Regulators came to Orlando for the annual convention of the Independent Community Bankers of America March 2-5, not because they wanted to chew them out for the subprime mortgage mess, but because they want community bankers to help clean things up. Regulators quickly acknowledged that the community banking sector of the mortgage industry had nothing to do with the weak underwriting that characterizes the souring portion of the subprime market, but they said community banks can be part of the solution. FDIC Chairman Sheila Bair even said there could be "a renaissance of mortgage lending" among community banks.
"Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should be done," said Federal Reserve Board Chairman Ben Bernanke in a convention speech carried live on CNBC. "Community bankers are well positioned to contribute to these efforts, given the strong relationships you have built with your customers and your communities."
John Reich, a former community banker who is the Director of the Office of Thrift Supervision, identified community bankers as the good guys in this drama. "The entire international financial community has had to re-learn what you have known all along; there is no substitute for sound underwriting of loans," he said. "Although community banks did not cause the major disruptions in the housing and mortgage markets, you are feeling many of the negative effects."
"As America's Main Street bankers, you can be a major part of the solution," Bair encouraged. "Long term, I believe the problems we're having now will lead to new opportunities for community banks and thrifts to regain a bigger share of the mortgage market.
"We could see a renaissance in Main Street banking. Traditional banks and thrifts are increasing their mortgage lending. They are bringing back old customers and winning over new ones. Responsible lending can increase access to credit for borrowers from all walks of life, who before had no or very limited access.
"While most of you did not originate subprime and nontraditional mortgages, you are now helping us to dig out of this mess," Bair continued. "By keeping credit available in your local market, community banks are supporting consumers and businesses to maintain economic vitality both locally and across the nation."
Bernanke roiled the markets with his 9 a.m. speech on March 4. Urging lenders to do more to help homeowners stay in their houses, he said: "The fact that many troubled borrowers have little or no equity suggests that greater use of principal writedowns or short payoffs, perhaps with shared appreciation features, would be in the best interests of both borrowers and lenders." That statement, which came near the end of his 25-minute speech, made investors nervous and by midday the Dow Jones industrials average had dropped some 200 points. It rallied to close down 45.10 points for the day.
Bernanke, however, wasn't saying anything new. Bair had made a similar suggestion six weeks earlier in testimony before Congress. "They absolutely need to use this tool," Bair said in an interview, referring to lenders resorting to writedowns. "A lot of these loans were unaffordable from the get go, and now they are seriously under water, and you have the prospect of a lot of borrowers just getting up and walking away."
Bernanke and Bair acknowledged criticisms of unfairness. "Concerns about fairness and the need to minimize moral hazard add to the complexity of the issue," Bernanke said. "We want to help borrowers in trouble, but we do not want borrowers who have avoided problems through responsible financial management to feel that they are being unfairly penalized."
"People say it's not fair," Bair said in an interview. "It's not fair; I'll admit it... I would say for a lot of these borrowers there's plenty of evidence they did not understand these loans, they did not understand the payment shock features. There is plenty of blame to go around on the lending side. And even if you don't have compassion for the borrowers, think about the surrounding neighborhoods. If everybody starts walking you have a lot of vacant properties on your street. That's really going to hurt your own home values."
Reich described the policy debate taking place on Capitol Hill surrounding the subprime mortgage situation. "The debate between the administration and Capitol Hill is whether there will be government funds used in any manner that would be perceived as a bailout, either to lenders, borrowers or investors," Rich explained.
"We need to keep the pressure on to do voluntary loan modifications," Bair urged. "What I worry about is that servicers might start to think, Oh, they're going to come out with some big bailout program; why should we bother now?'"
But Bair said she is not expecting a bailout. "I would be very surprised if anyone came up with a program that was going to be funded by general tax revenue," she commented during a press interview. "I just don't think it is going to happen."
ICBA leadership said community bankers are happy to work for mitigation of the nation's housing troubles, but that they have their own concerns about fairness.
"Community banks did not cause this problem," said ICBA President and CEO Cam Fine during a convention press conference. "We are willing to help to get through this problem ... One thing that makes community bankers bristle is that as Congress and regulatory agencies move to try to correct whatever inequities they seem to have found in the sins of Wall Street, many times those regulations pour down onto community banks." Fine said ICBA will work to prevent any additional regulatory burden from falling on community banks.
"It is almost certain there will be some regulatory oversight introduced," said ICBA Chairman Cynthia Blankenship, Bank of the West, Irving, Texas. "What we are most concerned about is that it doesn't unfairly fall on our shoulders because we didn't create this mess."
"In order for community banks to be part of the solution, it's going to be important not to impose unnecessary burdens on them because they will make fewer loans in that case; some community banks may decide they don't want to participate in the mortgage loan process because of the additional burdens," said Karen Thomas, ICBA executive vice president.
Thomas said she is concerned about the attitude of regulators. She said bankers want regulators "to modulate their response in terms of cracking the regulatory whip. Particularly, we are concerned about not having the pendulum swing to the point where we find ourselves in a credit crunch; you don't want to scare bankers away from making appropriate loans when that might be helpful to the solution."
"Generally, the first reaction of regulators to an economic situation like we find ourselves in now, is knee jerk and they over-react," Fine said. "They come in like a ton of bricks on the banks they are supervising and all that does is make things worse because then the bankers draw back and they won't extend credit because they don't want to get beat up in an examination, even if the credit is worthy credit.
"The community banking industry is having to fly through the prop wash of bad decisions of Wall Street and we will do all we can to keep our plane stable," Fine said.
"One of the things ICBA has been trying to tell the regulatory chiefs in Washington is that they need to temper their field forces ... don't let the poor $70 million asset bank out there in their little town take the brunt of that through the field force."
In a brief question and answer exchange following his speech, Bernanke acknowledged the potential for increased regulatory burden on community banks. "Banking is certainly one of the most regulated industries in the world," he commented. "And further, community banks, being smaller, suffer proportionately more from the cost of regulation than other banks. Consequentially, and we take this very seriously at the Federal Reserve, new regulations and rules, whatever their social benefits may be, should be structured to minimize the costs of the burdens on smaller banks."
And Bernanke wasn't the only one to recognize disparity in regulatory burden. Reich said the subprime mortgage mess clearly proves "a level playing field between regulated institutions and unregulated mortgage brokers does not exist."
After describing new regulations the Federal Reserve wants to apply to mortgage originators through the Homeownership Equity Protection Act, Bernanke said during his Q&A: "the benefit of these regulations would be to create a level playing field so that non-bank lenders will have to face the same underwriting and disclosure standards that community banks and other banks already face ... The objective here is to create a broad, level playing field where high cost loans will be underwritten in a careful, clear way, that will avoid the kind of problems we have seen the last couple of years."
"We need to make sure that all actors in the home loan market are playing by the same rules, treating customers fairly," commented Bair. "In the months ahead, I hope we'll see a strong national standard emerge for mortgage lending. Such a standard will set the groundwork for ending this sorry chapter in the history of mortgage finance."
