Compliance & Regulation

By providing Fannie Mae and Freddie Mac with unlimited capital support over the next three years, the Obama administration can delay fixing the GSEs and use them to pursue more aggressive loan modification programs, according to Washington observers. Keefe, Bruyette & Woods equity analyst Bose George noted that it was unlikely loan losses sparked the Treasury Department's decision to increase its $400 billion commitment to keep Fannie and Freddie operating with positive net worth. "Given this outlook, we believe that the main driver of this significant change is the flexibility it gives the government to take more aggressive action to support the housing market, including potentially going down the road of allowing some form of principal writedowns as part of an enhanced Home Affordable Modification Program," Mr. George says in an "Industry Update" to clients. Federal Financial Analytics points out that the Treasury Department's December 24 statement on the GSEs allows Fannie and Freddie to maintain their large mortgage investment portfolios for another year. Treasury also put any end to expectations that the administration would unveil its plan for restructuring the GSEs in early February as part of the President's budget proposal for fiscal year 2011. "Now we are told only a preliminary plan will come 'around the time' of the budget," FFA analysts said.

The Treasury Department will stop purchasing Fannie Mae and Freddie Mac mortgage-backed securities on Dec. 31, but the department is increasing its capital support for the two financially strapped government-sponsored enterprises. As of Nov. 30, Treasury had purchased $211.5 billion in Fannie and Freddie MBS. "By the conclusion of its MBS purchase program, Treasury anticipates that it will purchase approximately $220 billion of the securities," according to a Treasury statement. Treasury has provided each GSE with a funding commitment of $200 billion to ensure each secondary market agency maintains a positive net worth while the GSEs deal with severe loan losses. Fannie has already received $51 billion in capital infusions and Freddie $60 billion. Now Treasury is lifting the $200 billion cap to accommodate any capital needs over the next three years. "The agreements announced today should leave no uncertainty about Treasury's commitment to support these firms as they continue to play a vital role in the housing market," Treasury said Thursday afternoon. Fannie and Freddie were placed in conservatorships in September 2008.

Valley National Bancorp, Wayne, N.J., the holding company for Valley National Bank, said that it has repaid the Department of the Treasury the final 100,000 shares of Valley's Series A Preferred Stock outstanding that was held by Treasury under the Capital Purchase Program. As announced on Dec. 22, Valley had received approval from Treasury to repay the remainder of the outstanding TARP funds. On Dec. 23, that transaction was consummated, ending Valley's participation in the Capital Purchase Program.

A bipartisan effort by members of the Senate Banking Committee to draft a financial regulatory reform bill is making progress, according to committee leaders. Committee members have been in talks for several weeks to reach a consensus on producing a bill, according to committee chairman Christopher Dodd, D-Conn., and ranking Republican Richard Shelby of Alabama. The two said the talks have been productive and they hope to resolve remaining issues by January. The House of Representatives passed a reform bill that deals with the resolution of large financial institutions, strengthening consumer protection, restructuring the supervision of depository institutions and improving oversight of derivatives. Senate Banking Committee members are trying to address the same issues but they are expected to come up with a very different bill. In mid-November, Sen. Dodd released a "discussion draft" of his regulatory reform bill. It garnered weak support among his fellow Democrats and the Republicans blasted it.

The Federal Housing Administration has tightened its guidelines on short sales so that borrowers who defaulted on their previous mortgages can't get a new FHA-insured loan. The new guidance is designed to prevent borrowers who want to take advantage of the decline in house prices to buy a new home at a reduced price using an FHA loan for doing so. "Borrowers in default on their mortgage at the time of a short sale (or preforeclosure sale) are not eligible for a new FHA-insured mortgage for three years," FHA says in a mortgagee letter. The new policy has been causing problems for some lenders with loans in the pipeline, according to Bud Carter, an FHA consultant with Potomac Partners in Washington. In general, FHA will not approve loans if the borrower has defaulted within the past three years. However, FHA never provided specific instructions on short sales, Mr. Carter said, so lenders were dealing with this issue on a "case-by-case basis." Mortgagee Letter 09-52 also addresses cases where a lender takes a principal writedown and refinances the borrower into an FHA-insured mortgage. The agency clarifies that the borrower has to be current on all their payments to qualify for an FHA refinancing.

The GSE regulator and the Treasury Department have approved $6 million pay packages for the chief executive officers of Fannie Mae and Freddie Mac. On top of a base salary of $900,000, the CEOs are targeted to receive $3.1 million in deferred pay and $2 million in performance incentives in 2009 and 2010. Both of the CEOs are new this year. Michael Williams was Fannie's chief operating officer before his July promotion to be the government-sponsored enterprise's new president and CEO in April. Mutual fund executive Charles Haldeman was appointed Freddie's CEO in July. Compensation for 2009 will be prorated and all compensation is in cash. (The GSEs were placed in conservatorships in September 2008 and they cannot issue stock.) At the beginning of 2008, former Freddie CEO Richard Syron was targeted to receive $15.2 million in compensation. Former Fannie CEO Daniel Mudd received $12.2 million in compensation in 2007, including $9 million in stock. Under the new compensation program, the second highest paid executives are Fannie's chief financial officer David Johnson ($3.5 million) and Freddie's chief operating officer Bruce Witherell ($4.5 million). Except for CEOs, CFOs and COOs, the base salaries for all other GSE executives cannot exceed $500,000 a year, according to the Federal Housing Finance Board. "On average, the total compensation for executive officers at the two enterprises for 2009 is down 40% from pre-conservatorship levels," FHFA said.

Document preparation vendor DocuTech has partnered with LOS Wipro Gallagher Solutions to more tightly integrate compliant documents into the lender's origination platform. The integration enables lenders to generate compliant documents and disclosures from any Web connection. NetOxygen Cirrus is WGS' Web-based LOS that enables lenders to take advantage of a streamlined service to enter, monitor and maintain loans through a scalable platform hosted by WGS. The integration with DocuTech's ConformX allows for the streamlined deployment of a more end-to end, enterprise wide LOS. This integration also provides users with internal compliance and document services, including support for disclosures.

International Document Services Inc., Salt Lake City, Utah, expects state mandated high-cost audits to become a more time-consuming concern for mortgage lenders in 2010. State-specific high-cost regulations should be a source of concern for lenders, according to IDS president Curt Doman. The company is advising lenders to test their ability to provide evidence that meets and satisfies state-specific requirements.

The Federal Reserve Board and the Federal Trade Commission have issued a final rule that requires lenders to disclose their use of risk-based pricing along with a notice that tells consumers they will not get the best deal because of their credit score. Starting in January 2011, lenders must provide mortgage applicants with a risk-based pricing notice if they will receive less favorable terms than 40% of the lender's other customers. The final rule has two tests, including a 40%/60% test, for determining when consumers should get a RBP notice. The Fair Credit Reporting Act rule, mandated by Congress in 2003, provides some exceptions to the RBP notice requirement, including one for single-family lenders that provide applicants with their credit score. Along with the credit score, the lender must provide a notice that "describes the creditor's use of credit scores to set the terms of credit," the final rule says.

Freddie Mac servicers had completed 7,300 HAMP modifications on Freddie loans as of Nov. 30, which represents 23% of all permanent modifications made under the Obama administration's Home Affordable Modification Program. Freddie's monthly activity report also showed that it purchased $19.3 billon in refinanced loans in November, including $2.1 billion worth with loan-to-value ratios of 80% to 105%. The new disclosures on loan modification and refinancings of underwater mortgages also show that Freddie purchased $60 million in refinanced loans with LTVs above 105%. A total of 115,600 borrowers with Freddie owned or guaranteed loans are participating in the HAMP payment trials and nearly 24,500 have been in the trials for more than the required three months. The monthly report also shows that Freddie issued $26 billion in mortgage-backed securities in November, down over 50% from June at the peak of the refinancing boom. In June, Freddie purchased $50.9 billion in refinanced loans from lenders and issued $61 billion in MBS. Single-family delinquencies increased by 18 basis points in November from the previous month. The report shows of 3.72% of Freddie's loans are 90 days or more past due.