"The problems have been most severe for subprime mortgages with adjustable rates: the proportion of those loans with serious delinquencies rose to about 13-1/2 percent in June, more than double the recent low seen in mid-2005 ... Apart from adjustable-rate subprime mortgages, however, the deterioration in performance has been less pronounced, at least to this point ... ... In recent months we have seen a reassessment of the problems of maintaining adequate monitoring and incentives in the lending process, with investors insisting on tighter underwriting standards and some large lenders pulling back from the use of brokers and other agents. We will not return to the days in which all mortgage lending was portfolio lending, but clearly the originate-to-distribute model will be modified--is already being modified--to provide stronger protection for investors and better incentives for originators to underwrite prudently.
Bernanke: No Such Thing as Containment, Fed Will 'Do What is Needed'
In highly-anticipated comments today at the Federal Reserve Bank of Kansas City's Economic Symposium, Fed Chairman Ben Bernanke said that the Fed "will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets," and said that problems that began in the subprime mortgage market are clearly not contained. "[T]he financial stress has not been confined to mortgage markets," he said in his prepared remarks. "Although this episode appears to have been triggered largely by heightened concerns about subprime mortgages, global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans." The Fed chief also voiced his stance against a bail out of investors and lenders. "It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions," he said in prepared remarks. (Read the full text of today's speech here.) Bernanke's remarks clearly signaled that housing -- and any economic fallout associated with ongoing troubles in US mortgage markets -- has moved to the forefront of the FOMC's policy agenda. "Obviously, if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy," Bernanke said. "We are following these developments closely." Some other highlights from today's speech, relevant for mortgage industry professionals: