John At The Center

1:15pm The Future of the Housing Finance System

Nancy Wallace, UC Berkeley, Moderator

Panelists:

Brad Blackwell, Wells Fargo Bank

Talking about the importance of home ownership.

Wells stayed conservative as the real estate bubble expanded.  They certainly lost market share, but now, they are the only AAA rated bank.

We need better regulation.  Right now it’s a patchwork and we need a single regualtory body.

We need to reward quality and not quantity.

Also need to educate borrowers (in schools).

John Krainer, Federal Reserve Bank of San Francisco

Showing a lot of data in powerpoint.  Comparing across different vintage years of these mortgages.  New loans:

(source McDash Analytics)

Different delinquency rates:

Even in 2007, when we were already worried about this problem, delinquency rates are much worse than the earlier vintage years.

We are definitely seeing tighter lending.  Fico score average is much higher in 2008 than it was in 2006.  Option Arm is completely dead.

So the story here is that the majority of this is localized in the mortgages that ended up in private securitizations.

Paul Leonard, Center for Responsible Lending

Predicted large percentage of foreclosures but it was seriously underestimated.  Will get worse before it gets better.  What he believes is that we really need a broad loan modification program.

Presenting a lot of data on California defaults and foreclosures.  Foreclosures are rising.  Defaults are trending down but that’s only due to laws that simply delay the beginning of the default process.  Half of the sales in California are foreclosure sales

Alt-a wave is building next.  The majority of resets will be between May 2010 and Jan 2012.  Data is showing that a lot of defaults are happening even before loans are resetting.  That’s why he’s so confident that we will see foreclosure challenges well into the future.  Loss projections are 50-55% of outstanding option arm pool.  We need a more systemic way than what Yellen talked about to deal with this issue.

There are lots of structural barriers.  We already talked about issue with buying loans from securitization trusts.  Also, loan servicing shops are not equipped to deal with what’s happening.  We need technology to address.  In the last ten years, we’ve had huge innovations in underwriting but no innovation in loss mitigation.

Paul Jablansky, 400 Capital Management LLC

Loans that are housed in securitization trusts are very difficult to unwind.  There is an idea that loans can be bought from these trusts but you can only purchase delinquent loans at high prices from these trusts.