Compliance & Regulation

Although one of the first steps the conference committee took last week was to preserve the existence of the thrift charter in the final regulatory reform bill, the charter's days are likely numbered anyway. The merger of the Office of Thrift Supervision into the Office of the Comptroller of the Currency will eliminate some of the key benefits of choosing the charter, and leave a single agency trying to enforce two different sets of rules, observers said. Ultimately, many said they expect the thrift charter to fade away. "It's a little complicated with two different charters in one agency," said James Barth, a finance professor at Auburn University and a senior fellow at the Milken Institute. "It seems it's not a real complete merger. I would think down the road one would want to eliminate that distinction." The future of the charter is just one of the difficulties stemming from the pending OTS-OCC merger, observers said, including how best to integrate the agencies' personnel, cultures and different supervisory approaches. "It's not a question of the OTS," said Dough Faucette, a partner at Locke Lord Bissell & Liddell LLP. "That's a foregone conclusion; that's gone. The real question is then what will the attitudes and culture of the new agency be like?" Although the bill has yet to pass—conferees were slated to address some of the remaining issues surrounding the merger during their session today—implementation of the agencies' combination has already begun.

Even though mortgage rates continue to flirt with all-time lows, homebuilding executives feel awful. A new report from the National Association of Home Builders says executives in the sector are losing confidence in housing now that two federal tax credits have expired. NAHB said its housing market index fell to 17 in June, sinking five points after two straight months of increases. It was the lowest reading since March. "The homebuyer tax credit did its job in stoking spring sales and we expected a temporary pullback in the builders' outlook after the credit expired at the end of April," said NAHB chairman Bob Jones, a homebuilder from Bloomfield Hills, Mich. "However, the reduction in consumer activity may have been more dramatic than some builders had anticipated, which resulted in their lower confidence levels." Builders were more optimistic earlier in the year when consumers could take advantage of tax credits of up to $8,000. The incentives expired April 30 but buyers with signed contracts have until June 30 to close. Legislation has been introduced in the Senate to extend the closing deadline into September.

Language in the "base text" document of the regulatory reform bill could allow residential borrowers to sue their lender—without a statute of limitations—if the mortgage banker violates the anti-steering provisions of the law. According to an analysis of the base text conducted by K&L Gates, "in the case of judicial or nonjudicial foreclosure or any other action to collect on a loan, it appears that a consumer has a perpetual federal right to assert such a violation by a creditor as a matter of defense by recoupment or set off in an amount equal to the monetary damages that could be asserted against the original creditor." The base text is an amalgamation of the House and Senate versions of the bill. The law firm notes that several provisions from the House bill pertaining to residential mortgage lending that were not in the Senate Bill are included in the initial base document. The anti-steering language is designed to prevent lenders from pushing borrowers into certain loans—regardless of their ability to repay—because the loan officer might receive higher compensation for delivering such a loan. The law firm is telling clients, "There is a lot to be digested in the base document, but it is important to stress that it is the starting point for negotiations among the conferees."

Freddie Mac and Fannie Mae have selected Veros Real Estate Solutions as a technology vendor for their Uniform Collateral Data Portal. The portal will support electronic appraisal data delivery to the government-sponsored enterprises as part of the Uniform Mortgage Data Program, launched this spring. The GSEs have said that to enhance their collateral risk management, they will require seller-servicers to submit full appraisal reports in electronic data format prior to loan delivery to either Fannie Mae or Freddie Mac, effective April 2011. UCDP will serve as a centralized portal for these submissions.

The National Credit Union Administration has issued a supervisory order directing Sperry Associates Federal Credit Union, Garden City, N.Y.—one of the biggest victims in the $140 million U.S. Mortgage/CU National Mortgage scam and a major investor in loan participation pools—to boost its capital. The Letter of Understanding and Agreement signed with NCUA may reverberate even further because it will require the $360 million asset CU to charge off $1.3 million of nonperforming participations it had from loans originated by the failed Cal State 9 CU, and another $1.9 million of participations in troubled South Florida loans. The supervisory order could spell trouble for hundreds of other CUs that hold participations in troubled real estate loans around the nation. Sperry Associates, which is fighting Fannie Mae for the return of $9.5 million of its mortgages fraudulently sold to the GSE by CU National, was cited for declining capital, participation losses, potential unrecognized investment losses and inadequate testing of high-risk areas. In return for agreeing to the Letter of Understanding and Agreement, NCUA will refrain from issuing an administrative order against the credit union.

A fight is brewing over which agency should replace the soon-to-be-eliminated Office of Thrift Supervision on the board of the Federal Deposit Insurance Corp. While the House regulatory reform bill would give that seat to the Federal Reserve Board, the Senate's version would assign it to the proposed consumer protection bureau. The disagreement, which must be resolved by conferees reconciling the two bills, has reignited an old debate: how to involve multiple agencies in running the deposit insurance system without usurping the FDIC's independence. It even has some arguing that the OTS should not be replaced at all, and that the FDIC should be returned to its traditional three-member structure. "It would be perfectly reasonable to consider a leaner FDIC board," said Randall Krozner, a former Fed governor and now a University of Chicago professor. "That option should at least be on the table." The issue could be addressed as early as Tuesday, when the conferees are scheduled to meet to discuss, among other things, the dissolution of the OTS.

Securitization market participants appear to be unified on eight issues related to risk retention proposals and split on two, according to a draft report by a group that represents both the "buy" and "sell" side of trades. The group is split on a portion of the legislative proposal which makes it possible in the commercial mortgage market to have a third-party purchaser retain the first-loss position if that purchaser specifically negotiates for such a position and performs due diligence on the pool. According to the American Securitization Forum's June 11 draft report on its membership's response to financial regulatory reform proposals by the House and Senate, certain of the group's members "believe this alternative form of retention should be available for other asset classes." However, it said, other members "believe retention of risk by a third-party purchaser is not retention at all, because it allows the issuer to sell the risk which does not align incentives or result in prudent securitization practices." The group also remains split on whether "qualified" securitized mortgages underwritten to "prime" credit standards should get an exemption. Some members believe allowing a "qualified" mortgage exemption would ensure "incentives are aligned between originators and investors." Others said they are concerned that "while a 'qualified mortgage' would require some minimum in quality, it would not require an issuer to have ongoing 'skin in the game' with respect to the securitization." While the membership is split on the aforementioned two issues, it is unified in pushing for proposals that allow for "adequate representations and warranties and enforcement mechanisms" to be used as an alternative for risk retention.

The former regulator of Fannie Mae and Freddie Mac said nationalizing the troubled GSEs is a bad idea, declaring that all government insurance programs are slated to fail. Speaking at a National Mortgage News conference on distressed assets, James Lockhart said the "right answer" to the Fannie/Freddie conundrum is to privatize the two, but admitted accomplishing such a task is near impossible right now since the government controls nearly 100% of the residential market and 80% of the multifamily sector. Lockhart, who left the Federal Housing Finance Agency about a year ago, suggested breaking up the GSEs into two separate companies, but not on a good bank/bad bank model, but what he called a new company/old company model. He noted that Democrats in Congress were correct in not including the resolution of the GSEs in the financial services regulatory reform bill. Lockhart said it would have made negotiations "messier" and that it's smarter to wait for a "calmer day." The two have been in conservatorship since September 2008.

The Federal Deposit Insurance Corp. has once again pushed back the auction deadline on the $23 billion AmTrust servicing portfolio, National Mortgage News has learned. At press time, the agency had not returned a telephone call about the matter. Milestone Merchant Partners, Miami, is the agency's advisor on the sale, but an official at the firm said he could not comment at this time. Investment bankers that have reviewed the receivables attribute the delay, in part, to the portfolio's large size. The delinquency rate on the underlying loans is relatively low. Also, investment banking sources say the FDIC is in the middle of wrapping up a $1 billion sale of (mostly) delinquent AmTrust whole loans. The sale of AmTrust's servicing rights has been delayed twice already. The latest bid deadline was mid-June. Originally, the agency had hoped to wrap up bidding at the end of May. The Cleveland-based thrift failed late last year.

The Government National Mortgage Association late this week unveiled a new MBS program for Title 1 manufactured housing loans but to play servicers need a minimum net worth of $10 million. Also, mortgage bankers that issue MH MBS must re-apply if they want to participate in the new program. Only "eligible" MH loans will be considered which means the applicant must also own the underlying real estate. Ginnie has set a 30 basis point guarantee fee. The minimum pool balance is $1 million. Two years ago MH units accounted for 12% of the new housing market, but that number has fallen significantly since then. At press time GNMA did not have an updated number.