Compliance & Regulation

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.

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 in 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.

In revamping appraisal standards, federal regulators should ensure that mortgage brokers can use the same appraisal in shopping a loan to different wholesalers, according to House and Senate conferees working on final details of the regulatory reform bill. The legislation directs federal regulators to draw up new appraisal independence standards for all residential mortgages while specifying abuses and deceptive practices. In sending a counteroffer to Senate conferees, the House included an amendment from Rep. Paul Kanjorski, D-Pa., instructing regulators to ensure the "portability" of appraisals. Senate conferees have accepted the Kanjorski proposal. But work on Title XIV dealing with appraisal and mortgage issues will still ongoing as National Mortgage News went to press. Under the Home Valuation Code of Conduct, loan officers and brokers cannot directly select an appraiser and must instead rely on the funder or a management company. If the lender does not accept the loan, the broker has a hard time getting another lender to accept the appraisal, which means the consumer has to pay for another one. Mortgage brokers have been complaining about this lack of portability since HVCC went into effect May 1, 2009.

Though executives at many private-equity firms continue to raise capital and scout opportunities, few have emerged victorious in the bidding for failed institutions in recent months. The reasons are many. The pace of failures has been slower than dealmakers expected. Methodical due diligence is slowing deals for banks that are still open, in which government loss-sharing is not available to protect buyers. And regulators remain reluctant to quickly sign off on deals that do not involve traditional bank buyers. "You're not going to see floodgates opening up soon in terms of a plethora of deals," said Mark Graf, an investment professional at Aquiline Capital Partners LLC, a New York private-equity firm. "The challenge is finding the right confluence of events with the right return on investment, and you have to meet the regulators' guidelines." The overall tone from private-equity executives appears calm despite an eagerness to put billions of dollars in capital to work. Most agree that as failures accelerate and traditional buyers prove scarce, private equity will be in the thick of things, ready to pursue an aggressive consolidation strategy. There have been notable deals, some point out, including one that closed last week where Aquiline bought common stock and convertible preferred shares that would give it a 24.9% of BNC Bancorp in High Point, N.C. BNC expects to use the funding for traditional and government-assisted acquisitions. Still, it took time for Aquiline to green-light its first direct U.S. bank investment. Graf, who will join BNC's board, has been with the private equity firm since late 2008 and former Wachovia Corp. CEO G. Kennedy Thompson came on board more than a year ago. Graf said, however, that Aquiline is looking at similar deals in other parts of the country.

Despite efforts to assist distressed homeowners, the number of foreclosure actions completed by mortgage servicers has steadily risen over the past four quarters, according to a new report from the Comptroller of the Currency and the Office of Thrift Supervision. "Completed foreclosures increased across all risk categories, with the highest percentage increase among prime mortgages," the OCC/OTS Mortgage Metrics report says. The joint report says completed foreclosures in the first quarter totaled 152,650, up 19% from the prior quarter and 68% since the first quarter of 2009. Roughly 76,000 prime borrowers lost their homes in 1Q as the servicer or investor took title to the property. Meanwhile, servicers initiated 370,500 new foreclosure actions in 1Q, up 19% from the fourth quarter, and at levels experienced during the first three quarters of last year. More than 174,000 prime borrowers received their first foreclosure notice in 1Q, according to government figures collected from 11 of the nation's largest bank and thrift servicers. These institutions service almost 34 million first liens with $6 trillion in outstanding balances. The servicers "indicated that new foreclosure actions and completed foreclosures are likely to continue increasing as alternatives for seriously delinquent borrowers are exhausted," the regulators said.

The American Land Title Association is calling on its members to contact their elected officials in Washington to support an extension of the June 30 closing deadline for the homebuyer tax credit. A Senate amendment to the American Jobs and Closing Tax Loopholes Act would give buyers an extra three months to finalize their purchases, and ALTA is joining the National Association of Realtors and the National Association of Home Builders in supporting the rider. According to a Grassroots Action Alert to members, the group says that in markets with the highest volume of short sales, "it is not uncommon" for the closing to take up to 120 days. Consequently, the memo warns "the two-month window afforded by the homebuyer tax credit is simply not long enough for current market conditions in the most severely distressed markets." NAR has estimated that between 55,000 and 75,000 contracts may be unable to close by the current deadline, and ALTA worries that many of the pending short-sale deals could easily become foreclosures if the buyer fails to qualify by the deadline. ALTA's members handle the bulk of settlements in most states.

Residential servicers on Thursday told a House panel that consecutive changes to the Treasury Department's foreclosure prevention program have made it increasingly difficult to keep distressed borrowers in their homes. Mortgage consultant Edward Pinto described the Home Affordable Modification Program in two words: "numbing complexity," noting that HAMP has 800 requirements and servicers are expected to certify compliance," he said. "With ever-changing regulations, a constant need to re-evaluate past decisions in light of new regulations, and multiple appeals, it is no wonder that the HAMP pipeline became clogged through no substantial fault of servicers." HAMP was created to help financially strained borrowers avoid foreclosure, but the program's performance, to date, has been lackluster. On Thursday, members of the House Oversight and Government Reform Committee held the second of two hearings to assess HAMP's progress. This latest hearing is focusing on what servicers are doing to ensure borrowers receive adequate relief.

House and Senate conferees working on the regulatory reform bill dealt a double-blow to loan brokers Thursday morning by extending HVCC appraisal ordering bans and capping yield-spread premium payments at 3%, according to one trade group official. Marc Savitt, who has been lobbying on behalf of the brokerage industry, said conferees decided against a sunset provision that would have allowed approved brokers and loan officers to order appraisals. (Under the Home Valuation Code of Conduct regulation originators cannot directly order appraisals and must use appraisal management companies.) Savitt, past president of the National Association of Mortgage Brokers who leads a new industry trade group, said the appraisal ordering ban was set to expire but Sen. Chris Dodd, D-Conn., supported language maintaining it. Savitt, who runs a small brokerage operation in West Virginia, noted that the House and Senate agreed to a compromise, essentially capping yield-spread premiums at 3%, though the final language allows for certain fees and charges to be excluded from the cap. He said that, overall, the loan brokerage industry was "shafted" and is being unfairly blamed for the financial crisis. "We've been convicted and sentenced without having a trial," he said.

Web-based LOS Avista Solutions has integrated with verification service company Kroll Factual Data. This integration was done at the request of joint clients to allow Avista Solutions' customers to pull credit through Kroll without leaving the Avista Agile LOS. The Avista Agile platform lets users create loan applications online through the system or import applications from external loan origination software. The consumer website portal allows lenders to provide their customers online loan application, status updates, loan officer webpages and online disclosure. Now Avista users will have access to Kroll's credit service, which provides reports in both PDF and text file formats.

The American Securitization Forum called for the Senate to "seriously consider and accept the House offer on covered bonds." The ASF said it believes the amendment would "facilitate...a covered bond market as it includes important provisions for default and insolvency of covered bond issuers. The group, which represents both buyers and sellers of securitizations, also noted that it feels the House offer "subjects covered bonds to appropriate securities regulation by federal regulators."