Compliance & Regulation

Senate Banking Committee chairman Christopher Dodd on Wednesday defended his massive regulatory overhaul bill, saying the GOP is involved in a "Wall Street lie" by claiming his legislation would perpetuate bank bailouts. Speaking on the floor of the Senate, chairman Dodd said his bill will end bailouts and set up a mechanism to wind down large failing institutions, while ensuring that taxpayers are not on the hook for the losses. However, Sen. Dodd said political strategists and bank lobbyists are spreading "false talking points" to kill the reform bill. "And that's why I've been so dismayed to hear members of this body repeat the utter falsehood-concocted by special interests whose jobs and pensions are plenty secure, thank you very much-that this bill will lead to more bailouts," he said. Democratic leaders are planning to bring Dodd's bill to the Senate for debate as early as next week. The chairman stressed that he has worked with Republican committee members in crafting the bill. "My friends on the other side of the aisle may not like every line in this bill. But, at the very least, let's not pretend that the bipartisan work that produced this legislation didn't happen," Sen. Dodd said.

The time has come for those who caused the housing market meltdown to step up to the plate in the effort to keep troubled owners in their homes by writing down underwater mortgages, Department of Housing and Urban Development Secretary Shaun Donovan told a somber group of mortgage bankers in Washington. While not every owner can be saved from foreclosure, he told the Mortgage Bankers Association's annual National Policy Conference, principal write-downs can be effective for a "targeted set of borrowers." Noting that Bank of America has already said it will expand the use of write-downs, and that other major lenders are expected to do the same, Donovan predicted that the trend will accelerate as a growing number of lenders and investors "come to the conclusion that it is in their interest to write down the value of underwater mortgages rather than incur the substantial cost of foreclosure." Donovan said that government should not and cannot be expected to bail out the "relatively small base" of borrowers who qualify for a principal write-down. Rather, he added, the burden belongs on lenders and investors, which "is where it should be. There are limits to what the public sector can do or should do," he said. "Taxpayers have already paid a very heavy price for the irresponsible and sometimes unethical behavior of those that precipitated this crisis." Donovan also told the conference that private capital is beginning to move off the sidelines and back into the market for private-label mortgage-backed securities.

Ginnie Mae will begin purchasing single loans in July in an initiative to help smaller lenders improve their bottom lines, HUD secretary Shaun Donovan said at the Mortgage Bankers Association's annual National Policy Conference in Washington. The Housing and Urban Development secretary also announced that in early May, HUD will begin releasing a regular scorecard on all of the Administration's housing recovery programs so the overall effort can be judged in its totality rather than piecemeal. "Viewing the Administration's efforts through a single lens fails to capture the full scope and results of our efforts to date," he told the MBA. Secretary Donovan offered few details on the forthcoming Ginnie Mae single loan program, but he did say that the GSE has the technology and ability to allow lenders to deliver single loans that would eventually be pooled with other loans into a Ginnie Mae security. Currently, community banks and rural lenders must either sell their production to aggregators or hold loans on their books "at a substantial cost and risk" until they have enough volume to create a pool large enough to sell to Ginnie Mae. Under the new initiative, they will be able to deliver what "technically" amounts to single-loan pools on a daily basis that Ginnie Mae will subsequently place into a multi-lender pool. "It will be interesting to see how (the program) works," said Rob Couch, a former HUD general counsel who left the agency in the last months of the Bush Administration. "But it sounds pretty creative to me."

Former Washington Mutual CEO Kerry Killinger on Tuesday blamed federal regulators and an insular Wall Street culture for the demise of the mega thrift, saying that firms that were "too clubby to fail" were protected during the financial crisis of 2008. The Seattle-based thrift, once the nation's largest, was a top-ranked subprime and payment-option ARM lender. Last decade, it grew rapidly by purchasing prime and nonprime shops, including A- to D lender, Long Beach Mortgage, a firm controlled by subprime magnate Roland Arnall. Killinger, in prepared testimony before the Senate Homeland Security and Governmental Affairs Committee, complained of "unfair treatment" of WaMu, the largest thrift (or bank) failure in history in 2008, when it was seized by the government and then sold to JPMorgan Chase. Killinger, who was forced out prior to the JPM sale, argued that the seizure "was unnecessary" and said the company "should have been given a chance to work through the crisis." However, committee chairman Carl Levin said the thrift's subprime loans were rife with fraud and may make a criminal referral to the Justice Department. Levin is holding four hearings on the financial crisis. Based on an 18-month investigation, Levin said, he believes that certain provisions of pending financial reform legislation, such as the creation of a consumer protection agency and a requirement that lenders maintain a stake in loans they sell to the secondary market, could have helped avoid, or lessen the impact of, the thrift's failure. "A lot of proposed reforms will gain additional support, we believe, from these findings," Levin said. "It is my hope that these hearings, these findings, give a boost, a momentum to strong regulatory reform in many, many different ways."

As the Senate prepares to debate regulatory reform legislation, Sen. Carl Levin is using the failed Washington Mutual as evidence that the bill's most contentious provisions are necessary. The chairman of the Permanent Subcommittee on Investigations is prepping four hearings related to the financial crisis, the first of which is scheduled for April 13 and will focus on WaMu's risky lending practices. Based on an 18-month investigation, Levin said, he believes that certain provisions of the reform legislation, such as the creation of a consumer protection agency and a requirement that lenders maintain a stake in loans they sell to the secondary market, could have helped avoid, or lessen the impact of, the thrift company's failure. "A lot of proposed reforms will gain additional support, we believe, from these findings," Levin said. "It is my hope that these hearings, these findings, give a boost, a momentum to strong regulatory reform in many, many different ways." The now defunct WaMu entered the subprime space about a decade ago when it bought Long Beach Mortgage from subprime magnate Roland Arnall. The thrift eventually became one of the largest subprime lenders in the nation, funding billions of dollars in A- to D loans, and selling them into securitizations through Wall Street. The thrift failed in the fall of 2008 and was sold to JPMorgan Chase. Mr. Arnall died in early 2008 by which time he had sold most of his subprime holdings.

The Federal Housing Administration will begin accepting electronic signatures on third party documents originated and signed outside of the lender's control, such as real estate contracts. A Mortgagee Letter detailing FHA's new streamlined process is posted on the HUD website. "This is just the beginning of FHA's commitment to use more electronic documents in our loan approval process," said FHA commissioner David Stevens. "Over time, we will be expanding the number and types of documents with electronic signatures which will be acceptable to FHA." The FHA expects lenders to employ the same level of care and due diligence with electronically signed documents as for paper documents with "wet" or ink signatures. Lenders are reminded that the electronic signature and date should be clearly visible in the document and that electronic documents will be subject to the same document retention requirements as paper documents.

Former GSE regulator James Lockhart is blaming Fannie Mae and Freddie Mac for encouraging poor underwriting standards during the housing bubble by not aggressively forcing their seller/servicers to buy back bad loans. Despite regulatory pressure, "they were lax in forcing repurchases for fear of offending major customers such as Countrywide," Lockhart told the Financial Crisis Inquiry Commission late Friday. The former Federal Housing Finance Agency director also testified that the government-sponsored enterprises encouraged lower underwriting standards in the subprime market by purchasing private-label subprime MBS. He noted that the GSEs were under pressure to meet their affordable housing goals. HUD pushed the AH goals "too high," he testified, and the GSEs were afraid their supporters would turn against them if they failed to meet those goals. "I believe that high affordable housing goals and the resulting political pressure compounded by the enterprises' drive for market share and short-term profitability were major reasons why they lowered their underwriting standards," he said. "I should point out that their underwriting standards remained higher than the general market." Mr. Lockhart is currently vice chairman of W.L. Ross & Co., which has been making vulture fund-like investments in the mortgage market.

Former executives and regulators, testifying Thursday before the Financial Crisis Inquiry Commission, all tried to shift blame for the giant company's problems. Charles Prince, Citigroup's former chief executive, pointed a finger at the credit rating agencies and overly complex products-like collateralized debt obligations-that no one understood. (Mr. Prince was onboard when Citi made several disastrous investments in subprime lenders, including its acquisition of assets from Ameriquest and Argent.) Robert Rubin, a former Treasury secretary and former chairman of Citi's executive committee, laid the blame on a confluence of market events while saying he was out of the loop for most of the company's decisions. The bank's regulators, meanwhile-John Dugan, the comptroller of the currency, and his predecessor, John D. Hawke-criticized the institution, its managers, other regulators and the market in general. If there was an underlying consensus, it was this: the financial crisis was either entirely unforeseeable or should have been spotted first by somebody else.

A pair of guilty pleas has been entered in a Georgia case where the defendants were accused of defrauding reverse mortgage lenders and the Federal Housing Administration. Kelsey Torrey Hull and Jonathan Alfred Kimpson admitted to charges that they faked the downpayment required for seniors to qualify for a purchase-money reverse mortgage. They created bogus gift letters from "relatives" for amounts ranging between $50,000 and $105,000. They also used fake HUD-1 settlement statements which purported to show the sale of nonexistent assets. The defendants provided the downpayment funds-not the senior citizen borrowers. Prosecutors said inflated appraisals were involved as well. Kimpson pleaded guilty to an additional charge of aggravated identity theft for stealing the identity of Realtors and their passwords to access the Georgia Multiple Listing Service and create fake property listings and sales at inflated amounts. Hull also was guilty of transferring properties into seniors' names to obtain reverse mortgages through the refinance portion of the Home Equity Conversion Mortgage program. He diverted these loan proceeds to his shell companies. Hull faces up to 30 years in jail and a fine up to $1 million on each of the conspiracy and bank fraud counts. Kimpson faces similar jail time, plus an additional two years in jail and a fine up to $250,000 for the identity theft conviction. Both are scheduled to be sentenced on July 16.

During the height of the mortgage boom, a thriving private-label MBS market "threatened" Fannie Mae financially, driving the congressionally chartered mortgage giant into the alt-A market which ultimately led to huge credit losses at the company, a former top Fannie official told a congressional panel Friday. The growth of the private-label securities market threatened Fannie "financially" along with its "relevance" to its seller/servicers, said former Fannie executive Robert Levin in testimony before the Financial Crisis Inquiry Commission. Speaking before the same panel, former Fannie Mae CEO Daniel Mudd testified that the GSE gradually entered the alt-A market and understood the risks. Fannie's alt-A loans performed better "by a factor of two" than alt-A loans generated by the Wall Street conduits, Mudd said. But FDIC chairman Phil Angelides noted that alt-A, subprime and other high-risk loans caused 69% of Fannie's credit losses in 2009, even though they comprised only 24% of total loans. He also noted the GSE was highly leveraged. (At one point, Fannie's alt-A holdings totaled $350 billion.) Mudd said the bulk of Fannie's alt-A loans were bought during the peak of the housing boom and their performance suffered as a result of declining house prices and the nation's economic downturn. In September 2008 the Federal Housing Finance Agency seized control of Fannie, placing it into conservatorship. Upon the GSE's seizure, Mudd was fired. In his opening remarks to the commission, Mudd said the GSE's business model and structure could not "withstand a multiyear 30% home price decline on a national scale, even without the accompanying global financial turmoil."