7/7T8:33 News and Notes

ECONX Excerpts from Ben Bernanke's speech at the Federal Deposit Insurance Corporation's Forum on Mortgage Lending for Low and Moderate Income Households
Unfortunately, in the past few years, many mortgage loans were extended that were poorly underwritten or whose terms were inadequately disclosed, particularly in the subprime market. As you know, those poor lending practices have contributed to a sharp increase in mortgage delinquencies and foreclosures. The resulting costs have been felt not only by borrowers but also by entire communities, as foreclosure clusters have caused neighborhoods to deteriorate and reduced municipal tax bases. The decline in the national housing market, which has been a major cause of the broader slowdown in economic activity, was in turn greatly exacerbated by the collapse of subprime lending. And financial institutions have suffered large losses, with implications for the cost and availability of new credit... I welcome recent efforts to improve the regulatory oversight of the government-sponsored enterprises, Fannie Mae and Freddie Mac. If these firms are strong, well-regulated, well-capitalized, and focused on their mission, they will be better able to serve their function of increasing access to mortgage credit, without posing undue risks to the financial system or the taxpayer... The PDCF and the TSLF were created under the Federal Reserve's emergency lending powers, with the term of the PDCF set for a period of at least six months, through mid-September. The Federal Reserve is strongly committed to supporting the stability and improved functioning of the financial system. We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets. At the same time, we are taking measures that will serve over time to strengthen the primary dealers, other financial institutions, and the overall financial system. As I will discuss, these measures include working with the SEC and the primary dealers to increase the firms' capital and liquidity buffers and cooperating with other regulators and the private sector to help make the financial infrastructure more resilient.

FNM Fannie Mae & Freddie Mac: Color on potential FASB 140/FIN 46 accounting changes (15.74 )
Friedman Billings notes that proposed changes to FIN 46(R) and FASB 140, particularly with regard to changes in off-balance-sheet accounting, will decrease the leverage ability of many regulated institutions in the future, but is less likely to cause any dramatic immediate change to the state of the financial markets. While the comment period does not expire until August 11, 2008, they believe there will be an orderly implementation of the new policies that will eventually eliminate many current off-balance-sheet vehicles. Initially, legacy assets will not have to be consolidated until the first quarter of 2010, thus allowing many short-duration assets to pay down before consolidation would be required. Contrary to market perception, the firm does not believe that FNM and FRE will be materially affected by the change. While FNM and FRE would certainly be the most affected institutions should they be forced to consolidate all assets, they believe OFHEO, or any other future regulator, will change its capital requirements in order not to force a tremendous strain on the mortgage and housing markets in the U.S. The firm believes that FNM and FRE would not be able to raise enough capital needed if they were forced to implement this statement, which would likely cause a nationalization of the companies... In a note out yesterday afternoon, Keefe Bruyette noted that FNM and FRE have both suffered significant share price declines based on possible FASB interpretations for off-balance-sheet treatment of securitizations. The firm believes this sell-off is unwarranted on this issue as the GSE regulations already have capital requirements for off-balance-sheet exposures of the two companies... Piper Jaffray says that with regard to the credit card assets and the GSEs, it sounds to them like they are not the target of the accounting changes. Firm says In addition to the GSEs, companies under their coverage that could be affected by the regulations include AXP, COF, WM, ADS and ACF.