Compliance & Regulation

Lending is steady or slower and residential real estate generally remains weak with signs of improvement, according to the Federal Reserve's Beige Book. Residential real estate lending is decreasing in New York, Richmond, and St. Louis, according to the Fed. Dallas' outstanding mortgage volumes are steady but low, while Kansas City's rise in mortgages is slowing. Refinancing activity is dropping dramatically in Richmond, decreasing in New York and Cleveland, and maintaining its pace in Dallas. Credit quality is varying by district with commercial real estate concerns leading to tighter credit in some areas as generally credit standards continue to tighten or remain stable. The only district where residential real estate sales are failing to improve is St. Louis, where they instead are seeing a steep drop. The Fed said the low end of the market, particularly entry-level sales, continues to do relatively well, with some districts attributing this to the first-time homebuyer tax credit. The Boston and New York districts said condominium sales are still far below 2008 levels. Home prices continue to decline in most cases although some districts see possible signs of stabilization. Three districts said foreclosure sales are putting downward pressure on prices. Residential construction appears to remain slow, with three districts noting that financing is difficult, according to the report. Respondents said commercial real estate sales volume is low, or even "non-existent" in some districts, citing a combination of tight credit and weak demand. Tight credit also was cited as a factor in limited or declining commercial construction in most districts, exceptions being health and institutional construction in the St. Louis district, public sector construction in the Chicago district and World Trade Center reconstruction in Manhattan.

A Senate appropriations subcommittee has approved new funding for the Federal Housing Administration to hire additional staff and update its aging information systems as part of the Department of Housing and Urban Development budget for fiscal year 2010. "It provides funds to start modernizing its technology systems in order to track its mortgages and obligations, which — I regret to tell you — it cannot do right now," said Sen. Christopher Bond, R-Mo. Sen. Bond also expressed concerns about the rapid growth of the FHA program and the lack of staff and expertise to manage the FHA single-family program effectively. "It may be at the edge of a meltdown," he warned. Sen. Richard Shelby, R-Ala., expressed similar concerns. "If we don't watch out we could have another Fannie Mae or Freddie Mac," Sen. Shelby said at a subcommittee markup of the HUD appropriations bill.

The House has passed a bill to provide the Federal Housing Administration with an additional $85 billion in loan committee authority so FHA can continue to insure single-family loans through Sept. 30 without interruption. The bill (H.R. 3357) also provides Ginnie Mae with an additional $100 billion in authority to guarantee the issuance of mortgage securities backed by FHA and other government guaranteed loans. The Department of Housing and Urban Development warned Congress back in June that it had used 75% of FHA's $315 billion in loan commitment authority. Now FHA might have to suspend its single-family program if Congress does not provide additional commitment authority before lawmakers leave Washington for the August recess. The House passed H.R. 3357 by a 363-68 vote. The Senate was debating the bill as MortgageWire went to press.

Starting August 15, servicers can reduce the principal amount of a troubled Federal Housing Administration-insured mortgage by up to 30% so the homeowners' monthly payments are reduced to 31% of income. "Tens of thousands of FHA borrowers will now be able to modify their mortgages," said HUD secretary Shaun Donovan. Under the new program, borrowers have to be 30-days delinquent to qualify and traditional FHA loss mitigation options would not be effective. "There is no net present value test for eligibility," the guidelines say. However, borrowers have to make timely payments during a three-month trial before the modification is finalized. Mortgage banking consultant Brian Chappelle said the new program should be able to help a high percentage of FHA troubled borrowers because their loans were not underwritten based on stated incomes or second mortgages to avoid paying mortgage insurance. Servicers will receive $1,250 incentive payments for completing these FHA modifications.

The National Association of Mortgage Brokers has received a setback in its lawsuit against the Department of Housing and Urban Development over the proposed Real Estate Settlement Procedures Act rule. NAMB president Jim Pair told attendees at the California Association of Mortgage Brokers convention in San Diego that the judge hearing the case ruled that HUD followed the Administrative Procedures Act in creating the rule. However, he added, the ruling, "Does not hurt us because the judge did not make any comments regarding yield spread premiums." In NAMB's favor, Mr. Pair said, is pressure from two different sources on HUD to withdraw the RESPA rule, first from the Federal Reserve proposal and the proposed Consumer Financial Protection Agency legislation. NAMB is still looking at the ruling, Mr. Pair said, but it is quite likely it will wait and see before deciding how to proceed on this suit. Mr. Pair was asked about a moratorium on the Home Valuation Code of Conduct. He said there was a good chance a bill will pass Congress but it needs more sponsors. He also said NAMB has obtained an e-mail from an appraisal management company sent to an appraiser saying the appraisal came in too low and it needs to be raised. This goes to the heart of the HVCC issue, which was said to be originator pressure of appraisers over valuations.

Obama administration officials want servicers to pick up the pace of loan modifications and qualify at least 500,000 homeowners for 90-day trial modifications by Nov. 1, according to Treasury Department and HUD officials. "The administration has established a goal of reaching half a million modifications," HUD secretary Shaun Donovan said after meeting with servicers that are participating in the President's Making Home Affordable program. "I am confident that the best practices shared today, combined with more transparent reporting methods, better communication among all parties, and a strong commitment from servicers, will ensure that we can ramp up the MHA program's pace to meet these ambitious goals," secretary Donovan said. Servicers already have over 200,000 borrowers on trials to see if they can make three monthly payments on time, which is required before a modified loan can be finalized. The July 28 meeting allowed servicers and administration officials to exchange ideas on how to improve the modification program, said Paul Leonard, vice president at the Financial Servicers Roundtable Housing Policy Conference. He noted that servicers suggested the creation of a universal web portal would helpful so homeowners could in-put their information and speed processing for servicers. "That is one of the issues they will keep working on," Mr. Leonard said. "We hope these kind of meetings will continue," he added.

Two-thirds of the 94,000 foreclosure sales in June involved properties previously financed by prime mortgages as the tide of subprime foreclosure sales has declined over the past four quarters, according to the Hope Now alliance. The alliance's monthly report shows the foreclosure sales involving subprime loans crested in the second quarter of 2008 and foreclosure sales involving prime loans have surged since the expiration of several moratoriums in March of this year. Prime foreclosure sales hit 154,000 in the second quarter, up 36% from the first quarter. Prime sales totaled 62,600 in June, up 13% from May and 50% from April. Meanwhile, the Hope Now servicers completed 96,000 loan modifications in June, down 5% from the previous month. This marks the second monthly decline as servicers put more modification candidates through a 90-day trial period as required by the Obama administration's Home Affordable Modification Program. Most of the Hope Now servicers have signed up for President's program but some are waiting for permission from their investors to modify loans.

About 30% of payment option adjustable rate mortgages are already seriously delinquent and a congressional watchdog agency expects defaults and foreclosures will only get worse next year. "We are particularly concerned about payment-option ARMs because so many are recasting and becoming less affordable to those homeowners," said William Shear, a director at the General Accountability Office. Mr. Shear testified before the Joint Economic Committee on a just-released GAO report that shows that 44% of the 837,000 POAs originated from 2000 and 2007 have prepaid and only 30% or 250,000 loans are current. The terms of POAs generally recast after five years but the recast can be moved up because of negative amortization. Louisiana State University finance professor Joseph Mason warned the committee defaults on POA could cause foreclosures to peak in 2010 and keep the foreclosure rate elevated into 2011. Meanwhile, option ARMs are difficult to modify because the borrowers already enjoy very low payments (due to the minimum payment option). However, the re-default rate on option ARMs is "much lower" than modifications on other alt-A mortgages, according to a Bank of America/Merrill Lynch Research report.

House Financial Services committee chairman Barney Frank, D-Mass., is urging bankers to work with him on historic regulatory reform legislation, which, he says, Congress will deliver to President Obama by the end of the year. "They should accept the reality of this regulation and work with us," Rep. Frank said during a speech at the National Press Club. The House Financial Services Committee chairman noted several changes to the Obama administration regulatory reform plan that he is considering to make the proposal more acceptable to Congress and the industry — including scrapping the requirement that all mortgage lenders offer "plain vanilla" products. But he stressed that Congress is going to pass legislation that restricts leverage at large institutions, curtails excesses in derivatives markets, requires some risk retention in securitizations and sets up a single, effective agency to protect consumers. "Those are all going to happen," Rep. Frank said, and opponents of reform "can't stop it."

New-home sales jumped 11% in June from the previous month and homebuilders expect to see a slow improvement in sales during the rest of this year. "Significant evidence has accumulated that we have hit the bottom," said Bernard Markstein, senior economist at the National Association of Home Builders. But NAHB has not called a bottom yet, because of concerns sales may drop off toward yearend with the expiration of the first-time homebuyer tax credit. NAHB is seeking an extension of the tax credit. The U.S. Census Bureau saw sales of new single-family homes rise to a 384,000 seasonally adjusted annual rate in June, up from a 346,000 rate in May. NAHB economists expect sales will run at a 390,000 rate during the second half of this year, up from a 347,000 rate in the first half.