CONSUMER ALERT

FOR IMMEDIATE RELEASE December 3, 2008

Beware of Unlicensed Mortgage Loan Modification Specialists

(Boise) – Gavin Gee, director of the Idaho Department of Finance, warned consumers and industry members today that so-called mortgage loan modification specialists are really credit counselors under Idaho law, and are required to obtain a license from the department before doing business in Idaho.

Gee said that mortgage loan modification specialists are soliciting homeowners in Idaho with promises of relief on their mortgage payments. “We are receiving an increasing number of inquiries from struggling homeowners about such offers,” said Gee.

“Idaho homeowners are being pitched by so-called loan modification specialists to sign up for services homeowners could do themselves,” said Gee. “And we’re receiving reports that homeowners are paying hefty nonrefundable fees for promised services with no assurance of real financial relief.”

Gee said that current economic conditions and mortgage payment increases can place considerable financial stress upon borrowers, “which may make them vulnerable to dubious offers of assistance from third parties.” Homeowners should educate themselves on the characteristics of their mortgage and budget for any increased payments. Idaho homeowners facing challenges paying their mortgages should communicate directly with their lenders or servicers regarding possible solutions.

If homeowners do turn to a private for-profit mortgage loan modification specialist they should check to see that the individual or company offering the services is properly licensed as a credit counselor with the Idaho Department of Finance. Consumers may contact the Department of Finance online at http://finance.idaho.gov, by telephone at (208) 332-8000, or in Idaho toll-free at 1-888-346-3378.

As an alternative, Gee encouraged struggling Idaho homeowners to consider taking advantage of FREE housing counseling programs, such as that offered by the Idaho Housing and Finance Association (IHFA) as described on IHFA’s website at http://www.housingcounselingidaho.com or for more information contact IHFA toll-free at 1-877-888-3135. Homeowners can participate in IHFA’s free housing counseling program even if they do not have an IHFA loan. Additional links to free housing counseling agencies and foreclosure prevention resources can also be found on the Department’s website at: http://finance.idaho.gov/Mortgage/ForeclosureResources.aspx.

Gee said that qualified housing counselors can assist Idaho homeowners identify resources for housing problems. “It is important that homeowners contact their lenders, servicers, or a qualified housing counselor as soon as they suspect they may have trouble making their mortgage payments.”

Department of Finance Press Releases and other information can be found on the Internet via the worldwide web at http://finance.idaho.gov and may be obtained by contacting the department at (208) 332-8000 or Idaho toll-free at 1-888-346-3378.

Marti Cooper
Idaho Department of Finance
Phone: 208-332-8072 Fax: 208-332-8096
e-mail: marti.cooper@finance.idaho.gov
Website: http://finance.idaho.gov

Notice: This e-mail message and any attachment to this e-mail message may contain information that may be legally privileged and confidential from the State of Idaho, Department of Finance. If you are not the intended recipient, you must not review, transmit, convert to hard copy, copy, use or disseminate this e-mail or any attachments to it. If you have received this e-mail in error, please immediately notify us by return e-mail or by telephone at 208-332-8000 and delete this message. Please note that if this e-mail message contains a forwarded message or is a reply to a prior message, some or all of the contents of this message or any attachments may not have been produced by the State of Idaho, Department of Finance.

Legal News Bulletin

Credit Crisis Cause and Effect – What to Expect for Northwest in 2009

November 7, 2008

The current economic turmoil will continue to affect our local economy even after other parts of the country start to show signs of recovery. Expect bank loan underwriting standards, especially on commercial real estate, to remain high causing economic activity to remain below the national average for the Northwest in 2009. Although fixes are included in the Emergency Economic Stabilization Act, they may be beyond the reach of many local financial institutions without a change in implementation policy from Treasury and the federal banking regulators. So, Northwest borrowers may miss out in a material way.

Banking creates liquidity by leveraging capital. Although some liquidity is held back to cover deposit demands, the net is used to make loans and investments. Prudent banking requires banks to keep capital ratios around 8%. What this means, if you do the math, is that for every dollar of capital, banks are able to lend or invest about 80% of $12.50 of funds, with the remaining 20% held to meet foreseen deposit withdrawal demands. In good times, this leveraging works to borrowers’ favor because banks have more funds to lend. Eventually, funds availability becomes so great that banks reduce underwriting standards to put excess funds to work. This all works to everyone’s advantage until the risk-taking exceeds prudence.

If the economy turns, as it did two years ago, the opposite effect occurs. For every dollar lost to capital, banks lose $12.50 worth of available funds. This “deleveraging” causes banks to tighten underwriting standards because they have fewer funds to lend. From the point-of-view of borrowers, this is perceived as a credit crunch. Economic activity decreases. This is why the "subprime meltdown” lead to the “credit crisis”. It’s all cause and effect.

Absent a capital infusion of some sort, a credit crunch could persist, prolonging the economic down-turn. This is why Treasury’s program to inject $250 billion of nonvoting preferred stock (the “Capital Purchase Program” or “CPP”) into the financial system makes sense. As originally intended, the $700 billion “rescue” package was expected to be used to buy troubled assets, thereby freeing up liquidity. If originally implemented in its entirety, the economy would receive one dollar of liquidity for every dollar of troubled assets bought on a 1-to-1 basis. Infusing $250 billion as capital, when fully deployed, will create ten times (80% of 12.5) the liquidity of an asset purchase or $2.5 trillion. Banks will have more funds to lend and invest, underwriting standards can come down to (hopefully) prudent levels (which means not to the unacceptable levels that caused this crisis) and our economy can return to something approaching normalcy.

In the Northwest, however, banks have significant investments in commercial real estate. In the spring of 2008, the state of Washington, for example, ranked third in the country in concentrations of commercial real estate, expressed as percentage of capital, at about 460%. Banking regulators were well aware of these trends nationwide and issued a guidance that called for stronger risk management oversight for banks considered “concentrated” in commercial real estate. For purposes of the guidance, a bank that exceeded the ‘screen” of 300% of capital would be considered concentrated for purposes of the guidance. 300% was the average level of concentrations after the last banking crisis of the late 80s and early 90s and perhaps it seemed nostalgic to get back to something closer to that level.

With the current economic turmoil, it appears that federal regulators, by enforcement action or “moral suasion” are requiring banks to reduce their concentrations in commercial real estate to levels closer to the 300% screen by increasing lending underwriting standards. In general, this move appears prudent given the higher levels in Washington relative to the rest of the nation. However, 18 years of build-up from 300% to 460% cannot be undone overnight without severe economic consequences for the region. In mathematical terms, focusing solely on banks headquartered in Washington, aggregate capital totals approximate $7.4 billion. Multiplying the excess CRE above the screen (460%-300%) by the aggregate capital level ($7.4 billion) provides the “excess” amount of CRE that would have to work its way through the system before banks achieve something closer to 300%. That’s $11.84 billion or the measure of an apparent regulatory enhanced credit crunch if the regulators push too hard and too fast.

Regulatory suasion often takes the form of increased standards about what is a bankable asset and what is subject to criticism. It is not a perfect science. If regulators decide to increase the standards on commercial real estate, banks will be required to increase loan loss reserves to compensate for the higher standards. Oftentimes higher reserves are justified due to economic trends; however, higher reserves can also be a result of overaggressive and over-reactive regulation. The combination can be devastating to a bank. It appears through anecdotal evidence that regulators are in fact tightening review standards; whether this tightening is prudent or over-reactive is a subject for considerable debate. Regardless, it will have a chilling effect on commercial bank underwriting standards and the move to higher reserves will significantly impact profitability. It will also cause more deleveraging at banks and ultimately reduce new loans and refinancing, except at much higher rates if at all.

Finally, one of the unintended consequences of this tightening may be to disqualify unnecessarily deserving Washington banks from participation in Treasury’s CPP program. To qualify for the program, banks must first receive approval from their responsible federal bank regulator. From the point-of-view of taxpayers, this is a prudent move. From the perspective of a Northwesterner whose bank may otherwise qualify but for overaggressive regulatory tactics, not-so-much.

Absent the ability to qualify, Northwestern banks may be unfairly excluded from CPP. This in combination with a federal bank regulatory strategy to suppress commercial real estate lending may be a material contributor to causing the Northwest economy to lag behind the national recovery.

w Please contact John L. Bley (206.447.8915), chair of Foster Pepper’s Financial Institutions practice group, for additional information, or if you have any questions.

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By Rep. Jim Patrick

Let us be clear. We are not going to solve the problems of rising gas prices and the energy future of Idaho with yesterday’s solutions.

It is going to take some bold new approaches to end our nation’s dependence on foreign oil, and in Idaho – where we have long benefited from low-energy costs – we need to look at a variety of alternative sources. Our existing facilities are near capacity and we need to look at alternative sources, such as nuclear, geothermal, wind and solar.

This is a time for solutions, not excuses. We have been hearing excuses for more than 30 years, which is why we are no closer to independence from foreign oil than we were three decades ago. In Idaho, naysayers are lining up to criticize alternative solutions. I say we need to keep these ideas on the table and let research take its course. We cannot afford 30 more years of excuses.

We also can’t afford to be bogged down with partisan politics, which is what we are seeing in the halls of Congress. Amazingly, the Democratic leadership in Congress adjourned for a month without taking up the debate on bipartisan legislation aimed at reducing gas and energy prices.

Idaho has its own gridlock. Nuclear energy has been dismissed by some as “too dangerous.” Geothermal is supposedly “too expensive.” Wind energy is not a constant source as well as endangering the environment in some eyes. Hydropower affects the migration of fish. Natural gas is unreliable because the supply and price fluctuates. Coal-fired plants release pollutants such as mercury. The only source that seems to escape scrutiny is solar, which relies on the sun. But we cannot rely on solar to meet all of our future energy needs.

n First of all, hydropower is not dead. The Hell’s Canyon complex re-licensing has been delayed by extensive and costly environmental studies, but I think re-licensing eventually will happen.

n Nuclear energy. The technology must grow, as we continue to find solutions to the disposal of nuclear waste. Twenty percent of our domestic electricity and 16 percent of the word’s electricity is generated by clean nuclear energy. Nuclear power is the world’s largest source of non-emitting energy.

n Geothermal. The Idaho Legislature this year took a positive step forward with legislation that will encourage the private sector to work with the state on developing geothermal sites on state lands.

n Windpower. It’s an important source, but like solar it’s not the only source. One thing Idaho has plenty of is wind.

Again, all these sources have benefits and drawbacks. But there are two factors that should keep Idahoans working together: People still need to live; and the demand for safe and reliable energy sources will not go away. As your State Representative, I will be doing everything I can to find solutions to our energy problems. I am anxious to hear what you have to say about this important issue.

On the national level, the decision makers in Congress need to work on solutions that are in the best interests of the nation and not the political parties. The price of gas, which has caused a ripple effect in the economy, is the biggest issue of this presidential campaign – as it should be. The person we elect as President will set the tone for the energy debate in 2009.

By Rep. Jim Patrick

I believe deflation is a real possibility and is much worse than inflation. The following remarks are from a speech by the fed chairman in 2002.

Conclusion
Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.¹⁹

Starting July 1, 2008 – Idaho will join about 40 other states that allow residents to place a freeze on their credit reports. “There is no magic formula that will protect Idaho residents from identity theft,” states Idaho Department of Finance Director Gavin Gee. “However, a credit freeze is an indispensable element of any state’s identity theft-fighting strategy.” The underlying goal of Idaho’s new credit freeze law is to give Idahoans a viable tool to protect themselves against financial and other fraud.

"Identity theft is a great concern for Idahoans," Attorney General Lawrence Wasden said. "Idaho's new credit freeze law will provide Idahoans with another valuable tool to combat this problem. I am pleased to provide our citizens with this very important information to assist them in avoiding becoming victims of identity theft."

With the goal of providing sound educational information to Idaho consumers the Idaho Attorney General’s Office and the Idaho Department of Finance offer the following information regarding Idaho’s NEW Credit Report Protection Act.

Currently, each of the three major credit reporting agencies (Equifax, Experian and TransUnion) offers consumers the ability to place a credit “freeze” on their credit reports, pursuant to their own programs. A credit freeze is free to identity theft victims who have filed a police report of identity theft. If you are not an identity theft victim, it will cost you $10 to place a freeze with each credit bureau, until the new law goes into effect on July 1, 2008.

For more information about Idaho’s new law, as well as current freeze options offered by each of the three main credit reporting agencies, visit the Idaho Attorney General’s website at http://ag.idaho.gov or the Department of Finance’s website at http://finance.idaho.gov.

OFFICE OF ATTORNEY GENERAL		Idaho Department of Finance
LAWRENCE WASDEN		Gavin M. Gee, Director
Media Contact: Bob Cooper		Media Contact: Mike Larsen
(208) 334-4112		(208) 332-8060

	Legislative Services Office • P.O. Box 83720 • Boise, ID • 83720-0054

	208/334-2475 • FAX 208/334-2125 Maintained by lsoweb@lso.idaho.gov Site Disclaimer

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CONSUMER ALERT

By Rep. Jim Patrick

By Rep. Jim Patrick

2008 Enacted Legislation