Compliance & Regulation

In a month-long campaign to convert 375,000 borrowers in payment trials into permanent loan modifications, Treasury Department and Fannie Mae staffers will be hounding servicers on a daily basis to achieve the highest conversion rate. Starting Wednesday, Treasury/Fannie teams will visit the eight largest servicers for three days to monitor their Home Affordable Modification Program efforts and troubleshoot any problems. In addition, each HAMP participating servicer will report to Treasury twice a day on their conversion progress during the month of December, according to Treasury assistance secretary Michael Barr. One-third of the 375,000 borrowers have submitted all the necessary documentation to qualify for a permanent loan modification and they "deserve" a timely decision from their servicer, Mr. Barr told reporters. Meanwhile, 37% of the borrowers have submitted some documentation and more 20% have not submitted anything. "Borrowers need to submit the necessary information or they could lose their eligibility for a permanent affordable modification," said Phyllis Caldwell, who joined Treasury in November to oversee the conversion campaign. Servicers are expected to continue their outreach efforts while Treasury engages in a "robust" communications and outreach campaign to reach those borrowers. "We are also working with 300 outreach partners — including state, local and community officials as well as homeownership counselors and advocacy groups," Ms. Caldwell said. Several years ago she headed community development banking for Bank of America.

Fannie Mae is raising its minimum credit score to 620 from 580 and lowering its maximum debt-to-income ratio to 45% to reduce future defaults. These underwriting changes go into effect the weekend of Dec. 12 as part of an update to Desktop Underwriter - Fannie's automated underwriting system. "The adjustments reflect careful analysis of a borrower's ability to repay their mortgage obligation over the life of the loan," said Fannie spokesman Brian Faith. Fannie claims that borrowers with credit scores below 620 are generally nine times more likely to become seriously delinquent than other borrowers. In modifying loans, "we have seen too many borrowers where their other consumer debt has jeopardized their success at homeownership," Mr. Faith said. He noted that none of these changes apply to Fannie's Refi Plus program, which provides a streamlined refinancing option for existing Fannie borrowers that have loan-to-value ratios greater than 80% and up to 125%.

Fannie Mae issued $40.7 billion in mortgage-backed securities in October, down 14.5% from September, according to the government-sponsored enterprise. October's issuance is the lowest since January, when the GSE issued $21.3 billion in MBS and it most likely reflects a decline in refinancing volume. Freddie Mac reported a similar 13.5% drop in MBS issuance in October. Freddie also reported that its purchases of refinanced loans fell by 15% month-over-month. Fannie did not report its purchases of refinanced loans. Recently it appears Fannie and Freddie MBS issuance has been tied to the refinancing market, while Ginnie Mae issuance has been tied to the homebuying market. Ginnie Mae MBS issuance totaled $38.7 billion in October, down only 2.5% from the previous month.

The Federal Housing Administration on Monday unveiled new proposals to strengthen its depleted insurance fund, including a mandate for all FHA lenders to maintain minimum capital of $2.5 million within three years. Since 1993, FHA has required lenders that use its insurance program to have a net worth of at least $250,000. But with its new proposals, lenders will need to have $1 million of capital within 12 months of implementation of the final rule, and then $2.5 million two years later. FHA is soliciting public comment for 30 days on its proposals, telling the industry that "comments received will be considered in the development of a final rule." Fannie Mae and Freddie Mac have announced similar minimum capital standards for their seller/servicers. At the end of September FHA had roughly $3.6 billion in cash left to cover a $685 billion book of business, leaving the fund with a capital ratio of just over 0.5%. Under the new proposals, mortgage brokers would no longer need to be FHA certified, but table funders that accept their loans would be financially responsible for them.

The Treasury Department is setting up a Homeownership Preservation Office to ride herd on servicers that are failing to turn trial loan modifications into permanent modifications. The Obama administration also is threatening to impose sanctions and fine servicers with low conversion rates. Servicers participating in the administration's Home Affordable Modification Program have placed over 650,000 borrowers into trial modifications and 375,000 are due to convert to permanent modifications by yearend. The administration wants to achieve the highest conversion rate for those 375,000 borrowers. "We must now refocus our efforts on the conversion phase to ensure that borrowers and servicers know their responsibilities and are converting trial modifications to permanent ones," said Phyllis Caldwell, who heads the new Homeownership Preservation Office. Treasury/Fannie Mae account liaisons are being assigned to monitor servicers' performance. "Servicers failing to meet performance obligations under the Servicer Participation Agreement will be subject to consequences, which could include monetary penalties and sanctions," according to Treasury.

Fannie Mae issued $40.7 billion in mortgage-backed securities in October, down 14.5% from September, according to the government-sponsored enterprise. October's issuance is the lowest since January, when the GSE issued $21.3 billion in MBS and it most likely reflects a decline in refinancing volume. Freddie Mac reported a similar 13.5% drop in MBS issuance in October. Freddie also reported that its purchases of refinanced loans fell by 15% month-over-month. Fannie did not report its purchases of refinanced loans. Recently it appears Fannie and Freddie MBS issuance has been tied to the refinancing market, while Ginnie Mae issuance has been tied to the homebuying market. Ginnie Mae MBS issuance totaled $38.7 billion in October, down only 2.5% from the previous month.

Thrifts originated $47.1 billion in single-family loans during the third quarter, down nearly 25% from the previous quarter as refinancings dropped off. Refinancing activity accounted for 39% of thrift originations, compared to 55% in the second quarter when refis were near record levels, according to the Office of Thrift Supervision. The 780 OTS-supervised thrifts hold $348.9 billion in one-to-four family loans on their books and 5.76% are classified as "noncurrent" (90 days or more past due or considered uncollectible), up from 3.39% a year ago. The noncurrent rate on construction loans is 13.1% and 2.7% on commercial real estate loans. Thrifts posted a profit of $1.3 billion for the third quarter, up from $94 million in the previous quarter. But $1.1 billion of that profit came from a sale or non-operating gain from one institution. "Without that gain, the industry's net income would have been $200 million, essentially breaking even," OTS said.

Banks had to buy back $7.1 billion in defaulted single-family loans in the third quarter to reimburse mortgage investors, up from $1.9 billion in the previous quarter. Federal Deposit Insurance Corp. Call Report information shows that most of the buyback demands fell on JPMorgan Chase and Bank of America. Chase repurchased $2.7 billion in defaulted loans and BoA repurchased $2.3 billion to satisfy investor demands. Both are on the hook for troubled loans they took control of when they purchased ailing mega-thrifts — Countrywide in the case of BoA and Washington Mutual by Chase. The FDIC information also lists buybacks by Citibank ($898 million), National City Bank ($361.6 million), Wells Fargo Bank ($266 million) and SunTrust Bank ($232.3 million). Investors like Fannie Mae and Freddie Mac can require lenders to buy back defaulted loans that don't comply with their underwriting requirements. Freddie Mac forced its seller/servicers to buy back $960 million in bad mortgages in third quarter. (Fannie does not disclose buyback information.) Ginnie Mae and Federal Housing Administration also require buybacks and indemnifications on bad loans.

The Mortgage Bankers Association is in the midst of reshaping its government affairs duties, and plans to hire a new senior vice president to oversee what it calls "advocacy." The new title has yet to be cast in stone, but MBA has hired the search firm of Lochlin Partners, Washington, to assist it in finding someone with legislative and policy experience. Steve O'Connor, who currently serves as senior vice president of government affairs, will take over as SVP of public policy and industry relations. A spokesman for the trade group said Mr. O'Connor and the new hire will have duties that overlap to a certain degree. Over the next two years Congress likely will decide the fate of Fannie Mae and Freddie Mac, a decision that will have a major impact on residential lenders. During his career, Mr. O'Connor has worked in government affairs for the National Association of Realtors and Freddie Mac.

The Federal Reserve should continue its MBS purchase program past the March 31 cutoff date, according to James Bullard, president of the St. Louis Federal Reserve Bank. "I have advocated to keep the asset-purchase program open but at a very low level and wait and see want happens," Mr. Bullard told Dow Jones Newswires. To support the secondary mortgage market, the Federal Reserve has purchased nearly $850 billion in Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities since December 2008. Mr. Bullard said in a recent speech that he would like the FOMC to adopt a "state-contingent policy that would allow for the adjustment of asset purchases as new information on the economy becomes available." At a Sept. 23 Federal Open Market Committee meeting, the Fed decided to extend its $1.25 trillion MBS purchase program through the first quarter and slow its MBS purchases. Since then, weekly MBS purchases have slowed to a $16 billion to $19 billion range from the faster pace of $20 billion to $25 billion a week. During the week of Nov. 11, however, the purchase activity spiked to $45.3 billion, as the Fed acquired $39.5 billion in Fannie MBS.