Compliance & Regulation

Genworth Financial, which controls the nation's fourth largest mortgage insurance company, said it failed to meet requirements to receive a large capital infusion under the Treasury Department's Troubled Asset Relief Program. The revelation came late last week, but on Monday Genworth's shares were hammered, falling 21% to just over $2. In a statement company CEO Michael Frazier said TARP money is only one of Genworth's options for surviving in the current economic climate. A spokesman could not be reached for comment at press time. The Richmond, Va.-based Genworth has abandoned plans to buy a small Minnesota depository, which would have served as its conduit to getting TARP money. In 2008 Genworth posted a net loss of $572 million. For years it had garnered a reputation for being the most conservative of the nation's seven MI firms.

The Federal Reserve expanded its purchases of GSE mortgage-backed securities by $750 billion in March to sustain the refinancing boom and keep mortgage rates low, according to the minutes of the last Federal Open Market Committee meeting. When the committee met in mid-March, the Fed was already on track to reach its initial target of purchasing $500 billion in Fannie Mae, Freddie Mac and Ginnie Mae MBS and $100 billion in GSE debt by the end of June. But committee members noted that the "pace of MBS issuance was likely to be especially brisk over the next few months, in part because of the Administration's new Making Home Affordable program," and they wanted to "accommodate the pattern of mortgage refinancing," the minutes say. So the committee agreed to expand the MBS purchase program to $1.25 trillion and extend it until the end of the year. The FOMC members said low mortgage rates, affordable housing prices and the Obama administration's new refinancing and loan modification programs could bring about a "sustained increase in home sales and a stabilization of house prices."

Builders are seeing increased foot traffic at model homes and say potential buyers are drawn by low mortgage rates, affordable prices as well as a first-time homebuyer tax credit, according to the National Association of Home Builders. "With affordability up dramatically, reports from our builders in the field indicate that foot traffic in new homes is on the rise and consumer interest is increasing," said NAHB chairman Joe Robson. The trade group noted that 1.5 million visitors have logged on to its website to learn more about the $8,000 first-time homebuyer tax credit that Congress approved in February. A survey by Move Inc. found that "nearly 20% of those that plan to purchase a home this year are doing so to take advantage of the tax credit, which expires at the end of November," NAHB said. Move Inc., based in Westlake Village, Calif., provides home listing services for builders and Realtors. Buyer interest typically increases in the spring.

The House Financial Services Committee might hold a hearing before it moves to mark up and vote on a major regulatory bill that would restrict subprime mortgage lending and lender compensation. Committee chairman Barney Frank, D-Mass., was expected to move quickly on the bill shortly after Congress returns from a two-week break on April 20. But committee deputy chief counsel Gail Laster said a meeting to hear testimony from interested parties is under consideration, although chairman Frank has not made a decision yet. As introduced, the mortgage regulatory bill (H.R. 1728) restricts yield spread premiums and mortgage bankers are concerned it could also ban servicing release premiums. "We are well aware of this issue," Ms. Laster told a Washington meeting of the Real Estate Services Providers Council. Mortgage lenders also want the bill changed so that Federal Housing Administration and Department of Veterans Affairs guaranteed mortgages are treated favorably like prime mortgages.

When it comes to complying with the new Real Estate Settlement Procedures Act regulations, many lenders appear to be sticking their heads in the sand, according to a pair of Washington regulatory lawyers. Jeffrey Naimon of BuckleySandler said his clients seem to be adopting a wait-and-see attitude, hoping, perhaps, that the new Obama Administration will pull the regulations before their most onerous sections take effect on Jan. 1. "The rules are incredibly complicated," he said at the annual RESPRO conference, "yet our phones are not ringing off the hook." Lots of "petrified" lenders are "waiting to see what others do," agreed Jeffrey Arouh of Holland & Knight. At the same time, though, Mr. Arouh warned that lenders who are not ready to implement the regs will be "out of the game." "The rule is the rule," he said. "You're kind of stuck with it, so you have to deal with it." Mr. Naimon, meanwhile, said he's surprised lenders haven't attacked the regulations on the grounds that the Department of Housing and Urban Development has overstepped its bounds. "I question HUD's legal authority" for many of the changes in RESPA's new rules, he said. "I don't think a lot of this holds water, but no one is interested in poking the government in the face right now."

Housing industry groups are urging the Treasury Department to provide capital support for the private mortgage insurers so more financing will be available for homebuyers that can't muster a 20% downpayment. In a letter to Treasury secretary Timothy Geithner, the trade groups warn that "a vibrant housing market will not be possible unless new homeowners enter the market." They point out that a $1 billion capital infusion into the MI companies would allow lenders to finance $80 billion in purchase mortgages that could be sold to Fannie Mae and Freddie Mac. (By charter, the GSEs cannot finance mortgages with less than 20% down unless they are credit enhanced with private mortgage insurance.)"This increased level of financing is critical to meet the demands of potential homeowners, restore growth in the market and reduce the excess supply of homes," the five trade groups say. The Financial Services Roundtable, Mortgage Bankers Association, National Association of Home Builders, National Association of Hispanic Real Estate Professionals and Asian Real Estate Association of America signed the letter. GSE regulator James Lockhart also has called on Treasury to provide support for the capital-constrained private MIs.

The Department of Justice is moving closer to forming a national mortgage fraud task force to investigate and prosecute real estate and mortgage related crimes, according to government officials familiar with the matter. The effort, if it comes to fruition, would involve state and local and federal prosecutors working together "to find trends and bring cases," said one government official talking on background. Presently, DOJ has a "working group" on mortgage fraud that is an informal effort and focuses more on mortgage issues and trends, as opposed to specific cases. David Fleck, who recently stepped down as deputy District Attorney in charge of real estate fraud for Los Angeles, said he has talked to DOJ about the task force, but noted that the agency has yet to make a final decision. (Once Lanny Breuer is confirmed by the Senate to head DOJ's criminal division a final decision on the task force is anticipated.) Speaking at SourceMedia's servicing show in Dallas this week, Mr. Fleck noted that Los Angeles has 20 detectives working on real estate fraud related investigations but added that, "We're just scratching the surface."

Fund managers seeking to run and raise capital for the Public-Private Investment Program will have an extra two weeks to file their applications with the Treasury Department. Treasury said it is extending the deadline from April 10 to April 24 to increase small business participation in the Legacy Securities program. Prospective fund managers are being encouraged to partner with small businesses, including firms owned by veterans, minorities and women. "There are several ways smaller firms can partner with fund managers including as an asset manager, an equity partner or a fundraising partner," Treasury said. Others can provide services, such as trade execution or valuation. Originally, Treasury wanted to select only five managers in the first round. But that may be changing also. "More than five pre-qualified fund managers may be selected depending on the number of applications deemed to be qualified," Treasury said. Successful applicants will be notified by May 15. The Public-Private Investment Program is designed to purchase bad residential and commercial mortgage-backed securities from banks and other financial institutions. The goal is to create a market for these securities and clean up bank balance sheets. Fund managers are expected to have a demonstrated capacity to raise $500 million of private capital and manage $10 billion of eligible MBS.

A housing recovery isn't likely to begin until the middle of next year at the earliest, according to the chief economist for the trade group representing U.S. and Canadian cement makers. Edward Sullivan of the Portland Cement Association, Skokie, Ill., said for the market to begin rebounding, there must be a "meaningful recovery" in sales and a corresponding reduction in unsold inventory. "Housing construction activity cannot begin until sales recover," Mr. Sullivan said in PCA's latest Economic Research report. "Increased foreclosures, coupled with deteriorating labor markets and tight credit conditions, will delay significant sales activity until mid-2010. Improvements in housing starts are not expected to be significant until 2011." The economist said that be expects the housing recovery bill, along with bank efforts to rewrite toxic mortgages, will help slow foreclosures over the next 18 months. But he also predicted that the weak labor market and declining house prices will lead to a net increase in repossessions, which will be added to the housing inventory. Furthermore, Mr. Sullivan said, unless Uncle Sam injects more cash into the banking system, tighter credit standards will serve as another drag on housing. "Under such a scenario, the housing recovery and overall economic recovery could be delayed significantly," he said.

The government's ongoing purchases of Fannie Mae and Freddie Mac debt and mortgage securities have "not completely" overcome investor concerns about the financial condition and future of the mortgage giants, according to a Federal Reserve governor. "Indeed, even after extraordinary actions, mostly recently by the Federal Reserve, to improve liquidity and market functioning in the agency debt markets, confidence in the GSEs is less than markets were long accustomed to before this period," said Gov. Kevin Warsh. The Fed governor blames the financial "Panic of 2008" for a loss of investor confidence and for a deeper and longer recession. "We are witnessing a fundamental reassessment of value of every asset everywhere in the world," he told a meeting of the Council of International Investors. He expects "elevated levels of volatility and unwillingness by many investors to participate in certain asset markets at virtually any price." The Fed governor also pointed out that household wealth fell by $11 trillion or 18% in 2008. And falling house prices accounted for much of that decline. "Homeownership is no longer perceived to ensure low-risk capital appreciation," he said. Mr. Warsh counseled that it will be a while before positive gross domestic product numbers are seen. "Though the pace of decline is likely to abate, I am decidedly uncomfortable forecasting a sharp and determined resumption in growth in the coming quarters."