Compliance & Regulation

Industry lobbyists are having a hard time getting senators or their staffs to focus on the issue of MBS risk retention, which could dramatically reduce the securitization of mortgages and other assets - and increase the cost of credit. Senate Banking Committee members are intensely engaged in drafting a regulatory reform bill and fighting over ways to protect consumers, regulate derivatives and deal with the issue of institutions that are "too big to fail." At the same time, there is a consensus on the committee that securitizers - especially those creating MBS - should retain 5% to 10% of the risk when they issue mortgage-backed securities. The holding of this risk is called "skin in the game" and lawmakers see it as a way to prevent another subprime meltdown. But accounting rule changes and a capital regulation recently finalized by the banking regulators have turned this politically attractive concept of imposing risk retention into a roadblock to securitization. "It will not work," said Anne Canfield, executive director of the Consumer Mortgage Coalition. "You will not have any securitizations any more." Under the new capital rule, any bank retaining credit risk (and therefore potentially sharing losses) must hold capital against the entire MBS, not just 5% of the MBS. The risk retention requirement and the additional capital charge "eliminate any benefit of securitizing assets," Ms. Canfield said.

Distribution data show U.S. investors bought 65.8% of Fannie Mae's $4 billion two-year Benchmark Notes new issue on Friday, followed by Asian investors who bought 20.2%. European investors bought just 1.2%. The balance of investors hailed from other miscellaneous geographic regions. Fund managers bought 59.4%, central banks bought 33.1%, state/local governments bought 4.4%, insurance companies bought 2.5%, foundations/nonprofits bought 0.3%, commercial banks bought 0.2% and retail investors bought 0.1%. The new issue due April 4, 2012 (CUSIP 31398AH54) was priced at 99.959 to yield 1.020% at a spread of 20 basis points above the 0.875% Treasury due Feb. 29, 2012. The Benchmark Notes' payment dates are each April 4 and Oct. 4, starting this year. Barclays Capital Inc., Citigroup Global Markets Inc., and Morgan Stanley & Co. are the joint lead managers. The co-managers include Blaylock Robert Van LLC, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., FTN Financial Capital Markets, Jefferies & Company Inc. and UBS Securities LLC.

Fannie Mae said Friday that many mortgage lenders are not complying with the most basic underwriting guidelines, such as confirming a borrower's identity or verifying a Social Security number. Marianne Sullivan, a senior vice president and Fannie's chief risk officer, sent a nine-page letter to lenders announcing a "Loan Quality Initiative" to ensure that loans meet the government-sponsored enterprise's credit and eligibility guidelines. Sullivan said Fannie analyzed the primary drivers of loan-repurchase requests and has launched the initiative to identify ways to improve compliance with its guidelines. "Many repurchase requests are driven by the fact that the delivered loan does not meet Fannie Mae's eligibility requirements," she wrote. In the next few months, the government-sponsored enterprise plans to add quality-control policies to monitor and assess the effectiveness of lenders' own quality-control plans. Lenders now will be required to obtain documentation to confirm the occupancy of a property. They also must determine that a borrower's debts are not only evaluated as part of the qualification for a mortgage but also are disclosed on the final loan application signed by the borrower at the closing table. Separately, Fannie reported Friday that its net loss narrowed to $16.3 billion in the fourth quarter, from $25.2 billion a year earlier. The GSE also said it requested another $15.3 billion from the Treasury to help eliminate its net worth deficit. Fannie has not been able to maintain a positive net worth without government assistance since September 2008. The GSE expects to receive the additional funds from the Treasury by the end of March, bringing its total government support to $75.2 billion.

Stung by continuing writedowns on risky alt-A, interest-only, and negative amortization loans, Fannie Mae posted a $16.3 billion loss in the fourth quarter, and said it would ask the U.S. Treasury for $15 billion in cash to keep its net worth above zero. In supplementary documents filed with the Securities and Exchange Commission, the government-controlled GSE revealed that a stunning 36% of loans it bought from 2005 to 2008 are in some category of delinquency. Its entire book-of-business ($2.796 trillion) carries a 5.38% 'serious delinquent' rate. Its worst loans - in terms of late payments - come from three states: Nevada (a 13% delinquency rate), Florida (12.8%) and Arizona (8.8%). In the fourth quarter of 2008 the late payments for these three were: 4.74%, 6.4%, and 3.4%, respectively. The GSE lost $72 billion for all of 2009, compared to a $59 billion loss the prior year. To date, the Treasury has pumped $75 billion into Fannie and $52 billion into Freddie Mac to keep them in the black. Government regulators - which placed the two into conservatorships in September 2008 - fear that MBS investors will not buy their securities if the GSEs are in a negative net worth position. During the most recent quarter, Washington-based Fannie suffered $11.9 billion in credit losses and a $5 billion write-down for low income tax credit investments. "Through this prolonged stress in the housing market, we are helping homeowners across the country, supporting affordable housing, and providing financing to keep the residential markets functioning," said Fannie's chief executive, Mike Williams.

The Bush Administration appointee who took Fannie Mae and Freddie Mac into conservatorship 17 months ago is disheartened that the Obama Administration has put off resolving the future of the two government-sponsored enterprises. James Lockhart, who is now vice chairman of WL Ross & Co., a private equity firm which owns American Home Mortgage Servicing and a 25% stake in Bank United, told the Midwinter Housing Conference in Park City, Utah, that he is "disappointed" the White House has "taken a pass" on Fannie and Freddie this year. The former director of the Federal Housing Finance Agency, the GSEs' regulator, said, "the whole servicing world has to be re-thought." But starting to rethink the whole mortgage business is an even "more critical issue," he added. "At some point, we need to attract the private sector back into the market." Meanwhile, another Bush appointee, Joseph Murin, who headed the Government National Mortgage Association for two years, told the conference that it's time for Congress to cut Ginnie Mae loose from the Department of Housing and Urban Development. "An entity with such a critical mission can no longer be treated as if it just another program office" within HUD, said Mr. Murin, who founded the Collington Group advisory firm when he left Ginnie Mae last year. If Ginnie Mae "is to fulfill its mission in the years ahead," he said, "it requires a structure that provides for its independence and the ability to respond to the always changing secondary markets." Otherwise, the agency's ability to continue to provide liquidity "will be severely compromised."

Fannie Mae completed nearly 40,000 short sales and deed in lieu transactions in 2009, up from 11,700 in the previous year, according to the mortgage giant. "We have increasingly relied on these foreclosure alternatives as a growing number of borrowers have faced longer-term economic hardships and home price declines have increased the proportion of borrowers with negative equity," Fannie said in releasing its 2009 annual financial report. The GSE completed 36,970 pre-foreclosure sales or short sales and 2,650 deed in lieu (of foreclosure) transactions last year. A short sale allows the borrower to sell the property and walk away debt free. It is generally understood that a short sale results in a 20% higher price than a sale of a foreclosed property (real estate owned). In the fourth quarter, Fannie said REO sale prices averaged 56% of the unpaid balance of the mortgage. In a deed in lieu transaction, the borrower simply turns the keys over the lender/servicer. The property ends up as REO. Fannie took over 145,600 foreclosed properties in 2009, compared to 94,650 REO in 2008. The GSE, which is in conservatorship, had 86,150 REO properties in inventory as of December 31.

Triad Guaranty Inc. - which is in the process of liquidating - reported a fourth-quarter loss of $79.1 million, a 35% improvement from the same period a year earlier. The Winston-Salem, N.C., mortgage insurer had a net loss of $595.6 million for the full year, compared to a net loss of $631.1 million for 2008. The MI's book of business is in "run-off" status. Ken Jones, president and chief executive, said, "First-time defaults, while down moderately from earlier 2009 quarters, continued at a high volume. We have seen very little permanent impact to date from the existing loan modification programs and, consequently, the cure rates on existing defaults remain at historic lows and have shown little sign of improvement." Its total insurance-in-force declined to $50.5 billion at Dec. 31, 2009, a 7.5% drop from Sept. 30, 2009 and a 19.3% decline from Dec. 31, 2008.

The fight to keep the Federal Reserve Board's role in banking supervision has finally been joined. Late this past week Fed chairman Ben Bernanke made his strongest public pitch to date to keep the central bank's powers intact, while industry lobbyists privately told Treasury secretary Timothy Geithner that they will work with the administration to press Congress on the issue. Although there remains strong support in the Senate to strip the central bank of much of its power, the issue is key as the final reform bill takes shape. "The ICBA will fight tooth and nail to preserve the Fed's role in bank regulation," said Camden Fine, president of the Independent Community Bankers of America, who along with other trade group representatives met with Mr. Geithner on Wednesday. "In our view, it is absurd to blind the Federal Reserve to 8,000 community banks on Main Street America. That's very poor public policy." All eight of the industry groups attending the meeting, including the American Bankers Association and the Financial Services Roundtable told Geithner much the same thing.

Freddie Mac said it will stop buying and securitizing interest-only mortgages - a $40 billion a year market - on Sept, 1. Interest-only and alt-A products have been Freddie's downfall: the two loan types accounted for 44% of the mortgage giant's credit losses in 2009. Freddie exited the alt-A market a few years back but the product still accounts for 8% of its portfolio holdings. The GSE currently has $129.9 billion in interest-only mortgages, which comprises 7% of its single-family mortgage portfolio. These loans have an average loan-to-value ratio of 106% and 17.6% are 90 days or more past due. This loan product features interest-only payments for a set period of time before the loan becomes fully amortizing and the borrower has to start making principal and interest payment. Because the initial payments are so low, it is very difficult to modify these loans once the homeowner defaults. Freddie has modified only 0.2% of its interest-only portfolio. Despite these problems, Freddie purchased $800 million in interest-only mortgages in 2009.

Freddie Mac reported that 4% of its single-family mortgages are 90 days or more past due, up from 2% in January of 2008. The serious delinquency rate edged up 16 basis points in January to 4.03%, according to the GSE's monthly activity report. The secondary market agency's report also provides investors with an update on the delinquent mortgages the GSE is buying out of its existing mortgage backed securities. On Feb. 10, Freddie said it will purchase all loans that are 120 days or more past due out of its MBS. The update on MBS coupons affected shows that $71.5 billion in loans were eligible for purchase as of Jan. 31. Freddie will disclose its initial purchases in a March 4 report. Meanwhile, Freddie purchased $22.6 billion in refinanced loans in January, down from $27.3 billion in the previous month. MBS issuance totaled $36.6 billion, down from $44 billion in December. For all of 2009, Freddie issued $475.4 billion in MBS, compared to $357.9 billion in 2008.