Compliance & Regulation

Farmer Mac's Class C non-voting common stock is now part of the Russell 3000 Index. Michael Gerber, Farmer Mac president and chief executive, said the company expects that being included in the index will increase its exposure to the investment community and to potential investors. Russell Investments reconstituted its indices on June 25. Membership in the Russell 3000 also means Farmer Mac's stock is included in the small-cap Russell 2000 index (Russell 3000 members with larger capitalization are included in the Russell 1000).

The financial services reform bill does little to help consumers shop for a loan, according to the National Association of Mortgage Brokers. NAMB chief executive Roy DeLoach said the government is trying to impose its choices on consumers. An amendment by Sen. Jeff Merkley, D-Ore., restricts the way brokers can be paid by lenders and consumers. It is "too big brotherish," he said. NAMB feels regulators should be given the flexibility to make changes to the compensation provisions. The trade group also is worried about a safe harbor provision that limits points and fees to 3% of the loan amount. Congress directed regulators to make adjustments, giving lenders an incentive to make loans under $100,000, a move that helps low- and moderate- income homebuyers. "This will help to counter any unintended consequences for consumers," DeLoach said in an interview conducted during NAMB's annual meeting in Phoenix.

Due to opposition from the Treasury Department, Sen. Christopher Dodd, D-Conn., blocked an amendment that would allow covered bonds to get a start in the U.S. mortgage market. Treasury is "strongly opposed" to covered bonds. "We will probably go with a study," Sen. Dodd said late last week during the House-Senate conference on the regulatory reform bill. Sen. Bob Corker, R-Tenn., said a study would be "worse" than doing nothing, because it would delay legislative action for two years. The House conferees approved an amendment by Rep. Scott Garrett, R- N.J., that would create a legal and regulatory framework for the development of a covered bond market in the United States. But the Senate conferees rejected the Garrett amendment by one vote, according to sources. This was a disappointment for banking consultant Bert Ely and other covered bond supporters. "It prevents the emergence for a new way to finance housing in this country that would actually help to facilitate the resolution of Fannie Mae and Freddie Mac," Ely said. Covered bonds won't replace the GSEs or securitization, he added, but it will "help to fill that funding gap." Meanwhile, House Financial Services Committee chairman Barney Frank, D-Mass., said he will hold a markup on Garrett's covered bond bill in July. Senate Banking Committee chairman Dodd said he would hold a hearing on covered bonds. Under the Garrett bill, the Treasury Department would be the primary regulator of covered bonds, and set standards and reporting requirements for issuers.

If anyone in the mortgage broker industry thinks that the bills being proposed and/or passed by Congress are bad, they should have seen what the National Association of Mortgage Brokers' lobbying team and staff were able to keep out of them, newly-installed president Bill Howe told the audience at the group's annual meeting in Phoenix. In his final speech as president, Jim Pair elaborated on some of those successes during the past 12 months. They included changes in the Federal Housing Administration program that takes away the need for audited financials and opens up the program to more mortgage brokers. The SAFE Act created national education standards and the loan originator registry system, both of which Pair pointed out, were long-held positions by NAMB. As for the Home Valuation Code of Conduct, Pair lauded the results of the financial services reform bill conference committee and said that it will be likely that in the future, mortgage brokers would once again be able to order appraisals. The future of the industry is good, he said, declaring, "consumers still need us, wholesalers still need us." Brokers are the originators who need to meet education standards and be licensed, and they need to take pride in NAMB's Lending Integrity seal. As for NAMB itself, Howe said the organization has downsized and now operates out of a virtual office. It is working on several initiatives to improve communications with its members, including the use of video e-mails. Howe also announced a deal with the University of Phoenix, where members who hold the CMC and CRMS designations would be able to receive school credit for them towards a degree.

Federal Housing Administration mortgage volume could get a boost from regulatory reform, because loans insured by government agencies are fully exempt from the bill's risk-retention requirement.

Morgan Stanley & Co. Thursday afternoon agreed to pay $102 million to Massachusetts homeowners and the state, settling allegations that it aided and abetted subprime lender New Century Financial Corp. in taking advantage of consumers. State attorney general Martha Coakley, announcing the settlement at a press conference, said Morgan provided billions of dollars in credit lines to New Century "which used Morgan funds to target lower-income borrowers and lure them into loans that consumers predictably could not afford to repay." She added that some Morgan executives referred to New Century as Morgan's "partner" in subprime lending. The Irvine, Calif.-based NCFC filed for bankruptcy in early 2008. For much of the decade it was one of the largest subprime lenders in the nation, according to figures compiled by National Mortgage News. As part of the settlement, Morgan agreed to "change its business practices" and to provide the AG's office with "information and materials" as part of its ongoing probe of subprime lenders and the securitization process. In a court filing AG Coakley notes that other Wall Street firms are under investigation regarding their securitization practices. Morgan agreed to the deal without admitting or denying any wrongdoing.

The Office of Thrift Supervision's watchdog said the agency was ineffective in regulating BankUnited -- a major player in the payment option ARM market -- before the thrift's 2009 failure and improperly allowed the Florida lender to backdate a capital infusion. The Treasury Department's inspector general said in a report that while the $13 billion-asset thrift's failure stemmed largely from high-risk lending, the OTS failed to clamp down on BankUnited's aggressive strategy. "OTS did not impose limits or restrict BankUnited's concentration and growth in high-risk option" adjustable-rate mortgages, said the report, which was made public Thursday. The inspector general report, which was required because the failure caused a "material loss" to the Deposit Insurance Fund, said the OTS also "did not adequately assess" poor underwriting at the thrift and failed to address BankUnited's "inaccurate risk-weighting." "We also found that OTS improperly directed the thrift to backdate a capital infusion from its holding company," the IG said. The report followed past criticism of the agency for allegedly encouraging backdating at troubled thrifts, which forced the dismissal of two senior OTS officials, former West Regional Director Darrel Dochow and former Senior Deputy Director Scott Polakoff.

Mortgage bankers are mostly happy with details of the financial regulatory reform bill but it all depends on which faction of the industry you belong to. Lenders that specialize in FHA, VA and high quality GSE loans appear to be the big winners because the legislation will not require MBS issuers to maintain 5% of the credit risk on their deals as long as they produce high quality loans. "It's nice to win one," said Lewis Ranieri, co-inventor of the mortgage-backed security. Ranieri, who pioneered securitization of plain vanilla residential loans 30 years ago, has been a frequent critic of Wall Street firms that took his invention and used it for subprime. Ranieri, who considers himself "pro-housing," is concerned that financial conditions in the industry could deteriorate rapidly without a viable securitization plan. The measure agreed to by House and Senate conferees could also provide a huge boost to the Federal Housing Administration which already accounts for 30% of all loan production today (compared to just 3% five years ago). Some believe FHA could be the biggest winner of them all because the agency gets a 'pass' on the qualified mortgage test. One lobbyist working on the bill predicted the measure could cause the agency's insurance volumes to boom. "We could be looking at a $500 billion year [eventually] for them," he said, requesting his name not be published because he is still lobbying. Then again, it's unclear what underwriting standards will fall into the qualified mortgage bucket. Balloon, negative amortization, and most interest-only notes will be excluded from the definition but debt-to-income ratios and verification practices must be defined by regulators and could change over time. The bill, as expected, gives little boost to a revival of the private label market, especially subprime loans. "I'm sorry, this is bad juju," said one specialty servicer and non-conforming lender based on the West Coast. "They are trying to baby proof everything. As far as I'm concerned this bill has bombed out the mortgage industry." Meanwhile, loan brokers are unhappy with the bill because it caps yield spread premiums payment at 3% though it allows for certain vendor fees to be excluded from the calculation.

Federal regulators will oversee appraisal management companies that are affiliated with federally insured banks under the Dodd-Frank regulatory reform bill. Affiliated AMCs are not required to register with the states, according to the bill. The House and Senate are expected to vote on final passage of the landmark legislation before the July 4 recess. The Title Appraisal Venders Management Association wanted all independent, multi-state AMCs to come under federal regulation, but the provision was dropped during final negotiations on the bill, according to TAVMA executive director Jeff Schurman. The bill means the nation's largest lenders, all banks -- Bank of America, Citigroup, JPMorgan Chase and Wells Fargo -- with affiliated AMCs will come under federal regulation. The final bill named after its principal sponsors Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass., directs banking and GSE regulators along with the new Consumer Financial Protection Agency to issue new rules to protect appraisers from lender pressure. The guidelines will replace the Fannie Mae/Freddie Mac Home Valuation Code of Conduct rule that is due to sunset November 1. Lawmakers left it to regulators to decide if the HVCC ban on loan officers and mortgage brokers selecting appraisers should be continued. Within 60 days after enactment of the bill, the regulators are expected to issue interim final regulations "defining with specificity, acts and practices that violate appraisal independence," according to a summary of the bill prepared by Canfield & Associates. In acknowledging the problems mortgage brokers have had with HVCC, lawmakers recommended that regulators try to provide for the "portability" of appraisals. This change would make it easier for brokers to use the same appraisal in shopping a loan to various lenders and save the borrower from paying for a second appraisal. But brokers are disappointed that final language does not require the regulators to ensure that lenders will accept an appraisal that was ordered by another lender.

Mortgage bankers will be allowed to securitize FHA and VA guaranteed loans without a risk retention requirement and certain GSE loans will be exempt as well, according to final provisions of the regulatory reform bill worked out late Thursday night. As a technical matter, mortgages backed by Fannie Mae, Freddie Mac and other issuers will be required to retain up to 5% of the credit risk if the loans are not eligible for a total exemption under a "qualified mortgage" test. "I believe chances are very good that in the future almost every mortgage that Fannie and Freddie either buys or securitizes will be qualified mortgages under the risk retention provision," said Glen Corso, managing director of the Community Mortgage Banking Project. Under the agreed final bill, federal banking agencies, the Securities and Exchange Commission, and the Federal Housing Finance Agency will draft rules establishing underwriting standards and allowable product features for these very safe, fully documented "qualified" mortgages. Qualified mortgages also have to meet a new and tougher "ability to repay" standard in the bill along with a 3% limit on points and fees and a separate 2% limit on bona fide discount points. Regulators have the flexibility to set risk retention percentage lower than 5% for residential mortgages that don't meet the qualified mortgage test. Meanwhile, securitizations of mortgages guaranteed or insured by the Federal Housing Administration, Department of Veterans Affairs, Rural Housing Service and other federal or state entities are totally exempt from risk retention. "We commend the House and Senate Conferees for adoption of the qualified mortgage provision that exempts soundly underwritten, stable, consumer friendly mortgages from the risk retention requirements in the final version of the financial reform bill," Corso said.