Compliance & Regulation

FDIC-insured banks had to buy back $1.9 billion of defaulted mortgages during the second quarter after facing heavy repurchase demands from investors during the first and fourth quarters. According to Federal Deposit Insurance Corp. call report information, banks repurchased $3.4 billion of mortgages in the first quarter and another $3.3 billion in the fourth quarter of last year. The two banks repurchasing the most in single-family loans in 2Q were JPMorgan Chase ($380 million) and Bank of America ($252 million). However, in the first quarter JPM had $2.2 billion in buybacks. BoA had $299 million. Both are on the hook for troubled loans they took control of when they purchased two ailing mega-mortgage lenders — Countrywide in the case of BoA, and Washington Mutual in the case of JPM. Secondary market investors like Fannie Mae and Freddie Mac can require lenders to buy back defaulted loans that do not comply with their underwriting requirements. Ginnie Mae and Federal Housing Administration also require buybacks and indemnifications on bad loans.

Senate Banking Committee Chairman Chris Dodd (D-Conn.) is actively considering a regulatory reform bill that would create a single federal regulator for financial institutions, stripping supervisory powers away from existing agencies, according to sources on Capitol Hill. The bill — which, sources cautioned, remains a work in progress and could be derailed by several factors — also would likely create an interagency systemic risk council rather than give such oversight to the Federal Reserve Board, as the Obama administration has advocated. Dodd's committee is working to finish a draft soon, with the hope of passing a bill this year. But whether this version will survive hinges on whether Dodd decides to give up his Senate Banking chairmanship in order to run the Health, Education, Labor and Pensions Committee. A new banking chairman would probably tweak the bill and could even take a new approach. Sen. Dodd is up for re-election next year but could be in trouble. In March one poll showed him with an approval rating of about 30% — thanks mostly to published reports that he was in the 'Friends of Angelo' program and received a price break on his mortgage from Countrywide Home Loans. Former Countrywide chairman and CEO Angelo Mozilo started the program which gave discounted points and fees to selected customers, including elected officials.

Federal Home Loan Banks are on pace to pay off their Resolution Funding Corp. obligations by April 15, 2012, which would free up 20% of their income one year earlier than expected. The FHLBank's Office of Finance made this determination based on the $278 million Refcorp payment the banks made in the second quarter. Since 1989, the 12 FHLBanks have diverted at least $300 million of their income to pay off $30 billion in Refcorp bonds. The federal government sold the 40-year bonds to cover part of the costs of the savings and loan cleanup. American Bankers Association executive vice president Bob Davis noted that the FHLBank System will be more secure once the Refcorp obligations are finally satisfied. "We need to start planning now for how we are going to use those funds. And how some of those funds can be used to make the FHLBank System more competitive and effective in carrying out its mission," Mr. Davis said.

Servicers completed 80,170 loan modifications in July, down from 96,000 in the previous month, as more troubled homeowners participated in 90-day trial modifications as part of the President's foreclosure prevention programs, according to the servicer alliance Hope Now. The number of delinquent borrowers that entered into repayment plans also fell in July. "The good news is that in July, over 253,000 borrowers were helped through loan workout solutions," said Hope Now executive director Faith Schwartz. Treasury Department recently reported that servicers initiated 230,000 trial modifications in July. Treasury is expected to report on the first completed loan modifications under the President's Home Affordable Modification Program this month (September). "It is anticipated that modification numbers will increase in the Hope Now industry surveys in the coming months," the servicer alliance said. Participating HAMP servicers have pledged to complete 500,000 loan modifications by November 1.

The Federal Reserve should slow its purchases of agency mortgage-backed securities so that it can extend the buying program into next year, according to one MBS market expert. Credit Suisse mortgage strategist Mahesh Swaminathan said the Federal Reserve Bank of New York is purchasing Fannie Mae, Freddie Mac and Ginnie Mae MBS at a rate of $25 billion a week. "They are really racing," said Mr. Swaminathan. "At this pace they will be done with their purchase program by yearend. I don't think that is desirable," he added. Recent statements by a couple of Federal Reserve Bank presidents indicate the $1.25 trillion MBS purchase program may be allowed to expire at the end of December. The New York Fed has already purchased $790 billion of agency MBS. If they cut their weekly purchases by 50% or more, the Credit Suisse strategist said, the purchase program could be extended into the first and second quarters of 2010. "It is much better to slow things down now and telegraph that they are ready to support the market for some more time," he said.

The fair value of loans held by the nation's largest commercial banks continues to decline, indicating that credit markets have not yet turned around and raising serious questions about the effectiveness of the government's efforts to help the industry through the credit crisis. Among the banks that were stress-tested by the government in May, the difference between carrying values and fair values grew 14.4% from Dec. 31 to June 30 - to $164.4 billion. Observers said the data shows that it is getting even more difficult to find buyers for stressed loans and that banks' efforts to jettison bad assets could be delayed. And if the Financial Accounting Standards Board advances a sweeping mark-to-market proposal, some banks might have to raise more capital to close their valuation gaps. "It is clearly a sign of stress that surprises me," said Tim Yeager, a finance professor at the University of Arkansas and a former economist at the St. Louis Federal Reserve Bank. "I thought by now that we would have turned the corner, but things seem to be getting worse."

Freddie Mac soon may be receiving a notice from the New York Stock Exchange, saying it is back in compliance with the NYSE's listing requirements. At press time Freddie's common was trading at $2.22, which means that its average share price will have been north of $1 for the past 30 days - that is, as long as its stock price doesn't collapse by close of business Monday. Under NYSE rules, the exchange can initiate delisting proceedings for companies whose 30-day average price falls below $1. "We're waiting for official notification from the NYSE," a company spokeswoman said Monday. In a week it will mark the one-year anniversary since Freddie and its sister company, Fannie Mae, were taken over the government and placed into conservatorship. The share price of both GSEs has been rising over the past month. Some stock analysts attribute the price increase to bottom fishing and speculation by short sellers. Freddie's 52-week low is 25 cents, its high $5.52. In the second quarter Freddie actually posted a profit while Fannie lost money.

Despite widespread optimism about the broader economy, the commercial banking industry remains deep in crisis with commercial real estate loans a deep concern for regulators. In the second quarter the commercial banking industry lost $3.7 billion, credit quality dropped to all-time lows, the troubled-bank list reached a 15-year high and federal reserves backing deposits fell to their lowest level since the savings and loan crisis. Federal Deposit Insurance Corp. chief Sheila Bair said credit problems are now hitting a broader class of loans than just residential mortgages. "For now, the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry's bottom line," Ms. Bair said as the agency released its Quarterly Banking Profile. After a first-quarter profit tied in large part to the government's bailout of the banking sector, the industry's net quarterly loss was only its second since 1990. The FDIC cited a 33% rise in loss provisions from the year-ago quarter - to $67 billion - and huge writedowns on asset-backed commercial paper as main drivers for the decline. But perhaps more troubling were alarming signs of credit-quality deterioration. The net charge-off rate last quarter of 2.55% was the highest ever, exceeding the fourth-quarter record of 1.95%.

The performance of home-equity lines of credit took a turn for the better in the second quarter as delinquency rates dropped but net charge-offs spiked up 30%. The Federal Deposit Insurance Corp. reported that 1.73% of HELOCs are 90 days or more past due or considered uncollectible, down 25 basis points from the previous quarter. "Noncurrent home-equity and junior-lien mortgages declined for the first time in six quarters," FDIC chairman Sheila Bair said. The noncurrent rate on closed-end second liens fell to 3.26% in the second quarter from 3.8% in the prior quarter. FDIC-insured institutions charged-off $5.1 billion in HELOCs and $2.7 billion in junior liens in the second quarter.

Next week the Federal Deposit Insurance Corp. could pick a winning bidder on $1 billion in servicing rights belonging to the now-defunct Franklin Bank of Texas. An investment banking source familiar with the transaction told National Mortgage News that "a winner will be picked a week from now." Initially 23 bidders expressed interest in the portfolio of residential servicing rights. Interactive Mortgage Advisors is auctioning the portfolio for the agency. The servicing brokerage declined to comment.