randall s kroszner : prospects for recovery and repair of mortgage markets speech by mr randall s kroszner, member of the board of governors of the us federal reserve system, at the conference of state bank supervisors annual conference, amelia island plantation, florida, 22 may 2008. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * as all of you well know, it was just about one year ago that the turmoil in the mortgage and financial markets emerged. today i will offer my perspective on the prospects for recovery and repair of the mortgage markets, which i believe will be a gradual process that requires both market and regulatory discipline. greater transparency and less complexity in credit instruments will help to promote broader scrutiny of credit risk. investors with more and better information from the originators and sponsors of credit products will be able to more easily conduct proper due diligence and verify evaluations of credit risk. financial institutions that develop and hold these instruments and that have similar or correlated exposures through various business lines should also strengthen risk - management practices. as supervisors, we must insist on effective risk management and take the steps necessary to ensure that changes are implemented where needed. although any assessment at this stage about the recovery and repair of mortgage markets is preliminary, i will outline some steps, many of which are already in train, that can foster the rehabilitation process. as part of this discussion, i will highlight what the federal reserve is doing to facilitate improvements in the mortgage markets, some of which involve important collaborations with the conference of state bank supervisors ( csbs ). background as you know, the initial shock to financial markets was essentially a rapid deterioration in the performance of subprime and so - called alt - a mortgages in the united states, particularly among such loans that were originated after the middle of 2005. a large share of those mortgages were funded through structures known as mortgage - backed securities ( mbs ), and many of those structures were, in turn, funded by other structures called collateralized debt obligations ( cdos ), in which subprime and alt - a mbs represented the collateral. these cdos were ultimately held by a wide range of investors and financial institutions. much of the issuance of these securities over the past few years occurred in an environment of tightly compressed risk spreads – that is, the difference between the yields on what were perceived as relatively safe and relatively risky assets was

market. we are also using our analytic resources to conduct research that the reserve banks can disseminate to local community groups, counseling agencies, financial institutions, and others who are working to help troubled borrowers and communities. earlier this month, we announced a new partnership with the nonprofit neighborworks america to develop materials, tools, and training programs to help communities and others acquire and manage vacant properties. the goal is to support the provision of affordable rental housing and new homeownership opportunities in low - and moderate - income neighborhoods. the federal reserve has collaborated with the csbs on several interagency initiatives to help struggling homeowners and to enhance the functioning of the mortgage markets. the federal banking agencies and the csbs last fall issued guidance urging lenders and servicers to pursue workout arrangements, when feasible and prudent, as an alternative to foreclosure. reaching borrowers before they fall too far behind in their payments is important to effecting a sustainable workout and may help more borrowers remain in their homes. in some cases, temporary adjustments to payments may not be sufficient, and more - permanent reductions in interest rates or an extension of the loan term may be called for. in some situations, lenders and servicers may want to consider using principal writedowns as a way to reduce re - default risk or to facilitate a refinancing. we are also coordinating with the csbs, the american association of residential mortgage realtors ( aarmr ), and other federal agencies on consumer compliance reviews of nondepository mortgage lenders with significant subprime mortgage operations. these reviews, which began earlier this year, are aimed at evaluating underwriting standards, riskmanagement strategies, and compliance with certain consumer protection laws. the federal reserve is also working cooperatively with the states to provide data and analysis on subprime mortgage loan performance to inform the states'policies in this area. these efforts will be supported by the new system for registering and tracking mortgage brokers that the csbs and the aarmr launched earlier this year. the nationwide mortgage licensing system should better protect borrowers by bringing greater consistency across the states to the supervision of mortgage lenders. nationwide licensing should prevent lenders who run afoul of authorities in one state from simply relocating their business to another state. conclusion as market participants take steps to foster greater transparency and to reduce the complexity of structured credit instruments, i believe that recovery and repair in the mortgage markets will take hold