Compliance & Regulation

The USDA's 'Guaranteed Rural Housing Program,' which has soared in popularity the past two years, could run out of allocated funds shortly, affecting hundreds of lenders and secondary market buyers, including JPMorgan Chase. A memo written by Chase executive Jack Jones notes that the U.S. Department of Agriculture has been allocated $13.5 billion to cover residential guarantees but six months into the fiscal year, $9.6 billion has already been used. A Chase spokesman confirmed the memo to National Mortgage News as well as the fact that the bank is a large investor of USDA-backed residential loans. The GRHP functions like the FHA program but is geared toward properties in towns with populations of 20,000 or less. Word that USDA could run out of guarantee money is beginning to spread. It was acknowledged at a regional meeting held by RE/MAX Realtors in Northern Virginia and in interviews conducted by NMN. Telephone calls to USDA's press office had not been returned at press time. Ron Wright, a mortgage banker based in the Midwest, said the USDA mortgage insurance program "is a big deal for people in rural areas. It also has a low default rate." If GRHP runs out of money Congress must allocate more. Another possible solution would be for lenders to charge higher upfront premiums on the loans, increasing the pool of money available for guarantees. Currently, the upfront premium charged to borrowers is 2%.

Excessive concentrations of commercial real estate loans have produced huge losses at banks and regulators need to set "hard limits" on CRE portfolios, according to Comptroller of the Currency John Dugan. The federal banking regulator issued CRE concentration guidance on banks and thrifts in 2006 over the objections of the industry. The comptroller acknowledged his guidance has "obviously not worked" as well as he would have liked, considering the huge number of bank failures stemming from CRE loans -- in particular construction and development notes. The 2006 guidance advised banks and thrifts that C&D loan portfolios exceeding 100% of equity capital would be considered a "high concentration" by examiners. Regulators should consider a range of options, including harder limits, Dugan told the Independent Community Bankers of America. In addition, regulators might weigh increased capital requirements, minimum underwriting standards and a more granular approach to defining concentrations based on CRE loan type. He noted that newly-chartered banks are over-represented among the 195 bank failures in the past 24 months. "I also think we should consider the issue of minimum federal standards for all newly chartered depository institutions, with a particular focus on business plans that call for significant CRE concentrations or reliance on non-core deposits for extended periods," he said.

A federal court in Newark has rescheduled next week's sentencing for U.S. Mortgage President Michael McGrath in the $140 million fraud at CU National Mortgage until April, when the one-time mortgage executive is expected to be given a long prison sentence. Prosecutors and McGrath have agreed to a sentence of 12 to 20 years in prison, according to sources familiar with the case. The sentence must be accepted by the judge. Meantime, two more of the 28 credit unions defrauded in the scheme, TCT FCU in Ballston Spa, N.Y., and Velocity Community CU of Palm Beach Gardens, Fla., have settled their claims with Fannie Mae, which bought their mortgages from McGrath under false pretenses. That makes at least three credit unions that have settled with Fannie, as they join Educational Systems FCU in Maryland. But several other credit unions, some with large claims, are vowing to continue to contest the ownership of their mortgages and of money with Fannie Mae. McGrath pleaded guilty last June to selling as much as $140 million of credit union mortgages to Fannie Mae without the credit unions' authorization and keeping the money. Under his plea agreement, McGrath has agreed to forfeit about $13 million in assets. He apparently lost the remaining funds in the stock market, leaving as much as $125 million of credit unions funds missing. At least two more executives in the company, an accountant and the head of servicing, are also expected to plead guilty in the coming days to being accomplices to the fraud.

Rep. Scott Garrett, R- N.J., has reintroduced a bill to create a legal and regulatory framework for development of a covered bond market in the U.S. Covered bonds are used in Europe and Canada to fund commercial and residential mortgages. But unlike mortgage-backed securities in the U.S., covered bond issuers continue to hold the mortgages on their balance sheets. Under the Garrett bill, the Treasury Department would be the primary regulator of covered bonds and set standards and reporting requirements for issuers. "Once members understand how a covered bonds marketplace works and the benefits that it can offer homeowners, I believe Republicans and Democrats can come together and provide the legislative framework necessary to create a robust covered bonds marketplace here in the U.S.," Rep. Garrett said. Reps. Paul Kanjorski, D-Pa., and Spencer Bachus, R-Ala., are co-sponsors of the Garrett bill. Rep. Garrett is pushing for passage of his bill this year, possibly as a part of the financial services regulatory reform package. The House passed its reform bill in December and now it is in the Senate's court. If the Senate ever passes a bill, a House-Senate conference might present an opportunity. However, a spokesman for House Financial Services Committee chairman Barney Frank, D-Mass, indicated that the congressman may have missed his chance. "The House, without the support of Rep. Garrett, passed a comprehensive Wall Street Reform bill so that ship has sailed. As you may recall, Mr. Frank held a [covered bond] hearing at the request of Rep. Garrett in December. We have a very crowded calendar right now, so it is impossible at this time to say if we would be moving this legislation," the spokesman said.

The Federal Home Loan Bank of San Francisco has sued nine securities dealers that sold the government sponsored enterprise nearly $20 billion in private-label mortgage backed securities. The San Francisco bank, like other FHLBs, suffered losses due to its investment in AAA-rated private-label MBS. The complaint filed in Superior Court in the County of San Francisco, alleges that the dealers made "untrue or misleading statements" about the characteristics and quality of the mortgage loans underlying the securities. The San Francisco FHLB is seeking to rescind those MBS purchases, which originally cost $19.1 billion. In February, the Seattle FHLB filed a similar lawsuit against issuers to compel them to buy back $4 billion in private-label MBS.

Republicans on the House Financial Services Committee Friday released a bare bones blueprint for the future of the nation's housing finance system, saying "private capital" should be the "primary source" of home mortgage money, replacing Fannie Mae and Freddie Mac. According to a document entitled "Goals and Principles for GSE Reform," Republicans, led by ranking member Spencer Bachus (R-Ala.), said Fannie and Freddie should wind down their operations within four years. Under its blueprint, the GOP thinks a covered bond market should replace the secondary market role currently played by the GSEs. They also want to see an end to GSE "jumbo loan limits" which they say is a taxpayer subsidy for mortgages made to millionaires. To date, the government has provided $127 billion in capital to Fannie and Freddie through the purchase of preferred stock. The cash has kept their net worth positions above zero. Next year the Obama Administration will release its official plan on restructuring the GSEs. Fannie and Freddie were taken over by the government in September 2008.

A federal judge has dismissed a shareholder lawsuit against Canadian Imperial Bank of Commerce and four executives for allegedly misleading investors about the bank's exposure to securities backed by subprime mortgages. Dow Jones reported that in an order Wednesday, U.S. District Judge William H. Pauley III in Manhattan threw out the case, saying a number of major financial institutions failed to anticipate a meltdown in the mortgage market and the plaintiffs failed to demonstrate that CIBC and its executives received information that was contrary to their public statements. "Looking back, a full turn of the wheel would have been appropriate. That CIBC chose an incremental measured response, while erroneous in hindsight, is as plausible an explanation for the losses as an inference of fraud," the judge said. "CIBC, like so many other institutions, could not have been expected to anticipate the crisis with the accuracy plaintiff enjoys in hindsight." A lawyer for the lead plaintiff didn't immediately return a phone call seeking comment.

Nationwide, one in every 200 funded residential loans is fraudulent, according to new figures released by First American CoreLogic. FACL analyzed 80 million loans provided through its "Mortgage Fraud Consortium" and identified trends, according to a report in The Orange County Register. The company's findings will come out at the end of this month, but in the meantime, the firm has released some key findings, including figures showing that the fraud rate has been decreasing since 2007 and is now about 25% lower than when it peaked in the third quarter of that year. Since then, lenders have been more aggressive in curtailing mortgage fraud. "In 2010, 2011 and 2012 you won't see nearly the amount of (fraud) reports that you're seeing today," said Tim Grace, senior vice president of fraud analytics. The states where the highest number of fraudulent loans were found include California, Florida, Georgia, North Carolina and South Carolina.

Wells Fargo & Co. became the second mortgage servicer to agree to a government plan to modify the second liens of borrowers who have received a modification of their first mortgage. Bank of America signed up for the plan, known as "2MP," in January. "When a customer has reduced payments, it frees up the cash flow to benefit everybody," Kevin Moss, an executive vice president of Wells Fargo's home equity group, said in an interview. "This program will simplify the process." First-lien servicers participating in the plan are required to notify second-lien holders that a first lien has been modified through the Home Affordable Modification Program. The company said at the end of February that it had modified second liens for 180,000 customers and first liens held by 500,000 customers through various internal and government programs, including HAMP.

A federal consumer protection bureau should be under the oversight of banking regulators and coordinate its activities with those regulators, according to Sen. Richard Shelby, R-Ala. The ranking Republican on the Senate Banking Committee wants to restructure a Democratic proposal that creates a new and independent Consumer Financial Protection Bureau. "I will do everything I can to make sure it is not running out on its own, causing a heck of a lot of trouble," Sen. Shelby told an American Bankers Association summit on Thursday. Banking committee chairman Christopher Dodd, D-Conn., wants to house a CFPB at the Federal Reserve Board but keep it independent with a director appointed by the president and confirmed by the Senate. This new consumer regulator would have enforcement and examination powers, along with the ability to act quickly to stop abusive lending practices. Only a two-thirds vote by a new nine-member Systemic Risk Council chaired by the Treasury secretary could overturn a CFPB rule. Sen. Shelby contends the CFPB is too independent. Consumer protection should not "trump safety and soundness," the Alabama senator said.