Compliance & Regulation

Stung by increasing credit losses on delinquent home mortgages, Fannie Mae lost $13.1 billion in the first quarter, prompting its regulator to ask the Treasury Department for $8.4 billion in cash to keep the GSE's net worth above zero. A new accounting rule that affects the consolidation onto its balance sheet of 'variable interest entities' added $3.3 billion to its net worth deficit. During the quarter Fannie paid $1.5 billion in dividends on senior preferred stock owned by Treasury. Unlike its cross-town rival Freddie Mac, Fannie saw worsening delinquencies. Its single-family seriously delinquent rate increased to 5.47% at March 31, from 5.38% at year-end. Its credit losses increased to $5.1 billion from $4.1 billion in 4Q. The government controlled mortgage giant noted that it bought $191 billion of loans during the period, $40 billion of which were delinquent loans that came out of its own (existing) securitizations. Fannie also grew its MBS issuance market share to 40.8% in the first quarter from 38.9% in the fourth. With the new request for financial assistance, Fannie Mae's total debt to taxpayers stands at $83.6 billion. Freddie has required roughly $64 billion in aid from the Treasury. Last week Freddie posted a $6.7 billion loss in the first quarter.

Senate Democrats have defeated efforts by Republicans to curb the power and independence of a new consumer protection agency by a 61-38 vote. The defeat of an amendment offered by Sen. Richard Shelby, R-Ala., paves the way for creation of the Consumer Financial Protection Bureau which will be funded by and housed at the Federal Reserve Board. The CFPB will be totally independent of the central bank and free of the congressional appropriations process. In defeat, Sen. Shelby claimed the measure ushered through the Senate by Sen. Chris Dodd, D-Conn., would create an out-of-control agency with no accountability to Congress. Shelby offered a substitute amendment to create a consumer protection division at the Federal Deposit Insurance Corp. that would have consumer oversight of large non-bank mortgage originators. The FDIC unit also would have authority over other financial providers that repeatedly violate consumer protection laws. "This will give the FDIC board authority to clamp down on the worst offenders of our consumer protection laws without needlessly subjecting law-abiding business to expensive regulation," Shelby said. If the Shelby amendment had passed, it would have been a step "backwards," Dodd argued, claiming the new division could not prevent abuses by finance companies, payday lenders, check cashers, credit card companies, debt collectors and car dealers involved in the finance business. "It is a stimulus package for unscrupulous lenders," Dodd added.

It appears there will be full Senate debate on placing a time limit on how long Fannie Mae and Freddie Mac can remain in conservatorship while placing a $400 billion limit on the government's financial support of the two GSEs. The amendment by Sen. John McCain, R-Ariz., gives Fannie and Freddie two years to become "viable" entities and emerge from conservatorship. Over the next three years, the government sponsored enterprises would operate under new restrictions, including a minimum 5% downpayment requirement and a $417,000 loan limit before they lose their government charter. Thursday evening, the manager of the "Wall Street Reform" bill, Sen. Christopher Dodd, D-Conn., said he would allow a vote on the McCain amendment some time after the Senate resumes consideration of the bill on Tuesday (May 11). "Let me say to my friend from Arizona, I have no intention of tabling anyone's amendment," Dodd said. Currently, the Treasury Department is providing unlimited backing for the GSEs. It hopes to unveil a plan next year concerning the future of the GSEs and the housing finance system in general. "We have not taken a position at this time" on the McCain amendment, a Treasury spokeswoman told NMN.

Rep. Maxine Waters (D-Calif.) is urging members of the Congressional Black Caucus to withhold their votes on the financial reform bill unless it contains a provision establishing an office of minority assistance within the new Consumer Finance Protection Agency. "If they expect us to vote for it, we've got to be in it, and I'm prepared to do whatever is necessary to make sure we are," Rep. Waters told a mortgage industry diversity conference. The senior-most woman in the House and the senior-most African American, Rep. Waters described situations where minorities are being excluded from participating in the real estate recovery. Minority contractors are not being hired in sufficient numbers to rehab foreclosed properties and minority realty brokers are being denied listings to sell them, she said at the Mortgage Lending Industry Strategic Markets and Diversity Conference at the Gaylord National Resort on the Maryland side of the Potomac River. "It's unfair, unjust and I'm going to make it right," she said. "I'm focused like a laser beam on this issue." The 10-term Congresswoman from South Central Los Angeles said every federal regulator should have a minority assistance office. "Whether it's the Treasury or the FDIC or the Fed, minorities are not there in the numbers they should be," she said. Rep. Waters, who chairs the House Subcommittee on Housing and Community Opportunity and is often described as the most powerful woman in politics today, also told the meeting that she is so "disappointed" with the inability of mortgage servicers to modify troubled borrowers' loans that she believes the entire servicing business is in need of reform.

The mortgage insurance subsidiary of American International Group earned $73 million in the first quarter -- its first quarterly profit in three years. AIG's United Guaranty Corp. affiliate reported improving levels of delinquencies and defaults. In the first quarter of 2009, UGC lost $483 million. Despite the good news on the MI unit, AIG's residential finance division, American General Finance, posted a 1Q operating loss of $132 million. In the same period a year earlier AGF lost $203 million. AIG said the improvement resulted from a decline in provisions for loan losses resulting from improved delinquency rates, lower interest expense due to lower average debt balances, and lower operating expenses. Meanwhile, AIG itself reported a profit of $809 million for the quarter, compared with a loss of $2.1 billion the prior year. The giant insurer's financial products unit, which piled up huge losses on credit default swaps during the financial crisis, had a $298 million operating loss -- an improvement over the $1.1 billion lost in 1Q09. AIG Financial Products also reduced the notional amount of its derivatives portfolio during the first quarter to $755.4 billion.

Beginning June 1, lenders originating mortgages being sold to Fannie Mae will have to pull a second credit report just before the loan closes. The new quality control requirement is designed to prevent a type of mortgage fraud called "shotgunning," but the guidelines could occasionally send lenders on wild goose chases. By pulling a second credit report, lenders can find out whether other creditors have recently requested information about the mortgage applicant-a red flag indicating someone might be trying to obtain several loans (from multiple, unwitting lenders) on the same property. Typically, a shotgun fraudster skips town with the proceeds of all his loans. Most of the lenders do not recoup a cent because their mortgages are subordinate to the first one recorded and the home will not fetch enough in a sale to cover the junior liens. Will Dillard, a vice president of operations at SettlementOne Credit Corp., a San Diego reseller of credit data, told American Banker that pulling a second credit report would help stop such frauds but that lenders might also waste time checking out false alarms. "If they see another inquiry, Fannie would like to see lenders query those creditors," Dillard said. "If you're at the funding table ready to fund and you see a new inquiry popping up, the question is, do you send your underwriter out...to track down Honda Motor if the borrower is also trying to buy a new car?"

The Senate voted 98-0 to change the assessment base of the Federal Deposit Insurance Corp. from deposits to assets, which could result in mega banks paying a greater share of the premiums for deposit insurance. The amendment sponsored by Senators Jon Tester, D-Mont., and Kay Hutchinson, R-Tex., bases FDIC assessments on a bank's total assets minus tangible capital. The Independent Community Bankers of America, which supports the Tester/Hutchinson amendment, estimates that 136 or 1.7% of the largest FDIC-insured institutions will pay more in assessments. Meanwhile, 7,794 banks and thrifts with less than $10 billion in assets will pay less-94% will save at least 20% on their premiums and 67% will save at least 30%. "The Tester/Hutchinson amendment recognizes the difference between Main Street and Wall Street by ensuring mega banks pay their fair share for the risk they pose to the FDIC Deposit Insurance Fund, and ultimately our entire financial system," said ICBA chairman Jim MacPhee. The FDIC assessment bill is now attached to the financial services regulatory reform bill, which is currently going through the amendment process on the Senate floor.

Republican senators Bob Corker (Tenn.) and Johnny Isakson (Ga.) have teamed up to offer an amendment that calls for establishing minimum mortgage underwriting standards as well a study on risk retention. The standards would include a 5% minimum down payment and prohibit warehouse lenders and wholesalers from funding mortgages that don't meet the minimum standards. The federal banking regulators, not the new Consumer Finance Protection Agency that is contained in the financial services regulatory reform bill drafted by Sen. Christopher Dodd, D-Conn., would set the minimum standards. The Dodd bill currently requires mortgage-backed securities issuers to retain 5% of the credit risk. The Corker-Isakson amendment would strike that language and replace it with a study on risk retention by the Federal Reserve Board. Meanwhile, the Senate voted 93-5 to approve a compromise by Senators Dodd and Richard Shelby (Ala.) to create a new mechanism for managing the failure of large financial institutions without government bailouts. The bi-partisan agreement on the "too big to fail" issue shows that the Senate is now moving toward passage of the 1,400-page reform bill.

Freddie Mac lost $6.7 billion in the first quarter, and after accounting changes tied to guarantees issued on off-balance sheet instruments, saw its net worth plunge by $14.9 billion. With its net worth now clearly in the red (by $10.5 billion) the government controlled mortgage giant is asking the Treasury Department for $10.6 billion in aid. The government's policy is to keep both Freddie Mac and Fannie Mae in a positive net worth position, a move designed to assure investors that the bonds they issue are safe investments. The large drop in Freddie's net worth was caused by an accounting change that forced the company to add $1.5 trillion of assets and liabilities to its consolidated balance sheet, which in turn caused its net worth to plunge. (Fannie Mae, which soon will release its 1Q results, is facing a similar problem.) Although Freddie's loss and decline in net worth was indeed bad news, there were some positives in its report. The GSE established credit reserves of $5.4 billion in 1Q, down from $7 billion in the prior quarter. It also reported lower delinquencies on its single-family loans: 4.13% at March 31, compared to 4.2% at the end of February. Freddie's chief financial officer Ross Kari said its 1Q results "were driven significantly" by the Financial Accounting Standards Board-promulgated changes. He added that the firm is seeing some signs of "modest stabilization" in housing. If Treasury grants Freddie's request for new capital, the government's investment in the GSE will increase to $62.3 billion.

Senate leaders late Tuesday cleared the way for Sen. Olympia Snowe, R-Maine, to offer an amendment allowing mortgage bankers to originate residential loans to small business owners with flexible payment schedules that reflect seasonal changes in cash flows. The Snowe language would amend the Consumer Financial Protection Agency section of the financial services regulatory reform bill, putting such mortgages in a category where they will not be considered abusive by the new agency. "The bill does not take into account that many entrepreneurs use home mortgage loans with customized payment terms," Sen. Snowe said. (Until the credit crisis, some self employed workers used payment option ARMs, or "NINA" loans to obtain housing credit but those loans have since fallen out of favor and are now viewed warily by consumer groups and many elected officials as well as regulators.) Once Senate leaders reach an agreement to start the voting process, the Snowe amendment is expected to be adopted. Meanwhile, Senate Banking Committee chairman Christopher Dodd, D-Conn., reached an agreement with Sen. Richard Shelby, R- Ala., on the issue of bailing out large financial firms. "I'm satisfied we have reached an agreement on 'too big to fail,'" said Sen. Dodd, but noted that other senators want to see the final language before signing off on it. Dodd believes the agreement on the TBTF amendment will result in the voting process moving forward.