Compliance & Regulation

The regulatory reform bill that cleared the Senate is supposed to impose risk retention requirements on MBS issued by Fannie Mae and Freddie Mac, but some legislative experts say the language adopted may have missed the mark. S. 3127 passed by the Senate imposes a 5% risk retention requirement on issuers of MBS through a change in the securities laws, according to an analysis prepared by Anne Canfield & Associates. The Washington consulting firm points out that under current securities law the GSEs are exempt from registering their MBS with the Securities and Exchange Commission. The bill, drafted by Sen. Chris Dodd, D-Conn., does not override that exemption and therefore, does not subject Fannie and Freddie's MBS to SEC regulation. "At best this is very unclear," Canfield told National Mortgage News. "But we don't think the GSEs are covered because the language in the bill does not address their underlying exemption in current securities law." The Mortgage Bankers Association would like Congress to specifically exempt the GSEs from risk retention. "Fannie, Freddie and Ginnie are not exempt from risk retention in the Senate bill, though the regulators could exempt them," said an MBA spokesman.

The Senate is slated to begin debate on an emergency appropriations bill Monday afternoon that includes a provision to get the Rural Housing Service program up and running again. The measure would allow the RHS to increase its current 2% upfront premium to 3.5% and make the single-family program self-funding. It would free RHS from the appropriations process and from seeking annual renewal of its loan commitment authority. RHS ran out of loan commitment authority on May 17. Some lenders are still using the program but only because the money has been committed, though not used. RHS is a key program for rural lenders of all stripes but also megabanks like Chase Home Finance. The emergency appropriations bill (H.R. 4899) includes funding for the wars in Iraq and Afghanistan and natural disasters stateside. Congress wants to pass this bill before the Memorial Day recess. It represents the fastest legislative vehicle to fix the RHS program. The House has already passed a RHS reform bill, sponsored by Rep. Paul Kanjorski, D-Pa., that increases the upfront premium to 4%, which means House appropriators likely will not object to the inclusion of the RHS provision in H.R. 4899.

At the urging of their regulator, Fannie Mae and Freddie Mac are expanding their data collection on loans and appraisals using new uniform standards. "This initiative is a major step toward meeting industry requests for uniformity in appraisal and loan data," said Federal Housing Finance Agency director Edward DeMarco. "Improvements in data quality will benefit all mortgage market participants and strengthen the housing finance system." The new data standard will be phased in through a common platform and structured to use existing originator and appraiser technologies, FHFA said. Fannie and Freddie both issued statements in support of the new initiative. "We applaud FHFA on this important effort to improve appraisal and loan data quality," said Freddie chief executive Charles Haldeman. "The additional loan and appraisal data requirements, standard data definitions and a common framework for capturing these new data sets will support the mortgage industry's efforts to manage risk, reduce costs and respond more efficiently to market changes," he said.

Federal Housing Administration commissioner David Stevens urged mortgage bankers to "think a little less about your own wallets and more about integrity and responsibility" in their efforts to mold legislation to reform the nation's financial system. "Make your case, but make it for the right reason," he said at the Mortgage Bankers Association's National Secondary Market Conference in New York. After MBA president John Courson prodded members to deliver their message to lawmakers—"The issues before us will affect the very shape and form of lending in the future," he said—Stevens took to the podium to warn that advocating for the industry alone is the wrong message to take to their legislators on Capitol Hill. "Washington doesn't trust this industry at all," he told a crowd of about 1,500 at the Hilton New York. "It's not about protecting mortgage banking, it's about protecting the American dream. That's the only issue that has credence in Washington today." The FHA commissioner said that while there is plenty of blame to go around for the financial crisis, the "general consensus" in Washington is that housing finance "is the industry that brought the world to the brink of financial ruin." On a brighter note, Stevens also told the conference that most signs are pointing to a housing market turnaround. The sector is "slowly starting to come back," he said. "You can feel a growing confidence in the market, and you can sense more willingness to invest."

A Utah mortgage broker has been charged with altering applications for mortgage loans provided to two state credit unions, one of which went bust in 2008 in the face of big losses on its mortgage portfolio. Joshua Butcher, a 28-year-old broker for Envision Lending Group in Utah, allegedly altered loan applications he sent on to TransWest Credit Union and Salt Lake Credit Union, which was merged into Mountain America Credit Union as losses were growing on its RE portfolio. Butcher, without the knowledge of the borrowers who would have been ineligible for the loans otherwise, overstated incomes and assets and even misstated that the borrower intended to occupy the house, even when the homes were bought on speculation for resale, according to a federal grand jury indictment handed down Wednesday. The charges are the latest in a growing number of cases where the state's inflated real estate markets were used to secure credit unions and bank loans, then caused big losses once the market soured. Lawyers for Butcher did not return phone calls seeking comment.

Commercial real estate sales, prices and lending showed improvement in the first quarter but regulators expect bank losses on CRE loans will be elevated for at least another year. Deputy comptroller Bert Otto told a congressional panel that vacancy rates are still rising nationally and cash flows on CRE properties are expected to decline into 2011. "We expect CRE losses to remain elevated for an extended period, much as we saw in the early 1990s downturn," the national bank supervisor testified. Losses on CRE loans are the major driver of small bank failures. But Otto noted there has been some improvement in the market. A private index shows a stabilization of CRE prices as of February and property sales jumped 16% in the first quarter, compared to a year ago.

Mortgage industry officials continue to lobby for language in the regulatory reform bill that will ease the burden of the Home Valuation Code of Conduct regulation. According to Marc Savitt, president of the National Association of Independent Housing Professionals, an amendment will be introduced during conference talks that will allow any licensed originator to order an appraisal. Currently, HVCC bans mortgage brokers and retail loan officers from being involved in the appraisal process. Mr. Savitt said a HVCC amendment was introduced in the Senate this week but not voted on.

The Federal Housing Finance Agency said Thursday that Fannie Mae and Freddie Mac are preparing to field complaints from appraisers, consumers and others about violations of the Home Valuation Code of Conduct. If, for example, a lender pressures an appraiser to overvalue a home so a loan can get done, the appraiser will be able to report the lender to one of the GSEs, which may refer the case to regulators. Originally that job was going to belong to an "independent valuation protection institute" that the GSEs would seed with a combined $24 million. But since the March 2008 agreement with New York attorney general Andrew Cuomo that established the code, the government has seized Fannie and Freddie and sunk $145 billion of taxpayer money into them. It has become untenable for the GSEs to bankroll an independent institute. "I cannot, as conservator, justify the enterprises funding the institute," said Edward DeMarco, the acting director of the FHFA in a letter to Cuomo. In the next few weeks the GSEs will create a process for people to submit complaints online.

The Senate late Thursday passed a landmark financial regulatory reform bill that will increase regulation and oversight of the residential mortgage industry and overhaul the way Wall Street conducts business. The legislation, the most sweeping since the Great Depression, requires issuers of mortgage-backed securities to pool the safest "qualified" mortgages (as determined by regulators) to escape a 5% risk retention requirement. The bill, crafted by Sen. Chris Dodd, D-Conn., creates a new consumer protection agency with rulemaking and enforcement authority to stop abusive mortgage lending practices. However, the legislation, for now, punts on the issue of reforming Fannie Mae and Freddie Mac. "For the first time ever, we will have a Consumer Financial Protection Bureau to watch out for the average citizen in our country when they are abused by the financial marketplace that takes advantage of them on home mortgages and credit cards," Dodd said. The legislation directs federal regulators to establish minimum standards for verifying a borrower's ability to repay a loan and places certain restrictions on loan officer and mortgage broker compensation. The bill (S. 3217) also instructs the Securities and Exchange Commission to create a regulatory body that selects the credit rating agency for initial ratings on MBS. The Senate passed the Dodd bill by a 59-39 vote around 8:30 Thursday evening. The House of Representatives passed similar reform legislation in December but many differences remain between the two bills. House and Senate banking committee leaders will meet in conference to iron out final legislation. The talks are expected to take several weeks and will not be completed until the end of June.

Lenders are tightening underwriting standards on Veterans Administration-guaranteed mortgages even though the VA delinquency rate is lower than on prime loans. "VA has received anecdotal evidence and reports from industry partners that stricter requirements are being imposed on their VA loans," an agency official told members of the House Committee on Veterans Affairs. VA associate deputy secretary Thomas Pamperin said many lenders are using credit scores to qualify veterans, which is not required by the agency. Also, some lenders are considering a downpayment requirement. The VA program is designed to provide no-downpayment loans to veterans. "VA does not have the authority to prohibit lenders from imposing this extra layer of requirements, but additional lender requirements may make it more difficult for veterans to obtain homes," Pamperin testified. The latest Mortgage Bankers Association delinquency report shows that 5.29% of VA single-family mortgages are 90 days or more past due and in foreclosure, compared to 7.08% for prime mortgages. Meanwhile, VA loan production is on track to match fiscal year 2009 when lenders originated $68 billion in such loans. As of April 30 (the first seven months of FY 2010), lenders had originated $36 billion in VA-backed mortgages.