Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

On Wednesday, April 14, the White House and the HUD Secretary Shaun Donovan both took steps in support of reforms for the housing market (including Fannie Mae and Freddie Mac).  Here is a quick summary:

1.  White House Asks Public Input on 7 Questions:  The Obama Administration issued a press release asking for public comment on seven questions, all covering reforming the current housing finance system.  The press release asks us to submit written responses (via on-line), or to attend various public hearings (planned to take place across the country.  Take a look at the questions; they are interesting.
   
   Remember my point that mid-term elections restrict the time period for Congress to pass any financial reform; and that the window of opportunity to pass a bill closes in August (when Congress will focus on re-election).  So, why the need for a series of public hearings around the country? Given the huge numbers of foreclosures since 2007, do we really think that the public needs a hearing to prove-up or substantiate the need for housing financial reform?
   
   Perhaps the hearings serve another purpose: simply good local news coverage for those mid-term elections?  
   
   While I understand the need for theater and the desire to be re-elected, I just hope that the political playbill leaves some time to address the problem with meaningful legislation.  The clock is ticking and August will arrive before we know it.
   
   
2. House Financial Services Committee Testimony: Recall the testimony last month by Treasury Secretary Tim Geithner before this committee. 
   
   During this second hearing, the Secretary of Housing and Urban Development Shaun Donovan articulated the Obama Administration's goals for reforming the housing finance markets. (PDF of his testimony)  A portion of his testimony focused on the important role of Fannie Mae and Freddie Mac in residential housing.  He stated that “government support for multifamily housing is important and should continue in the future housing finance system to ensure that consumers have access to affordable rental options.”
   
   I totally agree on the importance of continuing the role of Freddie and Fannie. I just hope, however, that Chairman Franks does NOT wait another month for the third hearing - and doesn't delay his process while the Administration takes the political theater (#1 above) on a cross country tour.  At the hearing, Chairman Barney Frank indicated that there is broad consensus among lawmakers on the need to reform the current system and that the Committee plans "soon" to draft legislation addressing housing finance reform. I do hope "soon" really is soon.  The clock is ticking and August will arrive before we know it.

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Unlike the CMSA January Conference (where the primary focus is on addressing substantive issues) [link], the MBA-CREF convention has a primary focus on relationships: mortgage bankers meet with lenders; and lenders meet with mortgage bankers.

However, the MBA does offer some very interesting Committee and Council meetings, where substantive issues are discussed.

But make no mistake about this: the focus is on the meetings.

Any way, here are my notes from two committee and council meetings that I found particularly interesting today: the Public Policy Committee; and the Investor & Originator Council.

As a general proposition, the general "atmosphere" is much, much more optimistic than the atmosphere at the CMSA January Conference.

Maybe the credit markets have radically changed in two weeks.  (Or not.)

Public Policy Committee

• Legislative climate: bad. "Hostile environment" for lenders.  Lenders are "demonized" by the administration. No one wants to help Financial Services sector. With this background, here are MBA priorities: financial reform (big issue for CRE: risk retention provision - skin in the game; MBA try exempt multi-family & CRE); FHA role & mission (housing finance system); future of Freddie & Fannie (altho only briefly mentioned in comments to the proposed budget). Revenue raising tax issues are important to the Administration.
• Financial reform: House bill passed. Action now in the Senate. Bi-partisan working groups at work in Senate since November. Senator Dodd is not under political pressure due to his announcement that he will not run for re-election. Risk retention is focus of MBA. Calendar constrained because no hope for bills after August (due to mid-term elections). Plus other regulator reform happening, such as the "Voelker bill" (which will severely restrict the activities of banks).
• Need specifics on Administration's proposal to fund $30bill for community banks
• The MBA has a long, long list of regulatory and legislative items
• GSE: part of restructure of housing finance system; no "hard" direction from administration; the unlimited funding of Freddie & Fannie (per the Dec 10 announcement) will not continue forever
• MBA will formally oppose the fee on regulated institutions (but caveat: no one loves bankers)

Investor & Originator Council

At the beginning of this meeting, the MBA's economist (Jamie Woodwell) discussed the MBA's 4thQ data (to be released on Tuesday, 2/2); CRE loan originations up 12% on average; caution - comparing to a low level (in 2008); CRE originations still at low volume; maturity volume survey - 13% of non-bank will mature in '10 and 7% in '11 (highest product is variable rate CMBS); all to be on MBA's website.

Next, a panel of speakers gave their perspectives on the following:

• Buzz in market - things are getting better; what is your origination prediction for '10? Life Cos have almost normal funds (and spreads a good relative to corp bonds), but conservative underwriting will limit production volume; wild card is employment numbers
• Trends in last 90 days: sentiment in market is improved, w/ people wanting to invest; but challenged by worsening CRE fundamentals; tale of two cities (intense competition for best deals and no $ for bad deals); several big banks have approval to take loan applications for multi-borrower loans for CMBS pools (but same challenge - the same tale of two cities); strong investor demand for GSE bonds (a lot of capital looking for a home); need to see job growth in order for lenders to believe rents have stabilize
• Risk of double dip in '11: due to foreclosed properties hitting the market; at same time, some properties will attract investors if in good location or unique replacement cost (high quality asset); one panel member did not believe in "double dip" theory; good, performing loans are being sold at close/at par
• Will rising employment save the "kick the can" lenders? Banks need to see an accruing loan, and thus A/B note structures will be attractive; but this will take time to implement
• Rush to fix CRE is not the best strategy; lenders are taking the right approach in extending & restructuring (charge off the new B Note); average loss on foreclosure is 2x loss following smart restructure (if B motivated & doing the right thing, and a performing loan will be in place); however, this approach will affect price uncertainty; but lenders will foreclose (if B can not cure a $ default) and are motivated to sell REO
• Risk Based Capital for life insurance companies: regulators have given concessions and are working for a long-term solution
• FDIC: maybe considering keeping assets and working them out - as opposed to taking the "RTC" approach (from the late '80s)

This is a very different crowd, with a much more optimistic attitude, than the attendees at the CMSA January Conference.

If you have any comments, please post them below.

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