December 02, 2008

The boss at the biggest Minnesota-based bank says federal regulators will have to get some pension funds, endowments and other investors who own about three-quarters of the nation's mortgages to accept new terms to stem a wave of foreclosures and thaw the mortgage-backed bond market. Otherwise, the housing crisis will persist a lot longer.Richard Davis, CEO of Minneapolis-based U.S. Bancorp, refused to underwrite or securitize subprime credit created by mortgage brokers and underwriters that was often packaged with debt and exotic financial instruments. Once the high-yield rage of Wall Street, those loans have proved toxic for institutional investors and hedge funds, for failing banks -- and for homeowners who never should have been underwritten.
To shore up the mortgage-infected financial system, the U.S. Treasury and Federal Reserve have thrown more than a trillion dollars at financial institutions -- including rescuing Citigroup, one of the biggest offenders -- and expanded federal deposit insurance. So far, the Bush administration has resisted the calls of the chairwoman of the Federal Deposit Insurance Corp. for $25 billion to help at least some stretched homeowners refinance into mortgages that will allow them to stay in their homes."We've told our regulators that we endorse [FDIC Chairwoman Sheila Bair's] plan," Davis said in an interview Monday. "That plan has a lot of merit."But 75 percent of America's mortgages are not in the hands of a bank or S&L. They are held by investors who bought into these large buckets of mortgages."Davis, as part of a government-assisted deal last month for two failed savings banks in California, has agreed to restructure up to 35,000 mortgages he inherited."The outlook for 35,000 loans and those homeowners is better if we go work it out than just let the Darwinian effect take place and let them fail. But until [the government] gets to the loans held outside the banking industry, I don't know that they can make the dent they need. All the banks with good intentions may not move the needle enough. Otherwise, it's going to take a long time."