Compliance & Regulation

Senate Banking Committee chairman Christopher Dodd, D- Conn., has been diagnosed with prostate cancer and he will have an operation during August when the Senate is not in session. Sen. Dodd said the cancer was discovered in an early state and his "prognosis is excellent." After the Senate adjourns, "I am going to have surgery. After a brief recuperation at home, I'll be back at work," Sen. Dodd said. The Connecticut senator is running for re-election next year. Sen. Dodd also is a key player in the Obama Administration's efforts to restructure regulation of the financial system and reform health care.

Rep. Paul Kanjorski, D-Pa., and 40 other congressmen are urging the Federal Reserve Board to extend its Term Asset-Backed Securities Loan Facility to provide "essential support" for the commercial real estate mortgage market. The program is due to expire at yearend and the Fed just recently opened the special facility to finance purchases of newly issued and legacy commercial mortgage-backed securities. "The $6 billion commercial real estate market has recently experienced a massive credit shortfall, which the TALF has only just begun to help stabilize," the congressmen say in a letter to Fed chairman Ben Bernanke. The Fed needs to give the TALF more time to work, "especially with $1 trillion in commercial real estate debt maturing in the near future," the July 31 letter says. The Fed chief recently signaled that he is open to extending the TALF.

The Federal Deposit Insurance Corp. is conducting its first legacy loan sale, which gives investors access to affordable financing to purchase a 50% stake in a pool of residential mortgages. Investors paying cash can take an 80% equity position in the pool of receivership assets and manage the mortgages, which are being sold on a servicing released basis. Investors seeking government financing can take a 50% equity position and split any profits with the FDIC. Financing is being offered with leverage of 6-1 or 4-1 depending on certain elections. FDIC is conducting the first sale using $1 billion in assets from the failed Franklin Bank in Houston, according to a report in the American Banker. FDIC is hoping this test of the Legacy Loans Program will lead to sales of bad assets by operating banks. "This step will allow FDIC to be ready to offer the LLP to open banks as needed," the agency said.

The Treasury Department has unveiled its loan modification insurance program to protect investors from declines in house prices. The $10 billion Home Price Decline Protection program will "offset any incremental collateral loss on modifications that do not succeed" during the first two years, Treasury said. The new program is aimed at giving investors and servicers participating in the administration's Home Affordable Modification Program an incentive to modify loans in markets with declining house values. "Home price decline protection can help homeowners who may not have been reached otherwise," Treasury assistant secretary Michael Barr said. The amount of the HPDP "incentive" payment is determined at the time the servicer runs the net present value test to qualify homeowners for a loan modification trial. It is based on expected price declines over the next year and other factors. Treasury is kicking off the incentive payment program for HAMP modifications with NPV test dates on or after Sept. 1. "Mortgage loans that are owned or guaranteed by Fannie Mae and Freddie Mac are not eligible for HPDP incentive compensation," according to a Treasury directive.

The California real estate commissioner said he would oppose increases in mortgage broker licensing fees that the state Legislature is considering as part of a regulatory reform package. Commissioner Jeff Davi told attendees at the California Association of Mortgage Brokers convention in San Diego he would fight to insure the new regulatory scheme would not drive up the costs for mortgage broker licenses. Higher fees could impact the ability of some brokers to stay in business, he said. The state Legislature is considering a bill to create a financial services regulator that would oversee the mortgage industry and brokers. Right now, mortgage brokers are licensed as real estate brokers.

Standard & Poor's Ratings Services has lowered several of Colonial BancGroup's ratings, citing risks linked primarily to its consent to a cease-and-desist order by its regulators. "The rating downgrade largely results from our view that regulatory risk has increased following the company's announcement that it has consented to an order to cease and desist by the Federal Reserve, its primary federal regulator, and the Alabama State Banking Department," S&P credit analyst Robert Hansen said. S&P noted that the cease-and-desist order states that the "company cannot pay any dividends or make any distributions of interest or principal on subordinated debt or trust-preferred securities without the prior written permission of these two regulators. If Colonial BancGroup is not granted permission by these regulators to make interest payments and subsequently misses an interest payment on its subordinated debt, the company's rating would be lowered [to default level]." The company's counterparty credit rating fell to CC from CCC. Its rating on the company's preferred shares fell to C from CC. And its long-term counterparty credit ratings on its subsidiaries fell to CCC- from B-. All short-term ratings on the company and its primary bank remain at C. All ratings remain on CreditWatch with negative implications.

The federal government has put up what a regulator said was a total of about $1 trillion to prop up Fannie Mae and Freddie Mac through capital infusions and purchases of their corporate debt and mortgage-backed securities since the two mortgage giants were placed in conservatorships last September. The Federal Reserve and the Treasury Department have purchased $843 billion in Fannie and Freddie MBS to lower mortgage rates and support the secondary mortgage market and $105 billion in GSE debt, according to the Federal Housing Finance Agency. Treasury already has provided $85 billion in capital support for the two government sponsored enterprises and has committed to provide another $315 billion if necessary. Each GSE can tap up to $200 billion in capital to maintain a zero net worth. But stress testing shows they "should not breach that $200 billion," FHFA director James Lockhart said during a speech at the National Press Club. Nevertheless, the GSEs, which own or guarantee $5.4 trillion in mortgages, will continue to report additional losses and increase their loan loss reserves. Fannie has a $42 billion reserve and Freddie a $23 billion reserve. Mr. Lockhart doubts all the capital, which is in the form of senior preferred stock, will be paid back to Treasury when the GSEs emerge from conservatorship. "Some of the losses will never be repaid," he said.

Senate and House appropriators are taking slightly different approaches in trying to cover an $800 million shortfall in the Federal Housing Administration reverse mortgage program. The Senate Appropriations Committee is providing $288 million to cover part of the shortfall, which is based on expected losses due to declining house prices, and requiring HUD to reduce the loan proceeds seniors receive by 5%. House appropriators are not providing any funds for the FHA Home Equity Conversion Mortgage program, but they are instructing the Department of Housing and Urban Development to cover the shortfall by reducing the proceeds on HECMs. Reverse mortgage lenders are opposed to such reductions, claiming it would hurt seniors who can't sell their home, but need a large enough HECM to pay off their existing mortgage. The National Reverse Mortgage Lenders Association is proposing that HUD reduce the upfront mortgage premium on HECMs and increase the annual premium to deal with shortfall. "We are willing to work with HUD to re-engineer the mortgage insurance premium," NRMLA president Peter Bell said.

The Senate passed a bill Thursday evening that provides the Federal Housing Administration with additional loan commitment authority so the FHA can continue to endorse single-family loans through Sept. 30 without interruption. The Senate's action clears the measure so it can be sent to President Obama for his signature. The House passed the bill (H.R. 3357) earlier in the week by a 363-68 vote. The bill provides $85 billion in additional commitment authority for FHA and $100 billon for Ginnie Mae. The Senate passed it by a 79-17 vote. The measure also includes emergency funding for the highway trust fund. FHA warned Congress back in June that it had used 75% of its $315 billion in loan commitment authority and later requested additional commitment authority to avoid a shutdown of the single-family program.

The GSE regulator is taking several steps in response to the continued deterioration of Federal Home Loan Bank investments in private-label MBS investments and he is even considering the creation of an insurance fund to prop up undercapitalized banks. "The Federal Housing Finance Agency in connection with the banks is studying the merits of establishing an insurance fund for the Federal Home Loan Banks," FHFA director James Lockhart said. The fund would "insure the timely payment of principal and interest on their obligations, facilitate mergers if necessary and provide capital assistance to under-capitalized FHLBanks," he said during a speech at the National Press Club in Washington. The director noted that FHFA is developing a framework for supervisory decisions on capital distributions and it is closely monitoring conditions at the FHLBanks where impairments on private-label securities (recorded as "other than comprehensive income") exceed retained earnings. In addition, the agency is issuing a proposal to expand the board of directors of the Office of Finance to include all 12 presidents of the FHLBanks and five independent directors.