Sen. Charles E. Schumer and Federal Reserve Chairman Ben S. Bernanke

The Fed's Role in Mortgages

Monday, September 3, 2007

Sen. Charles E. Schumer (D-N.Y.), chairman of the Senate Banking Committee's subcommittee on housing, traded letters recently with Federal Reserve Chairman Ben S. Bernanke about easing restrictions that limit the ability of mortgage-finance giants Fannie Mae and Freddie Mac to buy more mortgages and mortgage-backed securities. Here are excerpts from their correspondence.

Aug. 22, 2007 Schumer to Bernanke:

The Federal Reserve Bank has taken good steps to restore liquidity to the financial system, but there is still much more that needs to be done to address the risks that we face to our broader economy caused by the ongoing turmoil in the mortgage market.

It is essential that the Federal agencies overseeing the financial markets use their influence over the major market players to encourage them to engage in a major effort to modify or refinance the loans that have a high probability of defaulting so that the upcoming wave of foreclosures that is anticipated can be abated and market confidence can be restored.

According to the Center for Responsible Lending and other sources, up to 40 percent of current subprime borrowers could now qualify for safe, prime, fixed-rate loans. Our ability and willingness to assist these borrowers is going to be essential to our efforts to prevent the further damage to the housing market, credit markets and overall economy that would otherwise result if their loans are not modified or refinanced.

The reality of today's mortgage market calls for new and creative thinking by the regulators. There are many nonprofit groups that are experienced and willing to assist these borrowers, but they are both resource-constrained and need the cooperation of the banks, lenders and loan servicers. In addition, there are still financial institutions, mainly regional banks, that do not sell off their mortgages and thus can readily assist their borrowers by refinancing them into safe, fixed-rate loans. . . . While the federal government and regulators have largely been reluctant to use these tools to help struggling homeowners in the past, this new type of crisis demands a new type of response. This crisis does not call for a bailout of borrowers, but it does demand a new way of refinancing borrowers who can no longer simply go to their neighborhood banks, as they could have twenty years ago.

Fannie Mae and Freddie Mac have already made commitments to provide substantial resources for subprime refinancings. I have publicly stated that I will introduce legislation when Congress reconvenes in September to increase the portfolio caps on the GSEs to increase their flexibility to participate in loan modifications with borrowers and lending institutions. I encourage the regulators to act before Congressional action is necessary, and raise these caps to help facilitate more loan modifications.


Senator Charles E. Schumer

Aug. 27, 2007 Bernanke to Schumer:

I want to assure you that the Federal Reserve, in cooperation with other federal agencies, is closely monitoring developments in financial markets. As you recognized, the Federal Reserve has also taken steps to increase liquidity in the markets. In particular, our changes to our discount window program are designed to assure depositories of the availability of a backstop source of liquidity so that concerns about funding do not constrain them from extending credit and making markets.

I share your concern about the potential impact of scheduled payment resets on homeowners with variable-rate subprime mortgages. The federal banking regulators have encouraged banks and thrifts to work actively with troubled borrowers to modify loans or to refinance as needed to avoid default or foreclosure and have jointly issued guidances to address underwriting and disclosure practices related to subprime mortgage lending.

As you note, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are currently assisting in subprime refinancings. However, the GSEs' charters limit their ability to take on higher-risk mortgages and their programs are relevant only to a relatively small share of subprime borrowers. The GSEs should be encouraged to provide products for subprime borrowers to the extent permitted by their charters. The current caps on GSE portfolios -- which were imposed for safety and soundness reasons -- need not be lifted to allow them to accommodate new borrowers. Currently, the GSE portfolios include substantial holdings of GSE-guaranteed mortgage products, which are easily placed in the private secondary market even under current conditions. Thus, the GSEs could readily sell these securities to make space for new mortgages if they wished to do so. Policymakers may also want to encourage the GSEs to increase their mortgage securitization efforts, which are not constrained by their portfolio caps.

Again, thank you for your interest and please be assured that we are following these issues closely.


Ben S. Bernanke

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