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The US accounting industry agreed Thursday to revamp rules that had required banks to quickly recognize losses from the housing slump and had been blamed by some for worsening the financial crisis. The Financial Accounting Standards Board, which sets corporate accounting rules, voted to change the so-called “mark to market” accounting standard, a spokesman for the group said.

Controversy had been growing on the rules, also known as “fair value” standards, that require a quarterly markdown of assets that have fallen in value. The rules had been tightened after a series of corporate scandals including at energy firm Enron, which used unrealistic figures to inflate its worth. But some analysts say that by forcing banks to recognize losses immediately, the rules delivered a one-two punch to the system by requiring financial institutions to raise new capital to offset the loss, and squeezing a bank’s ability to make new loans to boost economic activity.

US banks had been forced to write off over 800 billion dollars’ worth of losses linked to the real estate meltdown in the past two years.

Critics have argued that because markets for mortgage-related securities have been frozen, banks should be able to hold the assets to allow them to recover without booking immediate losses.

Jon Ogg, analyst at 24/7 Wall Street, said the mark-to-market rule forced banks “to put up good capital in reserves to offset the new lower market value of bad assets. That in turns takes up capital that could be used for new loans, and as you have seen over the last year creates a situation where the banks have to raise additional capital from the market or go to Uncle Sam with hat in hand. When the markets are shut off or illiquid, this can create the feared death-spiral for lending institutions.”

The change would allow banks to hold some securities to give them more time to recover in conditions where financial markets are frozen, making it hard to find a true market price. Some economists have excoriated “mark to market” as a cause of the crisis, pointing out past periods such as the 1980s Latin America debt crisis where banks would have been wiped out if they had to book losses instead of holding them to await recovery.

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New mortgage-backed securities issued by non-governmetn operations plunged 68.3 percent in the first quarter of 2009 from the same period a year earlier as investors fled the market leaving the housing market almost entirely with government bond issuers.  Thomson Reuters said U.S. mortgage-backed securities issuance totaled $21.6 billion in the first quarter of 2009, down sharply from $68.2 billion in the same period a year earlier, a drop of 68.3 percent.

Issuance of bonds backed by companies other than Fannie Mae (FNM.P) (FNM.N), Freddie Mac (FRE.P) (FRE.N) and Ginnie Mae has virtually come to a halt as investors refuse to buy securities backed by loans whose payments are not guaranteed.

Bank of America (BAC.N) was the top underwriter of U.S. mortgage-backed securities in the first quarter of 2009, the survey showed.

Bank of America underwrote 13 issues of mortgage-backed bonds totaling $4.9 billion, a 22.7 percent market share.

Barclays Capital, the investment banking arm of UK lender Barclays (BARC.L), ranked second among U.S. MBS underwriters in that quarter, with a 17.6 percent market share. The company underwrote five issues totaling $3.8 billion.

Goldman Sachs & Co (GS.N) was third, with a 14.0 percent share. The firm underwrote five issues worth $3.0 billion.

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When is a hedge not a hedge? When it is hedging an Alt-A or Sub-prime mortgage, according to Democrats who are proposing that lenders not be allowed to substantially shift repayment risk from such exotic loans.

The legislation proposed this week in the U.S. House of Representatives would prohibit lenders from “directly or indirectly” hedging or transferring a minimum retained credit risk on most nontraditional mortgages, including some loans that have adjustable interest rates or require little documentation of a borrower’s income. The bill, introduced yesterday, is being sponsored by Representatives Barney Frank of Massachusetts, and Melvin Watt and Brad Miller of North Carolina.

The bill is designed to curb “predatory” lending and encourage the use of traditional 30-year, fixed-rate loans. “The growth of exotic, non-traditional mortgages was a major factor in the current housing and foreclosure crisis,” Frank, Watt and Miller said in a statement.

Alt-A loans were primarily sold to borrowers who wanted atypical terms such as proof-of-income waivers, investment- property collateral or delayed principal repayment, without enough positive compensating attributes. Subprime loans were made to people with poor or limited credit histories.

About 20 percent of Alt-A mortgages securitized with bonds not backed by Fannie Mae, Freddie Mac or the federal government are at least 60 days past due, in foreclosure or already seized. The Alt-A market expanded to $400 billion in 2006 from $55 billion in 2001, according to newsletter Inside Mortgage Finance.
The legislation would make permanent rules that prohibit lending to borrowers who don’t have a “reasonable ability” to repay. It also restricts so-called yield spread premiums, which are upfront commissions paid to mortgage brokers when a loan is closed. The legislation builds on a measure Frank said lacked political support last year to pass.

“We don’t know whether this would work for individual mortgage lenders” that rely on warehouse lines of credit — a form of interim financing — to fund the loans they originate, said Francis Creighton, the chief lobbyist for the Mortgage Bankers Association in Washington. For smaller independent mortgage firms, it may be difficult to repay those credit lines if they cannot sell off 100 percent of the loan, Creighton said.

“The political climate has changed,” Miller said in the statement. “The foreclosure crisis has wreaked havoc on middle- class families and our economy as a whole.”

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New economic numbers released by the government yesterday suggest that if the recession isn’t getting better at least it isn’t getting worse, either. Retail sales have held steady recently. And there are signs that the housing market is stabilizing.

The number of newly issued residential building permits, which offers a glimpse of construction activity in coming months, ticked up 3 percent in February from January. Existing-home sales were up 5.1 percent, according to industry data released this week. And yesterday, government data showed that sales of new single-family homes increased 4.7 percent, the first increase in that market in seven months. Median sale prices of those homes, however, were down 18 percent over a year ago.

The positive signs in the housing market are particularly encouraging. It was the housing bust that led the nation into recession, and for months analysts have said that a recovery in the market will be key to leading the nation out of recession.

Analysts said buyers are being enticed back into the market by plummeting home prices, along with historically low mortgage rates and an $8,000 tax credit for first-time home buyers in the stimulus package.

“There are some pieces of information that reconfirm that we are very near the bottom. . . . I want to see a couple more before I am confident that this truly the bottom,” said David Crowe, chief economist for the National Association of Home Builders.

Forecasters, for their part, stress that even after the worst is over, the economy will be fragile for some time. Recovery is expected to be weak, especially in the housing market, because there’s so much excess inventory. Consumers are still deeply in debt, unemployment is still on the rise, and countries around the world remain mired in recession, crippling demand for U.S. goods.

“Businesses have a ways to catch up to weak demand over last six months, so business spending will be extremely weak. . . . Exports will fall further as the global economy falls,” said Scott Anderson, an economist with Wells Fargo. “But this increases the odds the economy will start growing at the end of this year.”

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March 26, 2009 — At a hearing before the House of Representatives’ Financial Services Committee, U. S Treasury Secretary Timothy Geithner is asked Congress to grant the Treasury Department sweeping authority over a range of financial institutions previously beyond the reach of bank regulators, including insurance companies and hedge funds, and possibly even the finance divisions of major U.S. corporations.

Geithner outlined parts of the administration’s ideas for regulatory reform during several public appearances this week, including testimony before the same House panel Tuesday.

Broadly speaking, the administration is looking for powers similar to those held by the Federal Deposit Insurance Corp. in its handling of bank failures. This would allow the government to take over non-bank financial institutions, sell their assets and renegotiate contracts with employees and counterparties.

The government wants to create a regulatory structure that will prevent the failure of some large firms from exposing the entire financial system to too much risk. Officials have said that if such regulation were in place, the government would not have needed to continue funneling money into American International Group, which has soaked up $170 billion in taxpayer money as the government props it up.

“Destabilizing dangers can come from financial institutions besides banks,” Geithner warned in a speech at the Council of Foreign Relations Wednesday. “Our plan will give the government the tools to limit the risk taking at firms that could set off cascading damage.”

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