Compliance & Regulation

Returning to his Realtor roots, Federal Housing Administration commissioner David Stevens called on the nation's largest trade group of real estate professionals to storm Capitol Hill in support of legislation to reform the government's housing insurance agency. "The FHA is at risk," Stevens told NAR's midyear legislative meeting in Washington. The FHA chief, who came to the agency from Long & Foster Realtors, one of the largest independent real estate companies in the nation, said the government cannot continue to prop up the housing market "unless we do something to shore up" FHA's capital reserves. Currently, H.R. 5072, which would allow the FHA to more closely mirror how private sector mortgage insurers price their products and hold lenders accountable for the loans they originate, has been cleared by the House Financial Services Committee but has not yet been scheduled for floor action. Commissioner Stevens called it a "critical bill" because otherwise FHA cannot continue to be the cornerstone to the housing market it has been for the past 30 years. If the legislative changes Stevens wants are enacted, the estimated value to the FHA insurance fund would be some $330 million a month. He said the fixes would help the agency replenish its capital reserves even faster than if this authority was provided through the annual Congressional approval process.

The Federal Deposit Insurance Corp. on Tuesday revamped its securitization proposal, mandating that depositories hold a 5% risk retention piece, but exempting loans sold to the GSEs and into bonds guaranteed by the Government National Mortgage Association. The initial proposal issued in November required banks to season single-family loans for 12 months before securitization. As a result of industry comments, FDIC dropped the seasoning requirement and is now proposing that banks issuing residential MBS maintain a 5% reserve fund for one year to cover early defaults and breaches of representations and warranties. The new proposal, which will be published for a 45-day comment period, requires bank issuers to retain 5% of each MBS tranche. The FDIC proposal is designed to update the agency's policies on the treatment of commercial and residential MBS when the issuing bank fails. It is also designed to address problems that arose in the subprime market, placing additional requirements on residential MBS issuers, including disclosures by the servicing bank if they own the second liens on the loans being serviced. "We want the securitization to come back the right way, not the wrong way," said FDIC chairman Sheila Bair. Agency officials noted that their measure is similar to a Securities and Exchange Commission proposal that also imposes 5% risk retention on bank and nonbank MBS issuers. Chairman Bair said the SEC proposal, when finalized, will become the "base" for banks. The FDIC board of directors approved the securitization proposal for public comment by a 3-2 vote. Comptroller of the Currency John Dugan and the Office of Thrift Supervision acting director John Bowman voted against the proposal.

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.