Compliance & Regulation

Fannie Mae completed 56,816 loan modifications during the first nine months of the year with 46% involving mortgages with current loan-to-value ratios greater than 100%. "A significant portion of our modifications pertain to loans with a mark-to-market LTV ratio greater than 100%," Fannie said in its third quarter financial report. Fannie notes that 20% of its high LTV single-family mortgages are 90-days or more past due, compared to a serious delinquency rate of 4.72% on its entire $2.8 trillion guaranteed mortgage portfolio. In the third quarter, the GSE completed 28,000 loan modifications, including a "limited number" of borrowers who qualified for the Obama administration's Home Affordable Modification Program. However, the GSE said a "large number" of the third quarter modifications involved borrowers "who did not qualify for modifications under the Home Affordable Modification Program."

Senate Banking Committee chairman Christopher Dodd, D-Conn., has scheduled a committee meeting for November 19, giving members a chance to air their opinions on his comprehensive regulatory reform bill. Chairman Dodd wants to use the vetting session to gauge the level of support for his bill and see what changes are needed to forge a consensus. The initial draft of the legislation would consolidate bank supervisory activities into one agency, establish a separate consumer financial protection agency, and create a process for safely shutting down firms that are currently considered "too big to fail." So far, no Republican members have expressed support for the bill and a few Democrats have noted they have problems with some provisions. Sen. Dodd plans to release a revised draft of his bill on November 23. He wants the committee to meet December 2 to start the markup of the bill where senators offer and vote on amendments.

Over the past two months the Federal Housing Administration has suspended or "eliminated" at least eight mortgage banking firms from using its insurance program, according to Assistant Housing Secretary David Stevens. Mr. Stevens told reporters at a press conference that the eight firms — which were not identified — "were originating a poor quality book of business." He noted that mortgage banking firms that were approved to do business with the agency between 2005 to 2009 account for just 5% of its overall business. "A vast majority" of FHA's $685 billion book of business consists of what Mr. Stevens called "long tendered institutions." One mortgage banking source told National Mortgage News that the government is now looking into a large number of early payment defaults at a New Jersey-based FHA lender. No further details were available. On Thursday HUD released an audit showing that at the end of September the FHA's Mutual Mortgage Insurance fund had a razor thin capital cushion of just $3.6 billion, or 0.53% of its entire coverage universe. HUD is considering raising premiums to bolster the fund. HUD officials say that despite the thin capital base of the MMI, the fund is constantly bringing in new cash through premiums and that almost 30% of borrowers using the program in fiscal 2009 had a credit score of 720 or better, an all-time high. Four years ago just 12.6% of FHA borrowers had a credit score that high.

The Federal Housing Administration has set new standards for housing counselors who want to work with seniors taking out FHA-insured reverse mortgages. To provide these services, counselors have to pass an AARP-approved examination and apply to be on FHA's new roster for Home Equity Conversion Mortgage counselors. "Only those counselors on the HECM roster can provide HECM counseling to potential HECM borrowers," according to FHA mortgagee letter 2009-47. FHA created the HECM roster in response to criticism that some counseling sessions are pro forma — conducted by counselors that are not knowledgeable about the product. The Government Accountability Office identified problems and Congress directed FHA to take corrective action. Darryl Hicks, a spokesman for the National Reverse Mortgage Lenders Association, noted that the new standards and roster have been a work in progress for the past two years. "We think it is great for the industry because it will establish a higher bar for counseling," Mr. Hicks said.

The Federal Deposit Insurance Corp. is reshaping its receivership policies and temporarily extending its hands-off approach on securitized mortgages and other loans when it takes over failed banks and thrifts. "It is fully appropriate and necessary to provide a transitional safe harbor" until March 31, FDIC chairman Sheila Bair said. Since 2000, FDIC has pledged not to reclaim securitized assets that qualify as sales and off-balance sheet assets under generally accepted accounting principles. But recent changes to accounting rules will force many institutions to consolidate private-label residential and commercial mortgage securities on their balance sheets starting Jan. 1. "The changes in accounting have changed the playing field," said FDIC vice chairman Martin Gruenberg. Going forward, FDIC will require securitizations to meet certain standards to qualify for the safe harbor. The FDIC Board will meet Dec. 15 to discuss and issue a set of conditions for public comment. These conditions will "support a structured finance process that does not create land mines for banks, investors and our financial system," Ms. Bair said.

The Department of Housing and Urban Development believes the Federal Housing Administration mortgage insurance program has enough cash reserves to stay in the black during the housing downturn — even though its capital ratio is near zero — but is not ruling out a hike in mortgage insurance premiums charged to consumers. In response to a question from National Mortgage News, HUD secretary Shaun Donovan said the agency is "actively looking at its options" to bolster the FHA reserve fund but is "not ready to make an announcement" regarding mortgage insurance premiums. Lenders fear that a hike in the MIP would raise costs for consumers and slow the housing recovery. A much-anticipated actuarial study on the FHA's "Mutual Mortgage Insurance" fund found that the agency had a 0.53% capital ratio at the end of September to cover a $685 billion book of business. In a two-hour public presentation, HUD secretary Donovan stressed that the MMI has $30.7 billion in cash but it has had to set aside $27.1 billion to cover anticipated losses on FHA-backed mortgages, leaving it with a cash cushion of just $3.6 billion. (The FHA reserve fund is required to have a capital base north of 2%.) The new study believes the MMI will stay in the black unless the housing recession deepens. If that happens, the fund will have a negative capital ratio of 0.46%. But if the mortgage market suffers what FHA calls a "downward interest rate shock" the fund could go negative by as much as 2.33%. But Mr. Donovan and FHA commissioner David Stevens said they do not anticipate that happening.

Farmer Mac had net income of nearly $18 million for the third quarter as the company continued its turnaround. A year ago, it had a third-quarter loss of $106 million. Farmer Mac is benefiting from increased guarantee and commitment fees as well as an improved net interest spread. During the quarter, it added $708 million to its portfolio of loans, guarantees and commitments, bringing that total to $10.8 billion as of Sept. 30. Nonperforming assets fell from $97 million at the end of the second quarter to $84.8 million at the end of the third. During the same timeframe, 90-day delinquencies increased from $42.3 million to $59.4 million. The decline in NPAs is because of the sale of three ethanol facilities that were classified as real estate owned. During the quarter Farmer Mac had an other-than-temporary impairment of $1.6 million to write down a $50 million investment in the unsecured debt of HSBC Finance to its fair market value. Since the end of the quarter, Farmer Mac sold $20 million of the debt for $19.5 million. But since the sales price was higher than the carrying value of the debt, the company will record a fourth-quarter gain of $100,000 on the sale.

U.S. District Judge Lynn N. Hughes sentenced Clarence Lewis III, a licensed mortgage and real estate broker from Houston, to 15 years in federal prison without parole, followed by three years of supervised release, for running a mortgage fraud scheme. Judge Hughes also ordered Lewis to pay restitution, the amount of which will be determined early next year. According to Tim Johnson, U.S. attorney for the Southern District of Texas, Lewis operated Motown Mortgage Group and Lewis and Associates Realtors and used an assumed name business, Astro Construction, to extract loan proceeds from the real estate closings. The loans on the majority of the properties obtained by fraud fell into default and the properties were foreclosed. Lewis obtained more than $12 million in fraudulent residential mortgage loans during the course of his five-year mortgage fraud scheme beginning in 2002.

Senate Banking Committee chairman Christopher Dodd, D-Conn., has produced a "discussion draft" of a comprehensive regulatory reform bill that requires sellers of mortgage-backed securities to retain 10% of the credit risk. However, the draft provides a risk retention exemption for government-guaranteed mortgages as well as mortgages purchased and securitized by Fannie Mae and Freddie Mac. In addition, regulators can approve a "total or partial" risk retention exemption for other MBS and allocate risk retention between securitizers and the lenders. The House Financial Services Committee is moving toward approving a similar bill to address systemic risk that also requires 10% risk retention, a mandate that the mortgage industry opposes. "To restore confidence in our markets and encourage investment, we will require companies that sell products such as mortgage-backed securities to keep 'skin in the game' so that they won't sell worthless securities to investors," Sen. Dodd said. His bill also creates an independent Consumer Financial Protection Agency to protect consumers from "hidden fees and abusive terms" so they know they are being offered "safe" mortgages and other products, he said. Sen. Dodd said he would seek input on his draft bill and reach out to Republicans in an attempt to mark up and approve a bill by the first week of December. Dodd's CFPA plan focuses on companies that "pose the greatest risk to consumers — mortgage bankers, brokers, finance companies and the largest institutions," according to a legislative summary.

Two former managers in charge of Bear Stearns hedge funds that invested in subprime bonds and derivatives were found not guilty of fraud charges Tuesday afternoon in New York. A jury in Federal District Court in Brooklyn acquitted former Bear executives Ralph Cioffi and Matthew Tannin, believing the two men did not lie to investors by presenting an upbeat picture without disclosing that the two funds they managed were plummeting in value. In particular, Mr. Cioffi was found not guilty of insider trading charges on accusations that he moved $2 million he had invested in one of the failing subprime hedge funds to another less risky fund while telling investors he was adding to his position. The government accused them of defrauding at least 300 investors out of $1.6 billion. The two had been charged with three counts of securities fraud and two counts of wire fraud. They still face civil damages in regard to the hedge funds. Massachusetts sued Bear Stearns Asset Management, accusing Mr. Cioffi of making hundreds of trades on behalf of the hedge fund with the approval of the fund's independent directors. In late 2007 Bear disclosed in an SEC filing that the funds were the subject of a criminal investigation. Bear, which collapsed in early 2008, was a major player in the subprime mortgage market. Previous to its collapse, Bear operated a trading desk and a warehouse unit, and also owned a mortgage banking firm called Encore Credit. (Photos: Bloomberg News)