Compliance & Regulation

The House Financial Services Committee has approved an amendment to a mortgage reform and anti-predatory lending bill that would give federal regulators the discretion to make exceptions to a 5% credit risk retention requirement. The bill requires lenders to retain 5% of the credit risk on non-prime mortgages that are sold or securitized. The amendment would allow the Federal Reserve Board and Treasury Department to relax the 5% requirement on lenders for certain mortgage products. In addition, it would allow regulators to apply credit risk retention to securitizers. Committee chairman Barney Frank, D-Mass., noted that Treasury asked for this discretion over securitizers. "I think it is justifiable," Rep. Frank said. But the chairman believes the main responsibility should be on the lender and he wants to talk with Treasury officials more about their approach. The committee also approved an amendment by Rep. Paul Kanjorski, D-Pa. which requires state monitoring of appraisal management companies and federal oversight of AMCs that are subsidiaries of banks and thrifts.

A proposal that would allow the Government National Mortgage Association to give some type of assistance to the warehouse lending sector is moving closer to fruition, according to industry sources.At press time it was still unclear what role GNMA would play in the market but it's anticipated that it might provide certain guarantees on lines made to already approved GNMA issuers. The agency could not be reached for comment at press time. The Mortgage Bankers Association and other industry lobbyists have been working on the warehouse issue for months. One MBA official said "we are closer" on a proposal that would be sent to the Treasury and the White House. The official declined to give details. Non-banks that depend on warehouse lines have been starved for credit because many Wall Street lenders and banks have exited the market. Those that are left have been restrained in their lending because of high capital charges against outstanding warehouse lines. There are roughly 10 active warehouse lenders compared to 30 two years ago.

The 130-members of Lenders One are reporting very heavy volumes of refinancings, according to Scott Stern, the chief executive of the mortgage cooperative, who is already looking ahead for another refinancing surge. "We expect continued heavy volume at least through June," Mr. Stern said. But he is hoping the Federal Reserve succeeds in driving mortgage rates even lower. "We think another $1 trillion in refinancing volume could come if mortgage rates drop into the 4.25% and 4.5% range," the CEO told MortgageWire. He noted that his members sold nearly $10 billion in mortgages to the coop's preferred investors in the first quarter and refinancings comprised 77% of originations. "The only thing slowing down refinances is warehouse line capacity. That is a problem," Mr. Stern said. "We could be refinancing more loans, if there was more warehouse lending capacity."

Mark Anthony McBride of East Point, Georgia, pleaded guilty in federal district court to obtaining millions of dollars in fraudulent mortgages and other loans and to a bankruptcy fraud designed to stay foreclosures on dozens of fraudulently obtained properties. According to the information presented in court, immediately after being released from prison in 2001, McBride began a mortgage fraud scheme that continued through 2002, when he had to report for service of another federal prison sentence. As soon as he was released from prison again in November 2006, McBride continued his scheme by completing fraudulent mortgage loans and other extensions of credit in his name, in his aliases, in a number of stolen identities, including those of his children and in the identities of other unqualified borrowers. These fraudulent loans continued until McBride was arrested in September 2008 for violating his supervised release. Dozens of banks and other funded fraudulent loans for McBride. McBride generated mortgage loan proceeds for himself using inflated valuations for properties, securing the loans and sharing those proceeds with his straw borrowers and other conspirators. He was able to retain proceeds from the frauds by filing eight bankruptcy cases in Georgia, Alabama and South Carolina. The last such fraudulent filing was a May 2008 petition in Atlanta, filed in a phony name and stolen Social Security Number. The petition falsely stated he had never filed bankruptcy in the past. Sentencing is scheduled for July 9 before U.S. District Judge Jack T. Camp.

Appraisal management companies have cornered nearly two-thirds of the single-family appraisal market and Rep. Paul Kanjorski, D-Pa., is concerned there is very little oversight of these entities. "We must establish oversight of appraisal management companies. They now touch 64% of written appraisals but are subject to little supervision," Rep. Kanjorski said. The high ranking member of the House Financial Services Committee said he is preparing a "comprehensive" appraisal reform amendment that he plans to offer when the committee meets to mark up a mortgage reform bill. The Appraisal Institute and other appraiser trade groups have warned the committee that the use of AMCs increases costs for consumers. The management firms rely on less experienced and less competent appraisers and keep "half the appraisal fee in most cases," Appraisal Institute president Jim Amorin testified. "One remedy is to direct that appraisal fees be clearly disclosed to borrowers and differentiated from the management or service fees on all relevant mortgage loan documents," Mr. Amorin said.

Automated compliance vendor Wolters Kluwer Financial Services notes that substantial regulatory changes have already been made, but lawmakers are in the process of debating additional legislation that would help protect consumers even more aggressively. Wolters Kluwer's compliance experts agree that development alone has already changed the mood within the financial services industry. "Regulators are feeling much more empowered than they were during the previous administration," said Edward Kramer, executive vice president for Regulatory Programs at Wolters Kluwer Financial Services. "More stringent regulatory exams, a rising number of enforcement actions and the growing number of financial institution closings during the first quarter of this year are evidence of that." Mr. Kramer said he believes the mortgage reform bill Congress debated last week could be the beginning of major financial services regulatory reform. The bill would fundamentally change the mortgage lending market, placing tighter restrictions on nonprime mortgage lending and lender compensation. Perhaps more importantly, it would require lenders establish what the bill calls a "duty of care" in proving borrowers could repay a loan or that refinancing gave them a net tangible benefit. "The proposed mortgage reform bill combined with numerous regulatory changes already scheduled to take effect this year could likely put financial institutions in a significant crunch," added Amy Downey, senior regulatory consultant at Wolters Kluwer Financial Services. "These changes are very different from those of previous years that required a simple update to a document or disclosure. Instead, they will require institutions to change the way they do business. Many institutions are just starting to figure this out and scrambling to adapt."

The House Financial Services Committee is scheduled to mark up a mortgage reform bill next week and industry groups are lobbying to reduce the amount of credit risk they would have to retain when selling or securitizing single-family loans. The bill (H.R. 1728) drafted by committee chairman Barney Frank, D- Mass., requires lenders to absorb 5% of the first loss on most loans that are not prime 30-year fixed-rate mortgages. As an alternative, the Financial Services Roundtable has proposed that lenders and investors (assignee) share pro-rata in the losses. If defaults lead to a $100 loss, the lenders would incur a 5% or $5 loss and the mortgage-backed securities investor would incur a $95 loss. "This ensures the lender will continue to have some 'skin in the game,' without having the unintended consequence of significantly reducing mortgage availability," FSR Housing Policy Council president John Dalton told the committee during a hearing on H.R. 1728. Roundtable officials say they are open to other risk retentions proposals that would reduce the impact on capital. Mr. Dalton also suggested that the retention requirement expire after 18 months. This would provide protection against early defaults and "avoid excessive buildup of capital depleting positions," he testified. The committee is scheduled to begin the markup on Tuesday (April 28).

Senate Democratic leaders want to force a vote on the bankruptcy cramdown issue this week even though they have not reached agreement on the cramdown provisions and it appears they don't have the votes to pass it. The 41 Republican senators are united in opposition to cramdowns and observers expect at least six Democrats will vote against legislation that would allow bankruptcy judges to reduce or cramdown the principal amount of a residential mortgage to the fair market value. Nevertheless, Sen. Richard Durbin, D-Ill., is continuing to work with Wells Fargo, J.P Morgan Chase and Bank of America on compromise cramdown legislation. If an agreement is reached, the cramdown language could be attached a House-passed bill that strengthens the Federal Deposit Insurance Corp. and enhances the Federal Housing Administration loan modification programs. If Sen. Durbin losses that fight, cramdown opponents are concerned Sen. Durbin may try to attach his cramdown provisions to the credit card reform bill that the House is expected to pass later this week.

Appraisal management companies have cornered nearly two-thirds of the single-family appraisal market and Rep. Paul Kanjorski, D-Pa., is concerned there is very little oversight of these entities. "We must establish oversight of appraisal management companies. They now touch 64% of written appraisals but are subject to little supervision," Rep. Kanjorski said. The high ranking member of the House Financial Services Committee said he is preparing a "comprehensive" appraisal reform amendment that he plans to offer when the committee meets to mark up a mortgage reform bill. The Appraisal Institute and other appraiser trade groups have warned the committee that the use of AMCs increases costs for consumers. The management firms rely on less experienced and less competent appraisers and keep "half the appraisal fee in most cases," Appraisal Institute president Jim Amorin testified. "One remedy is to direct that appraisal fees be clearly disclosed to borrowers and differentiated from the management or service fees on all relevant mortgage loan documents," Mr. Amorin said.

The House Financial Services Committee is scheduled to mark up a mortgage reform bill next week and industry groups are lobbying to reduce the amount of credit risk they would have to retain when selling or securitizing single-family loans. The bill (H.R. 1728) drafted by committee chairman Barney Frank, D- Mass., requires lenders to absorb 5% of the first loss on most loans that are not prime 30-year fixed-rate mortgages. As an alternative, the Financial Services Roundtable has proposed that lenders and investors (assignee) share pro-rata in the losses. If defaults lead to a $100 loss, the lenders would incur a 5% or $5 loss and the mortgage-back securities investor would incur a $95 loss. "This ensures the lender will continue to have some 'skin in the game,' without having the unintended consequence of significantly reducing mortgage availability," FSR Housing Policy Council president John Dalton told the committee during a hearing on H.R. 1728. Roundtable officials say they are open to other risk retentions proposals that would reduce the impact on capital. Mr. Dalton also suggested that the retention requirement expire after 18 months. This would provide protection against early defaults and "avoid excessive buildup of capital depleting positions," he testified. The committee is scheduled to begin the markup on Tuesday (April 28).