Compliance & Regulation

The House and Senate passed another short-term extension bill Thursday evening that will allow for the continued issuance of new flood insurance policies, and unemployment benefits. President Obama immediately signed the bill (H.R. 4851) that extends the National Flood Insurance Program through May 31. The Federal Emergency Management Agency's authority to write new flood insurance policies, renew policies or increase coverage expired on March 28. Without flood coverage, lenders would not originate loans on homes located in designated flood zones. The NFIP reauthorization is retroactive, which means that any mortgage transactions completed during the three-week hiatus will be covered if the borrowers completed an application for flood insurance. (However, there must be proof they paid the insurance premium, including a copy of the check.) Flood insurance reauthorization had become ensnarled in a tax extension bill. Congressional tax writers hope to find ways to pay for the tax provisions until the end of this year, but so far have been unsuccessful. They have been "kicking this can down the road" with short-term extensions for the past six months, one lobbyist said.

The Office of Thrift Supervision was more focused on blocking the Federal Deposit Insurance Corp. from reining in Washington Mutual Bank than it was in regulating the thrift company itself, congressional investigators and two watchdogs said Thursday. A day before officials representing both agencies are scheduled to answer for the biggest failure in U.S. history, Sen. Carl Levin, released a scathing report on Wamu's 's oversight, asserting that the OTS viewed the Seattle company as a "constituent," repeatedly ignored its own examiners' findings about Wamu's risky strategy and responded to the FDIC's more aggressive tone by fighting a turf war. "Bank regulators are supposed to be our first line of defense against unsafe and unsound banking practices, but OTS didn't defend us," the Michigan Democrat told reporters ahead of Friday's hearing of the Permanent Subcommittee on Investigations. "Instead, although OTS repeatedly identified serious problems with Wamu, it failed to act based on the problems that it itself saw. These agencies, in particular the OTS, are supposed to be like a fire inspector to protect us ... but instead stood and watched idly while the incendiary threat grew higher and higher." Ahead of the hearing, Levin released a raft of documents, including internal FDIC and OTS memos that documented their arguments during Wamu's final days. Earlier this week, Levin also released internal Wamu documents detailing the company's risky lending practices and held a contentious hearing with its former CEO Kerry Killinger.

The Securities and Exchange Commission on Friday accused Goldman Sachs & Co., of civil fraud, charging that the firm created a synthetic CDO -- with the help of a hedge fund that was shorting the same bond -- and then marketed the RMBS to investors who eventually lost an alleged $1 billion on the deal. The suit, however, has just two defendants: Goldman and company vice president, Fabrice Tourre, 31, who the SEC says devised the bond known as ABACUS 2007-AC1 which came to market in 2007. At press time the hedge fund involved in the alleged scheme -- Paulson & Co. -- said it would not comment. Goldman Sachs denied the charges, saying it would "vigorously" defend itself. In a statement Robert Khuzami, director of the SEC's enforcement division, called the CDO -- which was backed by subprime loans -- "new and complex but the deception and conflicts are old and simple: Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party." Since the collapse of financial markets in 2008, Paulson & Co. has made headlines worldwide for earning billions by shorting the subprime market, in particular the ABX Index, which represents the value of outstanding subprime MBS. During the height of the subprime boom, Goldman -- unlike many other Street firms -- did not own any large B&C lenders, nor was it a top ranked issuer of subprime MBS. The agency is seeking to recoup profits reaped on the deal.

Residential real estate activity increased in most Federal Reserve Bank districts in March despite sluggish sales of higher end homes, according to a periodic Federal Reserve report. "Contacts in Philadelphia, Cleveland and Kansas City expressed concern about whether sales would continue to grow after the expiration of the first-time home buyer tax credit," the Fed's Beige Book says. Most district banks noted the house prices were stable and construction activity increased slightly in New York, Atlanta, St. Louis, Minneapolis and Dallas. As usual, the Beige Book notes that commercial real estate activity remains "very weak" in most districts.

Rep. Paul Kanjorski, D-Pa., has introduced a bill to make the Rural Housing Service single-family program self-funding by imposing higher loan guarantees fees. The bill (H.R. 5017) would increase the upfront guarantee fee to 3.5% and allow the Agricultural Department to assess a 0.5% annual fee on the loan balance. "This change will cost taxpayers nothing and ensure families in rural areas can continue to access affordable mortgages," Rep. Kanjorski said. The second-ranking Democratic on the House Financial Services Committee noted that more and more rural families are turning to the RHS program in these difficult economic times and the RHS program is running out of loan commitment authority. RHS has $13.1 in funding authority for fiscal year 2010, which ends Sept. 30, and less than $3 billion is left. "Rather than relying on ad hoc federal funding, my bill would transform the (RHS) program and allow it to pay for itself," the Pennsylvania congressman said. House Financial Services Committee chairman Barney Frank, D-Mass., said the committee would act on the bill soon.

Lenders can use worksheets with the new good-faith estimate to provide information to mortgage applicants that is not disclosed in the GFE, according to the Department of Housing and Urban Development. "A loan officer may use a worksheet to provide the consumer with additional information about his or her loan transaction, such as the amount of cash needed at closing, seller credits and other non-loan transaction fees that would be helpful to the consumer," HUD says in an update of its "Frequently Asked Questions" on the Real Estate Settlement Procedures Act rule that went into effect Jan. 1. HUD warns, however, that the worksheet should not look like the GFE and a loan originator should "never" use a worksheet in lieu of a GFE. The new RESPA rule makes it very difficult for lenders to change their origination fee once the GFE is given to a mortgage applicant. HUD officials were suspicious of worksheets at first because the estimates of lender fees and settlement costs would not be enforceable under the RESPA rule. But now "HUD is acknowledging these documents have their place," said RESPA attorney Phillip Schulman, a partner at K&L Gates.

The Department of Housing and Urban Development has issued its long-awaited final rule that eliminates the Federal Housing Administration's approval process for mortgage brokers starting Jan. 1, 2011. The final rule increases the net worth requirement for FHA-approved lenders and requires those lenders to be fully accountable for the loans they purchase from brokers. "Mortgage brokers already approved by FHA will be authorized to continue to originate FHA-insured loans through the end of the calendar year," HUD said. Brokers appear to be divided over these changes which essentially mirror the way Fannie Mae and Freddie Mac require their lenders to underwrite and approve broker-originated loans. Some brokers are preparing to qualify as FHA-approved "small business" lenders, according to National Association of Mortgage Brokers executive vice president Roy DeLoach. The final rule creates this new category of FHA-approved lenders, which requires a minimum net worth requirement of $500,000. The final rule raises the net worth requirement from $250,000 to $1 million for other FHA-direct endorsement lenders starting a full year after the final rule goes into effect.

Residential servicers working on Home Affordable Modification Program transactions approved permanent loan modifications for 60,600 struggling homeowners in March, bringing the total number of borrowers helped by the government program to 230,800. Another 1.01 million borrowers are in trials where their monthly payments are reduced to 31% of income on their first mortgage, according to monthly data released by the Treasury Department and the Department of Housing and Urban Development. The pace of permanent modifications under HAMP has averaged 50,000 a month over the past several months. However, the number of borrowers in the three-month payment trials rose 20% in March, up from 835,200 in February. Observers have been expecting the number of permanent modifications and borrowers in trial modification to level off.

Executives from the nation's four largest residential servicers told Congress on Tuesday that their firms will accept "proportional" modifications on second liens but only when a first mortgage is modified and the principal reduced in a similar fashion. The four mega-servicers signing on to the government's second lien modification program (2MP) include Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. Together, these four firms control 60% of the residential servicing market, according to figures compiled by National Mortgage News. The 2MP program will become operational this fall. In testimony before the House Financial Services Committee, Wells Fargo Home Mortgage co-president Michael Heid agreed that his company will make proportional modifications, "especially under the 2MP program." He noted that WFHM last year completed 50,000 principal forgiveness modifications on first liens but "did not condition that based upon on what the second-lien holder did." The 2MP guidelines do not specifically require principal reduction but is part of the program's internal "logic," according to B of A Home Loans president Barbara Desoer. "Our recommendation is to further advance 2MP from principal forbearance on a shared percentage basis across the first and the second-to principal forgiveness," she testified. Besides being the four largest servicers in the nation, the banks also hold an estimated in $425 billion of second liens on their books. Committee chairman Barney Frank, D-Mass., had accused the banks of holding up modifications of first mortgages by refusing to modify their seconds. But on Tuesday Frank seemed pleased by the testimony. He noted that calling a hearing can produce results.

The Treasury Department and the Department of Housing and Urban Development will be holding public hearings this summer and fall to solicit advice from all stakeholders on the role the federal government should continue to play in the housing finance system and the future of Fannie Mae and Freddie Mac. "The public's input will be invaluable as we think through these difficult and complex issues," HUD Secretary Shaun Donovan said. In preparation of the hearings, Treasury is soliciting written comments on seven questions regarding the future structure of the housing finance system, how it fits within broader housing policy goals, and how system changes will contribute to sound underwriting standards and prevent abusive and deceptive lending practices. The Obama administration also is seeking comment on how to transition "from where we are today to a stronger housing finance system," Donovan told the House Finance Services Committee. Committee Republicans claim the questions and hearings just show the administration has no plan to deal with Fannie and Freddie and the mounting taxpayer costs of their conservatorships. Republicans lawmakers have proposed a bill that would close down the two government-sponsored enterprises. "This housing recovery remains fragile," the secretary warned. "Any hasty action to quickly change the composition of the GSEs or eliminate them, I have no doubt, would drive down this housing market and cause taxpayer losses to increase."