Mudd: Innovation Needed to Rescue B&C Borrowers

Some blame creative financing for putting so many borrowers on the brink of foreclosure, but one of the industry's top executives thinks innovation also is key to solving the problem.

Speaking at an American Enterprise Institute conference last month, Fannie Mae CEO Daniel Mudd called for strategies aimed at helping borrowers who face onerous rate resets to refinance into "innovative, high quality" fixed-rate mortgage products.

He said the industry will have to stretch its capabilities to "keep foreclosure from becoming a malignancy on communities and the economy."

Mr. Mudd believes innovative fixed-rate products could replace "a lot of the sloppy products" that have already been eliminated from the market in the wake of the subprime meltdown. Mr. Mudd noted that one commentator has called the plethora of nonprime products that have fallen out of favor "high school science projects masquerading as mortgages."

Among the possibilities, Mr. Mudd said the industry might want to embrace equity-participating mortgages, in which both the borrower and lender share in home-equity gains, as one way to save troubled homeowners.

He also said depository lenders could benefit from incentives to make Mortgage Reinvestment Act home loans, whereby the banks would get credit similar to the credit they receive for making Community Reinvestment Act loans for developing strategies to help borrowers avert foreclosure.

However, Mr. Mudd took aim at one legislative proposal on the drawing board: reform of bankruptcy laws that would allow judges to "cram down" the amount of secured credit on a home loan. He said abrogating the contractual nature of mortgage loans would inevitably shrink the pool of credit available for the housing finance industry in the future.

He said the goal should be to "make balanced reforms to the lending system" and restore demand for housing, especially among immigrants and military personnel.

Mr. Mudd said that licensing mortgage brokers, improving mortgage disclosures, discouraging loan fraud, and promoting simplicity and transparency to housing finance should be priorities for regulators and legislators.

While the idea is not on the table today, Mr. Mudd suggested that policymakers should over the long term consider the creation of a single, national housing finance regulatory agency to oversee all aspects of the industry.

"I think we need a more unified approach to housing finance policies," he said.

Even though the subprime lending market has contracted dramatically following its collapse last summer, he said policymakers should review the private-label mortgage securities market.

"I think it will rise again, so it's worth taking a hard look at what happened to allow so much unsustainable lending to happen," Mr. Mudd said.

But fundamentally, the underpinnings for growth in the housing finance sector remain strong, Mr. Mudd said, noting that economists project the U.S. population will increase by 26 million, or 15 million households, over the coming 10 year period.

That population growth should fuel the development of two million new homes a year, he predicted. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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