Compliance & Regulation

The Comptroller of the Currency is urging national banks to take a look at the Federal Housing Administration loan program that can be used to restore foreclosed homes and help stabilize neighborhoods. The FHA 203(k) program provides government insured financing for the purchase and renovation of a property in a single loan transaction. OCC is promoting the benefits of FHA 203(k) loans in its "Community Development Insights" magazine. "This product can be used by banks to develop new business, mitigate risk, enhance profitability, as well as assist in the revitalization and stabilization of neighborhoods negatively impacted by the current foreclosure crisis," OCC says in the magazine. FHA commissioner David Stevens said he welcomes OCC's efforts to increase bank participation in the FHA loan program "With so many bank-owned properties in need of repairs, this program offers a great way for homebuyers to finance both the purchase and rehabilitation of these homes," Mr. Stevens said.

Freddie Mac reported a profit of $768 million in the second quarter and positive net worth of $8.2 billion so it will not have to seek additional capital from the Treasury Department this quarter. It is a remarkable turnaround for a company that posted a $9.9 billion loss in the first quarter. But after the paying the Treasury $1.1 billion in dividends for previous capital infusions, Freddie had a net loss per common share of $0.11 for the second quarter. "We are pleased that our financial results allow us to finish the quarter with a positive net worth," Freddie interim chief executive John Koskinen said. But he said the company remains cautious due to the recession and rising foreclosures. Freddie absorbed $5.2 billion in credit-related expenses in the second quarter, compared to $9.1 billion in the first quarter. The serious delinquency rate on its $172 billion Alt-A portfolio hit 9.44% in the second quarter. Overall, 2.9% of the GSE's single-family mortgages are 90 days or more past due. "Second quarter results were driven primarily by $4.3 billion in net interest income mainly due to lower funding costs, as well as $4.2 billion in gains on the company's derivative portfolio," Freddie said.

The Government National Mortgage Association has hired Bank of America to service the roughly $25 billion in FHA receivables it seized from Taylor, Bean & Whitaker last week, according to industry sources. One investment banking official also noted that TBW is a major servicer of Freddie Mac-guaranteed loans and that the GSE may soon make a decision regarding its rights. "They haven't serviced for Fannie in years," said the banker. At the end of March TBW, a non-bank, ranked 13th nationwide among residential servicers with $78.2 billion in receivables, according to the Quarterly Data Report. At press time officials at BoA, GNMA, Freddie Mac and TBW were not commenting or had not returned telephone calls about the matter. Last week the Federal Housing Administration suspended the Ocala, Fla.-based TBW as a lender which then caused it to pull the plug on its wholesale division. Shortly before that, TBW's $300 million financial rescue of its chief warehouse provider, Colonial Bancshares, fell apart after the Alabama bank reported a huge loss. Colonial is now the subject of a federal probe of its warehouse lending operations.

Fannie Mae reported a $14.8 billion loss for the second quarter, compared to a $2.3 billion loss a year ago, and the mortgage giant is seeking a $10.7 billion draft from the Treasury Department to maintain a zero net worth. The government sponsored enterprise, which is in conservatorship, absorbed $18.8 billion in credit expenses due to defaults and foreclosures. The company benefited from a change in the accounting rules and recorded a $753 million impairment charge on its Alt-A and subprime private-label securities. In the first quarter, Fannie recognized a $5.7 billion "other than temporary impairment" charge, which contributed to a $23.2 billion loss for that quarter. The GSE also increased its reserves by $13 billion and ended the second quarter with a $54 billion single-family loss reserve. Guaranty fee income fell 5% to $1.7 billion in the second quarter from the previous quarter while net interest income rose 15% to $3.7 billion. Fannie said it is experiencing increasing default rates across its entire guaranty book of business and the serious delinquency rate on its $270 billion Alt-A portfolio hit 11.9% in the second quarter. Overall, 3.9% of the GSE's single-family mortgages are 90 days or more past due, up from 1.7% a year ago.

The Obama administration's Home Affordable Refinance Program jumped into second gear in July as Fannie Mae purchased 16,000 HARP refinancings in a single month. July purchases matched the total number of HARP loans the mortgage giant acquired during the whole second quarter. Fannie noted in its second quarter securities filing that lenders have been ramping up for the HARP program that allows homeowners with loan-to-value ratios of 80% to 125% to refinance their mortgages. But the number of refinancings completed was limited due to capacity. "As a result, we expect an increase in refinancings under this program in the third quarter... as second quarter applications are closed and delivered," Fannie said. Overall, Fannie acquired or guaranteed 843,000 refinanced loans in the second quarter, up 40% from the previous quarter.

Mortgage companies trimmed their payrolls of 500 full-time employees in June and continue to hold back on hiring despite stabilizing home sales and high demand for refinancings. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector fell to 265,100 in June from 265,600 in May. The decline in mortgage industry jobs has leveled in the past few months, although the number of jobs is off by 16% since June 2008. Meanwhile, Friday's job report contains some encouraging signs that job losses are slowing, which could also slow foreclosures since layoffs have been driving up defaults. BLS reported that 247,000 U.S. workers lost their jobs in July, compared to 443,000 in the previous month. The nation's unemployment rate edged down slightly to 9.4%. [There is a one-month lag in BLS's reporting of mortgage industry employment data.

Colonial BancGroup Inc. said it is the target of a U.S. Department of Justice criminal investigation relating to its mortgage warehouse lending business. The Montgomery, Ala., company said it is cooperating with the investigation which concerns accounting irregularities on more than one year's audited financial statements and regulatory financial reports. The company also revealed it has provided documents to the Special Inspector General for the Troubled Asset Relief Program and the Securities and Exchange Commission. A Justice Department spokesman said the agency is not commenting on Colonial. Colonial also said its bank subsidiary received notice that the Alabama State Banking Board will meet on Aug. 12 at which time Colonial Bank will be asked to consent to the appointment of the Federal Deposit Insurance Corp. as receiver or conservator if and when the state regulator deems necessary. This news wraps a bad week for Colonial as it reported the death of its recapitalization deal with Taylor, Bean & Whitaker, a $606 million second quarter loss, and a raid by the TARP IG on its warehouse office in Orlando as well as the abrupt closing of TBW.

Joseph Silvestro and his wife Julie Silvestro pleaded guilty before U.S. District Judge Ortrie D. Smith to their roles in a mortgage fraud scheme. According to Matt J. Whitworth, acting U.S. attorney for the Western District of Missouri, the Silvestros defrauded mortgage lenders by obtaining larger loans from lenders than the actual sale price associated with a particular property. These loans were based on material false and fraudulent representations, and by concealing material facts. The Silvestros arranged for mortgage documents that often included payment of fictitious and fraudulent invoices to their company, Taylor Investments, as part of the settlement statement. The plea agreements cite three properties — two in Kansas City, Mo., and one in Kansas City, Kans. — in which the Silvestros fraudulently claimed invoices for Taylor Investments, ranging from $20,000 to $37,000. The government believes that the loss attributed to the Silvestros totaled more than $567,000, though the defendants have reserved the right to contest the amount of loss at their sentencing hearings, which will be scheduled after the United States Probation Office completes its pre-sentence investigation. Under federal statutes, the Silvestros are each subject to a sentence of up to five years in federal prison without parole, plus a fine up to $250,000 and an order of restitution.

Federal Housing Finance Agency director James Lockhart made it official and will step down soon but it does not appear that the White House is ready to name his replacement. FHFA senior deputy director Edward DeMarco will become the acting director when Mr. Lockhart leaves. "As the housing market is starting to stabilize and the housing GSEs are strongly supporting the housing markets and other financial institutions, it is time for me to move on to the next chapter," Mr. Lockhart said confirming media reports circulating during the day on Aug. 5. Mr. Lockhart has served as Fannie Mae and Freddie Mac's regulator for the past three years. From the start he pushed hard for a reform bill that finally Congress passed last year to strengthen the regulation of the government-sponsored enterprises. Treasury secretary Timothy Geithner wanted Mr. Lockhart to stay until the end of this year while the administration formulates plans for restructuring Fannie Mae and Freddie Mac. But he is expected to leave the agency before the end of this month, possibly as soon as next week. Mr. DeMarco is currently the senior deputy director of FHFA. "His extensive knowledge of both the supervisory matters and administrative matters ahead make him well-suited to lead the agency at this time," Mr. Lockhart said.

Federal regulators are advising banks that their ownership of a second lien should not influence their decision to modify the first mortgage that they are servicing for other investors. Banks that service the first and second mortgages on the same residential property may face "potential conflicts of interests," the regulators say in a joint statement. "A servicer's decision to modify the first mortgage should not be influenced by the potential impact on the subordinated lien and vice versa," according to the Federal Financial Institutions Examination Council statement. An investor group recently told Congress that four banks that own $44 billion in second liens also service 55% of all first mortgages. The regulators stress that servicers have an obligation to modify the first lien if it would "produce a greater anticipated recovery" for the investors. "Failure to do so would be a breach of the servicer's obligation to those owners/investors," the FFIEC says.