Industry professionals aren't surprised by Federal Reserve Chairman Ben Bernanke's comments on tight mortgage lending, “too big to fail” banks and MBS sales in his testimony before a Joint Economic Committee of Congress this morning.
Bernanke pointed to excessive conservatism on the part of the banks, uncertainty about regulation and the need for GSE reform to explain the current lending market. He also mentioned the fear of put backs that the banks still have.
His speech is consistent with his past speeches and the administration position, said Independent Community Bankers of America (ICBA) Senior Vice President and Senior Regulator Counsel Chris Cole.
“I think that he is correct on conservatism, which is a result of put backs from Fannie and Freddie – they are having a tough time with that, they have to make sure that every mortgage loan is carefully underwritten and that it complies with guidelines,” Cole said.
Regulation is a problem, Cole said, and the QM rule will be a problem when it comes into play.
"As is usually the case, the pendulum has swung too far," said Larry Muck, executive director of the American Association of Private Lenders. Muck attributes tight underwriting standards for the difficulty many self-employed individuals and those who were defaulted out of their homes face to be approved for loans.
Bernanke also addressed what the Federal Reserve is doing to move in the right direction in regards to big banks, through Dodd Frank, Basel III and orderly liquidation authority.
"And as I have said, if we don't feel after some additional work here that we have addressed that problem, I would certainly be supportive of additional steps,” Bernanke said in his testimony. “I think the best direction is probably requiring the largest firms to hold more capital proportionally."
Though Cole supports this direction, James Chessen, chief economist for the American Bankers Association (ABA) has already established his opinion on the matter, stating in a report that “more capital” shouldn’t be confused with “you can’t have too much capital,” because capital comes at a cost in the form of forgone lending as institutions shrink to meet extreme capital-to-asset ratios.
Bryan McNee, a senior bond analyst with MBS Authority, reports that Bernanke’s statements on monthly MBS purchases have also seen market reaction.
After Bernanke’s statement that it was too soon to consider pulling back on the amount of monthly MBS purchases, MBS rallied, causing mortgage rates to get better, McNee reports. But after a few moments, MBS sold off dramatically, causing mortgage rates to rise as traders moved past the headlines and focused on the actual content of what Bernanke was saying, which is that the Fed was ready to alter their monthly bond purchase program if the labor market continued to improve.
When minutes from the last Federal Open Market Committee meeting were released, discussion about taking action on reducing bond purchase by as early as June has kept the pressure on MBS pricing and on pushing up mortgage rates, according to McNee.
“We are certainly in for a bumpy ride for the remainder of 2013,” McNee said. “Prior to May mortgage rates drifted sideways and were at fantastic levels. But that certainly hasn’t been the case since May 1st and won’t be the case for the rest of the year either.”