Durbin is the main backer of legislation that failed to pass the Senate earlier this year that would have empowered bankruptcy judges to modify primary home mortgages. On Monday, he said he would consider resurrecting that bill, but is also interested in a range of alternatives that may find broader support.”

Durbin’s bankruptcy legislation, derided as “cramdown” in the financial industry, fell 15 votes shy of passing the Senate and for years has been vigorously opposed by the industry.

“Americans don’t have time for any more voluntary half-measures that fail to significantly reduce avoidable foreclosures,” Durbin said at the Center for American Progress, a liberal-leaning think tank.

The Obama administration met with the financial industry last week and worked out a goal of 500,000 completed mortgage modifications by November.

On Tuesday, the Treasury Department will release the first monthly progress report on the administration’s efforts to encourage mortgage modifications. Durbin said that he is also sending letters to the 34 banks and mortgage servicer companies that are participating in the administration’s loan modification plan, asking them to detail their efforts so far.

Durbin said he is still strongly in support of bankruptcy legislation as a way to force the industry’s hand.

“There is growing consensus that principal reductions are the key to sustainable modifications that won’t redefault, since a homeowner who has equity will fight harder to make the mortgage work,” Durbin said.

The financial industry has shown no signs of easing its opposition to the measure. The industry engaged in one of its heaviest lobbying battles this year to beat back the policy.

Among other options, Durbin said he is considering policies that would mandate arbitration between borrowers and servicers prior to foreclosure. Arbitration would allow homeowners and lenders to renegotiate the terms of the mortgage and avoid foreclosure. Congress could also help finance arbitration programs in cities and states.

Durbin also suggested that legislation could allow homeowners to stay in their homes for some time while they pay fair-market rent.

Additionally, lawmakers could pursue financial penalties against firms that fail to meet the administration’s foreclosure-reduction standards, he said.

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After 18 months of study and consumer testing, the Fed’s division of consumer affairs proposed, and governors accepted, a change to how finance charges and the annual percentage rate would be calculated. They also proposed restricting some bonus compensation from lenders to those who originate loans.

The action by the Fed’s Board of Governors, which requires a four-month comment period before becoming final, came as Congress is weighing an Obama administration proposal to strip the central bank of some of its regulatory authority over consumer credit products such as mortgages and credit cards. The administration favors giving those powers to a new Consumer Financial Protection Agency, which would have the sole mandate of protecting consumers from abusive practices such as the weakened lending standards that triggered a collapse of the housing sector. This crisis in mortgage lending quickly morphed into a global financial crisis.

Last week’s Fed vote also came hours after the National Association of Realtors reported that sales of existing homes rose 3.6% in June, the third consecutive month of increasing sales. All regions of the country posted growth, and the percentage of distress sales fell to 31% from 33% in May.

“This report provides further evidence that activity in the housing market is stabilizing and that price declines are slowing,” the New York forecasting firm RDQ Economics said in a note to investors. “The increase in home sales over the last three months was the fastest since May 2004 (in percentage terms) and the NAR reports that the share of distressed sales is declining. This report, along with recent data on housing starts, building permits suggests that we may have seen the bottom in home sales and housing construction.”

Wall Street cheered the housing news.

The Dow Jones Industrial Average closed up 188.03 points to 9069.29, crossing the psychological threshold of 9,000. The S&P 500 finished up 22.22 points to 976.29, and the Nasdaq wrapped up the day with a gain of 47.22 points to 1973.60.

Under the Fed proposal, lenders or other originators of mortgages-such as mortgage brokers-would have to provide borrowers with clear one-page explanations of how adjustable-rate mortgages, like those that triggered the housing crisis, differ from fixed-rate products. They’d have to provide clearer examples of what borrowers’ true costs would be, using the loans themselves rather than generic examples. In doing so, they’d have to include things such as title insurance and pest inspection that aren’t factored in now.

Lenders also would have to notify borrowers of payment changes 60 days beforehand, rather than the current 25 days. Similarly, for home-equity lines of credit, the notification period would be 45 days instead of 15.

Those moves are decidedly more consumer-friendly, giving borrowers more notice to adjust to pending changes and perhaps seek refinancing in the case of adjustable-rate loans.

The proposed rules also would allow home-equity lenders to suspend or reduce lines of credit when the prices of the properties involved decline by 5% and the borrowers have paid off no more than 10% of the loans. This gives lenders more legal cover to pull back credit, something they’ve done of late-to the ire of consumers-without clear guidance from federal regulation.

The most controversial proposed change is restricting special compensation from lenders when mortgage brokers get borrowers into higher-priced loans when they qualified for lower rates. This bonus, called a yield-spread premium, was a factor in the explosion of sub-prime lending, which involved high-cost loans given to the weakest borrowers.

The National Association of Mortgage Brokers has defended these special commissions but it declined immediate comment on the proposed rule change, which expressly would prohibit steering consumers to higher-priced products in pursuit of personal gain.

During the comment period, the Fed will work to create similar disclosures at the Department of Housing and Urban Development, which has jurisdiction over the settlement documents involved in home purchases.

“It is a complex and comprehensive proposal, so I think an extended comment period is appropriate,” Fed Chairman Ben Bernanke said.

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Offering a more hopeful outlook on the grim picture than many economists, Bernanke projected that the U.S. economy would turn the corner in the second half of this year, with growth gradually recovering next year and accelerating in 2011. But he said consumer spending, which accounts for about 70% of U.S. gross domestic product, was likely to be constrained by the weak labor market, tight credit and declining home prices.

“We have a very long haul here,” Bernanke said, addressing a question from the House Committee on Financial Services. “Unemployment is going to stay up for quite awhile, and it’s not going to feel like a strong economy,” he said, raising the specter of a jobless recovery.

Bernanke said that the jobless rate, which hit 9.5% in June, probably would peak at the end of this year and that overall employment would start growing again at year’s end or early next year. The U.S. economy shed nearly half a million jobs in June, putting the total payroll losses since the recession began in December 2007 at about 6.5 million.

“The combination of unemployment and falling house prices, the double trigger, does create a very high rate of foreclosures,” he said. “Our assessment of the foreclosures is that it’s likely to peak in the second half of 2009, corresponding with the peak in the unemployment rate and, perhaps, be somewhat less in 2010.”

Given the fragile economic conditions, Bernanke reiterated that the key federal funds rate was likely to remain at “exceptionally low levels for an extended period.” The Fed has maintained the rate that banks charge one another for overnight loans near zero since December. In his prepared remarks, Bernanke indicated that, given the economic conditions and low inflation, the key federal funds rate was likely to remain near zero for an extended period. That is the rate that banks charge one another for overnight loans.

At the same time, he sought to reassure Wall Street and the public that the Fed had the ability to withdraw in “a smooth and timely manner” the extraordinary policy measures that it took to boost the economy, so as to avert a buildup of inflation in the future. “We are confident that we have the necessary tools to implement that strategy when appropriate,” he said, noting that some of the emergency measures have already started to unwind. The total credit extended by the Fed to banks and other entities, he said, had fallen below $600 billion from about $1.5 trillion at the end of 2008.

In response to a question about the $787 billion stimulus package, Bernanke told lawmakers that he believed the money had helped to support consumer spending and the labor market. But he said it was too early to assess the overall effectiveness of the package.

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In a statement, the agency confirmed that certain life insurers are eligible to receive an unspecified amount of the money that remains from October’s $700 billion Wall Street rescue program.

“There are a number of life insurers who met the requirements for the Capital Purchase Program because of their thrift or bank holding company status. These companies applied within the appropriate deadline,” Andrew Williams, a Treasury spokesman, said in a statement. “These are among the hundreds of financial institutions in the pipeline that will be reviewed and funded as appropriate on a rolling basis.”

The $218 billion program was created as part of October’s bailout and is designed to help bolster the balance sheets of financial institutions. In exchange for receiving capital, participating companies provide senior preferred shares to the Treasury Department, paying a dividend of 5% annually for five years and 9% if the money hasn’t been repaid after that.

At the end of 2007, before the economy’s steep swoon, life insurers had assets under management exceeding $5.1 trillion, half of which was in corporate bonds. Life insurers are the largest buyers of corporate bonds, which mature over a long period. Insurers try to match these long-term investments to the risks they’re assuming as they guarantee retirees annuities that are dispersed over similarly long periods of 15 or 20 years.

The only insurer to date to receive bailout money is American International Group (AIG), which was brought to the verge of collapse by problems in its Financial Products division, not in its insurance business. The Federal Reserve rescued AIG on Sept. 15 with an $85 billion bailout that’s grown since to about $180 billion.

In order to receive the funds, life insurers must own a regulated bank or thrift. Companies that met this qualification and sought funds include the Hartford Financial Services Group and Lincoln National.

Prudential Financial already owned a thrift and has also applied for taxpayer funds. Two other insurers, Genworth Financial and MetLife, qualify for funds but hadn’t indicated whether they’ve sought rescue money or would in the future.

The American Council of Life Insurers, a trade group, welcomed the confirmation by Treasury that government funds are forthcoming.

“As we have argued all along, allowing life insurers to participate in the (program) would be consistent with the stated goals of the program to increase the flow of financing to U.S. businesses and stabilize the credit markets,” Frank Keating, the council’s president and a former Oklahoma governor, said in a statement.

Many life insurers offer consumers variable annuities that pay a guaranteed return, regardless of whether bulls or bears are running the stock market. Although the obligations require payment years off, the financial markets are in such turmoil that life insurers are being forced into protective strategies that make it hard to offset the risks they’ve assumed.

The money from the Treasury Department program will allow life insurers to wade back into the corporate bond market without significantly affecting their operating capital.

The life insurers’ council said the bailout was for a broader good. Keating said that the goal of the program “is to provide capital to the marketplace in order to unclog credit and financing that corporations rely on to grow and in turn hire new workers. “Providing this funding to life insurers would clearly be in line with this goal,” he said, acknowledging the unusual nature of Treasury’s decision, “particularly concerning an industry that does not have a federal regulatory presence.”

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“Every year, thousands of working taxpayers don’t file tax returns because their income levels don’t require it and they may not realize they are due a refund,” said Mark Steber, vice president of tax resources at Jackson Hewitt. “With the tough economic conditions, it makes sense this year, more than ever, for individuals who have not previously filed to consider whether they may be missing out on cash that they’re entitled to.”

Individuals who did file a 2005 individual income tax return should be mindful of the deadline, too, Steber added. Taxpayers have three years to claim a refund or amend a return for a given tax year. So a taxpayer who itemized deductions for 2005 and later realized he or she qualified for a deduction or credit that was missed, still has time to claim it. But after April 15, 2009, the IRS will no longer provide refunds for individuals who file a tax year 2005 income tax return and are deserving of a refund.

One credit both filers and non-filers may have missed is the Earned Income Tax Credit (EITC). Generally, unmarried individuals qualified for the EITC if in 2005 they earned less than $35,263 and had more than one qualifying child living with them, earned less than $31,030 with one qualifying child or earned less than $11,750 and had no qualifying child. Married individuals who file jointly had slightly higher income limits.

Other commonly overlooked credits and deductions include:

-Interest paid on a student loan
-Mileage incurred performing charitable activities
-Select home office expenses (if the home is your primary place of business)
-Alimony payments, but not child support
-Half of self-employment tax paid
-Points paid on a mortgage or refinancing
-Payments made for health insurance by the self-employed
-Contributions to a retirement savings account like an IRA
-Required uniforms and work clothes that are otherwise not suitable for street wear

Steber notes that there is no penalty for filing late when a refund is owed. However, refund checks for 2005 may be held if an individual also did not file a return for 2006 or 2007. Taxpayers who did not file returns for 2006 and 2007 also should determine whether they are due a refund for those years, too, he added. Refund amounts will be reduced by any debt owed to the IRS or to the federal government.

“The best way to be sure you’re not leaving money on the table is to consult with a tax preparer who is knowledgeable about all of the deductions and credits and who can help determine the ones that apply to you,” Steber said.

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Results from both polls are sure to be welcome news to President Barack Obama and his Treasury Department, which has spent the past two months working round the clock in an effort to reverse the worst economic crisis since the Great Depression.

The Ipsos/McClatchy tracking poll found that 52% of Americans now think the U.S. economy has stabilized. That’s well up from the 35% who felt that just four weeks earlier. “That’s a 17-point bump. It’s congruent with what were kind of seeing … people are feeling at least that the bottom has bottomed out I guess, and at least were stabilizing,” said Clifford Young, an Ipsos spokesman.

Only one in three Americans thought the worst of the economic crisis is still to come, compared to 57% last month.

And in another bit of good news, 72% of poll respondents expected the $787 billion economic stimulus package to show results in a period beyond six months. It suggests that the Obama administration’s plea for patience seems to have created expectations for a recovery over a longer horizon.

“I think that would be consistent with the reports we are seeing out of the economy that are now popularly called these ‘green shoots.’ There is no doubt that there is less bad news around, unemployment aside, that would be consistent with consumers thinking things are not going to get worse,” said James Dunigan, managing director of investment for PNC Wealth Management in Pittsburgh.

Among the “green shoots” of a recovery are lower mortgage rates, which have prompted new refinancing and some growth in new home purchases. Other boosts to consumer confidence include lower gasoline prices, some reduction of payroll taxes as part of the economic stimulus plan passed by Congress and tax rebates going out ahead of the April 15 filing deadline.

That’s not to say that there aren’t risks ahead, not the least of which is that credit markets remain tight and lending restrained. The Treasury Department by month’s end will have completed stress tests on the country’s 19 largest banks, and the results could lead to new concern about the banking sector.

And in the coming weeks, the Obama administration will implement its program to co-invest in the so-called toxic assets. If that doesn’t go well, it could lead to more uncertainty.

There’s been a steady stream of bad news since last September, and month-by-month through March, when the RBC Cash Index set new lows for consumer confidence.

“However, either through the efforts of government and business to correct the situation or from consumers’ own weary acceptance of their new, diminished, circumstances – consumer confidence has shown a significant improvement for the first time in half a year,” the survey’s authors concluded. “This increase is also bolstered by the continuing improvements in confidence in real estate and hopefully marks the start of a trend marking improved consumer confidence.”

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According to the company, the results of the survey report that seven in 10 (71%) Americans who expect to receive a federal tax refund for 2008 will not be spending, but saving it, investing it or using it to pay off debt.

In these difficult economic times, Americans are also banking on their refunds to put food on the table and pay bills. More than half (51%) of Americans expecting a federal tax refund this year said they are using their federal tax refund to cover basic household expenses, including an alarming 65% who are under the age of 35.

“Although Americans are often encouraged to spend their refunds to help stimulate the economy, Americans are choosing to save themselves first. They strongly believe their top priorities are to stimulate their personal finances and keep the lights on at home. Americans are scaling back and they are doing their part to become more financially responsible citizens,” said Arkadi Kuhlmann, president of ING DIRECT USA, one of the nation’s largest direct banks.

With uncertainty in the marketplace, Americans are doing their best to make do and save more money.

Other survey results include:
- Almost half (46%) of Americans between the ages of 35 to 54 who expect to receive a federal tax refund this year intend to use it to pay off debt
- One in four Americans expecting a federal tax refund (27%) plan to save their refund and one in three (39%) will pay off debt with their refund
- For Americans who owe taxes this year, 43% stated they will dip into their savings to pay

About the survey
The national online survey was conducted within the United States by Harris Interactive on behalf of ING DIRECT between March 17-19, 2009 among 2,115 adults age 18+.

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“Mortgage rates fell sharply to low levels not seen in six decades following the Federal Reserve’s announcement on the Treasury bond and mortgage-backed securities purchase programs. The drop offered a sizable refinance incentive for most homeowners sparking a pickup in refinance activity,” said Orawin Velz, associate vice president of Economic Forecasting.

The Refinance Index increased 41.5% to 6363.2 from 4497.6 the previous week and the seasonally adjusted Purchase Index increased 4.2% to 267.8 from 257.1 one week earlier. The Conventional Purchase Index increased 3.9% while the Government Purchase Index (largely FHA) increased 4.6%.

The four week moving average for the seasonally adjusted Market Index is up 13.9%. The four week moving average is up 1.7% for the seasonally adjusted Purchase Index, while this average is up 18.7% for the Refinance Index.

The refinance share of mortgage activity increased to 78.5% of total applications from 72.9% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 1.4% from 2.0% of total applications from the previous week.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.63% from 4.89%, with points decreasing to 1.13 from 1.23 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The contract rate is the lowest in the history of the survey, which began in 1990.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.48% from 4.52%, with points decreasing to 1.07 from 1.18 (including the origination fee) for 80 percent LTV loans.

The average contract interest rate for one-year ARMs increased to 6.22% from 6.20%, with points increasing to 0.15 from 0.14 (including the origination fee) for 80 percent LTV loans.

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To read more about the economy, see:

• Treasury Delivers Details of ‘Toxic Asset’ Treatment Plan
• Surviving in Today’s Market: Using Peak-Time Methods to Increase Business Today

While the Dow Jones industrial average, the Standard & Poor’s 500 and the Nasdaq all showed strong gains after yesterday’s announcement, some economists said a key challenge facing the plan is putting a value on the toxic assets that will be acceptable to both the sellers and the buyers.

“I have strong doubts about the plan working,” said Robert Goldberg, an adjunct professor of finance at Adelphi University and a former Wall Street investment banker. “You still have the problem of how you find the proper price for these assets. The investors don’t want to pay too much, and the banks don’t want to take any more losses.”

Geithner’s plan is the latest in a series of efforts by the Treasury, the Federal Reserve and other agencies to end the worst U.S. financial crisis since the Great Depression.

Geithner said he expects the latest plan to work. “This will allow banks to clean up their balance sheets,” he said in an announcement. “There is no doubt the government is taking risk. You cannot solve a financial crisis without the government assuming risk.”

The complex plan revolves around the government’s creation of a Public-Private Investment Program that will rely on financing from the Fed and debt guarantees from the Federal Deposit Insurance Corp. The plan is to finance as much as $1 trillion to buy the banks’ toxic assets, using $75 billion to $100 billion of the remainder of the Treasury’s $700-billion bank-rescue funds.

Some hedge fund managers are certain to see opportunity in the plan, said Andrew Schneider, managing partner and founder of HedgeCo Networks, consultants for hedge fund services, in Manhattan. “I think this is a step in the right direction,” he said. “There’s going to be some incredible opportunity that the smarter hedge fund managers that know the product and know the asset class and the marketplace for it will see. Hedge funds historically have been known for making money in marketplaces that are inefficient.”

But the program is likely to develop slowly, said Hugh Johnson, an economist at Johnson Illington Advisors in Albany. “Before private investors will commit to the plan, they have to do due diligence, and it takes time to understand what each toxic asset is made up of. And they also need to take time to understand what the financing is all about,” he said.

Investors may also be skittish about becoming involved in what amounts to another government bailout program after the wave of anger over bonuses handed out to executives at American International Group, said experts.

Investor fear may make it difficult for the program to get off the ground, said Irwin Kellner, chief economist for MarketWatch.com. “The whole plan is fraught with difficulties,” he said. “Cash is scarce. These hedge funds have plenty of money, but they’re not going to throw it into something as dubious as this.”

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After a disastrous first attempt to explain the plan that sent markets into a nose dive because of the lack of detail, Geithner spelled out more clearly how the $75 billion to $100 billion in taxpayer money will be used to leverage the purchases of up to $1 trillion in securities and loans held by banks that are eroding confidence in the financial system.

“I’m very confident this scheme dominates all the alternatives,” the embattled treasury secretary said.

After some hesitation, traders apparently digested the plan and signaled approval. The Dow Jones Industrial Average surged and was up almost 300 points in midmorning trading on Monday.

Under Geithner’s plan, taxpayer money and private-sector investment will flow into the Public-Private Investment Program. The Federal Reserve and the Federal Deposit Insurance Corp. will help provide low-cost financing to subsidize the purchases of distressed bank assets. The Fed will bolster purchases of mortgage-backed securities, the pools of mortgages that are bundled and sold to investors as mortgage bonds. The FDIC will support financing for purchases of mortgage-related loans.

The money to match the private investment will come from the Troubled Asset Relief Program, which was created during last October’s $700 billion Wall Street bailout. That bailout originally envisioned the government purchasing the distressed assets, but the Bush administration backed away from that because it would have involved the government paying inflated prices to unfreeze the credit markets.

In laying out his plan, Geithner said he sought to strike a balance between letting the market sort out these problems on its own, risking a deeper, longer recession, and having the government buy these assets on its own, risking taxpayers paying too much.

The compromise was to have private companies, namely hedge funds, private-equity funds and perhaps pension funds, bid against one another for distressed assets to find their market prices, and to sweeten the deals by having the government join them as an investment partner.

If the plan works, taxpayers would share in the upside as markets unfreeze and housing-related securities begin trading again. If the investments lose money, taxpayers will share the loss.

Some critics think that the taxpayer is more at risk than private investors are under the Geithner plan. “The value of cheap multi-year government financing is quite significant, as is the government’s promise to put a floor under losses at 10 percent or 20 percent of what the investor puts up. It is possible that these incentives will cause investors to overpay for the assets, with most of the eventual losses flowing to the taxpayer because of the downside protection offered the investors,” wrote Douglas Elliott, a research fellow at the Brookings Institution, a center-left research center in Washington.

“For example, it could be rational for investors to offer 40 cents on the dollar, calculating that they would benefit sharply if the price went to 50 cents, while the government would absorb most of the losses if the value fell to 30 cents on the dollar,” Elliott wrote.

Pricing was, is and will be the complicating factor in solving the banking meltdown. At the center of the nation’s banking problems are trillions of dollars’ worth of mortgage-backed securities. Banks have been forced to write down the value of these assets quarter after quarter, because there are no buyers for them. That makes the banks hoard their capital, in turn, to comply with regulatory requirements, rather than lending it out. The result is a credit crunch that’s contributing to the economic slowdown.

The banks won’t sell their declining assets at fire-sale prices either, however, in the belief that they have maturity dates and will return to value over time. Investors have been unwilling to touch these assets unless they get steep discounts. Result: no market.

The government’s plan seeks to create a market for these assets. “I think you are going to see a fair amount of interest in this,” Geithner said.

If Geithner’s plan doesn’t work, it could lead to nationalizing some banks, something that some high-profile analysts have advocated, including former Treasury secretary James Baker and Nobel Prize-winning economist Paul Krugman, pointing to Sweden’s successful nationalization of banks in the early 1990s.

“We’re the United States of America.” Geithner said, suggesting that the U.S. financial system is much larger and more complex than any other and includes the world’s largest capital markets and plenty of nonbank financial institutions

If Geithner’s plan succeeds in establishing some preliminary pricing and the market begins to revive, the administration is likely to seek more money to help it grow. President Barack Obama proposed setting aside $250 billion in his fiscal 2010 budget for potential bank-rescue efforts, and may seek $750 billion.

However, Congress must approve any such move, and the mood on Capitol Hill is hostile to more taxpayer bailouts.

Some analysts see promise in Geithner’s approach.

“The government can then come in and buy these assets on a large scale at these prices. (Roughly) $1 trillion is not enough; it probably needs to be twice that,” said Mark Zandi, the chief economist for Moody’s Economy.com, a forecaster in West Chester, Pa. “But if the plan works well enough, I think Congress will provide more money to solve the problem once and for all. This plan makes me more optimistic about the financial prospects for the financial system and the economy.”

Obama, flanked by Geithner and Federal Reserve chairman Ben Bernanke, called this latest plan an important element of a multi-pronged approach to thawing credit markets, and he dialed down expectations, cautioning, “It’s not going to happen overnight.”

The plan for toxic assets is the last and most vital link of the Obama administration’s broad financial-rescue program. Under the whole program, federal banking regulators have started stress tests on the nation’s 19 largest banks to determine whether they have sufficient capital to survive an even deeper recession.

By the end of April, these banks, if they’re deemed insufficiently capitalized, will have to raise capital in the private sector within six months or get cash from the government. In the latter case, taxpayers would get stakes in the banks.

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Insider lending to directors is particularly troublesome because it could cloud the judgment of people charged with protecting shareholders and overseeing bank management, the experts say.

At Charlotte-based Bank of America, those loans more than doubled last year, to $624.2 million – the biggest dollar jump in the country. The largest of them likely went to three directors or their companies. The surge came during the third quarter as credit markets froze, the government prepared to infuse banks with billions in tax dollars and the board approved the purchase of troubled Merrill Lynch.

Bank of America ranked fourth on the list of biggest insider lenders. At the top was JPMorgan of New York, which held $1.48 billion in insider loans, mostly by directors or their companies.

At No. 2, Charlotte-based Wachovia, which was sold to Wells Fargo of San Francisco at the end of 2008, finished the year with $747 million in insider loans, all of which were held by the bank’s directors or their companies.

Ranking third on the list was M&I Marshall & Ilsley of Milwaukee, with $644.4 million, and Chicago’s Northern Trust was at No. 5 with $524.5 million.

Insider loans, ranging from home mortgages to multimillion-dollar lines of credit for big companies, are legal but are largely shrouded from public scrutiny.

Banks don’t have to explain increased insider lending. They don’t have to disclose individual loan amounts or terms for any insiders, including executives.

Directors and their businesses, often the largest insider borrowers, are completely shielded. Directors must approve insider loans greater than $500,000, so they sometimes vote on loans for each other or the executives they oversee. Insider favoritism is against the law, and bankers and regulators say the loans are subject to greater scrutiny to ensure insiders aren’t getting better terms and are creditworthy.

But top corporate governance experts contend that insider lending carries serious potential for conflict of interest among bank officials and must be stripped of secrecy. They argue that lending to directors, the watchdogs of management, must be revealed so shareholders can gauge their independence. And disclosure should be paramount for banks receiving government aid, said Ed Lawrence, a University of Missouri-St. Louis finance professor and co-author of a 1989 study that offered a rare look at insider lending.

Seven of the 10 banks with the largest insider loans received a total of more than $50 billion in the banking bailout late last year, according to a Charlotte Observer analysis of banks’ federal filings.

“It’s good for the public to know … where the money is going,” Lawrence said. “When you start taking public money, we hold them to a much higher standard.”

The majority of the nation’s 8,000-plus banks make insider loans, some very small. At the end of last year, banks had $41 billion of insider loans, up 5.7% from a year earlier, according to The Charlotte Observer’s analysis.

Insider loans accounted for less than 2% of the banks’ assets, amounts that are generally unlikely to seriously damage banks if the loans go sour. The loans tend to make up a larger percentage of business for smaller banks.

Not all large banks are big insider lenders though. Wells Fargo, for example, was about the size of Wachovia before the San Francisco bank swooped up the wounded Charlotte institution late last year. Wells ended last year with $20 million of insider loans, a fraction of Wachovia’s $747 million. Neither bank would discuss the disparity.

Most publicly traded companies were banned from making insider loans in 2002, part of the regulatory rush following the collapse of Enron and other accounting scandals.

But banks were excluded from the ban, partly because they’re in the business of lending and also because the loans have been subject to extensive regulation for more than 25 years.

The loans were blamed for bank problems during the nation’s S&L crisis. Lawrence and others have linked insider lending to bank failures. “Studies of bank failures have found that insider abuse, including excessive or poor quality loans… is often a contributing factor to the failure,” says the “Insider Activities” handbook from the Comptroller of the Currency, the lead regulator for big national banks.

Banks can be hurt by even the perception of insider favoritism, the guide says. “We don’t have a difficulty with insider loans when they’re properly written and extended,” said Ray Grace, the North Carolina deputy banking commissioner who heads bank supervision for state-chartered firms. “It makes a certain amount of sense that a director or bank officer take that business to their own bank rather than shop it to a competitor.”

A key requirement is that insider loans be on the same terms as those to similar outsiders.

“This is a highly scrutinized area, so usually any problems would be caught early,” said Mindy West, a Federal Deposit Insurance Corp. chief whose job includes crafting instructions for bank examiners.

Large banks, such as Bank of America, have regulatory officials on site. Smaller banks are typically examined every 12 to 18 months. Regulatory officials request insider loan details for review prior to their regular bank examinations, West said. The FDIC has regulatory authority over about 5,100 banks.

New loans and increases in existing loans are especially likely to be scrutinized, West said. And a loan balance that doubled would probably trigger a second look.

Longtime governance expert Charles Elson doesn’t advocate banning insider loans, although he was startled that the loans can run into hundreds of millions.

But, he said, banks need to make full disclosure, revealing names, amounts and terms. He is especially concerned about disclosure for loans to directors and their interests.

“Management, who can dictate the terms of the loan, are being overseen by the director who is a beneficiary,” said Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance. “It compromises the director’s ability to be objective.”

As borrowers, directors might be less rigorous when evaluating the CEO or other executives, he said. They might be unwilling to buck management when approving deals.

Wachovia’s board approved its 2006 acquisition of mortgage lender Golden West Financial, a vote that ultimately helped push the bank near collapse. Shortly before that approval, the bank had $1.47 billion in insider lending, with fifteen borrowers holding the largest loans.

Nell Minow, co-founder of The Corporate Library, said directors should take their business elsewhere if they aren’t comfortable with disclosure. “Do you want them as directors or do you want them as customers?” she said. “To the extent there’s even the perception of conflict of interest, it’s very important for them to be very transparent.”

© 2009, The Charlotte Observer (Charlotte, N.C.).
Distributed by McClatchy-Tribune Information Services.

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So here’s how to protect yourself:

1. Run a full scan of your computer before doing your taxes. “You’ve got the best chance of finding something that somehow got past your antivirus protection and is lurking there,” said Ray Dickenson, chief technology officer at Authentium, which develops Internet security software.

“Remember that fraud issues aren’t necessarily contained within the website you visit. The so-called ‘malware’ (malicious software) may already be within your PC, which then exposes your personal and financial information to cybercrooks.”

2. Disable file-sharing software. “File-sharing programs such as LimeWire make files on your computer visible to other users on the Internet,” Dickenson said. “When you install a file-sharing program like LimeWire, the program automatically shares your music and almost any kind of file, including Word documents and Adobe PDF files with everyone else on the Internet.” Make sure your antivirus programs are up to date, but know that antivirus programs can’t find all the malware that may be on your PC.

3. Understand how electronic tax-filing products keep your information secure. “The privacy and security of customer data is a top priority for Intuit,” said Julie Miller, spokeswoman for Intuit, which manufactures the popular TurboTax tax-filing software. The online version of TurboTax stores your tax information on a firewall-protected server and can only be accessed using your user name and password.

If you use the desktop version of TurboTax, the information is downloaded and stored on your computer. “The data file saved to your desktop is automatically encrypted,” Miller said. “We also recommend that customers take advantage of adding a password to that data file.”

4. Take advantage of the Free File Alliance program. The Free File Alliance, a coalition of 19 private tax software companies, has partnered with the Internal Revenue Service (IRS) to provide free, electronic federal tax preparation services to taxpayers with an adjusted gross income of $56,000 or less. You can access it only through the IRS’ Web site at www.irs.gov.

In the end, you shouldn’t depend solely on the government or any other source to protect your taxpayer information. You are your first and best line of defense.

© 2009, The Dallas Morning News.
Distributed by McClatchy-Tribune Information Services.

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The problems that created the mortgage meltdown mess mean that tighter rules and regulations have been put in place for home buyers and those seeking to refinance, and tight lending standards make it much harder for all but the most creditworthy borrowers to qualify.

“A lot of people could not requalify for the loan they have now,” said Alex Stenback with Residential Mortgage Group in Minnetonka. “There are tougher credit standards in place and you have to have a certain amount of equity in the property in addition to meeting the now-tighter debt-to-income ratio requirements.”

Keith Gumbinger of HSH Associates, a publisher of mortgage information, said good interest rates were available to all kinds of borrowers in all kinds of credit circumstances when the market was running flat out five years ago. That’s not the case today.

“You must be a much better borrower than you had to be before,” he said. “For some borrowers, you might have to get used to hearing ‘no.’”

By snapping up Treasury securities, the Fed boosts their prices, and that drives down the yield, or interest rate. The 10-year Treasury bond dropped by the biggest one-day amount since 1981 this past Wednesday and rebounded slightly on Thursday.

Analysts expected mortgage rates to follow suit, and they did come down on both Wednesday and Thursday.

The national average rate on a 30-year, fixed-rate mortgage fell to 4.94%, down nearly a quarter of a percentage point from a day earlier, according to HSH Associates.
Stenback said that rates on a 30-year fixed rate mortgage were 4.5% to 4.625% for a best-case scenario borrower.

Will they stay that low? Probably not.

“When we see these really dramatic drops, there’s a little bit of a snap-back effect,” said Stenback. “But they probably won’t go back up to where they were before.”

Paul Schuster, vice president of Marketplace Home Mortgage and head of the Minnesota Mortgage Association, called the downward trend positive but said it won’t solve the housing problem alone. “It’s a key to affordability, and low rates are critical to helping the housing market recover, and it was a commitment by the Federal Reserve to support that in a big way.”

Home buyers and owners who want to refinance should be prepared for a longer process, Schuster said, and for different rates or costs, depending on their credit scores and loan-to-value ratios. “Now, there might three or four different levels for transactions that previously would have been priced equally,” he said.

Stenback said he expected a “huge” number of people to try to refinance but urged patience as the underwriters, closers and others scramble to keep up with demand.

Copyright © 2009, Star Tribune, Minneapolis
Distributed by McClatchy-Tribune Information Services.

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The Auto Supplier Support Program will let troubled carmakers General Motors (GM) and Chrysler determine which suppliers need the credit. The idea is to ensure that suppliers to the two auto giants – which are trying to avoid bankruptcy – don’t go bankrupt themselves and create problems for the automotive production chain.

Automotive suppliers employ at least 500,000 workers nationwide, but are unable to tap credit at banks because of the credit crunch. Many of them face growing financial uncertainty as GM and Chrysler wrestle with plunging sales and production.

“The Supplier Support Program will help stabilize a critical component of the American auto industry during the difficult period of restructuring that lies ahead,” Treasury secretary Timothy Geithner said in a statement. “The program will provide supply companies with much-needed access to liquidity to assist them in meeting payrolls and covering their expenses, while giving the domestic auto companies reliable access to the parts they need.”

In normal times, suppliers ship auto components such as axles or windshields to the carmakers and are paid within 45 to 60 days. In the interim, they usually could sell, or borrow against, those expected payments, called receivables.

These aren’t normal times, however, and banks, worried about a GM or Chrysler bankruptcy, aren’t willing to lend against these expected payments.

The Treasury Department has guaranteed that it will provide against these expected payments, and participating suppliers can also tap a short-term revolving line of credit if they wish to sell their expected payments to someone else at a discount in order to have cash on hand.

“It says that no matter what happens to GM or Chrysler, we recover our receivables and will be paid,” said Neil De Koker, the president of Original Equipment Suppliers Association in Troy, Mich., a trade group for suppliers.

The new initiative is funded through the Troubled Asset Relief Program, created under last October’s $700 billion Wall Street bailout. It comes just days before a March 31 deadline for a special presidential automotive task force to decide whether to give GM another $4.6 billion and Chrysler another $5 billion in taxpayer bailout money to help them avoid bankruptcy.

A member of the task force, speaking on the condition of anonymity in order to talk freely, said that the aid to parts suppliers shouldn’t be seen as a decision to keep the carmakers out of bankruptcy.

“We are going to articulate something before March 31, but I would not draw any inference on what that would be,” the official said.

Only suppliers to U.S. automakers, not foreign transplants such as Toyota and Nissan, may apply. However, suppliers that are foreign-owned but are U.S.-based subsidiaries can participate.

New car sales for GM plunged 53% in February; for Chrysler, 44%. Consumers are afraid to spend amid the deepening recession, and banks are fearful of lending.

“The most important thing that we need is credit availability for consumers, so they can get loans to buy cars. That solves all the problems for the automotive sector,” De Koker said. “Whatever they can do to stimulate the economy and get banks to provide credit … that’s more important than anything we (suppliers) have talked about.”

© 2009, McClatchy-Tribune Information Services.

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“They are trying to fire absolutely every weapon they can,” said Nigel Gault, chief U.S. economist at IHS-Global Insight, a Lexington, Mass.-based forecasting firm. “It improves the odds that we’ll bottom out in the second half of the year.”

David M. Jones, a former Fed economist and president of DMJ Advisors, a Denver-based consulting firm, said he expects the Fed actions to help lower conventional mortgage rates from their current level of just below 5%, perhaps to near 4%.

“I’ve never known when the Fed has taken a move this powerful in easing monetary policy,” Jones said. “If you bring the interest rate down that much, we’ll have a huge amount of refinancings and that will create money for banks” and help shore up the financial sector.

The news had an immediate impact on Wall Street, where the stock market reversed course and posted a modest rally, and yields on 10-year Treasuries dropped by 0.5 percentage points, to 2.5%. Many interest rates, including mortgage rates, are pegged to the 10-year note.

“Bottom line, these actions by the Fed certainly increase the chances of a housing bottom sometime this year, and a return to economic growth by year end,” said Scott A. Anderson, chief economist at Wells Fargo Economics in Minneapolis. “Ten-year Treasury yields plunged by half a percentage point shortly after the statement, which will drive significantly lower mortgage and corporate bond rates across the country. I sense a refinancing or financing opportunity coming on.”

Guy Cecala, editor of trade publication Inside Mortgage Finance, said that many consumers may find that the rates their banks actually offer are higher than they might expect. And that may not change quickly, especially since lenders are already swamped with applications for loan refinancings and modifications. “If they have all the business they can handle, what’s their incentive to lower their rates?” Cecala said. “That has been the challenge the government has faced from day one. You can’t force lenders to offer the cheapest possible rates.”

Although the Fed has kept the rates it charges banks near zero since December, interest rates for consumers and businesses have remained significantly higher because banks continue to be cautious about issuing new loans as the economy declines and unemployment rises.

Gault said that before the credit crisis, the difference between the 10-year Treasury note and rates offered to consumers for conventional loans was about 1.5 percentage points. It’s now around 2 percentage points and, he said, “I don’t expect the spread to go back down to 1.5.”

With its interest rates already hovering just above zero, the Fed has turned to other programs to generate money, or liquidity, in the credit system, which is the lifeblood of the economy.

The Fed’s announcement significantly expands these programs and adds a new one to the pack as well: the direct purchase of $300 billion in long-term U.S. Treasury bonds.

The central bank’s purchases will increase demand for the bonds, which will permit the government to decrease the yield it has to pay to attract buyers. Many loan rates are pegged to the yield on Treasury securities.

“The Fed is now trying to influence not just the spread between private interest rates and Treasuries through its mortgage-backed securities purchases, for example, but to pull down the entire spectrum of interest rates by driving down the rate on benchmark Treasuries,” Gault said.

In addition, the Fed will increase to $1.25 trillion the amount it intends to spend to buy mortgage-backed securities issued by government agencies including Fannie Mae and Freddie Mac, and will double its purchases of agency-backed bonds from $100 billion to $200 billion. These moves should increase the ability of the government-backed mortgage giants to continue to provide financing to the housing market.

Fed governors, who voted 10-0 in favor of the moves, described them as necessary to try to revive an economy in serious distress.

“Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending,” the Fed’s rate-setting committee said in a statement. “Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession.”

The committee said it would keep its benchmark rate for banks at the current level of 0% to 0.25%, saying they anticipate “that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Governors said the Obama administration’s upcoming program to help banks shed bad assets and strengthen their balance sheets will work in concert with the central bank’s actions.

“Although the near-term economic outlook is weak, the committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth,” the policymakers said.

It remains to be seen how lenders will respond to the Fed’s actions. Many lenders have been unable to significantly expand their lending, in part because of a reduced ability to sell their loans on secondary markets, and in part because many of them reduced staff in their loan origination departments.

Moreover, many borrowers are higher risks for banks now than they would have been a short while ago. Some have lost significant equity in their houses. Others have lost jobs or may be on shakier financial footing.

“We’re not in a credit crunch because of an inability to provide credit, it’s because of an unwillingness to create credit,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. “The private sector is not doing it because the larger banks can’t do it. They can’t take the risks.

“The Fed is being the visible hand of the economy because the invisible hand of the economy has failed,” Naroff added.

© 2009, Tribune Co.
Distributed by McClatchy-Tribune Information Services.

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To read more economic news on RISMedia.com:

• Ambitious Foreclosure Plan Revealed – How Will It Help?
• Reader Commentary: Bring Back Lending to the Jumbo Loan Market

While the average working American family spends nearly 60% of its budget on housing and transportation costs, these two areas account for the largest expenses for American families. Donovan and LaHood want to seek ways to cut these costs by focusing their efforts on creating affordable, sustainable communities.

The secretaries discussed their plans for sustainable communities at a U.S. House of Representatives Appropriations Subcommittee on Transportation and Housing hearing titled, “Livable Communities, Transit Oriented Development, and incorporating Green Building Practices into Federal Housing and Transportation.”

“One of my highest priorities is to help promote more livable communities through sustainable surface transportation programs,” said LaHood.

“This partnership will help expand every American family’s choices for affordable housing and transportation,” said Donovan. “HUD’s central mission – ensuring that every American has access to decent, affordable housing – can be achieved only in context of the housing, transportation, and energy costs and choices that American families experience each day.”

DOT and HUD have created a high-level interagency task force to better coordinate federal transportation and housing investments and identify strategies to give American families:

More choices for affordable housing near employment opportunities; more transportation options, lower transportation costs, shorter travel times, an improved environment; and safe, livable, and healthy communities.

The HUD/DOT task force will:

Enhance integrated regional housing, transportation, and land use planning and investment. The task force will set a goal to have every major metropolitan area in the country conduct integrated housing, transportation, and land use planning and investment in the next four years. To facilitate integrated planning, HUD and DOT seek, through HUD’s proposed Sustainable Communities Initiative which it will administer in consultation with DOT, to make planning grants available to metropolitan areas, and create mechanisms to ensure those plans are carried through to localities.

DOT will encourage Metropolitan Planning Organizations (MPOs) to conduct this integrated planning as a part of their next long-range transportation plan update and will provide technical assistance on scenario planning, a tool for assessing future growth alternatives that better coordinate land use, and transportation planning.

This effort will help metropolitan areas set a vision for growth and apply federal transportation, housing and other investments in an integrated approach to support that vision. HUD currently requires states, cities, and counties to prepare a five-year Consolidated Plan estimating housing status and needs.

Concurrently, DOT requires states and metropolitan areas to develop Long Range Transportation Plans and four-year Transportation Improvement Programs. Coordinating these federally mandated planning efforts, including planning cycles, processes and geographic coverage, will make more effective use of Federal housing and transportation dollars.

Redefine affordability and make it transparent. The task force will develop Federal housing affordability measures that include housing, and transportation costs and other costs that affect location choices. Although transportation costs now approach or exceed housing costs for many working families, Federal definitions of housing affordability don’t recognize the strain of soaring transportation costs on homeowners and renters who live in areas isolated from work opportunities and transportation choices. The task force will redefine affordability to reflect those interdependent costs. The task force will also continue to ensure that the costs of living in certain geographic areas are transparent- using an online tool that calculates the combined housing and transportation costs families face when choosing a new home.

Develop livability measures. The task force will research, evaluate and recommend measures that indicate the livability of communities, neighborhoods and metropolitan areas. These measures could be adopted in subsequent integrated planning efforts to benchmark existing conditions and identify progress toward achieving community visions. The task force will develop incentives to encourage communities to implement, use and publicize the measures.

Harmonize HUD and DOT programs. HUD and DOT will work together to identify opportunities to better coordinate their programs and encourage location efficiency in housing and transportation choices. HUD and DOT will also share information and review processes to facilitate better-informed decisions and coordinate investments.

Undertake joint research, data collection and outreach. HUD and DOT will engage in joint research, data collection, and outreach efforts with stakeholders to develop information platforms and analytic tools to track housing and transportation options and expenditures, establish standardized and efficient performance measures, and identify best practices. An interagency working group, led by DOT, is currently developing performance metrics, research and data needs to support an integrated regional planning framework.

For more information, visit www.hud.gov and espanol.hud.gov.

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Read more real estate headlines on RISMedia.com, see:

• HUD Awards $12 Million in Grants to Bring Jobs, Economic Independence to Public Housing Residents
• Today’s Marketplace – The ‘Good’ News, The ‘Bad’ News

The new effort was also meant to allay criticism that the White House has focused too much on the needs of fallen financial titans on Wall Street and not enough on the economic damage to small businesses around the country.

The financial crisis has dried up most commercial lending throughout the country, including the lines of credit that are the lifeblood of the small businesses that historically have created about 70% of the economy’s new jobs.

“Today, too many entrepreneurs can’t access the capital to start, operate or grow their business,” Obama said after meeting at the White House with small-business owners and community lenders. “Too many dreams are being deferred or denied by a form letter canceling a line of credit.” He added: “Less lending leads to fewer jobs and lower spending, which leads to less lending – a vicious cycle that delays our recovery.”

Under the new program, the Treasury Department would directly purchase up to $15 billion in securities composed of loans backed by the Small Business Administration. Loans made after July 1, 2008, would be eligible as well.

The funding will come from the $240 billion in bailout funds already approved by Congress as part of the Troubled Asset Purchase Program, or TARP.

The purchases mean that banks could sell the loans on the secondary market, freeing up capital to make more loans. The market for securitized SBA loans was about $4 billion prior to the current crisis.

Cynthia Blankenship, founder of Grapevine, Texas-based Bank of the West, who met with Obama and Treasury Secretary Timothy Geithner at the White House, said her bank is holding $11 million in new small-business loans that it has been unable to sell on the secondary market.

“This is an incredible tool for community banks nationwide to help jumpstart the economy and the credit markets,” said Blankenship, who is also chairwoman of the Independent Community Bankers of America.

In addition to buying securities, the administration is proceeding with plans to eliminate fees for borrowers and lower fees for lenders on its two signature small-business lending programs and increasing the level of guarantees provided by the government.

Additionally, the IRS issued information about a new tax provision, passed in the government’s stimulus bill that would allow businesses to credit losses in 2008 against taxes paid for the previous five years – an increase from the standard “carryback” of two years.

The administration said the combination of new policies would give small businesses significant new resources to help weather the recession.

“Banks need to make the extra effort to make sure that good loans are getting to creditworthy small businesses in order to serve the larger public good of moving this nation to recovery,” Geithner said. “And given the role that many banks played in causing this crisis, you bear a special responsibility for helping America get out of it.”

Business groups praised the plan, saying that frozen credit markets have hamstrung businesses at the worst time for the economy.

“Going forward, small businesses should have increased opportunities to receive bank funding since banks will now have reduced risks in making the loan,” said U.S. Chamber of Commerce president Thomas Donohue. “What the president has done is to implement provisions of the stimulus bill and address some secondary market issues that should have positive benefits for lending.”

Added Diane Casey-Landry, chief operating officer of the American Bankers Association: “Bankers are optimistic that small-business owners will soon see a steady stream of new loans.”

© 2009, Chicago Tribune.
Distributed by McClatchy-Tribune Information Services.

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The grants are provided through HUD’s Public Housing Family Self-Sufficiency Program, which enables public housing agencies (PHA) to hire program coordinators who work directly with residents to connect them with local education and training opportunities; job placement organizations and local employers. The purpose of the program is to encourage local innovative strategies that link public housing assistance with public and private resources to enable participating families to increase earned income; reduce or eliminate the need for welfare assistance; and make progress toward achieving economic independence and housing self-sufficiency.

“As America prepares to meet the growing challenges brought on by rising unemployment, it helps to have a helping hand guide individuals to training and job opportunities in their community,” said HUD Secretary Shaun Donovan. “These grants will help public housing residents find employment or assist others who want to increase their earning power.”

Public housing residents sign a contract to participate, which outlines their responsibilities towards completion of training and employment objectives up to a five-year period. For each participating family that is a welfare recipient, the PHA must establish an interim goal that the participating family be independent from welfare assistance prior to the expiration of the contract. During the period of participation, residents may earn an escrow credit based on increased earned income, which they may use in a variety of ways, including continuing their education or down payment toward a home purchase. A HUD study showed low-income families who participated in a similar HUD family self-sufficiency program saw their incomes increase at a higher rate than non-participants.

For more information, visit www.hud.gov and espanol.hud.gov.

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Testifying before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, NAHB Chairman Joe Robson, a builder from Tulsa, Okla., said that coordinated regulatory efforts among federal and state agencies are necessary to ensure prudent lending practices and effective consumer protections while facilitating efficient operation of the residential mortgage markets.

“NAHB supports efforts to ensure that mortgage lending occurs in a safe and sound manner and that abuses in lending practices are properly addressed,” said Robson. “However, it is imperative that any steps taken in this effort do not inadvertently or unnecessarily disrupt the mortgage lending process or consumer financing options, or increase the costs or reduce the availability of mortgage credit.”

NAHB urged Congress to implement a clear national framework for mortgage origination standards to replace the current patchwork of state and local laws, which often lead to unnecessary restrictions on mortgage credit.

“Specifically, Congress should establish a federal pre-emption statute creating essential uniformity in mortgage market standards,” said Robson.

NAHB also supports efforts to improve consumer education on financing and owning a home and believes it is important that efforts to ensure prudent mortgage lending and risk management practices as well as adequate consumer disclosures are comprehensive and uniform for all organizations involved in providing mortgage credit.

Single-family appraisal problems are an area of concern for home builders, and are contributing to the current housing and credit crisis. “Appraisers have often used sales of homes in foreclosure or other distressed property sales as comparables for appraisals of new homes without making the appropriate value adjustments,” said Robson.

At its most recent board of directors meeting, NAHB adopted policy expressing the following principles for mortgage lending:

- Underwriting standards and decisions should be based on documented borrower credit and repayment capacity rather than expectations of rising collateral value.

- There should not be overly rigid adherence to loan-to-value limits that results in inappropriate rejections of creditworthy borrowers.

- Underwriting decisions should be based on mortgage quality and not driven by fee income.

- Mortgage brokers and lenders should be subject to adequate oversight.

- Mortgage originators, lenders and investors should have appropriate accountability and liability for the instruments in which they are involved.

- The process for mortgage securitization must be more transparent, providing adequate collateral and risk information for investors and regulators.

- Credit rating organizations must have adequate oversight and restrictions to ensure objective evaluations and avoid conflicts of interest.

- Appraisals should be undertaken by fully qualified individuals and should accurately reflect values under orderly market conditions.

- The appraisal system should not exacerbate price volatility.

- Distressed sales should not be used to determine value.

The nation’s home builders also strongly support the use of alternative dispute resolution techniques, including binding arbitration, as the most rapid, fair and cost-effective means to resolving disputes.

“Invalidating binding arbitration provisions in contracts would undermine decades of jurisprudence strongly favoring arbitration of disputes where the parties have agreed to use the arbitration process,” Robson told lawmakers. “NAHB opposes any attempt to prohibit the use of pre-dispute arbitration in contracts.”

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“Too often, the appraisal has been relegated to a formality in mortgage lending, a gimmick to push a deal, rather than an essential element of risk-management. It is a dangerous precedent for lenders to outsource their risk management functions,” Jim Amorin, MAI, SRA, President of the Appraisal Institute, noted in his testimony. “Confidence in our financial system will be restored only when serious attention is devoted to prudent lending practices.”

To address weaknesses plaguing the mortgage lending industry, Amorin presented the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit with a short list of recommendations that the Appraisal Institute believes will protect the safety and soundness of mortgage transactions.

His recommendations included the following:

-The introduction and passage of mortgage reform legislation addressing the inappropriate pressure of appraisers, providing greater accountability of federal and state appraiser regulators, and promoting professionalism among appraisers.
-The establishment of a high-level agency Chief Appraiser position for collateral valuation review, with oversight of all appraisal and valuation issues across the financial spectrum, including the mortgage and secondary markets, and all financial, mortgage and real estate-related financial instruments.
-The undertaking of an immediate review of the new loan modification guidelines (Home Affordable Modification) released by the Treasury Department last week, to ensure that consumers and neighborhoods are being protected and that proper valuation is being utilized, including questioning the allowance of broker price opinions in lieu of appraisals.

In addition, Amorin identified automated valuation models (AVMs) and broker price opinions (BPOs) as unregulated methods of obtaining opinions of value that undermine federally created appraisal standards. Lenders’ use of these unregulated methods put both banks and consumers at risk of receiving inaccurate valuations.

“Our organization is concerned by the Administration’s decision to rely heavily on unregulated valuation services such as brokers,” said Amorin. “Frankly, we are shocked. Once again, we are not treating the valuation process seriously. Computer-generated analyses cannot approach the valuations prepared locally by hands-on appraisers who are experts in their communities.”

Amorin, representing 25,000 real estate appraisers from the Appraisal Institute, also voiced the need to regulate appraisal management companies (AMCs). “Currently operating as unregulated institutions, AMCs act as a conduit between bankers and appraisers, but often fail to inform the consumer that the company retains as much as 60 percent of an appraisal fee. As a result, such practices typically attract new and less qualified appraisers,” he said.

“With the rise of AMCs, we are concerned that the appraiser independence problem simply may be diverted from one formerly unregulated entity (mortgage brokers) to a new one (AMCs),” concluded Amorin.

For more information on this and other government affairs issues, contact Bill Garber at 202-298-5586 or bgarber@appraisalinstitute.org or visit www.appraisalinstitute.org.

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