Compliance & Regulation

The Department of Housing and Urban Development is getting deluged with many questions from mortgage bankers regarding the new good-faith estimate form, in particular the treatment of the real estate transfer tax, according to a top official at the agency. Speaking at a regional mortgage banking trade show in Atlantic City, HUD's RESPA director Ivy Jackson gave attendees a quick list of questions the agency has received since the new GFE and HUD-1 forms went into effect Jan. 1. After disclosing the list, audience members bombarded Jackson with questions, showing-as one questioner put it-the industry's frustration with HUD over how to implement the new forms. (The questioner admitted, however, that he liked the new forms.) In her formal presentation to the trade show, Jackson said the revised forms are a new concept for the mortgage industry and professionals must learn how to do things differently. The "worksheet" issue was discussed during the audience question-and-answer portion. Jackson said the Real Estate Settlement Procedures Act does not prohibit the use of a worksheet, but she warned that it must not look like the new GFE. If it does, HUD will be paying a call on the originator. She also reiterated that the lender is responsible for the GFE in a wholesale transaction, not the mortgage broker.

Despite efforts by appraisers to discredit broker price opinions, there is no reason why the Treasury Department should ban the use of BPOs on short sales, according the National Association of Realtors. "There is no evidence that BPO exacerbates mortgage fraud or abuse," NAR says in a letter to Treasury secretary Timothy Geithner. The Realtors point out that BPOs are used to analyze mortgage loan portfolios for risk management and fraud detection. Home Affordable Modification Program servicers are gearing up to implement a new process to expedite short sales and Treasury has authorized the use of BPOs. Three appraisal groups recently warned Treasury that its decision to use BPOs could exacerbate mortgage fraud. "There is no evidence to support the assertion that appraisers are more or less likely to engage in mortgage fraud than real estate agents," NAR president Vicki Cox Golder said in the letter to Geithner. The Appraisal Institute, American Society of Appraisers and National Association of Independent Fee Appraisers claim that real estate agents and brokers generally are not independent or properly trained valuation specialists. "They have an inherent bias toward quick results which produces a fee for themselves," the appraisal groups said in a March 8 letter.

The Federal Open Market Committee issued a statement Tuesday indicating that the Federal Reserve will follow through with its plans to end its purchases of agency mortgage-backed securities this month as well as with plans to end a program supporting loans backed by new-issue commercial MBS in June. The agency MBS and debt purchases "are nearing completion, and the remaining transactions will be executed by the end of this month," the FOMC said. However, the committee also noted that it will "continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability." The FOMC also said in its statement that the Fed plans to follow through with its plans to close its Term Asset-Backed Securities Lending Facility program for loans backed by new-issue commercial mortgage-backed securities on June 30 and close the TALF program for loans backed by other types of collateral by March 31.

If Sen. Christopher Dodd cannot get any Republican support for his new financial services regulatory reform bill, it is highly unlikely the legislation will ever reach the Senate floor, according to a top banking lobbyist. The Senate Banking Committee is slated to begin a markup of the massive reform bill on Monday (March 22). Right now Chairman Dodd has no Republican support for his bill, according to Floyd Stoner, chief lobbyist for the American Bankers Association. If the committee approves Dodd's bill on a straight party-line vote, "it is almost certain not to get to the Senate floor, unless there are further negotiations after that point," Stoner told his bankers at ABA's Washington summit. After the committee starts the markup, the members might realize "it is possible to work out a bipartisan agreement," he said. In that case, the negotiations would begin again in private. ABA opposes Dodd's latest bill and his proposal to create a Consumer Financial Protection Bureau that would be housed at the Federal Reserve Board. Stoner said the CFPB would be too independent of the Fed and other banking regulators. ABA lobbyists are amazed that some liberals are attacking Dodd's CFPB proposal.

The changes in the Real Estate Settlement Procedures Act and the implementation of the SAFE Act mean that in the future there will be a viable mortgage broker industry that will grow in size again, declared Federal Housing Administration commissioner David Stevens. Speaking at the Regional Conference of Mortgage Bankers Associations in Atlantic City, in response to an audience member's question, he said that in his opinion, "mortgage brokers play a valuable role in the marketplace." This is because it is a scalable business model that can grow when the mortgage industry as a whole grows and because brokers service areas where other lenders will not serve. But like other parts of the mortgage industry, Stevens said he did not believe mortgage brokers policed themselves well during the run up to the crisis. As for the proposal by FHA to allow wholesale lenders to approve the mortgage brokers they wish to do business with, rather than the agency itself, he told the attendees he believes the end result will be more mortgage brokers being able to originate FHA-insured loans.

A new Consumer Financial Protection Bureau could examine any mortgage banking company, servicer or mortgage brokerage and take enforcement actions against those entities if the Senate passes a bill crafted by Banking Committee chairman Christopher Dodd, D-Conn. The CFPB would be housed at the Federal Reserve Board but operate as an autonomous unit when writing rules to curb abusive mortgage lending and credit card practices at banks and nonbanks. If a banking regulator objects to a CFPB rule, it would take a two-thirds vote of the members of the new Systemic Risk Council to kill the rule. The CFPB's authority over banks and credit unions depends on size. Institutions with assets over $10 billion could be subject to the bureau's exams and enforcement actions. The primary regulators of smaller institutions would retain that authority. Sen. Dodd said he wants the banking committee to markup and vote on his "Restoring American Financial Stability" bill next week. The massive bill merges the Office of Thrift Supervision into the Office of the Comptroller of the Currency, regulates derivatives, increases oversight of credit rating agencies and establishes risk retention for mortgage-backed securities.

The mortgage industry is becoming increasingly worried that if risk retention language for MBS in a new bill from Sen. Chris Dodd is not clarified, nonbanks could disappear, the nation's megabanks will get even larger, and consumers will have fewer retail choices. In particular, mortgage bankers fear that a 5% risk retention requirement will apply to all loans, particularly "A" paper credits guaranteed by Fannie Mae and Freddie Mac, which currently account for 70% of all fundings. The capital requirement could force small- to medium-sized lenders to either exit mortgage lending/servicing entirely or become correspondents for Wells Fargo, Bank of America and JPMorgan Chase, the three largest players in residential finance. "This will cause a huge rollup of mortgage bankers," one former MBS trader said. "At a time when the government wants to prevent 'too-big-to-fail' they will be creating more of it. The big banks will be in charge." The Community Mortgage Banking Project, a trade group headed by former mortgage insurance executive Glen Corso, says the new Dodd bill "needs a clear exemption for well underwritten, lower-risk traditional loans." The senator's financial regulatory overhaul bill requires securitizers to retain at least 5% of the credit risk when loans are packaged into bonds. The legislation that Sen. Dodd will mark up next week allows federal banking regulators and the Securities and Exchange Commission to reduce the risk retention on loans that exhibit high-quality underwriting. However, the direction given the regulators seems to be very vague when clarity is needed, one source said. Industry groups are urging the lawmakers to create an exemption for 30-year fixed-rate mortgages and other "qualified" loans. But the Dodd bill does not provide such a blanket exemption. The regulators also have the discretion to require originators to retain a portion of the credit risk.

Securitizers of mortgages and other assets would have to retain at least 5% of the credit risk with some exceptions for loans that meet certain regulatory standards, according to a bill introduced by Senate Banking Committee chairman Christopher Dodd, D-Conn. The financial services regulatory reform bill that chairman Dodd plans to mark up next week allows federal banking regulators and the Securities and Exchange Commission to reduce the risk retention on loans that exhibit high quality underwriting. However, the direction given the regulators seems to be very vague when clarity is needed, one source said. Industry groups were urging the lawmakers to create an exemption for 30-year fixed rate mortgages and other "qualified" mortgages. But the Dodd bill does not provide such a blanket exemption. The regulators also have the discretion to require originators to retain a portion of the credit risk.

Moody's Investors Service has placed 40 RMBS resecuritization tranches with a current outstanding balance of $500 million on watch for possible downgrade. The ratings changes affecting these resecuritizations of mortgage-backed securities originally issued from 2005 to 2008 stem from a reconsideration of loss projections on the underlying MBS whose collateral includes: payment option ARMs, alt-A, jumbo and subprime-related loans. Moody's believes the increased loss projections on the underlying certificates are likely to affect not only principal recovery on junior resecuritization bonds but probably on senior resecuritization bonds as well. In December and January, thousands of resecuritized RMBS tranches from the 2005-2008 vintages were placed on watch for possible downgrade as a result of the loss projections.

One third of the streamlined refinanced loans that the Federal Housing Administration insured in 2009 are probably underwater, according to a New York University economics professor. Professor Andrew Caplin and his colleagues at the National Bureau of Economic Research estimate that 33.4% of the 330,000 FHA loans refinanced through the streamlined process during the first nine months of 2009 started out with negative equity. The professor told a congressional panel that the federal mortgage insurance agency and its auditors are underestimating the number of FHA underwater mortgages and the default risk of those loans. FHA doesn't require new appraisals when an existing FHA loan is refinanced, provided borrowers are current on their payments. FHA simply records the value of the property on a streamlined refinancing at the original purchase price, which ignores any decline in home values. In addition, the auditors treat streamlined refinancings as new loans instead of loan modifications. "Misclassification of streamlined refinances not only compromises the [FHA] loss model, but also results in underestimation of underwater mortgages," the professor testified. The NBER economists used the Federal Housing Finance Agency housing price index to estimate the number of underwater loans. "With all other house price indexes, the proportion in negative equity is even higher," Mr. Caplin told the House Financial Services housing subcommittee.