Washington News

Senate Banking Committee chairman Christopher Dodd, D-Conn., said his talks with the ranking committee Republican have reached an impasse and he wants to move ahead with financial regulatory reform legislation. "While I still hope that we will ultimately have a consensus package, it is time to move the process forward. I have instructed my staff to begin drafting legislation to present to the committee later this month," Sen. Dodd said. The chairman wants to strengthen consumer protections and supports the Obama administration's proposal to create a separate agency to protect consumers from abusive mortgage lending and credit card practices. Sen. Richard Shelby, R-Ala., opposes a separate agency that would strip the federal banking regulators of their consumer protection function. "I fully support enhancing both consumer protection and safety and soundness regulation. I will not support a bill that enhances one at the expense of the other, however," Sen. Shelby said. The Alabama senator said he hopes to reach bipartisan agreement in other areas, including derivatives regulation and corporate governance. "I remain willing to work with Chairman Dodd to see whether that is possible," Sen. Shelby said. Despite the impasse, Sen. Bob Corker, R-Tenn., said he would continue to work with Sen. Mark Warner, D-Va., on a bipartisan approach to dealing with the failure of large financial institutions and other systemic risk issues. "Chairman Dodd has assured us that our work will be included in the bill," Sen. Corker said.

Lenders originated $86.1 billion in FHA-insured single-family loans in the fourth quarter, up 21% from same quarter in 2008. The Federal Housing Administration reported that 60% or $51.8 billion of the endorsements involved home purchase loans during the final quarter of calendar year 2009. Meanwhile, FHA insurance-in-force grew by 24% during in the calendar year to $752.6 billion as of Dec. 31. But the percentage of singe-family loans 90 days or more past due grew by 34%. FHA ended the year with a 9.12% default rate, up from 6.82% at yearend 2008. Housing officials are raising the FHA upfront mortgage insurance premium 50 basis points to 2.25% this April to cover rising claims and losses. Foreclosures involving FHA-insured loans totaled 20,650 in the fourth quarter, up 41% from the same quarter in 2008. The use of short sales to avoid foreclosure shot up 140% from a year ago to 2,925 in the fourth quarter of 2009.

Of the $87 billion in first mortgage loans Bank of America originated in the fourth quarter 2009, $23 billion were given to 151,000 low- and moderate- income customers, according to its Lending & Investing Initiative Report. For the full year of 2009, the Charlotte, N.C., based banking giant originated nearly $87 billion in mortgages to more than 561,000 low- and moderate- income borrowers. The bank also originated nearly $3 billion in home equity and reverse mortgage loans in the fourth quarter and $13 billion for the full year. On the loss mitigation side, BoA provided rate relief or agreed to modify terms for approximately 460,000 mortgage customers, compared to 230,000 in all of 2008 for itself and Countrywide (acquired during 2008) combined. The full year 2009 activities include performing 260,000 loan modifications with total unpaid principal balances of approximately $55 billion. Approximately 200,000 customers are in trial-period modifications under the government's Making Home Affordable Program at Dec. 31, 2009.

The Federal Reserve is prepared to act as a backstop for the mortgage market after it officially ends its MBS purchase program on March 31, according to New York Fed Bank President William Dudley. The Fed is on track to complete its planned purchases of $1.25 trillion of Fannie Mae, Freddie Mac and Ginnie Mae MBS at the end of this quarter. But Mr. Dudley told the Associated Press that the Fed is not on "automated pilot" and will restart MBS purchases if mortgage rates spike. "If there is a sharp turn in the road," Mr. Dudley said, the Fed will intervene. Wall Street mortgage experts seem divided on how the market will react when the Fed stops its MBS purchase program. The Fed bank president expects it will be orderly since the central bank has telegraphed its intentions well in advance of the March 31 cut off.

The Federal Housing Administration had $32.6 billion in liquid assets on hand at Dec. 31 — a slight increase from three months earlier — to cover potential losses on its $700 billion-plus book of business, according to new figures provided by the agency. Compared to the same period a year earlier, the FHA 'Reserve Fund' saw its cash and "investment" balances improve by 13%. However, FHA would not provide a capital ratio for the December 31 period, noting that the figure is "only calculated once a year, at the end of each fiscal year." In the fall, the reserve fund had a capital ratio of just 0.56%, well below the 2% minimum FHA prefers. Analysts fear that unless the insurance fund can quickly raise premiums, FHA might be overwhelmed by claim payments with the reserve fund going into the red. (For the full analysis see the Monday edition of National Mortgage News.)

A probe by the HUD Inspector General of 15 FHA lenders is causing warehouse providers to have second thoughts on extending credit to some of these firms, according to attorneys, consultants, and mortgage executives close to the situation. These officials, who spoke on the condition they not be identified, said entire warehouse lines have been pulled or are in jeopardy. "When a government agency humiliates companies in public, there can be consequences with their relationships with third parties," one attorney said. In early January, Housing and Urban Department IG Kenneth Donohue subpoenaed documents from 15 FHA direct-endorsement lenders, citing their high default and claim rates. Recently, the IG counsel issued a letter to 10 of the companies, clarifying the nature of the probe and its review of loan documents. "Be advised the selection of 20 loans from these lenders was not based upon any evidence of wrongdoing — a point we made in the press release," the OIG counsel says in the letter. He adds, "Further, HUD IG's review of these lenders does not presently affect their ability to participate fully in the department's FHA insurance program." It appears the letter could be used to reassure warehouse lenders that the targeted companies were not accused of wrongdoing. The letter was requested by K&L Gates attorney Phillip Schulman who declined to comment on the matter.

The House Financial Services Committee will hold its first hearing on the future of the housing finance system on March 2. Treasury Secretary Timothy Geithner and Housing Secretary Shaun Donovan are scheduled to testify. "The hearing will focus on all the private and public entities that support the housing market," the committee said. "It is the first step in a legislative process to determine the future of housing finance and the federal government's role in responsible homeownership and the supply of affordable rental housing." On Feb. 10, the committee will hold a hearing on the Federal Reserve's mortgage-backed securities purchase program and other Fed liquidity programs. The hearing is entitled "Unwinding Emergency Federal Reserve Liquidity Programs and Implications for Economic Recovery."

Residential Capital Corp. — which is on the auction block — posted a $4 billion loss in the fourth quarter after reclassifying some of its troubled mortgages and being forced to repurchase loans from Fannie Mae and Freddie Mac. A year ago, the GMAC-owned ResCap lost $790 million. GMAC is trying to unload several billion dollars in troubled loans held by ResCap and said in a statement Thursday that it continues to "explore strategic opportunities" for the unit. Loan repurchases by ResCap cost the company $573 million in the fourth quarter 2009. It also marked down the value of its mortgage servicing rights by $122 million. (According to the Quarterly Data Report, ResCap ranks fifth nationwide in terms of housing receivables with $380 billion.) There was some good news, though. The mortgage lender originated $18.1 billion in the quarter, more than double its fundings in the same period a year earlier. GMAC Financial Services is majority owned by the U.S. government, which has spent more than $15 billion to keep the company in operation through the credit crisis and recession. The parent company lost $5 billion in the fourth quarter ($4 billion of that amount tied to ResCap.)

The Mortgage Bankers Association said it will oppose a White House budgetary proposal to reduce itemized deductions, a measure that includes caps on write-offs for mortgage interest paid by high wage earners. In a new statement, the trade group said such a measure "would have a negative impact on the housing market, particularly in high cost states like California and New York." The White House is proposing a cap on mortgage interest deductions for taxpayers reporting income above $250,000 (joint) and $200,000 (single). In years past other administrations — usually Republicans — have tried to scale back the mortgage interest deduction but with little luck. "Reducing the federal deficit is vital to the long-term health of the U.S. economy and our industry," said MBA chairman Robert Story. "However, we believe it can and should be done without negatively impacting the already-fragile housing market. Limiting the mortgage interest deduction and imposing additional taxes on lenders will only make economic recovery more difficult." The trade group also opposes a proposal to tax "carried interest" at ordinary tax rates (as opposed to the capital gains rate, as it is taxed now), because it thinks the measure would discourage capital formation for lending.

Fannie Mae and Freddie Mac will not become large buyers of mortgage-backed securities this year and will maintain plans to reduce their total asset size, according to a new letter from their regulator. Federal Housing Finance Agency director Ed DeMarco told banking committee leaders on Capitol Hill that the Obama administration wants Fannie and Freddie to concentrate on conserving assets while minimizing credit losses and stressing foreclosure prevention. "This is and will remain the central goal of FHFA and the enterprises," the government-sponsored enterprise regulator says in the letter. FHFA acting director DeMarco also notes in the letter that the GSEs have the flexibility to expand the size of their investment portfolios but notes that such moves will center around purchases of delinquent mortgages out of guaranteed MBS for modification and loss mitigation. The Federal Reserve is expected to end its purchases of GSE MBS at the end of this quarter. Many market observers assumed Fannie and Freddie would step in to fill the void — if necessary — to keep mortgage rates stable. "I expect that other private parties will begin to invest in Enterprise MBS as the Federal Reserve gradually withdraws its purchase activity," Mr. DeMarco says.