall housing prices both in the short and long-run.
Right now, families who have watched their home values decline over the last few years want nothing more than new homebuyers to buy the vacant homes so that their neighborhoods can start the process of recovery. While the foreclosure reviews may reduce the near-term supply by delaying the sale of distressed homes, we expect that most of the affected houses will eventually come on the market.
Looking Ahead for Housing
Since EESA was enacted, the housing market has remained distressed, and although there are promising signs of stabilization, the nature of that distress has changed. In late 2008 and 2009, the nation's housing market was in broad decline, as a result of the subprime mortgage collapse and the effects of the financial crisis and the severe recession. Following the implementation of TARP, housing markets began showing some signs of stabilizing and wealth recovery for U.S. households. Thanks in part to federal government financial policies, mortgage rates remain near historic lows. Home prices stabilized in March 2009, following consistent declines since 2006. For example, the S&P/Case-Shiller U.S. 20-City Composite Home Price Index experienced a 3 percent year-to-year increase in July, compared to a 19 percent year-to-year decline in March 2009.
However, certain areas of the country continue to struggle as the nature of the stress in the housing market has evolved to concentrated unemployment, negative equity, excess housing inventory, and rising foreclosures, which act as a drag on housing prices and economic recovery in those communities. As described above, the Administration has responded by expanding MHA beyond the initial version of HAMP, the first lien modification program. MHA has been modified to include unemployment programs, second lien relief, short sales and deeds-in-lieu of foreclosure and principal reduction programs. Recognizing that the housing market conditions vary widely by locality, and are especially stressed by continued unemployment, the Administration has quickly rolled out the HFA Hardest Hit Fund for those states most affected by these issues. In addition, to combat negative equity and improve affordability, Treasury has partnered with FHA to expand refinance opportunities through the FHA Short Refinance option.
These programs will allow Federal assistance to reach more distressed homeowners and provide additional stability to the housing market going forward. In much the same way that HAMP's first lien modification program has provided a national blueprint for mortgage modifications, these new programs will continue to shape the mortgage servicing industry and act as a catalyst for industry standardization of short sale, refinance and principal reduction programs. The interplay of all these programs will provide a much more flexible response to changes in the housing market over the next two years. While TARP is ending, TARP's positive effects on the housing market are expected to continue over time.
I appreciate the opportunity to discuss these important issues and am happy to take your questions.
TG-928
Written Testimony of Chief of Home Ownership Preservation Office Phyllis Caldwell Before the Congressional Oversight Panel
Chairman Kaufman, Members of the Panel, thank you for the opportunity to testify today regarding Treasury's efforts under the Emergency Economic Stabilization Act of 2008 (EESA) and the Troubled Asset Relief Program (TARP) to address the housing crisis.
We recently passed the two year anniversary of TARP, and the end of Treasury's ability to make new commitments of TARP funds. In the context of that anniversary, I would like to discuss the development of the Making Home Affordable (MHA) program and the Administration's other TARP-funded housing programs, and how Treasury's response to the housing crisis has developed as the nature of the housing problems has changed over time. It is also important to analyze the progress of the MHA program and the Administration's efforts at stemming the tide of foreclosures in a broader economic context. In addition, early data indicate that MHA's Home Affordable Modification Program (HAMP) permanent modifications are performing well over time, with lower delinquency rates than those reported by the industry at large.
I also would like to take the opportunity to address the recent reports of faulty documentation and potentially fraudulent affidavits within the foreclosure process, and its relationship to MHA in particular. The reported behavior of these mortgage servicers is unacceptable. Servicers must comply with the law and Treasury is working with other Federal agencies to ensure that servicers improve their foreclosure processes. Because MHA and HAMP intended to keep homeowners out of foreclosure, and are primarily based around the concept of modifying a loan to keep a borrower in their home, it is not directly affected by "robo-signers" or false affidavits. MHA has strong compliance mechanisms in place to ensure that servicers follow our program's guidelines. I will discuss these recent developments, and the Administration's response, in more detail below.
The Development and Expansion of MHA
The impact of MHA should not be measured solely by the number of borrowers who have received modifications, but also by how the program has helped reduce the number of foreclosures and helped transform the way the mortgage industry views the modification of mortgage loans. Just over two years ago, distressed borrowers had few options to stay in their homes – either a "work out" plan that increased payments over time, or foreclosure. Today because of the standards that MHA set, distressed borrowers have more options to avoid foreclosures, including modifications under MHA's first lien modification component, the Home Affordable Modification Program (HAMP), proprietary modifications built on the HAMP model, and short sales. To date, more than 1.3 million borrowers have started HAMP trials. While many of these borrowers did not convert to permanent modifications, they were afforded much needed breathing room. In addition, the majority of borrowers who did not receive permanent HAMP modifications moved into alternative modifications or became current through other means.
It is important to consider how the housing crisis has changed rapidly over time. When EESA was enacted, the housing collapse was primarily considered to have been caused by a collapse in the subprime lending market. Many of these subprime loans were over-leveraged and had adjustable-rates that were re-setting to higher fixed monthly payments, which triggered widespread defaults. But as the recession deepened, unemployment surged and house prices declined, often dramatically. Today, the primary reason the housing crisis continues is due to (1) borrowers becoming unemployed (or under-employed) and (2) the severity with which borrowers find themselves underwater on their homes.
Over the past several months, we have enhanced MHA to address these changes to the housing crisis. Treasury has launched enhancements to MHA that incentivize principal reduction, streamline foreclosure alternatives, provide additional time for unemployed borrowers to stay in their homes while searching for other employment, and simultaneously modify second liens with the first. We will begin to see the full impact of these enhancements early next year, but it is safe to say that MHA will continue to be dynamic in reaching distressed borrowers, and will continue to set standards for the industry in helping homeowners stay in their homes or otherwise avoid foreclosures.
The Initial Response to the Housing Crisis
The Obama Administration took office in the midst of the most serious housing crisis in decades. Home values had fallen by nearly one-third and were expected to fall by another five percent by the end of 2009. Stresses in the financial system had reduced the supply of mortgage credit, limiting the ability of Americans to buy homes. Millions of responsible American families who were making their monthly payments – despite in many cases having lost jobs or income – saw their property values fall, and were unable to sell or refinance at lower mortgage rates. The combination of falling home prices and economic contraction dramatically increased the financial strains on many responsible homeowners.
There was no consensus among loan servicers about how to respond to responsible borrowers who were willing to continue making payments but in need of some mortgage assistance. There were no accepted timeframes for servicer decisions. Servicers were paralyzed by the need to seek approval from investors on an individual, mortgage-by-mortgage basis. And, perhaps most critically, there was no affordability standard for monthly mortgage payments. As a result of the absence of an accepted affordability standard and a systematic process for evaluating modification requests, the solutions offered by servicers often achieved nothing other than adding unpaid interest and fees to the mortgage balance, resulting in higher – not lower – payments for homeowners. Millions of responsible American families simply lost their homes.
During its first month in office, the Obama Administration took aggressive action to address the housing crisis. In February 2009, President Obama announced the Homeowner Affordability and Stability Plan. As part of this plan and through other housing initiatives, the Administration took the following actions to strengthen the housing market:
* Launched the HAMP, which would permanently reduce mortgage payments to affordable levels for qualifying borrowers;
* Provided strong support to Fannie Mae and Freddie Mac to ensure continued access to affordable mortgage credit across the market;
* Purchased over $200 billion in agency mortgage backed securities as part of the combined purchases with the Federal Reserve of more than $1.4 trillion in agency mortgage backed securities and agency debt securities, which helped keep mortgage rates at historic lows, allowing homeowners to access credit to purchase new homes and refinance into more affordable monthly payments;
* Through the Federal Housing Administration (FHA), provided liquidity for housing purchases at a time when private lending had declined, playing an important counter-cyclical role;
* Supported expanding the limits for loans guaranteed by Fannie Mae, Freddie Mac, and FHA from previous limits up to $625,500 per loan to $729,750;
* Expanded refinancing options for Fannie Mae and Freddie Mac loans, particularly for borrowers with negative equity, to allow more Americans to refinance;
* Supported a tax credit for first time homebuyers, which helped 2.5 million American families purchase homes; and
* Through the American Recovery and Reinvestment Act of 2009 (ARRA), provided more than $5 billion in support for affordable rental housing through low income housing tax credit programs and $2 billion in support for a neighborhood stabilization program (bringing the total neighborhood stabilization program funding to close to $7 billion when funding from the Dodd-Frank Financial Reform Act and the Housing and Economic Recovery Act of 2008 is included) to restore neighborhoods suffering concentrated foreclosures.
These efforts are part of a comprehensive approach designed to stabilize the housing market. As Mark Zandi (a former economic adviser for Senator John McCain's 2008 presidential campaign) and Alan S. Blinder (a former economic adviser for President Clinton) noted in a paper released in July 2010, the government's financial and fiscal policies tend to reinforce each other, such that the combined effect exceeds the sum of the parts. For example, Zandi and Blinder observed that providing housing tax credits as part of the stimulus boosted housing demand and therefore house prices - foreclosures decreased, and the financial system suffered smaller losses, which, in turn, enhanced the effectiveness of the government's efforts to stabilize the financial system.
Design of MHA
As part of the Homeowner Affordability and Stability Plan, under the authority granted in EESA, the Treasury Department began work on a program to improve the affordability of mortgages for responsible homeowners, consistent with the mandate of EESA to promote financial stability while protecting taxpayers. Developing the program posed very difficult and challenging policy tradeoffs--how to make meaningful interventions that would yield a high probability of participation and broadly support borrower success while minimizing the cost to the government, moral hazard, adverse selection, and operational and financial risks and complexity.
In addition, legal and other constraints required Treasury to develop a voluntary program that would support servicers' efforts to modify mortgages. EESA authorized certain types of programs to assist homeowners but constrained Treasury's ability to set up a mandatory modification program. Consequently, these legal constraints forced Treasury to seek the voluntary cooperation of mortgage servicers and investors.
Designing a program to improve the affordability of mortgages for responsible homeowners was difficult. Loan servicers were simply not equipped to manage the magnitude of the crisis before them. They did not have the systems, staffing, operational capacity or incentives to engage with homeowners on a large scale and offer meaningful relief from unaffordable mortgages. Moreover, the expansion of private securitizations during the housing boom left servicers in a complicated legal situation; contractual language designed during the heady days of the bubble bound them in general terms to maximize investor returns, but little specific guidance existed on how that might be accomplished if house prices were to fall in conjunction with a rapidly rising number of defaults.
The Administration challenged itself to develop a program that would protect taxpayers at the same time that it broadly offered responsible, but struggling, homeowners the opportunity to remain in their homes at more affordable payment levels. The Administration determined that in order to achieve these objectives simultaneously, it was critical, with respect to the HAMP program, to leave the financial risk of modification re-default with the investors. Ultimately, the program should offer the opportunity to remain in their homes to many borrowers, but the taxpayer will only pay to the extent the distressed borrower is assisted by a permanent modification that remains in effect.
It is important to emphasize that HAMP was not intended to help all borrowers, but was intended to help an important segment of borrowers – specifically, owner-occupants whose mortgages were originated prior to 2009 with conforming loan balances ($729,750 or less), and who were currently at risk of foreclosure or who would be at risk prior to the end of 2012. HAMP was built around four core principles, designed to help the large segment of at-risk homeowners for whom foreclosure is avoidable and who want to stay in their homes.
First, the program focused on affordability -- every modification under the program would be required to lower the borrower's monthly mortgage payment to 31 percent of the borrower's monthly gross income, a level estimated to provide reasonable assurance that the modification would be sustainable. The borrower's modified monthly payment would remain in place for five years, which Treasury expected would provide sufficient time for the housing market and the financial system to recover.
Second, HAMP would protect the taxpayer by employing an innovative pay-for-success structure and requiring the investor in the mortgage to retain the risk of future re-default. This structure aligned the interests of borrowers, taxpayers, investors and servicers and encouraged loan modifications that would be both affordable for borrowers over the long term and cost-effective for taxpayers.
Third, any servicer that signed up for the program would be required to evaluate every eligible loan using a standard net present value (NPV) test. If the test was positive, the servicer would be required to modify the loan.
Fourth, unemployed borrowers would be allowed to participate in the program. Unemployed borrowers who had nine months or more of unemployment insurance remaining would be eligible to include it in their income for consideration in the NPV calculation. Unemployed borrowers would also be allowed to include other sources of passive income like rental income and income from an employed spouse. In addition, in response to the growing problem of unemployment and its impact on borrower incomes, in May Treasury launched UP, the forbearance program for unemployed borrowers. UP requires servicers to provide a minimum of 3 month forbearance to unemployed borrowers.
The basic HAMP terms were as follows: a participating HAMP servicer applies a series of modification steps to reduce the homeowner's monthly mortgage payment to 31 percent of the homeowner's gross (pre-tax) income, in the following order: rate reduction to as low as two percent; term extension up to 40 years; and principal deferral (or forbearance, at the servicer's option). The modified interest rate is fixed for a minimum of five years. Beginning in year six, the rate may increase no more than one percentage point per year until it reaches the Freddie Mac Primary Mortgage Market Survey rate (essentially the market interest rate) at the time the permanent modification agreement was prepared.
Before a mortgage is permanently modified, the homeowner must submit the necessary documentation and make the new, reduced monthly mortgage payment on time and in full during a trial period of three months to demonstrate that the modified monthly payment is sustainable. Homeowners who make payments on permanently modified loans on time accrue an incentive of $1,000 per year to reduce the amount of principal they owe up to a maximum of $5,000.
Any modification offer will provide a binding reduction in payments for borrowers who continue to meet the full terms of the modification, whether in the trial phase or after having converted to a permanent modification.
Measuring Success
The Administration originally projected that the new program would offer help to three to four million families through the end of 2012, expecting most of these families to act on the offer of help and to receive a permanent modification. When a trial modification did not convert to a permanent solution, Treasury developed other strategies to transition borrowers out of homeownership in the manner least disruptive to them or their communities.
Early Success and Challenges
Nearly 1.6 million borrowers were in contact with their servicers and were approved for and extended a modification offer, with more than 1.3 million of these approved offers resulting in modification trials. The run rate of eligible borrowers approved for and starting modifications was at or above the target rate set internally by Treasury of 20,000 – 25,000 per week. To date, borrowers who started HAMP permanent modifications had their payments reduced by a median amount of more than $500 per month.
Conversion challenges
While the overall number of borrowers in permanent modifications rose substantially, the conversion rate to permanent modifications was below anticipated levels. When the program launched in April 2009, servicers were explicitly provided flexibility to approve borrowers for trial modifications without documentation of income in order to reach more borrowers more quickly. They were required to verify the income prior to granting a permanent modification. In the early fall and over the coming months, as the first large numbers of borrowers reached a trial length that would allow them to become eligible for conversion to a permanent modification, servicers experienced substantial difficulty in collecting and processing applications and making decisions based on the limited documentation provided.
Steps Taken to Ensure Greater Conversions
On January 28, 2010, Treasury issued new guidance requiring servicers to begin verifying income upfront no later than June 1, 2010. This was done in direct response to the challenges of collecting documents during the trial period, and to help better ensure that more borrowers who started modifications were able to convert to permanent status.
In the spring of 2010, the move to collect documents upfront to achieve better overall conversions reduced the pace of modification offers materially; however, Treasury expects that over time, requiring documentation up front will substantially improve the success rate of trial modifications and speed determinations.
Cancelled Borrowers still have a Number of Foreclosure Alternatives
A cancelled trial modification does not mean that the program has failed a homeowner or that the borrower will inevitably face foreclosure: HAMP explicitly requires servicers to consider these borrowers for other foreclosure prevention options including proprietary modifications, short sales or deeds-in-lieu of foreclosure that also prevent a foreclosure sale. Based on survey data from the eight largest servicers, it is estimated that a majority of borrowers who are turned down for a trial modification are offered a foreclosure alternative – usually a modification proprietary to the servicer, or a short sale – rather than proceeding directly to foreclosure.
HAMP Permanent Modifications Have Been Performing Well
The overall sustainability of HAMP permanent modifications appears promising. Early data indicate that HAMP permanent modifications are performing well over time, with lower delinquency rates than those reported by the industry at large. At nine months, almost 90 percent of homeowners remain in their permanent HAMP modification and less than 16 percent of permanent modifications are 60+ days delinquent. And while it is still early, so far, there does not appear to be a correlation between back-end debt-to-income ratio (DTI) and the performance of borrowers with permanent modifications. Performance is consistent across all ratios of back-end DTI, including very high end DTI homeowners. In addition, based on early data, there does not appear to be a correlation between how underwater borrowers were on their loans before modification (in other words, their mark-to-market loan-to-value ratio before the modification), and the performance of those borrowers on their permanent modifications. Performance appears consistent across all loan-to-value ratios.
There are a range of important measures of success; keeping in mind the measures mentioned above, as well as others like the effect of HAMP on neighborhood and housing market stabilization, Treasury continues to monitor progress and push for improved results. HAMP has had a substantial impact on avoiding foreclosures so far (under HAMP's guidelines, servicers were always prohibited foreclosure sales while borrowers were being evaluated for HAMP), and very few borrowers that have qualified for HAMP (including the ability to make a reasonable payment on a modified loan as measured by income sufficient to pass an NPV model) have gone through foreclosure sale to date. Recently, Treasury strengthened homeowner protections by (a) requiring servicers to evaluate delinquent borrowers for HAMP before initiating a foreclosure sale, and (b) halting foreclosure proceedings for those borrowers who are already in HAMP trial periods.
MHA has been a Catalyst – Setting the Benchmark for Sustainable Modifications
MHA has transformed the way the mortgage servicing industry treats borrowers in distress. Because of MHA, servicers have developed constructive private-sector options. Where there was once no consensus plan among loan servicers about how to respond to borrowers in need of mortgage assistance, MHA has established a universal affordability standard, a 31 percent debt-to-income ratio. This has enhanced servicers' ability to reduce mortgage payments to sustainable levels while simultaneously providing investors with a justification for modifications.
Taking into account MHA's effect on standardizing and expanding proprietary modifications in the mortgage industry, the number of mortgage modifications has been double the number of foreclosure completions: More than 3.35 million modifications were arranged from April 2009 through the end of July 2010. This includes more than 1.3 million HAMP trial modifications started, more than 510,000 Federal Housing Administration (FHA) loss mitigation and early delinquency interventions, and nearly 1.6 million private sector modifications performed by members of the HOPE Now alliance. Given the complexity of the mortgage modification process and the number of government and non-government modification programs available, homeowners often receive more than one modification arrangement. Therefore it is difficult to determine the exact number of homeowners assisted by multiple programs.
On the measure of neighborhood and housing market stabilization, the substantial number of foreclosure sales avoided has contributed to a material improvement in market expectations for house prices and to many successive months of stability in home prices in much of the country. But, as discussed, efforts must continue to capitalize on early encouraging signs and overcome remaining challenges. There are still a number of risk factors that will challenge the stability of the housing markets, including the potential for mortgage rates to rise, continuing elevated levels of delinquency exacerbated by unemployment and the large number of underwater borrowers, and the associated potential for a substantial increase in the number of foreclosure starts.
Further, it is important to keep in mind that MHA is only one of many Administration housing efforts targeting these challenges: the Administration has also provided substantial support for the housing markets through investment in Fannie Mae and Freddie Mac to help keep mortgage rates affordable; purchase of agency mortgage-backed securities; refinancing opportunities that have allowed more than four million borrowers to refinance since the launch of the MHA; and an initiative to provide support and financing to state and local Housing Finance Agencies. These Housing Finance Agencies provide, in turn, tens of thousands of affordable mortgages to first time homebuyers and help develop tens of thousands of affordable rental units for working families, including those displaced by the housing crisis and foreclosures.
Responding to a Changing Housing Crisis
MHA was designed to be a versatile program. As the mortgage crisis evolved, Treasury enhanced MHA and developed new programs designed to meet the changing landscape. Treasury expanded MHA to include a second lien modification program, a foreclosure alternatives program that promoted short sales and deeds-in-lieu of foreclosures, and an unemployment forbearance program. Treasury expanded HAMP to include FHA and Rural Development mortgage loans through the FHA-HAMP and RD-HAMP program, and also introduced a principal reduction option. Finally, Treasury introduced a program to allow the hardest-hit states to tailor housing assistance to their areas, and worked with FHA to introduce an option for homeowners with high negative equity to refinance into a new FHA loan if their lender agrees to reduce principal on the original loan by at least 10%.
Second Lien Modification Program
A few months after launching HAMP, Treasury rolled out its first major expansion of the program, the Second Lien Modification Program (referred to as 2MP). Under 2MP, when a borrower's first lien is modified under HAMP and the servicer of the second lien is a 2MP participant, that servicer must offer to modify the borrower's second lien according to a defined protocol, which provides for a lump sum payment from Treasury in exchange for full extinguishment of the second lien, or a reduced lump sum payment from Treasury in exchange for a partial extinguishment and modification of the borrower's remaining second lien. Although 2MP was initially met with reluctance from servicers and investors who did not want to recognize losses on their second lien portfolios, as of October 3, 2010, Treasury has signed up seventeen2MP servicers, which includes the four largest mortgage servicers, who in aggregate service approximately 60 percent of outstanding second liens.
Home Affordable Foreclosure Alternatives Program
Any modification program seeking to avoid preventable foreclosures has limits, HAMP included. HAMP does not, nor was it ever intended to, address every delinquent loan. Borrowers not qualifying for HAMP may benefit from an alternative program that helps the borrower transition to more affordable housing and avoid the substantial costs of a foreclosure. On April 5, 2010, the Home Affordable Foreclosure Alternatives (HAFA) Program became effective, pursuant to which Treasury provides incentives for short sales and deeds-in-lieu of foreclosure for circumstances in which borrowers are unable or unwilling to complete the HAMP modification process. Borrowers are eligible for a relocation assistance payment, and servicers receive an incentive for completing a short sale or deed-in-lieu of foreclosure. In addition, investors are paid additional incentives for allowing some short sale proceeds to be distributed to subordinate lien holders.
Unemployment Program
In March 2010, the Obama Administration announced enhancements to HAMP aimed at the unemployment problems by requiring servicers to provide temporary mortgage assistance to many unemployed homeowners. The Unemployment Program (UP) requires servicers to grant qualified unemployed borrowers a forbearance period during which their mortgage payments are temporarily reduced for a minimum of three months, and up to six months for some borrowers, while they look for a new job. Servicers are prohibited from initiating a foreclosure action or conducting a foreclosure sale while the borrower is being evaluated for UP, after a foreclosure plan notice is mailed, during the UP forbearance or extension, and while the borrower is being evaluated for or participating in HAMP or HAFA following the UP forbearance period.
Principal Reduction Alternative
The Administration announced further enhancements to HAMP in March 2010 by encouraging servicers to write down mortgage debt as part of a HAMP modification (the Principal Reduction Alternative, or PRA). Under PRA, servicers are required to evaluate the benefit of principal reduction and are encouraged to offer principal reduction whenever the NPV result of a HAMP modification using PRA is greater than the NPV result without considering principal reduction. The principal reduction and the incentives based on the dollar value of the principal reduced will be earned by the borrower and investor based on a pay-for-success structure. Under the contract with each servicer, Treasury cannot compel a servicer to select PRA over the standard HAMP modification even if the NPV of PRA is greater than the NPV of regular HAMP.
FHA Short Refinance
Also in March 2010, the Administration announced adjustments to existing FHA programs that permit lenders to provide additional refinancing options to homeowners who owe more than their homes are worth because of large declines in home prices in their local markets. This program, known as the FHA Short Refinance option, will provide more opportunities for qualifying mortgage loans to be restructured and refinanced into FHA-insured loans.
In order to qualify for this program, a homeowner must be current on their existing first lien mortgage; the homeowner must occupy the home as a primary residence and have a qualifying credit score; the mortgage owner must reduce the amount owed on the original loan by at least 10 percent; the new FHA loan must have a balance no more than 97.75% of the current value of the home; and total mortgage debt for the borrower after the refinancing, including both the first lien mortgage and any other junior liens, cannot be greater than 115% of the current value of the home – giving homeowners a path to regain equity in their homes and affordable monthly payments. TARP funds will be made available up to $11 billion in the aggregate to provide additional coverage to lenders for a share of potential losses on these loans and to provide incentives to support the write-downs of second liens.
HFA Hardest-Hit Fund
On February 19, 2010, the Administration announced the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest Hit Fund) for state housing finance agencies (known as HFAs) in the nation's hardest-hit housing markets to design innovative, locally targeted foreclosure prevention programs. In total, $7.6 billion has been allocated to 18 states (Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, and Tennessee) and the District of Columbia in four rounds of funding under the HFA Hardest Hit Fund.
Allocations under the HFA Hardest Hit Fund were made using several different metrics. Some of the funds were allocated to states that have suffered average home price drops of more than 20% from their peak, while other funds were allocated to states with the highest concentration of their populations living in counties with unemployment rates greater than 12 percent or unemployment rates that were at or above the national average. In addition, some funds were allocated to all the states and jurisdictions already participating in the HFA Hardest Hit Fund to expand the reach of their programs to help more struggling homeowners. The applicable HFAs designed the state programs themselves, tailoring the housing assistance to their local needs, although $2 billion of the funding is required to be used by states for targeted unemployment programs that provide temporary assistance to eligible homeowners to help them pay their mortgages while they seek re-employment or additional employment or undertake job training. Treasury also required that all of the programs comply with the requirements of EESA, which include that they must be designed to prevent avoidable foreclosures. All of the funded program designs are posted online at http://www.FinancialStability.gov/roadtostability/hardesthitfund.html.
Accomplishments
To date, HAMP has achieved three critical goals: it has provided immediate relief to many struggling homeowners; it has used taxpayer resources efficiently; and it has helped transform the way the entire mortgage servicing industry operates.
HAMP established a universal affordability standard: a 31 percent debt-to-income ratio, which dramatically enhanced servicers' ability to reduce mortgage payments to sustainable levels while simultaneously providing the necessary justification to investors for the size and type of modification. Eighteen months into the program, HAMP has helped more than 1.3 million homeowners by reducing their monthly mortgage payments to more affordable levels. This includes more than 460,000 homeowners who are currently in permanent modifications. These homeowners have experienced a 36 percent median reduction in their mortgage payments--more than $500 per month--amounting to a total, program-wide savings of nearly $3.2 billion for homeowners. In short, hundreds of thousands of American families have been able to avoid foreclosure and keep their homes because of HAMP.
In the year following initiation of HAMP, home retention strategies changed dramatically. Wells Fargo Co-President Michael Heid testified that "HAMP serve[d] as a catalyst...a mobilizing event to push servicers to take broader actions at a more rapid pace" and noted that "it pushed other investors, including Fannie and Freddie, to move in a direction of programmatic home loan modifications." Bank of America Home Loan President Barbara DeSoer noted that "one of the significant advantages of HAMP has been the establishment of standards. And in particular, the debt-to-income ratio that was used, even on our proprietary programs prior to HAMP, was higher than 31 percent." In the first quarter of 2009, nearly half of mortgage modifications increased borrowers' monthly payments or left their payments unchanged. By the second quarter of 2010, 90 percent of mortgage modifications lowered payments for the borrower. This change means borrowers are receiving better solutions. Modifications with payment reductions perform materially better than modifications that increase payments or leave them unchanged.
Moreover, even holding the percentage payment reduction constant, the quality of modifications made by servicers appears to have improved since 2008. For modifications made in 2008, 15.8 percent of modifications that received a 20 percent payment reduction were 60 days or more delinquent three months into the modification. For the 2010 vintage, that delinquency rate has fallen almost in half, to 8.2 percent. The OCC's Mortgage Metrics Report from 2010:Q2 attributes the improvement in mortgage performance to "servicer emphasis on repayment sustainability and the borrower's ability to repay the debt."
Early indications suggest that the re-default rate for permanent HAMP modifications is significantly lower than for historical private-sector modifications--a result of the program's focus on properly aligning incentives and achieving greater affordability. For HAMP modifications made in the fourth quarter of 2009, OCC records show that 7.9 percent of loans were delinquent three months into the modification and just 10.8 percent were delinquent six months into the modification. The comparable delinquency rates for non-HAMP modifications made in the same quarter were 12.1 percent and 22.4 percent, respectively. For modifications made in the first quarter of 2010, the delinquency rates for HAMP and non-HAMP modifications are similar – 10.5 percent and 11.6 percent delinquent at three months, respectively. Convergence between the HAMP and non-HAMP re-default rates going forward may suggest that the industry is adopting the HAMP modification standard.
Borrowers who do not ultimately qualify for HAMP modifications often receive alternative forms of assistance. Approximately one-half of homeowners who apply for HAMP modifications but do not qualify have received some form of private-sector modification. Less than ten percent have lost their homes through foreclosure. Industry representatives testifying at foreclosure prevention hearings before the Committee on Oversight and Government Reform in the United States House of Representatives on June 24, 2010 indicated that many of their private-sector modifications are intended to assist borrowers who are not eligible for HAMP.
HAMP uses taxpayer resources efficiently. HAMP's "pay-for-success" design utilizes a trial period to ensure that taxpayer-funded incentives are used only to support borrowers who are committed to staying in their homes and making monthly payments, and the investor retains the risk of the borrower re-defaulting into foreclosure. No taxpayer funds are paid to a servicer or an investor until a borrower has made three modified mortgage payments on time and in full. The majority of payments are made over a five-year period only if the borrower continues to fulfill this responsibility. These safeguards ensure that spending is limited to high-quality modifications.
The Administration originally projected that HAMP would offer help to three to four million families through the end of 2012, expecting most of these families to act on the offer of help and to receive a permanent modification. From one perspective, counting borrowers who get a HAMP permanent modification or an FHA Short Refinance loan is over-inclusive, because some of the families will re-default and end up in foreclosure in any event, although these programs will increase the odds that they can prevent foreclosure and receive valuable temporary relief (up to $6,000 per year) as long as they remain current.
However from another perspective, the "count" of borrowers who get a HAMP permanent modification is also under-inclusive, because measures to reduce foreclosures help to stabilize housing markets and avoid community-wide costs of foreclosure. The measure is also under-inclusive because every person who is in a temporary modification is getting a significant benefit – the family has several months to remain in the home with a reduced payment to try to remedy the situation and avoid foreclosure. It is under-inclusive because homeowners who are able to take advantage of HAFA will receive significant help transitioning more quickly and less traumatically to new housing they can afford than they would if they suffered foreclosure. Lastly, it is under-inclusive because many of the unemployed homeowners who receive a temporary forbearance through UP are likely to become re-employed and resume mortgage payments. This is especially important in the case of the FHA Short Refinance option, which will encourage lenders and borrowers to work together where appropriate to restructure debts and provide more opportunities for qualifying mortgage loans to be refinanced into a FHA mortgage at today's low rates, and the HFA Hardest-Hit Fund, which helps states provide targeted assistance to combat deteriorating conditions in local markets.
Finally, the projection of three to four million borrowers does not include all of the new mortgages provided to families at reasonable cost because of FHA and government interventions with Fannie Mae and Freddie Mac. In many cases, these mortgages have provided financing to help families purchase foreclosed homes and become homeowners themselves, often for the first time since housing has become so much more affordable as a result of the crisis.
Transparency and Accountability
To protect taxpayers and ensure that every TARP dollar is directed toward promoting financial stability, Treasury established rigorous transparency and accountability measures for all of its programs, including MHA and the other housing programs. In addition, every borrower is entitled to a clear explanation if he or she is determined to be ineligible for a HAMP modification. Treasury requires servicers to report the reason for modification denials in writing to Treasury.
In order to improve transparency of the NPV model, which is a key component of the eligibility test for HAMP, Treasury increased public access to the NPV white paper, which explains the methodology used in the NPV model. To ensure accuracy and reliability, Freddie Mac, Treasury's compliance agent, conducts periodic audits of servicers' implementation of the model. If servicers' models do not meet Treasury's NPV specifications, Freddie Mac will require the servicers to discontinue use of their own implementation of the model and revert back to the NPV application available from Treasury through the MHA Servicer Portal. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Treasury is preparing to establish a web portal that borrowers can access to run a NPV analysis using input data regarding their own mortgages, and to provide to borrowers who are turned down for a HAMP modification the input data used in evaluating the application.
Servicers are subject to periodic, on-site compliance reviews performed by Treasury's compliance agent, Making Home Affordable-Compliance (MHA-C), which is a separate, independent division of Freddie Mac. MHA-C ensures that servicers satisfy their obligations under HAMP requirements. Treasury works closely with MHA-C to design and refine the compliance program and conducts quality assessments of the activities performed by MHA-C. Following these reviews, MHA-C provides Treasury with assessments of each servicer's compliance with HAMP requirements. If appropriate, Treasury may implement remedies for non-compliance. These remedies may include requiring additional servicer oversight, or withholding or reducing incentive payments to servicers, or requiring repayments of prior incentive payments made to servicers with respect to affected loans.
Loss Mitigation versus Foreclosure Activities
I would like to take the opportunity to address the recent reports of faulty documentation and potentially fraudulent affidavits within the foreclosure process. Representatives from Ally Financial, JPMorgan Chase and Bank of America, among other servicers, have stated that they may have filed faulty affidavits in foreclosure cases in the 23 states that have judicial foreclosure proceedings. Based on these statements, these servicers announced voluntary efforts to correct and re-file flawed documents before proceeding with foreclosures.
The reported behavior of these mortgage servicers is unacceptable. Servicers must comply with all applicable laws and regulations and be held accountable if they do not. We are working with our partner agencies to ensure that servicers improve their foreclosure processes.
MHA and Foreclosures
Although the issues around the affidavits and compliance with MHA guidelines are separate issues, I assure you that Treasury, with its federal partners, is monitoring this situation closely and is working to ensure that servicers are adhering to MHA guidelines. The MHA programs are intended to help eligible homeowners avoid foreclosure. Neither MHA nor HAMP requires a judicial process for a homeowner to receive a modification, nor does it require affidavits to be filed with courts. Therefore MHA is not directly affected by "robo-signers" or false affidavits filed with state courts.
However, while these two issues are unrelated, Treasury has stepped up compliance efforts around servicer adherence to HAMP loss mitigation guidelines. These guidelines require servicers to certify to their foreclosure lawyers that all loss mitigation options have been exhausted. This certification is required before servicers can proceed to foreclosure sale. The goal of our compliance program is to ensure all eligible homeowners who qualify for the program receive modifications or other alternatives to a foreclosure.
Under MHA guidelines, participating servicers must evaluate all eligible homeowners for a HAMP modification before referring them to foreclosure. For those homeowners that were already in foreclosure proceedings, Treasury guidelines require servicers to stop the foreclosure proceedings while the homeowners are being evaluated for HAMP. Should a homeowner not qualify for HAMP (or if the homeowner fails or cancels the modification), participating servicers are required to evaluate that homeowner for alternative loss mitigation modifications, such as HAFA, or one of the servicer's own modification programs. If a homeowner proves ineligible for an alternative modification, servicers are required to evaluate that homeowner for a short sale or deed-in-lieu of foreclosure.
If all of these efforts are unsuccessful, participating servicers may not proceed to foreclosure unless they have issued a written certification to their foreclosure attorney or trustee stating that "all available loss mitigation alternatives have been exhausted and a non-foreclosure option could not be reached." Only after these steps are taken and the certification delivered, may the foreclosure process proceed.
On October 6th, Treasury issued guidance to servicers reiterating the fact that they are to comply with all applicable federal and state laws, and are also prohibited from conducting a foreclosure sale until the HAMP-required written certifications to foreclosure counsel or the trustees have been issued.
The compliance agent for MHA, Making Home Affordable -- Compliance (MHA-C), regularly reviews participating servicers' operations to ensure that they are adhering to program guidelines, including the HAMP pre-foreclosure certification requirement. Treasury has recently instructed MHA-C to review the ten largest servicers' internal policies and procedures for completing the pre-foreclosure certifications.
If MHA-C finds incidents of non-compliance during a servicer review, corrective action options include requiring servicers to re-evaluate homeowners, and requiring that foreclosure proceedings be suspended while borrowers are re-evaluated. MHA-C also monitors servicers for compliance with these requirements through the "Second Look" process, which audits loans that were foreclosed without the benefit of a modification. Finally, if instances of systemic non-compliance remain un-corrected, Treasury does have the ability to claw back or withhold incentive payments.
Federal and State Response to the Foreclosure Crisis
Because foreclosure rules and requirements are determined under state law, the attorneys general for all 50 states and the District of Columbia have launched a joint investigation into alleged mishandling of documentation regarding foreclosures. In addition, some of the state attorneys general have launched investigations into other participants in the foreclosure process, including law firms, third party contractors, and process servers. We strongly support the state attorneys general with these investigations.
Treasury is working with other federal agencies and regulators to fully investigate the issues that have been raised, including taking the following actions:
· The FHA has been reviewing servicers for compliance with loss mitigation requirements. These reviews are being broadened to include a larger range of processes, focusing in particular on servicer procedures during the final stages of the foreclosure process.
· The Financial Fraud Enforcement Task Force (FFETF), led by the Department of Justice and with the participation of Treasury's Financial Crimes Enforcement Network (FinCEN), has brought together more than 20 federal agencies, 94 U.S. Attorney's offices and dozens of state and local partners to share information about foreclosure and servicing practices. The FFETF's collaborative efforts are ensuring that the full resources of the federal and state regulatory and enforcement authorities are being brought to bear in addressing this issue. In addition, the FFETF has also been coordinating with state attorneys general in their investigations.
· The United States Department of Justice is also working with regulators to investigate and, if material violations of the law are discovered, litigate against servicers, their law firms, and third-party providers regarding their foreclosure and bankruptcy processes.
· The Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac to remind servicers of their contractual and legal responsibilities in foreclosure processing. On October 13, FHFA directed Fannie Mae and Freddie Mac to implement a policy framework for dealing with possible foreclosure process deficiencies that requires servicers to review their foreclosure processes and fix any processing problems they identify. The FHFA policy framework includes specific steps servicers should take to remedy mistakes in foreclosure affidavits so that the information contained in the affidavits is correct and that the affidavits are completed in compliance with applicable law.
· Treasury's Office of the Comptroller of the Currency (OCC) directed all large national bank servicers on September 29 to review their foreclosure management processes, including file review, affidavit processing and signatures, to ensure that the processes are fully compliant with all applicable state laws.
· The OCC and the Federal Reserve System are jointly examining foreclosure and securitization practices at the nation's largest servicers. The examinations will include intensive review of the firms' policies, procedures, and internal controls related to loan modifications, foreclosures and securitizations seeking to determine whether systematic weaknesses are leading to improper foreclosures. The reviews will also evaluate controls over the selection and management of third-party service providers.
· In coordination with the work of the other agencies, the Office of Thrift Supervision (OTS) is reviewing the mortgage related policies, foreclosure processes and staffing levels of the largest servicers it supervises. The OTS issued correspondence on October 8 to all savings associations involved in servicing residential mortgages requiring the immediate review of their actual practices associated with the execution of documents related to the foreclosure process.
· The Federal Deposit Insurance Corporation (FDIC) is participating in the reviews by the OCC, the Federal Reserve System, and the OTS of the foreclosure and securitization practices of the largest mortgage servicers in its role as back-up supervisor. The FDIC also is verifying that the servicers it supervises do not exhibit the problems that others have identified as well as reviewing the processes used by servicers of loans subject to loss share agreements and other loans from receiverships of failed banks. These regulators are also evaluating foreclosure and securitization practices in electronic registration systems.
· The Federal Trade Commission (FTC) is monitoring servicers under existing public orders to confirm proper servicing and foreclosure processes, is conducting reviews in line with past servicing abuses and monitoring the market closely for any fraud or foreclosure scams.
· The Securities and Exchange Commission (SEC) has issued proposed rules that would provide greater transparency and disclosures in the securitization market and provide investors with additional tools to evaluate actions in the securitization market.
Administration Objectives
The Administration has three primary goals in addressing these issues which have been raised: raising accountability, sustainability for borrowers and clarity for the housing market. First, we seek to hold lenders and servicers accountable while maintaining the stability and functionality of one of our economy's most fundamental economic markets. This must be done while recognizing the differences between different states and different types of lenders, who have varying practices and standards and legal requirements.
Second, the Administration seeks to help struggling borrowers into sustainable housing situations. To that end, as described above, we have created a series of programs designed to benefit responsible homeowners. These include modification programs for homeowners who are facing financial hardship or have lost their jobs, refinancing programs for underwater homeowners, and incentives to promote alternatives to foreclosure such as short sales and deeds-in-lieu of foreclosure.
Third, the Administration seeks to resolve the significant uncertainty that this controversy has raised for borrowers and the housing market. The issues that have been alleged raise significant questions about the accuracy, fairness and even legality of several mortgage processes. We are working to address those issues that are problematic, and to clarify for the public those issues raised that are not in fact problems.
Possible Economic Effects of Suspension of Foreclosure Proceedings
The time required to resolve these recent foreclosure issues by the servicers and state courts, and delays due to the related law enforcement investigations, could delay thousands of foreclosures for several months, which may have both immediate and longer term consequences. Longer foreclosure timelines will likely lead to lower sales prices of houses that are already in the foreclosure process. Vacant houses, in particular, are likely to not only sell for lower prices once they are ultimately put on the market but may also drag down the value of nearby houses in the present as long as they remain unsold. Further, uncertainty about the status of foreclosed houses, including uncertainty with title insurance, and whether based on the documented problems in these banks or not, may discourage purchases of foreclosed houses until the uncertainty is resolved. This would hurt homeowners and home-buyers alike at a time when foreclosed homes make up 25 percent of home sales. Together these two factors may exert downward pressure on overall housing prices both in the short and long-run.
Right now, families who have watched their home values decline over the last few years want nothing more than new homebuyers to buy the vacant homes so that their neighborhoods can start the process of recovery. While the foreclosure reviews may reduce the near-term supply by delaying the sale of distressed homes, we expect that most of the affected houses will eventually come on the market.
Looking Ahead for Housing
Since EESA was enacted, the housing market has remained distressed, and although there are promising signs of stabilization, the nature of that distress has changed. In late 2008 and 2009, the nation's housing market was in broad decline, as a result of the subprime mortgage collapse and the effects of the financial crisis and the severe recession. Following the implementation of TARP, housing markets began showing some signs of stabilizing and wealth recovery for U.S. households. Thanks in part to federal government financial policies, mortgage rates remain near historic lows. Home prices stabilized in March 2009, following consistent declines since 2006. For example, the S&P/Case-Shiller U.S. 20-City Composite Home Price Index experienced a 3 percent year-to-year increase in July, compared to a 19 percent year-to-year decline in March 2009.
However, certain areas of the country continue to struggle as the nature of the stress in the housing market has evolved to concentrated unemployment, negative equity, excess housing inventory, and rising foreclosures, which act as a drag on housing prices and economic recovery in those communities. As described above, the Administration has responded by expanding MHA beyond the initial version of HAMP, the first lien modification program. MHA has been modified to include unemployment programs, second lien relief, short sales and deeds-in-lieu of foreclosure and principal reduction programs. Recognizing that the housing market conditions vary widely by locality, and are especially stressed by continued unemployment, the Administration has quickly rolled out the HFA Hardest Hit Fund for those states most affected by these issues. In addition, to combat negative equity and improve affordability, Treasury has partnered with FHA to expand refinance opportunities through the FHA Short Refinance option.
These programs will allow Federal assistance to reach more distressed homeowners and provide additional stability to the housing market going forward. In much the same way that HAMP's first lien modification program has provided a national blueprint for mortgage modifications, these new programs will continue to shape the mortgage servicing industry and act as a catalyst for industry standardization of short sale, refinance and principal reduction programs. The interplay of all these programs will provide a much more flexible response to changes in the housing market over the next two years. While TARP is ending, TARP's positive effects on the housing market are expected to continue over time.
I appreciate the opportunity to discuss these important issues and am happy to take your questions.