Compliance & Regulation

For failed-bank bidders, the end of the sweetheart deal may be at hand. During the financial crisis, the Federal Deposit Insurance Corp. has routinely guaranteed 80% of the potential losses on assets at scores of failed banks, a bargain for those trying to enter or expand their reach in the banking market. But in one of its most recent deals-TD Bank's purchase of three Florida banks on April 16-the FDIC agreed to cover only half the losses, a significantly less generous arrangement. Though an 80% guarantee is likely to remain the norm in the near term, the FDIC is expected to do more deals like the one with TD Bank. "We would expect that as the market continues to improve the terms of the loss-share transactions will change and that the amount of risk an acquirer will be willing to assume will increase," said James Wigand, deputy director in the FDIC's division of resolutions and receiverships.

As anticipated, Senate Republicans stood together and blocked the Senate from starting debate on a game changing financial services reform bill. The Democrats needed 60 votes to bring the bill-crafted by Senate Banking Committee chairman Christopher Dodd-to the floor to start the amendment process. But early Monday evening the final vote fell short, 57-41. One Democrat, Sen. Ben Nelson of Nebraska, voted against the bill. Nelson was concerned that the treatment of derivatives in the Dodd bill would force Nebraska-based Berkshire Hathaway to post additional collateral against its $63 billion derivative portfolio. The vote is a setback for Democrats who were betting adverse publicity about Goldman Sachs and their role in the mortgage crisis would compel some Republicans to vote for a motion to proceed with the bill and start debate. Democratic leaders plan to have more votes this week, showing that its party wants to reform the way Wall Street works and protect consumers. "We will not tolerate efforts to slow-walk this process or water down this reform because it is too important to middle-class families in Nevada and across American," said Senate Majority Leader Harry, D-Nev. Meanwhile Sens. Dodd and Richard Shelby, R-Ala., are expected to continue working on a compromise. After the vote, Sen. Sherrod Brown, D-Ohio, said Dodd has been involved in negotiations with Republicans for months. The Ohio Democrat said the GOP initially intended to stall the bill for months. They want "to delay and kill the bill," Brown said.

As the Federal Reserve begins looking for ways to reduce its $1.1 trillion of agency MBS holdings, a group of private sector policy analysts are advancing a proposal that would finance the transfer of agency MBS back to the GSEs. The move, the Shadow Financial Regulatory Committee argues, would allow Fannie Mae and Freddie Mac to manage and liquidate the assets. "It would place housing debt on the books of Fannie and Freddie where it belongs and remove the Fed from financing U.S. housing policy," according to the group which laid out its ideas at a meeting sponsored by the American Enterprise Institute. Under the proposal, the Treasury Department would issue Treasury debt to Fannie and Freddie and the GSEs would swap the debt for the MBS. As MBS are sold or the mortgages run off, the GSEs would pay Treasury back. Financial consultant Bert Ely said Fannie and Freddie might do a better job of managing the MBS than the Fed-if the GSEs do not overspend on hedging interest rates and prepayment risk. The Treasury note should be structured as a pass-through, he said, "so they don't feel compelled to go out and waste money on Wall Street on hedging." Fed staff estimates the agency MBS portfolio will have a run-off rate of $200 billion a year, according to the Shadow Regulators. Credit Suisse mortgage analysts view the annual run-off rate as too high. They estimate the Fed experienced close to $50 billion in runoff in 2009 mostly due to prepayments. "This year we estimate $100 billion in run-off," said Mahesh Swaminathan, a mortgage strategist at Credit Suisse. During 2009, the Fed was buying agency MBS on a weekly basis, eventually accumulating $1.1 trillion in MBS. The Fed stopped its buying spree in March.

The Goldman Sachs official at the center of an SEC civil fraud case against the company regarding a subprime CDO declared his innocence to a Senate subcommittee on Tuesday. The Goldman executive, Fabrice Tourre, was accused-along with Goldman-of selling a subprime CDO to investors in early 2007 without telling those investors that one of the firms helping pick the collateral was also shorting parts of the bond. Tourre told the Senate Permanent Committee on Investigations that all charges against him are false and that he will defend himself in court. He said the bond in question, which caused an estimated $1 billion in losses, "was not designed to fail."

Mortgage industry and consumer groups are urging members of the House Financial Services Committee to vote against an amendment that would raise the minimum downpayment on Federal Housing Administration loans to 5%, from the current 3.5%. "Increasing FHA's downpayment could disenfranchise more than 300,000 responsible homeowners," eight groups say in a letter to the committee, warning such a hike could derail the fragile recovery in housing. Rep. Scott Garrett, R-N.J., claims FHA is making too many risky loans and the downpayment increase is needed to protect taxpayers. The Financial Services Committee is expected to vote this week on Garrett's 5% downpayment amendment as it marks up an FHA reform bill. The bill (H.R. 5072) includes several proposals to adjust FHA annual and upfront mortgage insurance premiums to replenish the agency's mortgage insurance fund. The Garrett amendment would "do little to strengthen FHA's capital reserve ratio," the eight believe. The organizations that put their name on the letter include the Mortgage Bankers of America, National Association of Realtors, National Association of Home Builders, Center for Responsible Lending, Consumer Federation of America, National Fair Housing Alliance, National Consumer Law Center and National Council of La Raza.

The Federal Bureau of Investigation is currently juggling 3,000 open mortgage fraud cases, but is facing challenges managing its resources. Speakers at an industry trade show on mortgage fraud told attendees that rather than spend more money to prosecute fraud, government agencies must utilize their available resources to be as smart and as effective as possible. Ninety-three U.S. attorneys across the nation are working to determine enforcement efforts to fit the needs of individual cases in local communities, said John D. Arterberry, executive deputy and fraud chief of the Justice Department's criminal division. "Each U.S. attorney has the opportunity to tailor his or her enforcement," he said. "The needs in the Northern District of Illinois are going to be different than Fargo, N.D., compared to what is happening in Phoenix or Washington, D.C.," said Arterberry. Speaking at the same show, which was put together by the Mortgage Bankers Association, FHA officials said they are spending an increasing amount of their time focusing on risk while carefully reviewing early payment defaults for signs of fraud. Vicki Bott, deputy assistant secretary for single-family housing at FHA, said the agency is stepping up enforcement through its Mortgagee Review Board. "We are not afraid to take action on lenders who are doing fraudulent activity," she said. "We are looking at how principles of lenders jump around. We are really beefing up our process around loan-level review. We are bringing delinquencies into our cycle of reviewing."

FHA single-family originations stabilized in March at the $22.7 billion level with the "seriously delinquent" ratio falling below 9% for the first time since November. The Federal Housing Administration reported that lenders originated $22.7 billion of FHA-insured loans in March, up slightly from the $22.3 billion funded in February. FHA monthly originations averaged $23.7 billion in the first quarter, compared to $28.8 billion in the fourth quarter. The government-backed product accounts for about 25% of all new fundings nationwide. Meanwhile, FHA reported that 8.8% of its insured single-family loans are 90 days or more past due, down from 9.17% in February and 9.4% in January. The drop in serious delinquencies may be signaling that FHA's $807 billion single-family portfolio has turned the corner, allowing its insurance fund to rebuild its depleted capital reserves. The positive news also might give Democratic members of the House Financial Services Committee more ammunition to shoot down GOP amendments to tighten FHA underwriting, including a hike in downpayments to 5% from the current 3.5% requirement. The committee is expected to vote on the amendments and approve a FHA reform bill late Tuesday afternoon.

Top executives at two credit rating agencies defended themselves Friday against charges that, to retain market share, they knowingly issued inflated ratings on mortgage-backed securities before the financial crisis and put off making needed changes in their standards. Officials from Moody's Investors Service and Standard & Poor's tried to rebut a congressional report regarding their actions, arguing that they had been public about flaws in the mortgage market and had made changes to better adjust to risk. "Moody's did see the escalating housing prices and the loosening of standards in subprime lending practices, we published on these observations, and we incorporated our more unfavorable views into the way we assigned ratings," said Raymond McDaniel, chairman and CEO of Moody's, in a hearing by the Senate Permanent Subcommittee on Investigations. But former employees of S&P and Moody's painted a much different picture, telling lawmakers that executives pressured analysts to maintain market share. They were discouraged, they said, from raising questions about the credit quality of some loans backed by mortgages. Eric Kolchinsky, a former director of Moody's derivatives group, testified that in October 2007, days after the firm downgraded $33 billion in subprime bonds, he was reprimanded by e-mail because quarterly market share fell to 94%, from 98%.

Federal Deposit Insurance Corp. chairman Sheila Bair said the agency has reduced its projection of the number of bank failures this year. In a cable news interview Friday, Bair said that though closures are still expected to exceed last year's total of 140, the pace is slowing. "We do think things are improving," she said. "We think it will be more than 140" this year "but less than what we were projecting, for instance, three months ago." Bair reiterated a projection that failures would peak "toward the end of this year." She added that it will continue to be predominantly smaller banks that are closed and said some institutions that had been nearing insolvency-and were placed on the agency's "problem" list-have since recovered. "Some of the banks that we thought were going to fail have actually raised capital, and they've come off of our list," she said.

The Federal Reserve Board will hold four public hearings this summer to see if its Home Mortgage Disclosure Act regulations need to be updated. The hearings will start July 15 in Atlanta. The other hearings will be held Aug. 5 in San Francisco, Sept. 16 in Chicago and Sept. 24 in Washington. Most mortgage lenders are required to file HMDA reports that include information on one-to-four family loans they originate or purchase. About 8,400 lenders file annual HMDA reports that include information on approvals and rejections of mortgage applicants and their race, gender and income. Banking regulators use the information to detect discriminatory lending practices. The last major HMDA revisions came in 2002 with the government requiring mortgage bankers to disclose pricing data on subprime loans for the first time. One of the objectives of the hearing is to evaluate whether the pricing data "helped provide useful and accurate information about the mortgage market," the Fed said.