OTC Chief Urges Lenders to Prepare for Higher Interest Rates
The Office of Thrift Supervision wants thrifts to prepare for rising interest rates and the agency plans to issue new guidance to the industry soon.
"We are closely monitoring how thrifts transition from the current intensive 'mortgage banking' mode to a more typical lending environment," OTS director James Gilleran told the Exchequer Club.
The past few years have been a "fool's paradise" for the thrift industry, he said, with record profits and mortgage volumes "we may never see again."
For the 12-month period ending Sept. 30, thrifts originated $586 billion in 1-4 family mortgages and sold $628 billion into the secondary market.
Interest rate risk is another concern and OTS is seeing an increasing number of institutions that exhibit IRR exposure levels that cause supervisory concern. But generally the industry is well positioned to withstand a 100 to 200 basis point rise in rates, the thrift regulator said.
He noted that the federal thrift charter is very attractive and he doesn't believe changes, such as raising the limit on business lending, are necessary.
Combined with OTS' power to pre-empt state predatory lending laws, the federal thrift charter makes it easy for mortgage lenders to operate nationwide, he said. OTS recently approved an application by J.P Morgan Chase & Co. to create a $1 billion thrift as a platform for originating mortgages outside of the New York, New Jersey and Connecticut.
"We are very pleased that Morgan Chase made a decision that they are going reorganize as a thrift," Mr. Gilleran said.
When asked about controversy involving the Office of the Comptroller of the Currency's powers to pre-empt state predatory laws, the thrift regulator doubted it would have any impact on OTS' pre-emptive powers.
The OTS pre-emption is an "absolute pre-emption and nobody really questions it anymore," he told the financial services executives and lobbyists attending the Exchequer Club luncheon.
In response to questions, the OTS director indicated his support for RESPA reform and his concerns about the Basel II capital accord.
The federal thrift regulator said the mortgage application and settlement process is so "convoluted and non-understandable" to consumers - it needs to be reformed. And he indicated it was predictable that the Department of Housing and Urban Development's effort to rewrite its Real Estate Settlement Procedures Act rules would stir a lot of opposition.
Mr. Gilleran pointed out that Fannie Mae chairman and chief executive Franklin Raines told him privately that he couldn't understand the settlement process when he recently refinanced his home.
"If Frank Raines doesn't understand it - who does," Mr. Gilleran said. "We have devised a system that doesn't make sense and it should be changed."
Fannie Mae would not comment on Mr. Gilleran's remarks. Mr. Gilleran also told the Exchequer Club that he is not comfortable with all the forces pushing for the completion of the Basel II capital accord by June.
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