FDIC Supervisory Insights Journal

10 June 2008

The Journal focuses on issues related to the financial markets turmoil such as transparency in the structured finance market, the risks and fallout associated with growth in non-traditional mortgage products and the inappropriate use of interest reserves.

The Journal focuses on issues related to the financial markets turmoil such as transparency in the structured finance market, the risks and fallout associated with growth in non-traditional mortgage products, such as hybrid adjustable-rate mortgages (ARMs), and the inappropriate use of interest reserves.

 

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.

 

Journal