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Inside Washington (03/03/2009)
* WASHINGTON (3/4/09)--The Obama administration’s loan modification plan, which was proposed last month, has redefault risk, financial industry observers say. The proposal would lower monthly mortgage payments to 31% of a borrower’s income but would not take into account the borrower’s debt-to-income ratio (American Banker March 3). Mortgages belonging to borrowers with a high ratio--more than 55%--may not be salvageable, according to Laurie Goodman, senior managing director, Amherst Securities Group. President Barack Obama is expected to release more plan details today. The Credit Union National Association is working toward targeted loan modifications to assist borrowers ... * WASHINGTON (3/4/09)--Sen. Richard Durbin (D-Ill.) said he may limit a mortgage cramdown bill to apply only to subprime loans (American Banker March 3). The most recent version of the bill was revised to make borrowers who could afford to repay their mortgages ineligible for judicial modifications, but it would still give bankruptcy judges the ability to determine which borrowers are eligible for modifications. The House is expected to vote on its version of the mortgage bankruptcy bill as early as Thursday ... * WASHINGTON (3/4/09)--The current approach to determining loan loss provision forces financial institutions to build reserves when it is most difficult, Comptroller of the Currency John Dugan told attendees of a banking conference this week. A more counter-cyclical approach allowing provisions to be made earlier in the credit cycle when times are good should be used, he said. Accounting standards for loan loss provisioning are based on an “incurred loss” model, which allows a bank to make a provision to the reserve only if it can document a loss. “We need to do a better job of telling banks and their auditors the degree to which they are permitted to use non-historical, forward-looking judgmental factors to justify provisions to the loan loss reserve,” he said. Disclosures also must be more robust. “If banks believe they need more flexibility to use their expert judgment to recognize losses in the credit cycle, then that judgment should be able to withstand the glare of investor scrutiny as an important check on the process,” he added ... * WASHINGTON (3/4/09)--The Federal Deposit Insurance Corp. (FDIC) and the Washington State Department of Financial Institutions have executed an information-sharing agreement relating to Money Services Businesses (MSB) supervision. The agreement was developed to limit regulatory redundancies by providing relevant supervisory information for MSB customers with relationships at FDIC-supervised financial institutions ... * WASHINGTON (3/4/09)--When Ben Bernanke, Federal Reserve chairman, told lawmakers Tuesday that they need to act on President Barack Obama’s budget quickly despite the anticipated $1.8 trillion deficit, he was met with anger from senators regarding American International Group’s failure (The New York Times March 3). Sen. Ron Wyden (D-Ore.) asked Bernanke when taxpayers will no longer be “on the hook” for AIG. Bernanke said he was upset by AIG’s failure but defended the Fed’s actions, saying that it had to stabilize the system. Bernanke agreed with senators that AIG-type institutions need to be more strictly regulated, but he said helping AIG was the best option. He also said that although economic indicators show little sign of improvement in the near term, the recently approved $787 billion economic stimulus package should help production and demand in the next two years. More will likely need to be done, though, he said ... * WASHINGTON (3/4/09)--If Fannie Mae and Freddie Mac’s conservatorships are permanent, their independence could be hindered, thus setting a precedent for the future nationalization of large banks, industry observers say. For the past few months, Fannie and Freddie have been ordered by regulators to oversee mortgage modifications, purchase more loans and refinance at-risk borrowers (The New York Times March 3). Regulators have said the actions were needed to stabilize the economy, but financial observers indicate the actions have had adverse effects. On Monday, David Moffett, former Freddie Mac CEO, resigned. Both enterprises are expected to announce record losses this week, and observers say policymakers have been able to influence the mortgage market through the takeover. The government’s involvement could lead to the same problems that caused the current economic crisis, according to Rep. Scott Garrett (R-N.J.), who said bad economic decisions are made when mortgage companies are used politically. Rep. Barney Frank (D-Mass.) said the government is committed to restructuring Fannie and Freddie, noting that some of what they accomplished will be returned to the private sector ...


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