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FHFA EXAMINES VARIATIONS IN REO DISCOUNTS CURRY ADDRESSES CONCERNS OF MINORITY- OWNED BANKS Depository Institutions (MDIs), Thomas J. Curry, comptroller of the currency, spoke on the important role of minority-owned banks while addressing concerns regarding new laws and regulations. He spoke before the National Bankers In a written speech addressing Minority on extreme levels. In a mortgage market note issued in late September, the Federal Housing Finance Agency (FHFA) explained the common reasons behind the variations. According to the agency, REO discounts Calculations for REO discounts can differ The last three effects are buyer-related and include risk aversion effect, seller motivation effect (such as loss aversion), and stigma effect. FHFA called these indirect mechanisms. The condition effect can affect an REO heard in media reports "are typically found by comparing sales prices of REO properties to prior valuations of the same houses or sales prices of non-foreclosed houses and are generally larger than the discount caused solely by REO status." RealtyTrac, which media reports often cite, Association at an annual convention. In his speech, Curry acknowledged that smaller financial institutions don't have the "small army of lawyers and compliance experts" of larger institutions but offered assurance that the OCC is "very sensitive to the needs of community institutions" and said regulators "will do everything possible to make the workload manageable for small institutions." Curry also discussed the new Basel capital discount since REOs, unlike non-foreclosures, are more likely to remain unrepaired if damaged, such as from inclement weather. Also, some REOs lose value because of intentional damage left from a previous owner. The note also stated that REO discounts found REO discounts from 2010 to 2012 ranged from 33 percent to 41 percent, according to the FHFA's research note. The estimates found in the news media are in accord with consumer expectations, the federal agency noted, pointing to a Harris Interactive survey conducted in April 2011 for an ongoing RealtyTrac and Trulia study, which found American adults expected to pay 38 percent less for a foreclosed house than a similar non-foreclosure. The discount range of the academic world, which tends to depend on location, time, and controls for estimates, can be anywhere between zero and 50, but most estimates on REO discounts in academic literature fall in the 10 to 25 percent range when looking at nationwide averages, according to the FHFA. When observing estimates for just one metropolitan statistical area, the variability is even greater since academic studies adjust for characteristics and property condition. FHFA stated there are at least six reasons requirements, which are expected to pose challenges for community banks due to the higher capital requirements. Basel III requires banks to raise the reported in the news typically don't account for differences in property characteristics such as age and size when comparing REO properties to non-foreclosures. According to the note, REOs actually tend to be older and have smaller lots than non-foreclosed houses. The note explained that REO discounts found in media reports also usually compare REOs to prior sales prices or previous assessment values of REO properties or values of non-foreclosures from other neighborhoods. This can have a significant impact on REO common equity Tier 1 capital ratio to 6 percent. In addition, the proposal "would revise the risk weights for residential mortgages and increase capital requirements for certain commercial real estate loans, past-due loans, and short- term commitments." Curry responded to the concerns by stating, "We have spent a good deal of time analyzing the impact, and we believe that most of the community institutions we supervise already have enough common equity to meet the new tests." Curry also gave mention to the discounts, especially during market downturns. For example, during a downturn, a home that sold in 2006 for $100,000 may sell for $80,000 in 2011 even if it's not an REO. This type of market downturn can inflate the REO discount estimate, the note explained. The buyer-related effects deal with concerns over risks such as hidden costs, unforeseen delays, and potential loss of property value due to unexpected issues. Seller motivation can affect the REO why REO discounts vary so greatly. The first three are the condition effect, characteristics effect, and market effect. Those explanations directly relate to the property value of houses. 18 development of an estimator tool to help community banks and thrifts determine their capital requirements under the proposed rule. To address the unique position of MDIs, Curry said a Minority Depository Institutions Advisory Committee is in the works. The initiative will gather representatives from minority-owned banks and thrifts with senior OCC leaders to discuss issues minority-owned institutions face. Curry also offered assurance that discount since servicers pay fees such as taxes, insurance, and maintenance costs. In turn, they have an incentive to maximize the sales price. In addition, the stigma of REO properties can mean a greater discount. community banks shouldn't worry about retaliation when appealing an examiner's decision and described OCC ombudsman, Larry Hattix, as "truly independent." Curry provided 2011 statistics, stating 25 percent of the cases decided by the Ombudsman were in favor of the bank and 75 percent were in favor of the examiner.

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