Financial Services Update

August 20, 2010

Authored by: Matt Jessee

Department of Labor Weekly Unemployment Report Released 

On Friday, the Department of Labor announced that the unemployment rate fell in 18 states during the month of July. The Department also said the jobless rate rose in 14 states and stayed the same in the remaining 18 states. Nationwide, the unemployment rate remained stuck at 9.5 percent in July. New York and Massachusetts reported strong job gains with Massachusetts reporting that it added 19,200 private-sector jobs in July, the largest monthly gain for any state in more than 20 years. 

Housing Conference Foreshadows Fight Ahead 

On Tuesday, the Departments of Treasury and HUD invited a cross section of housing and banking industry participants to Washington for a summit on the future of the housing finance industry. The industry representatives voiced overwhelming support for the government to maintain a large role in supporting the nearly $11 trillion mortgage market. Participants expressed support for a new program that would allow homeowners to refinance their mortgages at lower interest rates through Fannie Mae and Freddie Mac, although Treasury officials indicated they have no plans to enact such a program.

 Treasury Secretary Timothy Geithner pledged “fundamental change” to the structure of Fannie and Freddie, but saying that the two companies were not the only cause of the financial crisis. While Geithner did not offer a specific strategy for reforming the two mortgage giants, he said that the government could remain involved in the mortgage system by guaranteeing that investors in mortgage-backed securities receive fair compensation, even when borrowers default. Representative Spencer Bachus (R-AL), the Ranking Republican on the House Financial Services Committee, accused the Administration of excluding critics of the Administration from Tuesday’s conference. In a letter to Secretary Geithner, Bachus said the housing conference appears to be “laying the groundwork for a predetermined policy outcome that looks uncomfortably similar to the failed status quo.” 

Sources indicate the Administration aims to submit its proposal for reforming the housing industry to Congress early next year. Representative Barney Frank (D-MA), Chairman of the House Financial Services Committee, said after the summit that the housing system should not include public-private companies like Fannie Mae and Freddie Mac, that the government should make explicit its subsidies for low-income housing, and that a federal guarantee program for conventional mortgages should finance itself through fees. While Frank said that he intends to move legislation next year, he acknowledged that the midterm elections could cause political changes that would make his legislation’s passage more difficult. 

Fed Bans Yield Spread Premiums 

On Monday, the Fed announced new rules banning yield spread premiums, which allowed mortgage brokers and lenders to gain additional profit from loans by charging borrowers higher than market interest rates. While the new rules prohibit payments to a lender or broker based on the loan’s interest rate, the rules do allow for compensation based on a fixed percentage of the loan amount. The new Fed rules stipulate that the borrower must be provided with competing options, including the lowest qualifying interest rate, the lowest points and origination fees, and the lowest qualifying rate, without features like prepayment penalties in order to prevent brokers from steering borrowers into loans that offer less favorable terms. The rules take effect April 2011, and similar, broader rules in the Dodd-Frank Wall Street Reform Act will also take effect at a later date.

Buy Back Window Opens for High Cost Securities

Monday marked the beginning of the Dodd-Frank bill’s 90-day window for banks to buy back $118 billion in high-cost securities. The program will enable banks to replace high-cost instruments with cheaper capital. However, confusion exists as to whether “trust preferred securities” will qualify for the program. Banks have an added incentive to redeem the trust preferred securities in the buy back window because the Dodd-Frank bill prevents such instruments from being counted as tier one capital starting in 2013 for institutions that had more than $15 billion in assets as of the end of 2009.


More Information 

If you have any questions regarding any of these issues, please contact: 

Matt Jessee, Policy Advisor

Patricia Ross, Policy Assistant