Transparency in the structured finance market; risks, fallout from non-traditional mortgages are focus of FDIC's Supervisory Insights MortgagePress.comFDIC, Supervisory Insights, ARMs, interest reserves, Enhancing Transparency in the Structured Finance Market
The current turmoil in the financial markets, the housing market
downturn and other credit quality issues have intensified the
challenges now confronting regulators and bankers, according to the
FDIC's Summer 2008 issue of Supervisory Insights. This
issue highlights three areas of concern: the need for greater
transparency in the structured finance market; the risks and
fallout associated with growth in nontraditional mortgage products,
such as hybrid adjustable-rate mortgages (ARMs); and the
inappropriate use of interest reserves.
"FDIC-insured institutions now face a much different, more
formidable set of conditions than they did even a year ago," said
Sandra L. Thompson, director of the FDIC's Division of Supervision
and Consumer Protection. "Articles appearing in this issue of
Supervisory Insights hone in on fundamental concerns for bank
management and regulators today, along with helpful information on
how to mitigate these problem areas."
Unprecedented growth and innovation in the structured finance
market have focused attention on the need for greater transparency
in certain securitization products.
"Enhancing Transparency in the Structured Finance Market"
reviews information available about these products and concludes
that concern about complexity and the lack of disclosure is
warranted. The article highlights actions the author believes would
improve transparency and summarizes existing supervisory guidance
regarding banks' investments in rated securities.
Underwriting weaknesses and potentially deceptive marketing
practices are considered key contributing factors to the current
problems in the U.S. mortgage market. "Hybrid ARMs: Addressing the
Risks, Managing the Fallout" describes these underwriting and
marketing practices and discusses key principles for protecting
consumers and managing the risks of hybrid adjustable-rate mortgage
products.
As the problems in the mortgage market continue, examiners are
more frequently seeing the potentially inappropriate use of
interest reserves. "A Primer on the Use of Interest Reserves"
describes the use of interest reserves in Acquisition, Development
and Construction (ADC) lending, examines the risks this
underwriting practice could present, and identifies "red flags"
that should alert lenders to potential problems at each stage of
the ADC cycle.
This issue's "Accounting News" feature examines communication of
internal control deficiencies as a part of the audit process. The
article provides examples of internal control deficiencies,
explains how these deficiencies should be evaluated and
communicated as part of external auditor reports, and discusses how
examiners can use the auditors' internal control reports.
Supervisory Insights provides a forum for discussing how bank
regulation and policy are put into practice in the field, sharing
best practices, and communicating about the emerging issues that
bank supervisors face.
The journal is available on the FDIC's Web site by clicking
here.
