Compliance & Regulation

The pace of permanent Home Affordable Mortgage Program loan modifications is now averaging roughly 50,000 a month with the cumbersome government program finally getting its legs. The Treasury Department reported that mortgage servicers completed 54,900 permanent HAMP modifications in February, up from 49,400 the previous month. To date, the Home Affordable Mortgage program has helped 170,200 homeowners secure a permanent modification that reduces the monthly payment on a first mortgage to 31% of income. Another 835,200 borrowers are in HAMP payment trials where their monthly mortgage payment is reduced by more than $500. The Obama administration's signature loan modification program was rolled out one year ago with the first 5,000 permanent modifications completed in October. Housing advocates are critical of the slow start. However, the program is still undergoing changes to simplify and streamline the process, allowing struggling homeowners to move through the three-month payment trials and receive a permanent modification. In addition, Treasury is trying to get banks to modify their second liens. "While we still have some improvements to go, we are making significant progress in terms of home affordable modifications," said HUD secretary Shaun Donovan. As the pace of HAMP modification finally picks up, the monthly activity report is showing more fallout. Treasury reported that 1,473 permanent modifications have been cancelled as of February 28, up from 1,005 in January. In addition, nearly 88,700 borrowers have dropped out of the payment trials, including 28,200 in the month of February.

The Obama administration is working on a national program to address negative equity, but first it wants to test existing programs managed by state housing finance agencies. Finance agencies in Nevada, Arizona, Florida, Michigan and California are expected to submit proposals to the Treasury Department in a few weeks. "Many of these state agencies already have programs up and operational that we could enhance or change -- that could get going very quickly," HUD secretary Shaun Donovan told Senate appropriators. The Treasury Department is offering to divvy up $1.5 billion to state agencies, testing their efforts to assist underwater borrowers in negotiating with lenders to write down their mortgages. The funds also will be used to assist unemployed homeowners. "We want to test models that potentially could be used in other states," the secretary told Sen. Patty Murray, D-Wash., who chairs the Department of Housing and Urban Development appropriations subcommittee. Sen. Murray wanted to know if the 250,000 underwater homeowners in her state would benefit from the $1.5 billion program that President Obama unveiled in Nevada several weeks ago. "We are looking at broader national efforts around negative equity and unemployment that could target the issues that you are talking about in your state," Secretary Donovan said.

The Federal Deposit Insurance Corp. has extended its "safe harbor" policy for six months while its board continues to work toward the adoption of new securitization standards. The safe harbor, which was due to expire March 31, assures investors that the FDIC will not seize or delay payments on securitized assets sold by failed banks and thrifts. The blanket policy applies to all securitized assets. But going forward, FDIC chairman Sheila Bair wants to condition this protection to securitizations that meet certain standards. In November, FDIC issued a proposed rule that outlines new securitization standards, which are designed to prevent a re-occurrence of the originate-to-distribute model that fueled the subprime boom. The standards include risk retention that would require banks to retain 5% of the credit risk when they securitize mortgages and other assets. The comment period on the proposal ended February 22 with the proposal drawing strong opposition from several industry groups. Even FDIC directors are divided on the issue. However, chairman Bair says she cannot ignore the losses FDIC has suffered due to the "misaligned incentives in mortgage finance. We hope to foster a sustainable securitization market that emphasizes transparency, improved clarity in transaction structures and responsibilities," she said. "We appreciate the board's decision to extend the existing Safe Harbor protection to September 30th," said Tom Deutsch of the American Securities Forum. "As our members indicated in our letter to the FDIC last month, the ASF strongly believes the proposals, which include significant preconditions for safe harbor protection, will create substantial uncertainty for investors, thus harming the drive to reopen securitization markets and get credit flowing to Main Street," the AFS executive director said.

Senate Banking Committee chairman Christopher Dodd, D.-Conn., said he will unveil his long-awaited financial services regulatory reform bill on March 15. The chairman has worked with Sen. Bob Corker, R.-Tenn., for the past several weeks to achieve a bi-partisan bill. But it appears negotiations have come to an impasse over the regulatory and enforcement powers a new consumer protection chief would wield. "Together we made significant progress and resolved many items, but a few outstanding issues remain," Sen. Dodd said. The reform bill covers regulation of derivatives, resolution of large financial firms, detection of systemic risks and consolidation of supervision of national banks and federally chartered thrifts. Sen. Dodd said the banking committee would meet during the week of March 22 to mark up and vote on the bill.

Tighter credit standards, along with Congressional approval of higher annual mortgage insurance premiums will enable the Federal Housing Administration to replenish its capital reserves by 2013, possibly as early as 2012, Congress heard. The Department of Housing and Urban Development is on track to raise the FHA upfront premium 75 basis points this April to 2.25% and raise its down payment requirement on homebuyers to 10% for borrowers with credit scores below 580, HUD secretary Shaun Donovan testified at a Senate Appropriations Committee hearing. But FHA would prefer to set the upfront premium at 1% and raise the annual premium to 90 basis points on single-family mortgages with loan-to-value ratios above 95%. FHA is asking Congress to raise the cap on annual premiums from 55 bps to 1.55%. Raising the annual premium would be "safer for homeowners and better for the health of the FHA fund," Mr. Donovan told Senate appropriators. The secretary also noted that the new premium structure is more in line with the private mortgage insurance companies, which have seen their market share shrink as FHA's has grown in the past three years. "Increasing the premiums is the single most important thing FHA can do to encourage the private market to return," the secretary testified. He noted that private insurers are already moving back into the market on the expectation that FHA is increasing the upfront premium to 2.25%. If Congress approves the annual premium adjustment, FHA will be able to meet its minimum 2% capital ratio in a few years, the secretary told committee chairwoman Sen. Patty Murray, D.-Wash. "We believe the 2% is achievable by 2012 or 2013 based on conservative assumptions," Mr. Donovan said.

A scathing report by a Congressional watchdog examining the bailout of GMAC Inc. found that the Treasury Department did not adequately protect taxpayer money. The government should have orchestrated a strategic bankruptcy of the auto finance and mortgage lender last year rather than invest $17.2 billion to save it, according to a draft of the report to be released Thursday by the Congressional Oversight Panel of the Troubled Asset Relief Program. GMAC is the parent company of Residential Capital Corp., an active residential funder and the nation's fifth largest servicer. "The rescue came at great public expense," the 152-page report says. The oversight panel also found that GMAC was treated more favorably than other companies in comparable circumstances, including both General Motors Corp. and Chrysler Group LLC, which were forced into bankruptcy. Last month, the report says, the oversight panel asked for "assurances from witnesses" that no third-party shareholder in GMAC would receive a return on its investment before taxpayers. The government currently owns 56.3% of the company. "The fact remains that the only way to ensure that result would have been through a bankruptcy," the report stated. "The panel remains unconvinced that in 2008 or very early 2009 bankruptcy or a similar restructuring, including a sale of the automotive financing business, was not a real possibility; nor has the panel been convinced that even now a GMAC or ResCap bankruptcy or sale of the automotive financing is impossible." In 2006 a consortium led by Cerberus Capital agreed to pay $14 billion for a 51% stake in GMAC. After the government takeover of the company, Cerberus' position in GMAC has been severely reduced with the value of its investment becoming almost worthless.

Appraisers are raising alarms that the Treasury Department's decision to use broker price opinions (BPOs) for its new short sales program will exacerbate mortgage fraud and property "flopping." Three appraiser groups are urging Treasury to review the Home Affordable Foreclosure Alternatives program guidelines and prohibit the use of BPOs for property valuations on short sales. Their letter to Treasury secretary Timothy Geithner points to a new trend in sales of distressed properties: "flopping," whereby the value of a home is artificially deflated using a BPO and sold to a related party of the real estate agent who quickly sells that property for a profit. "Generally speaking, real estate agents and brokers are not independent or properly trained valuation specialists. They have an inherent bias toward quick results which produce a fee for themselves, irrespective of whether the lender/servicer/property owner/borrower gets a fair return on a short sale," the March 8 letter says. The Appraisal Institute, American Society of Appraisers and National Association of Independent Fee Appraisers signed the letter. Property "flipping" (as opposed to "flopping") usually involves the quick sale of real estate using straw borrowers (and payoffs to these borrowers) to artificially inflate a home for quick profit or some type of equity stripping scheme. Inflated appraisals play a key role in flipping schemes.

Senate Banking Committee leaders are close to agreement on a way to enhance consumer protection as a part of a larger financial regulatory reform bill. "We are on the verge of getting a bi-partisan approach that appropriately enhances consumer protection," said Sen. Mark Warner, D-Va. "This is about to be a huge win for consumers," Sen. Warner said during a National Journal Live event held to discuss financial services reform. Sen. Bob Corker, R-Tenn., said the goal is to provide uniform regulation of consumer financial products that applies to everybody engaged in financial activities. "There are no carveouts for payday lenders," he said. "There are no carveouts for anybody." Sens. Corker and Warner indicated that enforcement would remain with the primary regulators. However, Sen. Warner stressed the need for "backup" enforcement authority if the current enforcement regime doesn't work. Banking Committee members are leaning toward housing the new consumer protection office at the Federal Reserve Board, despite its failure to curb abusive mortgage lending practices that contributed to the global financial crisis. "I know the Fed did a terrible job on consumer protection," Sen. Corker said. But he argued that it doesn't matter where it is housed. What is important is to enhance consumer protection and not "trump the safety and soundness of our financial system." Sen. Warner said he has concerns about the Fed. "I am not sure the Fed is the right place."

The creation of an independent Consumer Financial Protection Agency would not impair safety and soundness regulation of banks, according to a majority of business economists. A survey by the National Association of Business Economics found 54% of economists are dismissive of claims by the banking industry (and their supporters in Congress) that a CFPA would undermine S&S regulation. A quarter (25%) of the 203 economists surveyed believe passage of CFPA legislation would be detrimental to safety and soundness. The House passed a bill that would create a stand-alone agency with rulemaking and enforcement powers to stop abusive mortgage lending and credit card practices. Such a strong consumer protection agency has run in to fierce opposition in the Senate where banking committee members are trying to wrap up negotiations on a massive financial regulatory reform bill. House Financial Services Committee chairman Barney Frank told a meeting of minority real estate professionals that CFPA opponents seem to be arguing that consumer protection will hurt banks. "There are people who believe if the banks aren't able to treat consumers unfairly they can't survive," Rep. Frank said.

Defunct FHA lender Lend America and its "chief business strategist," Michael Ashley -- who controlled the company -- have effectively been barred from the mortgage industry, according to newly released court documents. The ban springs from a civil suit brought by the Justice Department on behalf of the FHA against the Melville, N.Y.-based nonbank and Mr. Ashley. Amid investigations against the company, LendAmerica closed its doors in early December. FHA found that the company had violated numerous underwriting guidelines and according to interviews conducted by NMN the company was refinancing some loans without paying off the prior liens. In agreeing to a ban from mortgage banking, Mr. Ashley, 44, did not admit liability, according to the agreement filed recently in federal court in Central Islip. In return, anything tied to federal-related loans is off limits -- from appraising properties and marketing mortgages to working as a consultant or housing counselor, Newsday reported. "I'm beyond thrilled to be done with the mortgage business," Mr. Ashley said. "I've had it with the mortgage business. I'm done with everybody chasing me around."