Beyond Debt Ceiling, Housing Market Still Greatest Threat to Financial Stability

Jul 26, 2011 5:21pm

ABC News' Amy Bingham reports:

With only one week left before the Treasury Department’s Aug. 2 debt ceiling deadline, fears of another financial meltdown are reverberating through the country. Those are the very fears the Financial Stability Oversight Council are seeking to quell.

The council, which was established under the Dodd-Frank financial reform act, released its first annual report today showcasing how the Dodd-Frank Act has already increased stability in the financial market and identifying areas that are still vulnerable to another financial crisis.

But regardless of what reforms are put in place, Treasury Secretary Timothy Geithner stressed that the number one issue threatening financial markets right now is the debt ceiling.

“The most important thing we can do right now to safeguard financial stability is lift the cloud of default hanging over our economy,” Geithner said in a statement. “As we move forward, however, we must also work to ensure that our regulatory framework keeps pace with the evolving global financial system. This report provides key recommendations that will build on the progress we’ve made through the Dodd-Frank Act and further strengthen the resilience of the financial markets.”

Aside from quickly raising the debt ceiling, the housing market still poses the most risk to the financial system’s stability, according to the report. The council suggests further regulation of home loans, strengthening mortgage underwriting and reform in the housing finance systems to help stabilize the housing market.

“An enormous amount of progress has been made,” one senior Treasury official said. “It is now a question of perfecting, rather than starting from square one.”

The council is required by the Dodd-Frank Act to issue this annual report to Congress outlining potential emerging threats to America’s financial stability, make recommendations for promoting market discipline and detail any activity the council makes.

Full summary of the Financial Stability Oversight Committee recommendations:

1) Heightened risk management and supervisory attention

  • Construct robust capital, liquidity and resolution plans.
  • Bolster resilience to unexpected interest rate shifts.
  • Maintain discipline in credit underwriting standards.
  • Employ appropriate due diligence for emerging financial products.
  • Keep pace with competitive, technological, and regulatory market structure developments.

2) Reforms to address structural vulnerabilities

  • Implement structural reforms to mitigate run risk in money market funds. 
  • Elimination of most intraday credit exposure and reform of collateral practices in the tri-party repo market to strengthen the market.
  • Improve the overall quality of mortgage servicing by establishing national mortgage servicing standards and servicer compensation reform.

3) Continued progress on housing finance

  • To strengthen the housing finance system, the Council member agencies and the Department of Housing and Urban Development should set forth standards and guidelines for participants in the housing finance system, and other actions that strengthen mortgage underwriting.
  • To give further confidence to the market and provide long-term stability to the U.S. financial system, the Council believes Congress must pass responsible legislation to reform the housing finance system. The reform efforts should not further destabilize the fragile housing market.
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