The Secret Testimony of Big Ben

Story Highlights:

• Fed Chairman Bernanke delivered his testimony to Congress today, depicting a resilient economy with troubles caused more by fearful psychology than fundamentals
• Bernanke highlighted copious market-based mechanisms already in place working to mitigate the soft housing market
• While he did allude to some new government regulation, on balance he recommended no drastic measures be taken

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Fed Chairman Ben Bernanke has an economic secret he doesn't want you to know…but MarketMinder's got all juicy dish right here!

Actually, that's not entirely true. Bernanke was pretty clear and upfront in his testimony to Congress today. But given the way the media covered the story, we can't help but feel Bernanke's real testimony is some kind of dirty little secret we're not supposed to tell you about. Here are two examples:

Bernanke: Economy Resilient, Strains Persist
Mark Felsenthal, International Business Times
https://www.ibtimes.com/articles/20071108/bernanke-economy.htm

Bernanke Says Growth Will Slow Significantly
The Associated Press via The New York Times

You might say, "Oh, those seem pretty balanced. One article took a dour view while the other took an optimistic view of his speech." That's true enough, but neither focuses on what the speech was really about! It would be much more helpful, in our view, if the media relayed Ben's testimony in a way that actually reflected the emphases of his speech.

The Fed Chairman opened with a thesis that economic growth will slow (mind you, not slip into recession, just slow) in the near future. He specifically alluded to psychological impediments hindering markets today and few real structural deficiencies, often citing impressive economic resilience.

Ben's real story (where he spent the most time by far) detailed the robust mechanisms and free market processes currently being utilized amid the housing market's softening. Here are some relevant quotes we'll bet you didn't see from the media at large:

(For those wishing to read the entire text: NPR has it here: https://www.npr.org/templates/story/story.php?storyId=16107868)

Our contacts with the mortgage industry suggest that servicers recently have stepped up their efforts to work with borrowers facing financial difficulties or an imminent rate reset. Some servicers have been proactive about contacting borrowers who have missed payments or face resets, as experience shows that addressing the problem early increases the odds of a successful outcome. Foreclosure cannot always be avoided, but in many cases loss-mitigation techniques that preserve homeownership are less costly than foreclosure. To help keep borrowers in their homes, servicers have been offering assistance with repayment plans, temporary forbearance, and loan modifications.

This part of the text probably didn't grab headlines because it tells us that lending institutions have robust contingency plans and tactics to help both borrowers and lenders. Further, these initiatives are not the product of some government "bail out," merely capital markets at work in a time of industry strife. Ben goes on:

The Federal Reserve has been participating in efforts by community groups to help homeowners avoid foreclosure. For example, Governor Kroszner of the Federal Reserve Board serves as a director of NeighborWorks America, a nonprofit organization that has been helping thousands of borrowers facing current or potential distress to obtain assistance from their lenders, their servicers, or trusted counselors through a hotline. The Federal Reserve Board's staff has been working with consumer and community affairs groups throughout the Federal Reserve System to help identify localities that are most at risk of high foreclosures, with the intent to help local groups better focus their outreach efforts to borrowers.

This all sounds too prudent and sanguine to be reportable. Ben even eschews the need for new government programs, alternatively arguing for a revamp of the FHA (an already existing program) as adequate ballast for housing troubles. While we don't like government agencies meddling in free markets in general, we'd certainly prefer this creating an entirely new regulatory arm.

The Congress is also focused on reducing homeowners' risk of foreclosure. One statutory change that could help is the modernization of programs administered by the Federal Housing Administration (FHA). The FHA has considerable experience helping low- and moderate-income households obtain home financing, but it has lost market share in recent years, partly because borrowers have moved toward nontraditional products with more-flexible and quicker underwriting and processing and partly because of a cap on the maximum loan value that can be insured. In modernizing the FHA, the Congress might encourage joint efforts with the private sector that expedite the refinancing of subprime loans held by creditworthy borrowers facing resets.

As I have discussed in earlier testimony, the Federal Reserve is taking steps to avoid subprime lending problems from recurring while preserving responsible subprime lending. In coordination with other federal supervisory agencies and the Conference of State Banking Supervisors (CSBS), we have issued principles-based underwriting guidance on subprime mortgages to help ensure that borrowers obtain loans that they can afford to repay and have the opportunity to refinance without prepayment penalty for a reasonable period before the first interest rate reset. In addition, together with the Office of Thrift Supervision, the Federal Trade Commission, the CSBS, and the American Association of Residential Mortgage Regulators, we have launched a pilot program aimed at strengthening reviews of consumer protection compliance at selected non-depository lenders with significant subprime mortgage operations.

We were, however, worried by one last bit: The possibility of new legislation and tightening lending standards. Curbing illegal activity is great, but it would be a real shame if the government stifled low income folks' ability to own a home. Getting a subprime loan has been a great boon for the vast majority those who sought them—allowing families to own homes when they otherwise couldn't.

Finally, using the authority granted us by the Congress under the Home Ownership and Equity Protection Act, we are on schedule to propose rules by the end of this year to address unfair or deceptive mortgage lending practices. These rules would apply to subprime loans offered by any mortgage lender. We are looking closely at practices such as prepayment penalties, failure to escrow for taxes and insurance, stated-income and low-documentation lending, and failure to give adequate consideration to a borrower's ability to repay. Using our authority under the Truth in Lending Act (TILA), we expect that we will soon propose rules to curtail abuses in mortgage advertising and to ensure that consumers receive mortgage disclosures at a time when the information is likely to be the most useful to them. We are also engaged in a rigorous, broader review of the TILA rules for mortgage loans, which will make use of extensive consumer testing of disclosures.

In sum, Ben's dirty little secret is a resilient US economy with plenty of markets-based mechanisms mitigating worst case scenarios. We're not sure why the media is mum about it, but we think it's a shame.