Compliance & Regulation

Residential mortgage companies cut 5,500 full-time workers in April despite rising home sales and low mortgage rates. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector fell to 247,900 positions in April from 253,400 in March. The poor showing came amid reports of hiring by servicers in their loan modification units. But although the servicing sides of many firms are hiring (or at least not laying people off), production jobs are being cut because of weak loan demand, which could get even weaker now that two federal homebuyer tax credits have expired. Friday's job report also revealed that employment in the construction industry and commercial banking fell in May. (There is a one-month lag in BLS' reporting of mortgage banker/broker sector employment.) Construction jobs fell by 35,000 in May, offsetting gains in the prior two months. Commercial banks reduced their payrolls by 500 workers. Overall, Friday's jobs report was disappointing to analysts. Most of the 431,000 increase in jobs reflected the hiring of temporary government census workers. Only 41,000 of the new hires involved private sector jobs. The nation's unemployment rate edged down to 9.7% in May from 9.9% in April. Meanwhile, stocks tumbled early in the morning and the yield on the 10-year Treasury fell to 3.26%, once again nearing its 52-week low of 3.1%.

A group of Hudson Valley Federal Credit Union borrowers filed a class action lawsuit against the lender, claiming it illegally collected thousands of dollars in mortgage recording taxes from them at closing, ratcheting up the stakes in the CU's own legal fight with New York over the same levy. The suit was filed in federal court, as opposed to state court, which just two weeks ago rejected HVFCU's challenge to the recording tax, an assessment of one-half percent, or 50 basis points, on every mortgage, amounting to thousands of dollars on each home loan. "Because of the pass-through nature of it, the person who bears the loss is the person who is paying the mortgage," said Mark Kindall, a lawyer with the Hartford, Conn., firm of Izard Nobel LLP. In its challenge in state court, the credit union asserted that the Federal Credit Union Act, which defines federally chartered (but not state chartered) credit unions as "instrumentalities of the federal government" exempts all federal credit unions from state taxes. In an odd way, the borrowers' lawsuit may end up aiding the credit union's own case, which asserts that a federal charter exempts Hudson Valley FCU from paying the tax. (In CU parlance, customers of a credit union are often referred to as members.) Two weeks ago, in the CU's case, a state court ruled that the tax is not assessed on the federal entity, but on the act of the transfer of property. Potential members of the class include not only the thousands of members of Hudson Valley FCU who paid the tax, but millions of New Yorkers who took out mortgages through a federally chartered credit union.

Fannie Mae and Freddie Mac may have a statutory duty to serve low-income and rural homebuyers, but their regulator does not want the two involved in financing mobile homes. The Federal Housing Finance Agency says most manufactured housing loans are essentially personal property notes and the GSEs have no experience in financing "chattel" loans. "Thus, FHFA proposes that chattel loans on manufactured homes not be considered toward the duty to serve the manufactured housing market as these loans are inconsistent with the enterprise conservatorship and would require substantial new efforts by the enterprises to ensure safe and sound operations and sustainable homeownership for families," FHFA says. However, the regulator is issuing a proposed rule that encourages Fannie and Freddie to finance manufactured housing loans secured by land. The GSEs can best serve low-income families by purchasing loans on "manufactured housing titled as real property," the regulator said. The proposed affordable housing rule is being issued for a 45-day comment period.

Fannie Mae and Freddie Mac are rolling out the new short sales program that servicers must use for distressed borrowers who do not qualify for a permanent loan modification. "Once all other home retention options have been exhausted, eligible borrowers must be considered" for a short sale under the government's Home Affordable Foreclosure Alternative program, Freddie says in a new bulletin to servicers. Fannie/Freddie servicers are expected to have the HAFA short sales and deed-in-lieu program up and running by Aug. 1. The GSEs will pay servicers a $2,200 incentive for every completed HAFA short sale, and $1,500 for every deed-in-lieu of foreclosure transaction. Borrowers who become former homeowners will receive $3,000 for relocation costs for a successful short sale or DIL transaction. Also, incentives are being offered to investors for releasing borrowers from subordinated liens. The HAFA program brings more standardization to existing short sales programs. Freddie completed 9,600 short sales in the first quarter, compared to 3,100 a year ago. Fannie processed 17,000 short sales, compared to 6,000 in the first quarter of 2009. All servicers participating in the government's Home Affordable Modification Program are required to implement the HAFA program.

The Federal Housing Finance Agency has released proposed requirements for Fannie Mae and Freddie Mac to provide liquidity to underserved housing markets. Under the proposal, each GSE would have to present a plan to serve such markets. FHFA will then rate their performance against the plans. The proposed rule, announced Tuesday morning, was required by a 2008 housing law. There will be a 45-day period for FHFA to collect public comments before finalizing the rule. Both have been wards of the government since the fall of 2008.

By mid-week issuers and rating agencies must comply with a Securities and Exchange Commission rule designed to encourage more unsolicited opinions on asset-backed securities. The regulator wants to remove the conflicts of interest in the ratings process that led to inflated ratings in the past and contributed to the financial crisis. Among the new requirements, when a firm is hired to rate an asset-backed security, it must notify rivals that did not get the job. The arranger of a security must give all raters - even those it has not tapped - detailed information on the underlying loans, something that previously only the agencies that got the assignment could see. And the agencies will have to rate at least 10% of all deals they inspect, whether or not they are paid to rate them. Government-sanctioned kibitzing could complicate the gradual recovery in the asset-backed market that began last year. "Issuers are not really crazy about getting unsolicited ratings that are going to be lower ones than they obtain," said Steve Kudenholdt, partner and co-chair of the capital markets practice at Sonnenschein Nath & Rosenthal LLP. For one thing, the new requirements may prolong the time it takes to bring deals to market. "It's definitely going to slow things up," said Michael Buttner, Wells Fargo & Co.'s head of residential mortgage-backed securities. "Until you've got all the rules laid out and have worked it through a few times, it's new and it's not going to be as smooth."

The Government National Mortgage Association says a recent change it made to its Ginnie II MBS program will help mortgage bankers with their warehouse lines of credit. "Lenders will be able to better utilize warehouse lending lines and reduce interest costs associated with carrying loans until they can be securitized and settled," said Ginnie Mae president Theodore Tozer. Beginning this fall, issuance for Ginnie II multiple issuer pools can occur daily, rather than once a month. Also, mortgage bankers can submit just one loan for securitization, eliminating the current three-loan minimum. Another wrinkle to the program will allow seller/servicers to submit "orphan loans" which are individual mortgagees that normally may not fit into a certain pool because the note rate differs significantly (at least 50 basis points) from other loans in the pool. In general, banks have been more willing to extend warehouse credit to nonbanks over the past six months, but only on Fannie Mae, Freddie Mac, and FHA/VA products.

It's no secret that the GSEs have been demanding billions of dollars in loan buybacks over the past year, but now Freddie Mac is warning that some of its seller/servicers may not meet their repurchase obligations. "Some of our seller/servicers failed to perform their repurchase obligations due to lack of financial capacity, while many of our larger seller/servicers have not fully performed their repurchase obligations," the GSE says in a public filing. As of March 31, Freddie had $4.8 billion in outstanding buyback requests pending. Roughly 34% of those requests were outstanding more than 90 days. The secondary market agency warned that its credit losses may increase if customers do not fulfill their buyback obligations. Freddie executives also are concerned that collection efforts could "negatively impact" their relationships with seller/servicers who have the financial capacity to perform buybacks but chafe at such requests for one reason or another. In the first quarter, seller/servicers reimbursed Freddie $1.3 billion for breaches of representations and warranties, compared to $789 million in the same period in 2009. Fannie Mae reported $1.8 billion of buybacks in the first quarter, compared to $1.1 billion a year ago. Fannie expects its buyback requests will remain high for the rest of this year.

Passage of a jobs bill in the next few weeks could provide the first $1 billion of seed money for the National Housing Trust Fund. Supporters estimate the trust fund could spark the construction of 10,000 affordable rental units while creating 15,000 new construction jobs. After a multi-year lobbying campaign led by the National Low-Income Housing Coalition, Congress passed legislation in 2008 to create the NHTF that would be funded by Fannie Mae and Freddie Mac. But low-income housing advocates lost that funding source when the GSEs were placed in conservatorships. Housing supporters are hopeful the Senate will pass the jobs bill (H.R. 4213) with the one-time funding for the start up of the trust fund. The House passed the bill May 28 by a 215-204 vote. "We are hopeful and it couldn't come a better time. States are eager to build affordable housing," said NLIHC vice president Linda Couch. The Senate is expected to begin consideration of the jobs bill when it returns from the Memorial Day recess.

The condition and performance of half the Federal Home Loan Bank system is "less than adequate," according to the nation's government-sponsored enterprise regulator. Federal Housing Finance Agency acting director Edward DeMarco, who cited continuing losses on investments in private-label mortgage-backed securities at six regional GSEs, told a congressional panel that he wants to see a gradual reduction in the FHLBs' investment portfolios. "FHFA is looking for the FHLBs to return to more traditional operations and activities with a focus on advances," DeMarco said. He stressed that the FHLBs have never experienced losses on making advances to their members. The GSE regulator did not mention mortgage purchase programs that several FHLBs engaged in, which caused financial problems at the Seattle and Chicago banks. Separately, FHFA issued a proposed rule to establish affordable housing goals for the mortgage purchase programs. The comment period ends in 45 days.