Compliance & Regulation

While the odds of passage remain strong, the process behind the regulatory reform legislation is increasingly chaotic. Senate Banking Committee Chairman Chris Dodd (D-Conn.) took to the floor late Thursday to beg his colleagues on both sides of the aisle to stop adding more amendments, warning the process is in danger of spinning out of control. In a rare spectacle, Dodd rebuffed another senior retiring Democrat, Sen. Byron Dorgan of North Dakota, and argued his plea to debate yet another amendment was threatening the legislation. "I'll be very candid with my friend from North Dakota, it complicates my job," Dodd said. "They all have amendments they want to bring up. ... We run the risk of losing this bill." This past week, several amendments directly affecting the residential mortgage industry were introduced, including language on risk retention, underwriting standards, yield spread premiums, and reverse mortgages.

If Congress fails to appropriate $250 million for the Federal Housing Administration reverse mortgage program, seniors could see the principal amount of a new loan reduced by 30%. "Without the budget request, we would be forced to reduce the amount of funds that would be available to seniors by more than 30%, which is, on average, a $23,000 to $27,000 impact," said FHA commissioner David Stevens. Last year, the Department of Housing and Urban Development requested $798 million in funding for the FHA home equity conversion mortgage program. When Congress rejected that request, HUD reduced the HECM principal limit by 10% for fiscal year 2010, which started October 1. During the first-half of FY 2010, FHA endorsed 45,200 HECMs, down nearly 22% from the same six-month period in FY 2009. The National Reverse Mortgage Lenders Association estimates that a significant portion of that reduction in loan volume is due to seniors coming up short at the closing table: the principal amount of the HECM is not enough to pay off the senior's existing mortgage. NRMLA president Peter Bell noted that funding is very tight with the appropriation process challenging this year. "We want to minimize any further principal limit reductions," he said. "Because every time we lower principal limits, we shut off access to the program for some seniors."

The Federal Housing Administration expects the capital ratio of its reserve fund will be higher at yearend than it is today thanks to improving claim rates. FHA commissioner David Stevens told a Senate appropriations subcommittee Thursday morning that the federal mortgage insurance fund will end fiscal 2010 "where we are or higher." According to outside auditors, the MIF had a capital ratio of 0.53% as of Sept. 30, 2009. But the agency has not provided a public update on the MIF cash position in seven months. Stevens told the panel the fund's capital position is in a "stronger position" today than it was last fall but is still far below its 2% statutory minimum capital ratio. Stevens stressed that early default and claim rates on FHA single-family loans have declined 15% since December, which is a "strong indicator that loan quality is improving." However, he noted that actual foreclosures are increasing. He expects 125,000 foreclosures with a 50% loss on each sale. Last year, FHA paid claims on 76,300 foreclosures.

The Senate Thursday evening approved by unanimous consent an amendment that will exempt "qualified mortgages" from the 5% risk retention provisions in the Wall Street reform bill. As approved, the language will ensure the 5% risk retention provision does not obstruct the securitization of the safest mortgages: loans that generally have 20% down payments or carry mortgage insurance. The amendment, sponsored by Senators Mary Landrieu, D-La., Johnny Isakson, R-Ga., and Kay Hagan, D-N.C., instructs federal regulators to exempt low risk, fully documented loans from risk retention. "We commend the Senate for the passage of the Landrieu/Hagan/Isakson amendment that exempts soundly underwritten, stable, consumer friendly mortgages from the risk retention requirements," said Glen Corso, managing director of the Community Mortgage Banking Project. Sen. Isakson supported the qualified mortgage exemption after his effort to strike the risk retention provision from the bill failed. "Risk retention is not the cure-all for good lending-underwriting is," the Georgia lawmaker said. Sen. Landrieu noted the amendment will ensure that applicants with good credit who finance their home the "old fashioned way" will not face higher interest rates due to risk retention. At the same time, the 5% risk retention provision will "eliminate the risk taking we saw in the home mortgage market between 2004 and 2007," Landrieu said.

A new report issued by the National Credit Union Administration on last year's failure of Eastern Financial Florida Credit Union of Florida found that the one-time high-flying CU was brought down by risky investments in derivatives known as collateralized debt obligations, or CDOs, as well as loan losses and other concerns. "Eastern Financial suffered substantial losses in the CDO investments during 2007 and 2008 that, coupled with increasing loan losses and other contributing operating factors, quickly eroded the credit union's net worth and led to its insolvency," said the report, conducted by NCUA's Office of Inspector General. At one time, EFFCU boasted $2.4 billion in assets. To date, its failure is the largest in CU history, according to The Credit Union Journal. The nonprofit was chartered in 1937 to serve employees of Eastern Airlines. Eventually it was acquired in a supervisory merger by Space Coast Credit Union. NCUA says as Eastern's profitability lagged its asset growth, management and the board approved a leverage strategy allowing it to invest in risky investments-specifically CDOs.

Indicating growing investor interest in commercial deals, bidders rushed to a U.S. Department of Housing and Urban Development auction of $306 million in non-performing multifamily and healthcare HUD loans that generated proceeds equal to almost half their unpaid balance, according to loan sale advisor KDX Ventures. KDX said 67 bidders submitted over 200 individual and pool bids for the 26 assets offered for sale in April. Executives said the 12 winning bids submitted on individual assets generated proceeds of over 48% of unpaid principal balance demonstrating "the pent-up demand and liquidity for commercial real estate assets." According to DebtX CEO Kingsley Greenland, even though over the past two years, investors have amassed a tremendous amount of capital to invest in commercial real estate loans, "there has been only a small amount of product available for sale." KDX is a joint venture between boutique investment banking firm KEMA Advisors, Hillsborough, NC, and international online marketplace, DebtX, Boston.

Ginnie Mae guaranteed more than $32.6 billion in mortgage-backed securities in April. Ginnie Mae II single-family pools totaled more than $18.9 billion and Ginnie Mae I single-family pools were $12.6 billion. Ginnie Mae's multifamily MBS issuance was over $1 billion, marking the second time during fiscal year 2010 that multifamily issuance crossed the $1 billion threshold. March numbers for 90-plus day delinquencies released with the April issuance figures showed late payments of this type dropped to 1.85% from 2.02% in February.

The Senate Wednesday morning approved an amendment that sets minimum underwriting standards on single-family loans with a "safe harbor" that essentially limits the points and fees lenders can charge to 3% of the loan amount. The National Association of Mortgage Brokers said the provision would "shut down" the broker channel due to the 3% cap on points and fees. "This amendment will take mortgage brokers completely out of the competitive landscape," said NAMB's top lobbyist Roy DeLoach. The amendment sponsored by Democratic Senators Jeff Merkley (Ore.) and Amy Klobuchar (Minn.) requires lenders to verify a borrower's income and ability to repay the mortgage. As part of an anti-steering provision to prevent borrowers from being forced into higher cost (and riskier) loans, the amendment has a safe harbor provision allowing lenders and brokers to know when they are compliant. Lenders will know they are operating on "sound ground," when their fees do not exceed 3%, said Sen. Merkley. The Senate voted 63-36 to approve the Merkley/Klobuchar amendment, which was drafted to counter an amendment by Sen. Bob Corker, R-Tenn. The Corker amendment would have set minimum underwriting standards including a 5% downpayment requirement on most loans, including FHA-backed mortgages. The Corker amendment also would have stripped the 5% risk retention requirement from the Wall Street Reform bill. Corker's amendment was defeated in a 57-42 vote.

The Senate voted 96 to 0 on Tuesday to compel the Federal Reserve Board to reveal recipients of its emergency lending programs during the financial crisis, but rejected a more sweeping alternative that would have audited all central bank actions including monetary policy. The compromise amendment from Sen. Bernie Sanders (I-Vt.), on emergency lending was adopted into the financial regulatory reform legislation that is still being debated. The amendment was significantly narrowed in scope - a previous Sanders amendment would have audited all Fed actions and could have extended into monetary policy decision-making activities - amid concerns from Senate Banking Committee Chairman Chris Dodd and Fed Chairman Ben Bernanke that it would influence monetary policy making. "Last week a number of senators, Democrats and Republicans, indicated to me that they were uncomfortable with my original amendment, which they believed would have allowed Congress to be involved in the day-to-day monetary operations of the Fed," Sanders said on the Senate floor Tuesday. "That was never my intention and I still do not believe that the original amendment would have done that... Sen. Dodd indicated to me that if we could clarify this issue, he would not only be supportive of this amendment but he would co-sponsor it. That's exactly what he did and I very much appreciate his support."

The National Credit Union Administration, as liquidating agent for the failed Heritage West Federal Credit Union, has filed suit against several member/borrowers of the defunct Salt Lake City CU, claiming they defaulted on millions of dollars in speculative real estate loans only to buy the properties back at steep discounts in foreclosure sales. The suits, removed to a federal court, are the latest in a variety of legal actions surrounding a troubled Salt Lake City residential development called Castle Stone Homes that was tied closely to the one-time $330 million credit union. Dozens of the project's borrowers, who were promised high returns, obtained loans through the credit union, which was acquired by Virginia's Chartway Federal Credit Union in a December supervisory merger engineered by NCUA. The case is reminiscent of those involving two big credit union failures: Norlarco Credit Union, and Huron River Area Credit Union, that financed speculative real estate projects in Florida's Gulf Coast. In the Salt Lake City case, the members claim that HeritageWest engaged in a variety of schemes to make loans readily available for the residential development. According to various courts documents, between 2005 and 2007 Castle Stone solicited individual investors with high credit scores to participate in their residential development designed to appeal to first-time investors that would provide big profits. After one of the initial lenders for the project, America First CU backed out, HeritageWest agreed to provide capital for the investors. Lawyers for Castle Stone did not return phone calls. NCUA declined to comment, saying it does not discuss cases in litigation.