Regulatory responses to the subprime crisis

Regulatory responses to the subprime crisis addresses various actions taken by governments around the world to address the effects of the subprime mortgage crisis.

Regulators and legislators are considering action regarding lending practices, bankruptcy protection, tax policies, affordable housing, credit counseling, education, and the licensing and qualifications of lenders. [ [http://jec.senate.gov/Documents/Reports/10.25.07OctoberSubprimeReport.pdf JEC October Subprime Report - FINAL FINAL ] ] Regulations or guidelines can also influence the nature, transparency and regulatory reporting required for the complex legal entities and securities involved in these transactions. Congress also is conducting hearings to help identify solutions and apply pressure to the various parties involved. [cite web | title = Speaker Nancy Pelosi | Issues | url=http://speaker.gov/issues?id=0053 | accessdate=2008-05-19 | year = 2008 ]

Housing and Economic Recovery Act of 2008

The Housing and Economic Recovery Act of 2008 included six separate major acts designed to restore confidence in the domestic mortgage industry. [ [http://banking.senate.gov/public/_files/HousingandEconomicRecoveryActSummary.pdf Summary of Act] ] The Act included:

*Providing insurance for $300 billion in mortgages estimated to assist 400,000 homeowners.
*Establishing a new regulator, the Federal Housing Finance Agency via the merger of two existing authorities, The Office of Federal Housing Enterprise Oversight (OFHEO), and the Federal Housing Finance Board (FHFB), endowed with expanded powers and authority greater than the sum of its predecessors, to supervise operation of the 14 housing government sponsored enterprises (GSEs): (Fannie Mae and Freddie Mac) and the 12 Federal Home Loan Banks.
*Raises the dollar limit of the mortgages the GSE's can purchase.
*Provides loans for the refinancing of mortgages to owner-occupants at risk of foreclosure. The original lender or investor reduces the amount of the original mortgage (typically taking a significant loss) and the homeowner shares any future appreciation with the Federal Housing Administration. The new loans must be 30-year fixed loans.
*Enhancements to mortgage disclosures.
*Community assistance to help local governments buy and renovate foreclosed properties.
*An increase in the national debt ceiling by US$ 800 billion, to give the Treasury the flexibility to support the secondary housing markets and the 14 GSEs, if necessary.

Federal reserve powers

A sweeping proposal was presented 31 March 2008 regarding the regulatory powers of the U.S. Federal Reserve, expanding its jurisdiction over other types of financial institutions and authority to intervene in market crises. [ [http://www.cnn.com/2008/US/03/28/financial.oversight/index.html Plan would expand Fed's power to intervene in financial crisis - CNN.com ] ]

Expansion of government agency authority

The U.S House passed a bill in early April, 2008 that would offer government insurance on $300 billion in new mortgages to refinance loans for an estimated 500,000 borrowers facing foreclosure and an additional 15 billion to affected states to buy and fix foreclosed homes. [ cite news |author= Alex Veiga |title= US foreclosure filings surge 65 percent in April |url=http://news.yahoo.com/s/ap/20080514/ap_on_bi_ge/foreclosure_rates;_ylt=AidEK4U.FbpY14fxrg1dZ9us0NUE |work=Yahoo News |publisher=Associated Press |location=Santa Clara, California |date=2008-05-14 |accessdate=2008-05-19] Dead link|date=July 2008

Lending practices

In response to a concern that lending was not properly regulated, the House and Senate are both considering bills to regulate lending practices. [cite web | title = Free Preview - WSJ.com | url=http://online.wsj.com/article/SB118904231551018883.html?mod=googlenews_wsj | accessdate=2008-05-19 | year = 2008 ]

U.S. Congressional ethics reform

In the wake of a subprime mortgage crisis and questions about Countrywide’s VIP program, ethics experts and key senators recommend that members of congress should be required to disclose information about their mortgages. [cite news | title=Congress keeps mortgages off books
date=2008-06-18 | publisher = Politico | url=http://www.politico.com/news/stories/0608/11159.html
]

Capital reserve requirements

Non-depository banks (e.g., investment banks and mortgage companies) are not subject to the same capital reserve requirements as depository banks. Many of the investment banks had limited capital reserves to address declines in mortgage backed securities or support their side of credit default derivative insurance contracts. Nobel prize winner Joseph Stiglitz recommends that regulations be established to limit the extent of leverage permitted and not allow companies to become "too big to fail," by breaking them up into into smaller entitites. He has also recommended reforming executive compensation, to make it less short- term focused; enhance consumer protection; and establish a regulatory review mechanism for new exotic types of financial instruments. [ [http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html Stigliz Recommendations] ]

hort-selling restrictions

UK regulators announced a temporary ban on short-selling of financial stocks on September 18, 2008. Short-selling is a method of profiting when a stock declines in value. When large, speculative short-sale bets accumulate against a stock or other financial asset, the price can be driven down. Short sales were among the causes blamed for rapid price declines in Lehman Brother's stock price prior to its bankruptcy. [ [http://biz.yahoo.com/ap/080918/eu_britain_short_selling.html Short Selling Restriction] ] On September 19 the SEC followed by placing a temporary ban of short-selling stocks of financial institutions. In addition, the SEC made it easier for institutions to buy back shares of their institutions. The halt of short-selling in the US will terminate on October 2, but can be extended by ten days. The action is based on the the view that short selling in a crisis market undermines confidence in financial institutions and erodes their stability. [ [http://www.sec.gov/news/press/2008/2008-211.htm SEC Halts Short Selling of Fiancial Stocks on 09-19-2008] ]

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