Compliance & Regulation

The Department of Housing and Urban Development is projecting that new, higher fees charged by the Federal Housing Administration along with earnings from the Government National Mortgage Association program will double the agency's mortgage-related "receipts" in the new fiscal year to $6.9 billion. HUD secretary Shaun Donovan said he plans to use some of the additional $3.4 billion in FHA/GNMA revenue to expand such social programs as Section 8 rental vouchers. During a press conference with reporters Mr. Donovan provided little detail on replenishing the depleted FHA insurance fund, but seemed confident that it would stay in the black thanks to new premium hikes charged to borrowers. HUD has set its overall FY 2011 budget at $48.5 billion, a 5% reduction from last year. The Section 8 plan and HUD budget, if approved by Congress, will create 35,000 additional renters by giving them federal housing vouchers. In terms of dollars for vouchers, the increase is 8% to $19.6 billion. Secretary Donovan, in response to a question, said government money will not be used to bail out apartment projects such as the $5.6 billion Stuyvesant Town leveraged buyout which occurred in 2006. The housing secretary noted that "private investors are rightly" suffering what he called "private losses."

The Comptroller of the Currency believes that in light of newly proposed accounting rules regarding "sale treatment," the congressional push to impose risk retention or "skin in the game" requirements on MBS issuers will only hamper a recovery in the private label market. Speaking at a American Securities Forum conference, OCC chief John Dugan called risk retention an "imprecise and indirect" way to improve the underwriting quality of residential mortgages. As an alternative, he thinks federal regulators should set minimum mortgage underwriting standards including requirements for verification of income, and minimum downpayments. These minimum standards would insure that newly funded mortgages are financially sound, likely to be repaid, allaying fears that an asset bubble is being created. Mr. Dugan thinks these attributes will attract investors to the securitization process. He supports risk retention but new accounting proposals prevent securitizers from achieving sale treatment on mortgage backed securities if they retain 5% of that risk. The language is part of a House-passed bill and appears in a recent proposal issued by the Federal Deposit Insurance Corp. "I do think...that minimum underwriting should be strongly considered as an alternative to rigid 'skin in the game' requirements," Mr. Dugan told conference attendees.

Refinancings at Fannie Mae and Freddie Mac surged 37% in the month of December to the highest level since August, according to the GSE regulator. The government sponsored enterprises purchased nearly 297,000 refinanced loans from lenders in December, up from 217,100 in November. "Total refinance volume rose in December in response to a gradual June to November decline in rates," the Federal Housing Finance Agency said in a report. December's surge includes refinancings of 33,347 borrowers with Fannie and Freddie loans under a special program for homeowners with loan-to-value ratios between 80% and 105%. Launched April 1, the Home Affordable Refinancing Program has helped 188,250 difficult-to-refinance homeowners take advantage of historically low mortgage rates in 2009 and lower their monthly payments. HARP does not require the purchase mortgage insurance. On October 1, FHFA expanded HARP to refinance underwater borrowers with LTVs greater that 105% and up to 125%. During the fourth quarter, the GSEs refinanced 1,900 of these higher LTV loans, including 1,100 in December.

The Federal Housing Administration is forecasting a dropoff in single-family originations during the current 2010 fiscal year and FY 2011 along with an increase in claims and foreclosures. In FY 2009, which ended Sept. 30, FHA lenders originated $330.5 billion in single-family loans, not counting reverse mortgages. FHA expects a 9% decline in originations in FY 2010 to $300 billion followed by an 18% decline in FY 2011 to $246 billion. The President's FY 2011 budget proposal also projects a jump in claim payments to lenders due to defaults on FHA guaranteed single-family loans. In FY 2009, FHA lenders paid $8.5 billion on defaulted loans. Budget estimates show these payments could jump to $15.7 billion in FY 2010 and $19.7 billion in FY 2011. The FHA mortgage insurance fund managed to stay in the black in FY 2009 by a very thin margin. Despite the jump in claims, FHA's financial performance should improve slightly in FY 2010, according to budget projections. FHA is expected to get a boost in revenues from a mortgage insurance premium increase that goes into effect this spring.

The Federal Housing Administration is seeking congressional permission to raise the annual premium on FHA-single-family loans to 0.85%, up from the current 0.55% statutory limit, according to the President's fiscal year 2011 budget proposal. "If granted this statutory flexibility, FHA will lower the upfront premium to 1% and increase the annual premium from 0.50% to 0.85%," the budget document says. The discussion of FHA issues in the budget documents also indicates FHA might charge a 0.90% annual premium on low downpayment mortgages. FHA is in the process of raising the upfront premium to 2.25% this spring with the caveat that it will lower the upfront charge once Congress approves the increase in the annual premium. The budget documents also show that the FHA reverse mortgage program will need a $250 million congressional appropriation in FY 2011 to break even. The administration is proposing changes to the Home Equity Mortgage Conversion program that will raise premiums and "slightly lower loan limits."

President Barack Obama, in his State of the Union speech, signaled that his administration is moving toward making it easier for homeowners to refinance into affordable mortgages. "This year, we will step up refinancing so that homeowners can move into more affordable mortgages," the President said. However, Mr. Obama was a bit light on details. Some industry officials indicated it might involve changes to the Home Affordable Modification Program. Others said it could portend changes to Fannie Mae and Freddie Mac programs that refinance borrowers with loan-to-value ratios from 81% up to 125%. Liberal housing groups were disappointed by the speech because of the lack of focus on foreclosures and housing issues. "The President highlighted the need for jobs and health care reform for middle-class families," said Mike Calhoun, president of the Center for Responsible Lenders. "But Americans need relief in the housing market and stronger measures to stop preventable foreclosures." National Low Income Housing Coalition president Sheila Crowley noted that the speech was "notably lacking" in its attention to the foreclosure crisis and affordable housing crisis. "Not only are homeowners facing the loss of their homes, but low income renters are competing for housing in an ever shrinking supply of low cost rental homes," Ms. Crowley said.

The Obama administration wants servicers to start verifying borrowers' income and eligibility for the Home Affordable Modification program upfront before they start the three-month payment trial. Under the new guidance from Treasury and the Department of Housing and Urban Development, HAMP servicers are expected to a use a "simple, standard package of documents" including pay stubs, to qualify borrowers starting June 1 or sooner. This update "should enable servicers to transition borrowers more quickly and easily from trial to permanent modification," said HUD senior advisor William Apgar. In jump-starting the HAMP program last spring, servicers were allowed to place borrowers into trial modifications without checking their income. This rush has resulted in a low rate of conversions to permanent modifications. Some servicers, including CitiMortgage, have already started verifying income up front. "We believe this will limit the number of borrowers who ultimately fall out of the trials," said a Citi official.

Genworth Financial's U.S mortgage insurance unit reported a net operating loss of $74 million for the fourth quarter, a considerable improvement from the same period a year ago. The Richmond, Va.-based company attributed two thirds of its fourth quarter losses to its GSE alt-A business, which soon will be mitigated by a reduction in its coverage on those high-risk loans. Genworth executed an agreement effective Jan. 1, 2010 that will result in the cancellation of approximately 80% of the GSE alt-A bulk risk-in-force. The agreement resulted in a total claim payment of approximately $182 million in January 2010 which was already fully reserved. This will reduce the GSE Alt-A bulk RIF from $295 million to approximately $65 million in the first quarter of 2010. Flow delinquencies totaled approximately 107,500, up from approximately 100,200 and 87,600 in the third and second quarters of 2009, respectively, reflecting seasonal increases and a decline in cured delinquencies. Loss mitigation activities, including workouts, presales and policy rescissions, resulted in $290 million of savings in the quarter, bringing total 2009 savings to $847 million. This included approximately $35 million in savings from delinquent loans that were modified through HAMP. Based upon reporting from the GSEs and certain servicers, Genworth estimates that there are approximately 22,200 delinquent loans that are currently pending within HAMP, nearly double the number at the end of the third quarter 2009. In Q4 2008 Genworth's MI business lost $114 million.

Richard Shelby, the ranking Republican on the Senate Banking Committee, believes Fannie Mae and Freddie Mac eventually should be spun off by the government and privatized. However, he warned that doing so will take a lot time and money. The "GSEs are in our lap," the Alabama lawmaker told American Banker. "You know, we own them. I would like to see them cleared up and spun off, whatever, see if anybody wants them. It's going to take a lot of money. There's a lot of guarantee out there. It's not implicit; it's explicit." When asked if he was saying he wants to privatize the GSEs, Shelby confirmed he does. "That's what I'd like to see done with them, because if you create a hybrid deal like this it's never worked." The Obama administration is expected to unveil its proposal for the GSEs in its 2011 budget, which is due Monday. Today, Fannie and Freddie in their role as secondary market investors, account for almost 70% of all residential originations.

The Federal Housing Administration is expected to ask for Congressional approval to raise the annual insurance premium on its loans to at least 75 basis points and perhaps higher, according to industry officials interviewed by National Mortgage News. The exact figure will be released Monday when the President's 2011 budget is unveiled. Currently, the annual premium is capped at 55 basis points. The additional money raised would be used to bolster its reserve fund which is barely in the black. Some sources think increasing the premium to 100 basis points is a possibility but likely will not happen. "They have half-a-million in delinquencies," said one insurance executive, requesting anonymity. "They are absolutely going to hike it; it's just a matter of how much." FHA recently raised the upfront mortgage insurance premium (MIP) to 2.25%, a 50 basis point increase that becomes effective this spring. The budget document likely will include FHA's estimates on how much the premium hike will rise and a timeline for restoring the fund's capital ratio back to 2%. (At last check it was at 0.53%.) The Department of Housing and Urban Development budget also will have projections for FHA loan losses and claims in the current (2010) fiscal year and FY 2011. HUD wants Congress to enhance FHA's authority to seek indemnification from lenders for loans that go bad. Mortgage bankers are anxious about the proposal because it will increase their liability and risks of doing business with the FHA.