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HUD plans to tweak $8,000 tax credit rules so first-time homebuyers can get instant down-payment assistance.

On July 26, 2008, the Senate agreed, by a vote of 72 to 13, to pass H.R. 3221, the Housing and Economic Recovery Act of 2008, which the House passed earlier in the week by a vote of 272 to 152. This is the most comprehensive housing bill to pass Congress in decades. After going back and forth between both chambers for many months, the bill is now expected be signed by President Bush this week.

In addition to addressing single family mortgage issues, H.R. 3221 also amends section 42 of the Internal Revenue Services code and other provisions of the United States Housing Act of 1937.  Below is a summary of H.R. 3221, which notably includes many the provisions long advocated by CARH:

Low Income Housing Tax Credit

• Increases the housing credit cap from $2.00 per resident to $2.20 per resident for 2008-2009 and increases the small population state minimum by ten percent for those same years.

• Provides a temporarily applicable percentage of nine percent for newly constructed non-federally subsidized building placed in service after the date of enactment and before December 31, 2013.

• Repeals permanently the Alternative Minimum Tax on Housing Credits for buildings placed in service after December 31, 2007.

• Sets the 70 percent present value “9 percent” credit applicable percentage at the greater of current law and 9 percent, with a sunset date of December 31, 2013.

• Eliminates below-market federal loans from the definition of federally subsidized properties, allowing the 9 percent credit on rural housing properties—exception would remain current law for tax-exempt bond financed properties.

• Eliminates the prohibition on the 30 percent basis boost for HOME-assisted properties qualified census tracts, or difficult development areas.

• Repeals the housing credit ten-year rule for acquisition of housing credit for projects currently subsidized pursuant to certain specified HUD and USDA housing programs and similar state assisted programs (e.g. Section 8, Section 221(d)(3), Section 221(d)(4), Section 236, Section 515, and other HUD and RHS programs).

• Defines area median income in rural areas as the greater of the area median income and the national non-metropolitan median income, effective for income determinations made after date of enactment, and an applicable only to nine percent credit developments.

• Repeals housing credit recapture bond rule, effective for future dispositions and past dispositions if: 1) it is reasonably expected to continue to operate as a qualified low- income building and 2) the taxpayer elects to be subject to new longer statute limitations.

• Excludes military employee’s basic allowance for housing from the definition of incomes if they are housed in a building located in a county with a military base that had its population grow 20 percent or more between December 31, 2005 and July 1, 2008.

• Adds a third type of eligible high-cost area enhanced credit: Any building designated by the state housing credit agency as requiring enhanced credit in order for such building to be financially feasible. This new type of high-cost area is not subject to the present law limitation which limits high cost areas to 20 percent of the population of each metropolitan statistical area or nonmetropolitan statistical area.

• Increases the minimum expenditure requirements: Rehabilitation expenditures must equal the greater amount that is at least 20 percent of the adjusted basis of the building or at least $6,000 per low income unit in the building being rehabbed. The provision also indexes the $6,000 for inflation.

• Eliminates present law prohibiting against the provision of the low income housing tax credits to buildings receiving moderate rehab assistance under sect 8(e)(2) of US Housing Act 1937.

• Adds two additional criteria which all states must use in its allocation of credits among potentially low-income housing projects: 1) the energy efficiency of the project and 2) the historic nature of the project.

Tax-Exempt Bonds for Housing

• Provides $11 billion in new tax-exempt housing bond authority in 2008 for single-family and multifamily housing activities. Authority lasts until 2010.

• Makes refinancing an eligible MRB activity for 2008-2010 for adjustable rate single-family mortgages made after December 31, 2001, and before January 1, 2008.

• Exempts permanent housing bonds from the alternative minimum tax.

• Allows HFA’s to use housing bonds for single room occupancy units.

•Modifies the tax-exempt bond, next available unit, and student rules, to make them consistent with the Credit rules.

• Extends MRB disaster relief by waiving the first-time homebuyer rule and increasing purchase price and income limits to targeted area requirements in presidentially declared disaster areas established on or after May 1, 2008 and on or before January 1, 2010, effective for bonds issued after May 1, 2008.

• Permits recycling of tax-exempt multifamily bonds if: o the second (refunding) bond is issued within six months of loan repayment and not later than four years of original issuance. o the second bond (refunding bond) does not generate new housing

Housing Finance Agency; Government Sponsored Enterprises

• Establishes a GSE-financed housing trust fund to provide grants to states for rental and homeownership activities targeted to extremely low income families.

• Requires Fannie Mae and Freddie Mac to set aside an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of its total new business purchases and to transfer 65 percent of that amount to HUD to fund the new Housing Trust Funds and 35 percent to the Treasury to fund the new Capital Magnet Fund.

• Directs all the GSE set-aside funds the first year, half the funds the second year, and 25 percent the third year to offset costs of new FHA refinancing.

• Increases Fannie Mae and Freddie Mac high-cost area loan limits to the lesser of 115 percent of median house price and 150 percent income limit or $625,000.

• Strengthens Fannie Mae’s and Freddie Mac’s affordable housing goals by lowering the income limit on qualifying mortgages from 100 percent are area median gross income to 80 percent area median income, requiring to serve a variety of underserved markets, such as rural areas.

• Creates a new, independent GSE regulator named Federal Housing Finance Agency (FHFA).

• Gives the FHFA director banking regulator-type powers over Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLBs).

• Requires the director to establish criteria for the portfolio holdings of the GSEs

Affordable Housing Trust Fund

• Establishes a Housing Trust Fund to provide grants to states for use to 1) increase and preserve the supply of rental housing for extremely low and very low income families, including homeless families and 2) to increase homeownership for low and very low income families.

• Requires the HUD Secretary to establish a needs-based formula for distributing funds to the states within 12 months of enactment of the bill.

• Requires the state or state-designated entity receiving grant funds to establish an allocation plan.

• Defines eligible activities as production, preservations, and rehabilitation of rental housing and production, preservation, and rehabilitation of housing for homeownership, including down payment assistance, closing cost assistance, and assistance for interest rate buydowns.

Capital Magnet Fund

• Establishes the Capital Magnet Fund within the Treasury’s Community Development Financial Institutions Fund.

• Directs Treasury to carry out a competitive grant program to attract private capital and increase investment to:

o The development, preservation, rehabilitation, or purchase of affordable housing for primarily extremely low, very low, and low-income families and

o Economic development activities or community service facilities which, in conjunction with affordable housing activities, stabilize, or revitalize a low-income area or underserved rural areas.

Since discussion of many of these issues have been front and center for several months, it is the belief that the regulatory agencies will be promulgating regulations to carry out the provisions of the legislation in an expedited fashion. Many of the issues that are part of this all encompassing housing legislation, have been advocated by CARH for several years. Thank you to all CARH members who attended CARH’s recent annual meeting and legislative conference and met with their members of Congress to urge them to adopt many of these important provisions. CARH also thanks members who have contacted their member of Congress outside of CARH meetings and urged support of these legislative changes.

High-balance loans aren't immune from credit problems, especially if the borrower falls into the subprime category. And the problem could get worse before it gets better.

By Alton Gary Simpson

The fallout from the implosion of the subprime market segment is being felt across the financial landscape of the mortgage industry, even reaching the heights of the jumbo and super-jumbo market niches.

According to Moody's Investors Service's U.S. Jumbo Mortgage Credit Indexes: April 2007 Reporting Period, March 2007 marked the first time since May of last year that the delinquency rate declined from the prior reporting period. "We're not even at the halfway point for what's in store for us as lenders, as brokers and secondary market players," said Michael Covino, president of wholesale super-jumbo luxury mortgage lender Luxmac Covino & Co., Tarrytown, N.Y.

"I don't want to be the bearer of bad news, but the mortgage marketplace is not in a recession. It's in a depression. If you didn't prepare for this and if you are not prepared for the fallout, whether you are a broker or a banker, you are probably going to exit the business."

Jumbo and super-jumbo loans are for borrowers in need of mortgages in excess of the conforming loan limits set for Fannie Mae and Freddie Mac by the Office of Federal Housing Enterprise Oversight. The average interest rates on these loans are typically greater than normal for conforming mortgages, and vary depending on property type and mortgage amount. The current conforming loan limit is $417,000, except in designated high-cost areas such as Alaska, Hawaii, Guam and the U.S. Virgin Islands, where the limit is $625,000.

Although the definitions of what constitutes a jumbo or super-jumbo loan can vary depending on locale and broker/lender, generally speaking, jumbo loans cover the range between the conforming loan limits and $650,000, with super-jumbo loans covering everything in excess of that. However, because of the skyrocketing price appreciation of the past six years, many homebuyers in high-priced markets, such as the New York and Los Angeles metropolitan areas, have been forced into the jumbo market segment.

A lot of the subprime lending of the past few years was in the jumbo price category noted Mr. Covino, who added that as recently as six years ago subprime lenders restricted themselves to loans under $250,000. "Within the last six years, subprime lenders started to go to $2 million," he said. "What they did was bring a lax underwriting standard to a jumbo market that had never before had that type of liquidity."

"The whole subprime fiasco was like a perfect storm," said Joseph Badal, senior executive vice president and chief lending officer, Thornburg Mortgage Inc., a Santa Fe, N.M.-based residential mortgage lender that focuses on the jumbo segment of the adjustable-rate mortgage market. He noted the toxic combination of lenders looking to increase their spreads, borrowers failing to take responsibility for their own financial situations, federal and state governments encouraging lenders to lend to disadvantage borrowers and investment classes such as hedge funds, investment funds, insurance companies and foreign banks searching for higher-yielding investments that inflated the subprime credit bubble.

According to Mr. Badal, "If you look at the overall mortgage business and look at how the ARM segment has declined dramatically, the biggest reason for that decline is the contraction of the subprime business in that market. It's the same thing with whatever subprime has touched. It is causing a decrease whether it is in housing starts, resale houses or mortgage applications."

As defaults and foreclosure rates on subprime loans began climbing and lenders began going under, underwriting guidelines became more restrictive and credit liquidity began drying up across the board. "What we're seeing is a flight to quality," said Mr. Badal. "There's pressure created both internally by companies themselves, by regulators, by congressional action and so forth. So all of a sudden companies are more concerned with credit quality. More and more people are focused on appropriate pricing and appropriate underwriting."

Mr. Covino added, "The collapse of subprime draws attention to the lax underwriting standards and that bleeds over to alt-A, drawing more attention to the underwriting criteria used to underwrite the super-jumbos. If that results in an overreaction on the part of the credit markets, then you will see a substantial slide in values, because once liquidity leaves a sector it tends to put more pressure on the downward trend for value." He estimates that as much as a third of recent jumbo and super-jumbo loans relied on alternative documentation. He also noted that the present turmoil in the industry is based on information that is more than 90 days old, alluding to the indications from Moody's and others that there is more unpleasant news in the offing.

"Last year wasn't a banner year and certainly volume is off this year as well," said Bill McNamee, president of the Illinois Association of Mortgage Brokers. "The jumbo market is still lower than usual. There are still people who are looking to refinance, but purchases are less than normal. The lack of appreciation, especially in the jumbo market is having its impact."

He noted that tighter underwriting guidelines combined with the lack of price appreciation is like a one-two punch for distressed borrowers looking to refinance their homes. "You find out fairly quickly whether you can help somebody," he said.

According to Michele Raab-Francis, president and founder of Safe Harbor Capital Group in Bellport, N.Y., "The criteria for approval are becoming more stringent. You're seeing a real sweeping change in underwriting guidelines for any level of financing." She said that credit score requirements have been raised to the next tier for approval, more equity requirements and liquid funds post-closing as bankers look to mitigate the risk. "We're bringing in the belt notch by five or six holes," she said, adding that this is true for both jumbo and super-jumbo loans.

Ms. Francis, who brokers many loans in the high-end luxury market in the Hamptons, stated that she hasn't seen any significant slowdown in luxury home sales in the over-$2 million price range. "You've got a real solid buyer in that price range," agreed Ms. Francis. "From a financial aspect, all the criteria are met there."

Mr. Badal added that borrowers on the prime side of jumbo loans almost by definition aren't as affected by economic exigencies as the average borrower. They tend to have a higher net worth and are usually more financially sophisticated. However, Ms. Francis noted that she is seeing more negotiation for homes in the $650,000-$2 million price range. "It's that profile of a borrower who is not on steady ground," she noted. "It's not a robust sale in that price range that I'm seeing. If a builder is out there on spec, it's taking them a longer amount of time to sell that house. A lot of builders are probably more inclined to engage someone in contract before moving forward in this particular market."

Mr. Covino said that the historical markets with high-end housing - the bedroom communities of the major metropolitan areas - are remaining somewhat stable. "But, these new communities that have popped up with multimillion-dollar houses aren't central to any major center of industry," he said. "You're seeing a bit of pressure on that." He also said that the weaker markets are starting to show stagnant price appreciation and in some instances, price depreciation of as much as 15% to 20%. "Traditionally, the super-jumbo market has remained resilient in times like that. The values are late to slide and early to recover, especially in the key prime markets," stated Mr. Covino, adding the caveat, "It really is all up to where rates go. If rates continue to stay where they are, I think that next year we'll fare far worse than we are." He said if that's the case, we would see marked declines in home values, originations and in housing starts, not to mention the ancillary effects that a general housing downturn would have on the overall U.S. economy.

Mr. Covino, who has more than 27 years of experience in the mortgage finance industry under his belt, has seen at least three or four of these market cycles. He pointed out that he witnessed the tremendous devaluation of high-end homes in the 1987-88 market, specifically in California and other parts of the country, which was a direct result of a credit squeeze when the S&Ls failed. "If liquidity dries up for super-jumbo loans, if they're not as readily available as they once were," he warned, "you could see a very quick depreciation of prices."

Mr. Covino emphasized that the market is cyclical, citing the New York area during the down market of 1986-87, when on average homes lost 33% of their value. Within three years, not only had these homes regained their value, but they were actually up by 12%. "It took four years for the cycle to work its way through," he noted. "It's all about rates. It's all about liquidity in the marketplace. It's about ease of credit."

Mr. Covino noted that the tightening underwriting guidelines had changed the rules for everyone in this sector. "I think that the key here is for both regulators and secondary market people to understand that the lending decision, especially on super-jumbos, is an individual decision. It's not a FICO score driven decision. It's not solely an asset driven decision. It's not solely a collateral decision. It's more a combination of all those factors, which makes for a prudent lending decision," he said.

Rather than the rush to origination if a person had an OK FICO score and six months of reserves, which Mr. Covino said was commonplace during the past few years, he said that originators will have to look at the story behind the borrower. He said that the kind of questions that originators and lenders have to ask when evaluating a prospect must include:

Who is this individual, their career path and length of time in chosen field of endeavor?

Where are they in their life cycle?

How do they manage their affairs and have they handled high debt before?

What sector of the economy are they involved in and what's the likelihood of that sector's continued success?

Does this individual have a track record of success?

What's the likelihood they will be successful in the future? "The appreciating market covered up a lot of mistakes." He noted that if you made a loan to a person who wasn't qualified, but they were receiving 20% appreciation on their property, then that person could probably sell that property at a profit before trouble hit home. "You make that same lending decision today and he loses 15% a year for the next two years, and can't carry the property," noted Mr. Covino. "Some lender takes a hit for a million dollars. That's only going to happen a couple of times before someone says, 'Wait a second, there's something more than a FICO score and liquid reserves that have to go into this equation.'

"You're going to see people looking towards the character of the individual and the experience of that individual before they go ahead and lend them several million dollars."

To further prove his point, he cited the example of builders during the 1980s, noting that before the S&L crisis, they were good bet. "Nobody wanted to make a builder a loan from 1989-1993," said Mr. Covino. "Those guys had a hard time getting mortgage loans on their own primary residences because liquidity to their sector dried up. If they had FICO back then, you would have seen a great FICO and great earnings for the previous years, but their business ended overnight."

What's Next for NonPrime?

Our panel at the Mortgage Bankers Association's Nonprime Mortgage and Networking Conference believes there is a bright future for this segment.

Participants: Rick Glass, RT Glass & Associates; Patrick Weaver, president, Quality Home Loans; Loretta Salzano, attorney, Franzen & Salzano; D. Fred Baldwin, chairman, Lime Financial; James Hennessy, managing director, Capsilon FSG. Moderator: Lew Sichelman, housing correspondent, National Mortgage News.

LEW: We're meeting in a midst of a major meltdown of the nonprime sector. Some say it is a blip on the road and it won't last long and it won't be bad. Others say it is the beginning of the end of the business. Can you give me your own assessments of what you see out there?

FRED: I don't have the final answer, but it isn't over. It won't mean the end of the subprime business. It recasts itself about every 10 years. The parameters get too wide and things slide downhill. I think we've got the rest of the year. If the real estate market comes back, I think it will make that a little shorter time.

JIM: I agree with Fred in that it's not going the end because the demand continues unabated. People need the product and it is going to be offered in some form. However, the form in which it will be offered will differ widely than what we've seen in the last 12 months, when loans were made to feed a securitization machine and to bring a profit. It probably got in the way of some good judgment. The guys who have been in the business multiple decades would realize these loans probably shouldn't have been made. There are some people who don't get a loan. It is that simple. That being said, what is the landscape going to look like? Will we have the big monoline companies going forward? I tend to think we are going to see fewer of them. We're going to see more big companies, probably investment-backed, that will offer a variety of products. Yes, they will all be risk-based priced to some degree.

LORETTA: I agree I don't think it is the beginning of the end certainly and I've seen a cycle or two in my career and certainly for some of the problems we've encountered, controls have been put into place. In the secondary markets, the limitation on products and we've state and federal regulatory guidance that has changed the landscape considerably. I think that the industry has already responded and now is thinking about proactive ways to help keep consumers in their homes over the rocky six months to 18 months.

PATRICK: I agree and echo the sentiments spoken here. I think we saw an abandonment of the traditional guideline approach to subprime. It has been that high-profile lender with that high-risk loan (high LTV/low FICO) that has certainly led to the guideline right size. It is not the end but the beginning of the change.

RICK: This is a thriving sector, while there have been some challenges - a flight to quality, a tightening and repair - you're also seeing there is interest from the street. I'm seeing demand for talent. I'm still seeing companies doing things. That tells me (the industry) is not over. It is going to reinvent itself and it is going to be a more efficient machine.

LEW: I'm curious: who is to blame? I have heard that some people are pointing their fingers at mortgage brokers, others at Wall Street.

JIM: The answer is everyone, all of the above.

LORETTA: Consumers too have made decisions, which aren't always the best decisions for themselves.

JIM: There is the conventional wisdom among consumers that everybody has to get into real estate because it is appreciating so rapidly and it is the best path to wealth. And no matter if have to lie, cheat or steal, you've got to get into that house and certainly, the origination community was there to provide a means. Stated-income loans and more, they certainly created a demand in the mortgage banking sector, which in turned asked Wall Street. Wall Street says you are the guys at risk ultimately. If the loans go bad, you've got to buy them back. We're focusing on the expertise of the mortgage banking sector to provide the guidance here and be the bellwether of what will and won't work. So the answer is everybody, up and down the chain.

PATRICK: The mortgage is about risk and that risk is born by all players. The appetite for production outweighed that risk. We saw the proliferation of a mortgage product, which fed all of those interests and ultimately all of those parties, lenders included, obviously suffered as a result of it.

LEW: I'm wondering how the situation has affected your own companies?

PATRICK: We actually had dumb luck, or just call it fear. We veered from that product. So we are being heavily courted by the street and by potential employees. So we do expect growth. We are at this point, in the first quarter of 2007, this is a record-breaking year for us in terms of production. We will continue to grow, we will to continue to focus on originating a risk-adverse product in the subprime sector. I think we will come out even stronger.

FRED: As a more traditional subprime mortgage banker as Lime is, liquidity has gone out of the business. If you don't have cash, it is difficult to survive. You have to watch your cost tremendously. You have to flag to new guidelines. The business used to be done by portfolio lenders, Household, Beneficial, some of the banks. Wall Street came into the mix. I'm not blaming it all on Wall Street, but they've certainly led us into the mix with securitizations. All you can do to survive is to maintain your liquidity and that can be done a lot of ways. You have to cut costs drastically, you have to a flow basis (on the secondary market) in a lot of cases to make sure you can sell your stuff and that you don't have early payment defaults coming back. It is in flux now. Even the credit score companies come into the whole wide circle of what caused this. A 580 guy could be better than a 640 guy if you are looking at mortgage lates. The blame belongs everywhere and you just have to watch your dollars so closely. We've said there is no liquidity. But it is interesting because you talk to many of the players and there is liquidity. It just depends upon which product are you referring to. We use the statement as almost as its universal for the industry, when in reality, there is no liquidity for a product there should not have been liquidity for.

PATRICK: I was told by a number of people today that they would pay 103 or 104 for the right product.

FRED: I've gotten rate sheets today from a couple of investors paying all the way up to 105. From a product mix/product development standpoint, there is liquidity. We've not encountered the "liquidity crisis." But again we don't originate that product. The mortgage industry and all players involved need to start focusing on and communicating on is what is the message we want the marketplace to understand about our industry. Or do we continue fulfilling the notion that the entire market has gone to hell in a hand basket. There is just that generalized statement about in regards to the industry vs. specific historical performance details that clearly identifies traditional subprime product being originated today is still performing as it did 10 years ago.

JIM: The companies that are having issues had been staying in the deep end of the mortgage lending gene pool but they were dabbling in the shallow end and that was enough to get them all into trouble.

LORETTA: Our firm does compliance and litigation defense and we've got a lot of litigation, a lot of repurchase demands and we're defending those. A lot of the litigation on that side is related to mortgage fraud and now people have time to look for it. On the compliance side, we do have a lot of clients who have pulled back, and (taken) certain proactive measures. We're seeing, for some, sales and change of controls, so we're doing multistate work on those changes. Folks are expanding into new markets. We don't see folks expanding into new products, but into new states. And we see a lot of folks reacting to the nontraditional mortgage guidance and trying to figure what that means to them as far as policies and procedures and how far they can go while still delivering the product that they want to the consumer. So it is a balancing act.

PATRICK: I'm sure most of you are familiar with the manufactured home market, which was taken down right across the floor by certain companies. It became nonexistent. Nobody would buy that paper. Now all of a sudden the manufactured home business is coming back, it's come from the dead. So this other business, which is much bigger than manufactured, will come back.

LEW: Rick, with all of the people out of work, it seems to me that some of the stronger companies have the ability to find some really good people.

RICK: There is a window right now for every discipline in the sector for acquiring top high-caliber talent. I am talking about groups of people, a top producer and his staff or people in a certain discipline. Our practice has shifted. This has actually been our best quarter ever. In 1998, we looked to where the demand was, and saw it in production and operation and worked with people that had the greatest demand. After that correction in 1998, we started looking at the market and where it was going and where are the risks. We tried to partner with companies that are very well capitalized and we are seeing that today. We are migrating toward the Wall Street integrators and the large banks. We are seeing large demand in risk, loss mitigation, those particular disciplines. We haven't slowed down but there have been shifts where the demand is.

LEW: Angelo Mozilo has said, "You never know you're swimming until the tide goes out." We've seen a number of companies, 20 to 30, already have gone out of business. Do you think the worst is over or do you think there is a lot more to come?

FRED: I don't think it is over, but I think the majority of it has happened. I think there will be some more companies that at least will be acquired, either with a street firm or possibly banks. The number of people in (nonprime) is going to be cut way down after this. I think that is the only way you can control the underwriting, the whole presentation. The business has to be under more control than it has been. Household and Beneficial in the old days were great controllers of the business, ITT Finance and the rest of them. They knew what held in their portfolios. They could make deals with their customers who were delinquent. Believe or not they didn't foreclose that much. They got whacked by the government, which said, "You can't charge that guy three more points to re-up," but they saved his house from foreclosure. I think in six months it will be back up and running.

JIM: Mike McQuiggan spoke (at the conference) about the real test. We've had one wave of tests now, the early payment defaults. But the next wave could be in ARM adjustments. We will know more in the next 18 months, if the programs aren't available, are we going to see major forbearance, are we going to see government intervention, are we going to see the GSEs getting involved? Who knows? It is going to be a real adventure over the next year and a half.

RICK: There is a firm out there in this sector that has a $24 billion (servicing) portfolio, and they told me that 90% of the loans that adjust in the 2/28s are in default for 90 days and they are doing pre-adjustment mods to try and keep (the borrower) in the house.

LEW: Someone said that 80% of this market will be concentrated in the top 10 companies. Is that a real possibility? That has never happened before in the overall mortgage market.

FRED: I think there will be some small players zooming along, I would agree with that. Angelo has been saying that for the last five years. I agree there will be consolidation. The middle guys will be gone. There will be small fish on a regional or local landscape.

JIM: I think you are right. About 10 years ago, Brenda White said that there would be within five years about six significant banks in the country. A couple of them already have been assimilated into one of those. I think there is an excellent chance you will see a relatively small group of mega-lenders that are really dominant not only in this sector but in a multiline scenario. I don't know how it can happen any other way, especially as some of these portfolios go bad. There are too many things that are going on that point to that. I just don't know how long it is going to take.

LEW: It seems to me that it is a foregone conclusion that proper regulations and maybe even new laws covering the mortgage industry in general and the subprime sector in particular will be passed. What could you live with and what could you live without?

FRED: It is probably a conversation that goes on every day, in our offices for sure. A delicate balance, certainly. There are some proposed regulations that will help, but I'm not sure any will. At the end of the day, those borrowers will have to be able to access capital. Unless the lending community is able to do that in a way without creating unnecessary risk, you are going to wind up hurting the consumer more so than helping them.

JIM: I was in lending for a long time. Subprime for me started in 1990. And we're more regulated now than we were then, for the simple reason is, in a free market, you are going to get abuses. You are going to get energetic, aggressive people out there creating the product, originating the loans. As the loan become more complex, you are going to have to create more regulations, more disclosure and what have you. If we get to the point where we get federal pre-emption in a lot of ways, but especially in the disclosure area, things should become simplified far more quickly. It is a political football. You get everybody who is holding elective office, whether locally, state or federally, seeing an opportunity here with blood in the water. They can make a statement, call a press conference and somebody will say, "We need to control these lenders and we will do so by requiring new disclosures." Multiple by thousands of municipalities, 50 states, not to mention this is going to be an election year, so you are multiplying that potential for more regulations. With some kind of federal pre-emption or oversight that obviates all of these small regulations we are going to be far better off.

FRED: I think we are probably going to see subprime qualify fully indexed in the first year. Everybody feels ARMs are a destructive business, I'm not sure, but there is certainly a problem. The other thing is if foreclosures really get high, you are going to get a year or two of forbearance by legislation. You can foreclose but you have to work for a period of time without taking the house to try to shore the customer up.

PATRICK: I don't know how we deal with the potential onslaught of disclosures without otherwise literally destroying the marketplace. What that is and how that is ultimately implemented will certainly have to address how do you keep these people in those homes.

LORETTA: I'm not a lender, but whenever we go through something like this, and I think about the predatory lending legislation that swept the nation, our clients generally say they can live with two things. They can live with certainty. So don't give us a suitability test or a reasonable tangible net benefit test or something wishy-washy. Give us certainty and give us a level playing field. The people in this room have to compete with banks and folks who take advantage of a federal preemption. We might as well all play by the same rules and we all can compete fairly in the marketplace. But if we end up with a smattering of states that are coming up with foreclosure moratoriums, limitations on products or fees or some kind of federal legislation that does not apply to federally chartered institutions, which I think would be unusual but could happen, that is really when folks will squabble. At least if it is certain and you know what you have to do to implement it and you know your competitors are struggling with the same challenges, that is certainly far more palatable.

PATRICK: New York is positioning very aggressive in the forbearance area. There was an article with Sen. Hillary Clinton promoting such as well as the elimination of prepayment penalties for subprime. I think that might cause other states to follow. But I think it comes back to, if it isn't universally applied, if it is not consistent, you will have lenders pulling out of states, and you will have pandemonium in the marketplace. At the end of the day, I think those remedies will be at the forefront of the regulatory issues. For existing borrowers, how we will save homes, how will we enable borrowers who are unable to afford homes? There are trillions of dollars that we talking about here. Inevitably there will have to be a stopgap for the existing borrowers.

JIM: It makes you wonder. One of the answers you mentioned would be not a forebearance but a moratorium on court judgments which would hopefully keep the loans current.

PATRICK: That is the issue. You have got bond investors. There needs to be some kind of mechanism to keep the money flowing.

LEW: In a situation like that, the ones that would be hurt would be the investors. At the same time they would be hurt less than the loan going away completely.

LORETTA: Those foreclosure relief services or outreach services or hotlines are really not designed for what is happening now. Even the most recent ones, even though they were launched in anticipation of what was going to happen with the resets, they just don't have the funding to help everyone.

PATRICK: If not some sort of bailout mortgage, the forebearance would have to be the only viable answer. But it would only be viable if the bond market was somehow subsidized. Otherwise, the losses there could create, in and of itself, another catastrophe.

LEW: Has the industry been painted unfairly in the press?

PATRICK: I think that is an understatement. I think it is definitely an understatement.