Federal Reserve Board governor Randall Kroszner submitted his resignation Monday. "The challenges and issues we have confronted have been unprecedented," he said in his resignation letter to President George W. Bush. "I am particularly pleased with our accomplishments in monetary policy, innovative liquidity facilities, banking and financial regulatory policy, and in strengthening consumer protection." He will return to a professorship position at the Booth School of Business at the University of Chicago after leaving Jan. 21, according to his letter.

A vocal authority on mortgage within the Fed, Kroszner has been a member of the Board of Governors of the Federal Reserve System since 2006. In 2008, he spoke out often on the unraveling of the subprime market and the need for “restoring confidence in our mortgage system.” Back in June 2008, he was urging banks and financial institutions to raise capital months before Treasury Department secretary Henry Paulson began rallying support for a $700 billion asset relief program that would eventually fulfill this exact role.

“The difficult conditions in the mortgage securitization markets, of course, put strains on the housing market itself,” Kroszner said. “Recovery in the mortgage markets themselves is also likely to be tied to recovery in the housing markets…. I expect housing markets to recover only gradually as demand rebounds and excess inventories are worked off.”

A month earlier, he'd been saying that recovery in the mortgage markets would take some time to materialize, although he said it would eventually materialize. Characterizing market recovery as “a gradual process that requires both market and regulatory discipline,” Krozner said that better information and transparency would be needed to restore investor confidence and bring liquidity back to a mortgage market that had been battered, and in some sectors, even left for dead.

Kroszner's reappointment — urged by President Bush — was blocked in 2007 by Chris Dodd, D-Conn. President-elect Barack Obama's pick for replacement at the central bank, Daniel Tarullo, will take Kroszner's position.

Write to Diana Golobay at diana.golobay@housingwire.com.

The Treasury has been under fire in recent weeks for its less-than-perfect implementation of the Troubled Asset Relief Program — particularly its failure to monitor how banks are using TARP infusions.  The Federal Deposit Insurance Corp. on Monday became the first bank regulator to require its state-chartered banks to monitor and report the ways in which they utilize TARP funds.

It's the first move in what many lawmakers hope will be a full-fledged movement, where all regulating agencies require their supervised institutions to report their use of capital injections, liquidity support and/or financing guarantees obtained through the government's financial stability programs. Many lawmakers have pushed similar, if not identical requirements, in pending legislation.

In a letter Monday to financial institutions, the FDIC said "given that government funds, capital and guarantees are being used to support banking institutions, banks are expected to document how they are continuing to meet the credit needs of creditworthy borrowers."

The letter outlined the FDIC's expectations of banks to deploy funding in a manner that prudently supports credit needs in their market and strengthens bank capital.

The monitoring process, according to the letter, should help determine how participation in federal programs has assisted institutions in supporting sensible lending and efforts to work with existing borrowers to avoid unnecessary foreclosures.

The FDIC also "encouraged' its institutions to include a summarized record of their fund usage in shareholder and public reports, annual reports and financial statements. Alongside the letter, the Agency issued a release that instructed all institutions how to report their monthly balance of debt covered by the liquidity guarantee.

The question is whether other regulators follow the FDIC's lead? A source familiar with the talks, according to an American Banker report, said a coordinated move is on the table. "The regulators are discussing the best way of going about….monitoring the use of funding," a source, who spoke on the condition of anonymity told American Banker.

"Banks never had public money investment before," Steve Fritts, the FDIC's associate director of risk management policy, told American Banker. "This is a big, new deal. It's important to communicate with them, and make sure they understand that … the expectation is that they use this to support their primary business activities."

He also said observers should not read too much in to the FDIC's issuance of the release alone, as it was meant to be "generalized" in the instance regulators or the Treasury Department creates more specific reporting standards in the future.

Amid intense pressure from lawmakers to account for how each institution has used government granted capital, interim secretary for financial stability Neel Kashkari has continued to defend TARP's current implementation — which doesn't require funds to be monitored — saying it's "difficult" to do so.

House Financial Services Committee Chairman Barney Frank (D-Mass.) and other Democrats, however, have said in recent weeks they will not support releasing the additional $350 billion in TARP funds unless Treasury implements procedures to monitor how participating banks are using the funds.

Write to Kelly Curran at kelly.curran@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

(Update 1 reflects a statement issued by Vitter's office.)

Senator David Vitter, R-La., on Tuesday introduced a measure to block the release of the second half of the $700 TARP funds, his aide said, according to a Reuters bulletin. Vitter in the past has vocalized his hesitation surrounding the bailout funds and in particular, the domestic automaker bailout. On Monday, he released a statement acknowledging President George W. Bush's request that Congress release the additional $250 billion, saying "congressional action is not required to release the remainder of these funds." He said an action that would be allowed is the congressional passage of a "disapproval resultion" to prevent the release of the money, and Vitter said he plans "on leading an effort to do just that," and to ensure that any more money given to the Treasury Department will be used effectively.

"When I publicly opposed the first bailout back in September, I did so because I was concerned that it would lead us down a slippery slope and encourage further bailouts. By now, it is clear that it has," he said Monday. "Since then, we’ve bailed out mismanaged auto companies, and now we are seeing a move in Congress to ensure that the entire $700 billion authorization will be spent…. I continue to oppose these bailouts, and I believe that responsible action demands some form of oversight."

The motion of disapproval comes as President Bush has asked Congress to release the rest of the TARP money on behalf of President-elect Barack Obama, who has said he would like to avoid taking office Jan. 20 without the appropriate financial ammunition, should a major financial disaster occur. Regulators on both sides of the aisle are now emerging with endorsements and objections.

House Financial Services Committee chairman Barney Frank, D-Mass., on Friday released proposed legislation to reform the TARP and increase program accountability. Speaker of the House Nancy Pelosi on Monday also endorsed releasing the rest of the TARP funds under Frank’s proposed legislation, specifically praising the requirement within Frank’s proposal that at least part of the TARP funds be required to go to helping homeowners, saying overall the legislation will ensure the rest of the funds come “with clear and specific strings attached.”

Write to Diana Golobay at diana.golobay@housingwire.com.

President-elect Barack Obama on Monday asked President George W. Bush for his assistance in requesting the release of the second half of the $700 billion granted to the Troubled Asset Relief Program. President Bush has called for Congress to release the next $350 billion, according to a report Tuesday by the Wall Street Journal. The request comes a week before Obama is sworn into office, suggesting both leaders wish to have the last $350 placed in Treasury hands even before the new administration takes over.

"In consultation with the business community and my top economic advisers, it is clear that the financial system, although improved from where it was in September, is still fragile," Obama said Monday about his request of Bush, according to the Journal. "I felt that it would be irresponsible for me, with the first $350 billion already spent, to enter into the administration without any potential ammunition should there be some sort of emergency or weakening of the financial system."

Treasury Department secretary Henry Paulson and interim assistant secretary Neel Kashkari have both publicly said the first $350 has been effectively allocated, with $189 billion of the $250 billion reserved for the capital purchase program already allotted as of Tuesday and "thousands" of applications still under review for the remainder, as well as other various infusions in American International Group (AIG: 25.25 +0.44%), Citigroup Inc. (C: 30.87 +1.61%) and the failing domestic auto makers. Lawmakers have consistently said they will not release the second half of TARP funds without some sort of language binding the Treasury to assist struggling everyday homeowners.

House Financial Services Committee chairman Barney Frank, D-Mass., on Friday released proposed legislation to reform the TARP and increase program accountability. Under Frank’s proposed makeover of the TARP, the second half of the $700 billion funds will be “conditioned on the use of a minimum of $50 billion for foreclosure mitigation.” His language would require Paulson to develop a comprehensive plan to prevent and mitigate residential mortgage foreclosures by March 15, 2009. The required elements of the plan include a guarantee program for qualifying loan modifications under a systematic plan and bringing down the costs of Hope for Homeowner loans “either through coverage of fees, purchasing H4H mortgages to ensure affordable rates, or both.” The plan would also need to establish a program for loans to pay down second lien mortgages that are impeding a loan modification, grant servicer incentives and assistance to stimulate modifications, and include the purchase of whole loans for the purpose of modifying or refinancing them.

Frank then on Monday released a statement of his approval to release the remaining funds for Obama's incoming administration. "We should not allow our disappointment at the Bush administration’s poor handling of the TARP program to prevent the Obama administration from using the funds in more appropriate ways," he said. " I hope the House will pass a bill this week that sets forth the conditions we believe are necessary to assure that the public gets the full benefit of these funds.”

Speaker of the House Nancy Pelosi on Monday also endorsed releasing the rest of the TARP funds under Frank's proposed legislation, which she said will make "significant changes" to the program and require strong oversight and transparency in the use of funds. In her statement, she mentioned the requirement within Frank's proposal that at least part of the TARP funds be required to go to helping homeowners, saying overall the legislation will ensure the rest of the funds come "with clear and specific strings attached."

She urged Congress to vote on Frank's legislation so that the rest of the TARP funds will go hand-in-hand with a reformed effort to aid struggling homeowners. "Millions of Americans have lost their jobs or face the prospect of foreclosure, and it is past time that we helped these families bolster their balance sheets," she said.

Fed vice chairman Donald Kohn spoke Tuesday before the Committee on Financial Services, stressing the need to stop preventable foreclosures and strengthen financial institutions with aid that may possibly "take the form of additional capital injections." He acknowledged that a "continuing barrier" for financial institutions remains the troubled assets clogging balance sheets. "The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit private investment and new lending," he said, further suggesting the Treasury might supplement more capital injections going forward with troubled asset purchases or "insurance that would pay off under very adverse conditions."

"Each approach could build on the infrastructure that the Treasury developed when it was planning to purchase troubled assets directly," he said. "Moreover…purchases that include residential mortgages could be combined with steps to restructure some mortgages as needed to avert preventable foreclosures."

Write to Diana Golobay at diana.golobay@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

There will be no lasting recovery without more government action and money to prop up the still ailing financial system, Federal Reserve chief Ben Bernanke said Tuesday.

"The global economy will recover, but the timing and strength of the recovery are highly uncertain," Bernanke said in his speech to the London School of Economics. "Government policy responses around the world will be critical determinants of the speed and vigor of the recovery."

The incoming administration is currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity, the fed chief said. "In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."

The government must rid its balance sheets of toxic assets, he explained. He discussed various ways to accomplish this, including the creation of "bad banks" to hold the troubled assets.

The government may need to provide more capital infusions to financial firms to help stabilize the still worsening markets, he added. And guarantees may become necessary "to ensure stability and the normalization of credit markets."

In his all but sugar-coated speech, Bernanke said there is still no end in sight to economic turmoil.  But he stressed the U.S. Federal Reserve still has "powerful tools" at its disposal to fight the financial crisis, and will continue to do its part to help.

Despite an overnight federal funds rate that cannot be reduced "meaningfully further" as Bernanke put it, the fed can still lend to financial institutions, provide liquidity directly to key credit markets, and buy longer-term securities, as the speech outlined.

The virtue of these policies in the current context, according to the fed chief, is that they allow the Fed to continue to push down interest rates and ease credit conditions in a range of markets, despite the fact that the federal funds rate is close to zero.

The Fed chairman acknowledged the concern about putting substantial government resources toward the financial industry, but "this disparate treatment, unappealing as it is, appears unavoidable," he said.

Some observers have expressed the concern that, by expanding its balance sheet, the Fed is effectively printing money, an action that will ultimately be inflationary.  Bernanke claimed, however, that the Fed sees "little risk of inflation in the near term; indeed, we expect inflation to continue to moderate," he said.

And he assured the audience that when the time comes, the unwinding of the government's programs will be "smooth" and "timely."

"In the near term, the highest priority is to promote a global economic recovery," Bernanke said. "Fiscal policy can stimulate economic activity, but a sustained recovery will also require a comprehensive plan to stabilize the financial system and restore normal flows of credit."

And international cooperation is absolutely essential he repeatedly said, if we are to address the crisis successfully and provide the basis for a healthy, sustained recovery.

Write to Kelly Curran at kelly.curran@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

It appears a cranky FASB, responding to a flood of comments — some ill-informed, a bunch form letters — added a few teeth to what had been looking like a technical fix to other-than-temporary-impairment guidance for securitized assets.

Last week the Financial Accounting Standards Board voted to issue FSP EITF 99-20-a, Amendments to the Impairment and Interest Income Measurement Guidance of EITF 99-20, but with additional language not included in the exposure draft.

The amendments were rushed through the FASB process over year-end under pressure from the SEC: the Board voted December 15 to issue the changes for comment, staff posted the exposure document December 19, users and preparers of financial statements had until December 30 to comment, and the Board voted January 7. The guidance will be effective for forth quarter earnings reports.

In all, over 350 comments were submitted despite the fact the comment period coincided with Christmas Eve, Christmas, Hanukkah, Kwanzaa and New Year's Day.

Based on the exposure document, one would have thought this was a big to-do for a small result. (HousingWire covered the exposure document and a flavor of the first couple hundred comments on January 6. See earlier story.)

For one thing, the scope of EITF 99-20 is limited, and that limits any relief it might provide. EITF 99-20 applies to a minority share of the dollar volume of outstanding asset securitizations (classes rated single-A or less, interest-only and residual interests). Moreover, risk-based capital requirements and regulatory oversight would tend to limit investment by regulated financial institutions in these lower-rated classes of securitizations.

Briefly, the proposal brought EITF 99-20 into alignment with FAS 115 by replacing language in EITF 99-20 that calls for OTTI to be measured using “cash flows that a market participant would use” with directions to follow the guidance in Paragraph 16, Impairment of Securities, in FAS 115.

Some users of financial reports objected to the change on the grounds removing a reference to market participants from anything is a step backwards, away from fair value accounting. To less partisan eyes, it’s simply the kind of change that a standard setter, reluctant to make a change under pressure because the preparer community does not want to recognize losses, would make. It tidies up accounting guidance, eliminates inconsistent treatment for similar assets, and reduces the number of OTTI models for financial instruments in GAAP from three to two. (The remaining model is provided in FAS 114, Accounting by Creditors for Impairment of a Loan.)

The changes do not alter the fact that preparers must assess whether the sharp decline in market value of their MBS, ABS, CDO, CMBS and so forth is other-than-temporary. The change doesn’t address a primary target of preparers’ dissatisfaction – current practice under the scant guidance provided for determining OTTI under FAS 115.

Boon or bone?

To an accounting outsider, the proposed FSP looks less like a boon to banks and more like a bone thrown by the SEC to Congressional and other political forces inflamed by the idea that fair value accounting hurts financial institutions, constrains credit and is deepening the crisis.

Indeed, the SEC has already taken bragging rights. In a December 8 speech, chairman Christopher Cox said since October they had been asking FASB to address issues like impairment. He was specific: “the treatment of so-called EITF 99-20 securities including CDOs and other structured instruments. As you will hear from Bob Herz and others later today, the FASB is working diligently on these issues, and is mindful of the importance of providing guidance in time for the preparation of annual reports at the end of this year.”

Actually, in his speech FASB chairman Robert Herz did not mention any diligent work on impairment and EITF 99-20. The issue surfaced soon thereafter, however, on the agenda for the December 15 Board meeting, wearing a tight deadline to reflect the looming closing of the books on Year 2 of the disaster.

Or maybe Cox was pushing them to meet a deadline the SEC faced under the Emergency Economic Stabilization Act of 2008. When the SEC published its mandated mark-to-market study on December 30, the EITF 99-20 adjustment was listed as a “Financial Reporting Responses to the Global Economic Crisis”. Read the full study.

Pushed to it

Clearly the Board was not gung ho. The vote was three to two. Herz and Board members Leslie Seidman and Larry Smith voted in favor. On FEI’s Financial Reporting Blog, Edith Orenstein reports that Seidman characterized the amendments as “modest clarification,” with which Herz and Smith concurred.

Some comments almost irritated the reluctant Board. According to Orenstein’s account of the discussion, Herz and Seidman were “troubled” by comment letters asserting that, if securities were currently receiving cash flows, “there definitely was no need to take any impairment.” Herz said he “felt the need to remind people, some of their assertions about the way current literature operates is not correct.”

That reminder was delivered, in the form of additional clarifying language that will be included in the final FSP. The language was proposed, in the words of the meeting handout, “to avoid any misinterpretation of the removal of the reference to market participants.”

The additions:

1. Remind entities to consider existing guidance to applying OTTI under FAS 115, and
2. Consider all available information, reflecting past events and current conditions, when developing the estimate of future cash flows for determining whether to record an other than temporary impairment. All available information would include, but not be limited to, the remaining payment terms of the instrument and economic factors that are relevant to the collectibility of the instrument, such as current prepayment speeds, the current financial condition of the issuer(s), and the value of any underlying collateral.
3. Exercise judgment when assessing whether declines in fair value are indicative of a decline in the cash flows expected from the issuer of the security. For example, an entity should not automatically conclude that a security is not impaired because all of the scheduled payments to date have been received. Nor should an entity automatically conclude that every decline in fair value represents an other than temporary impairment.

This is clarity

According to Orenstein, Herz thought this similar to the SEC’s SAB Topic 5-M guidance. This accounting outsider disagrees. The clarifying language is more specific and more pertinent to the impairment issues facing financial institutions now.

The caution that not every decline in fair value results in OTTI should discourage any bright line rules (a decline of x percent for y months = OTTI) that have evolved from the SAB Topic 5-M’s direction to consider the extent and duration of the decline from cost.

In addition, the “available information” cited sharpens the criteria for determining OTTI in securitized assets in a way that leaves little room for preparers to hide behind the current performance of a security.

Remaining payment terms refers to payment resets – the language recommended in the meeting handout goes farther to, state payment terms could be significantly different in future periods for securities backed by nontraditional loans.

Relevant economic factors could include a sober estimation of the likelihood of repayment given rising unemployment and continued deterioration, nationally and in many local markets, of home prices.

The value of any underlying collateral would refer, in particular, to the residential and commercial real estate securing loans backing impaired securitizations. Houses, that is, that could have declined in value 20 percent or more. And the outlook for commercial properties is dimming as well, with the credit crunch and economic recession.

Use models to comply

The specificity of this added language should promote the use of valuation models that forecast cash flows based on loan characteristics and economic variables to project the prepayments, delinquencies, defaults and loss severities that determine the collectibility of cash flows.

A number of such models exist — from third-party valuation vendors, the broker-dealer research groups still standing, even the rating agencies, who have enhanced and migrated their rating models to business units charged with providing investment evaluation and strategy services. In its comment on the FSP, Andrew Davidson & Co. point out that, owing to their proprietary nature and complexity, “no two models will predict exactly the same cash flows, even under similar economic assumptions. Nevertheless by comparing the results of several models and looking at the historical performance of a model, it is possible to determine the reasonableness of a forecast.”

It’s much fairer to ask auditors (some of whom have their own models as well) to make those comparisons than to continue to use rules-of-thumb, though my experience tells me that entities compelled to book losses will dislike the results of this guidance at least as much as they dislike rule-based practices.

Some observers of the capital markets train wreck may complain that models helped make the mess, but fact is, models are no better than the assumptions fed them and the bad assumption was that home prices would continue to rise. These same tools are now being used by the slowly emerging cadre of distressed asset buyers to evaluate the break-even, upside and downside on prospective purchases of securities and loan portfolios. That is to say, the models incorporate the cash flows the reviving market will use to project asset performance.

Editor’s note: Linda Lowell is a 20-year-plus veteran of MBS and ABS research at a handful of Wall Street firms. She is currently principal of OffStreet Research LLC.