Compliance & Regulation

President Barack Obama is expected to nominate mortgage industry veteran David H. Stevens to be the new Federal Housing Administration commissioner. A former Freddie Mac and Wells Fargo Home Mortgage executive, Mr. Stevens joined Long & Foster in 2006 and was promoted to president and chief executive of the real estate firm's mortgage, insurance and title affiliates last year. Long & Foster's Prosperity Mortgage is a joint venture with Wells Fargo. Sources indicate the White House is likely to announce Mr. Steven's nomination on Monday or Tuesday.

Ending retention bonuses at Fannie Mae and Freddie Mac as demanded by a powerful House Democrat would be "extremely detrimental" to the companies' and government's efforts to stabilize the housing finance system, according to Federal Housing Finance Agency director James Lockhart. "I believe FHFA would be violating its duties as conservator to end the retention plans and allow Fannie Mae and Freddie Mac to be hollowed out," the GSE regulator said. He noted in a letter to House Financial Services Committee chairman Barney Frank, D-Mass., that Fannie and Freddie employees are working longer hours for less compensation these days. And there is a "great risk" key employees will walk away if incentives are terminated. "If we don't provide existing employees incentives to stay, we will have a serious problem," Mr. Lockhart said. FHFA is preparing detailed information on the retention bonus plans for the committee chairman.

The National Credit Union Administration seized control of the nation's two largest corporate credit unions on Friday due to growing losses on their private label mortgage-backed securities. NCUA placed into conservatorship Western Corporate FCU, San Dimas, Calif. which provides services to 1,022 regular credit unions, and U.S. Central FCU, Lenexa, Kan., which serves as a banker to both WesCorp and 25 other corporate credit unions. Friday's action came just hours after U.S. Central released financial figures for February showing that unrealized losses on its securities rose by $1.2 billion, to $10.5 billion, with almost all of the new losses accruing on private-label mortgage-backed securities. The unprecedented government takeover came after NCUA received an independent review of the investments in U.S. Central, WesCorp. and the 25 other corporates conducted by Pimco Investors. Pimco found that the corporates' current holdings could result in losses of more than $16 billion, which would wipe out the capital of every corporate CU. The Pimco report runs 4,500 pages. According to The Credit Union Journal, regulators are discussing a plan to combine the distressed corporate investments into a single "bad bank," while trying to rescue the remnants of the corporate credit union system, which provides critical investment and payment system services to the nation's 8,000 regular credit unions. U.S. Central holds $34 billion in credit union funds and WesCorp $24 billion.

The Treasury Department on Monday unveiled two separate programs for the removal of more than $500 billion in toxic private-label mortgage-backed securities and bad real estate loans from the balance sheets of financial institutions. Both initiatives involve the participation of private investors willing to partner with the federal government, which is putting up financing and 50% of the capital for the these public-private partnerships. Under the new effort, federally insured depositories can sell troubled real estate loans into pools that the Federal Deposit Insurance Corp. will auction off to the private investors. Treasury and private capital will provide equity financing and the FDIC will provide guaranteed debt financing issued by the public-private investment funds. The second program is designed to remove formerly AAA-rated residential and commercial MBS from the balance sheets of banks and other financial institutions. However, Treasury and the Federal Reserve Board are still working the details of this program, which will provide non-recourse loans to investors willing to purchase these "legacy securities" and employ a long-term buy and hold strategy. "Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes and loan duration have not yet been determined. Asset managers selected by the Treasury and FDIC will oversee the public-private investment funds."

The rapid growth in FHA originations during 2008 has many concerned the federal mortgage insurance program is headed for trouble, but so far agency officials say they have not seen deterioration in loan performance, even when it comes to borrowers missing their first or second payments. "We have not seen any increase in early payment defaults," said Meg Burns, director of Federal Housing Administration single-family program development. FHA data and analysis show that only 0.6% of the over one million FHA loans originated in the first nine months of 2008 experienced first or second payment defaults, down from 0.8% in the same period in 2007. In addition, the default rate on FHA loans where borrowers miss three of the first six payment months has declined slightly. Early defaults generally are caused by income, martial or illness problems and they don't necessarily lead to foreclosures or claims on the FHA insurance fund. "There really is no correlation there," Ms. Burns said.

Leib Pinter, a former executive of Olympia Mortgage Corp., has been sentenced to 97 months in prison for orchestrating a refinancing scheme to defraud Fannie Mae.Pinter also was ordered to pay more than $43 million in restitution to victims of the scheme. According to Benton J. Campbell, U.S. attorney for the Eastern District of New York, Pinter pleaded guilty to a wire fraud conspiracy on Sept. 11, 2008. Olympia, formerly headquartered in Brooklyn, N.Y., originated and serviced mortgage loans owned by Fannie. When Olympia refinanced a Fannie Mae mortgage loan, Fannie Mae typically wire transferred the money to an Olympia bank account. Olympia was then required to pay off the underlying mortgage loan by remitting the outstanding balance to Fannie Mae. Instead, Pinter misappropriated these proceeds for the benefit of Olympia. When the fraudulent scheme was revealed, Fannie held nearly $44 million in unpaid principal in refinanced mortgage loans.

The Department of Housing and Urban Development has completed the process of allocating $4 billion to states and communities for the purchase and renovation of foreclosed properties. Another $2 billion in neighborhood stabilization funds will available soon."These funds will be used to buy up and rehabilitate vacant foreclosed homes and resell those homes with affordable mortgages," President Barack Obama said. On Friday, HUD said it awarded the last $731 million of the $4 billion in funds that Congress approved last July as part of the Housing and Economy Recovery Act. These funds were allocated by formula to states and local communities hardest hit by the housing crisis. HUD is working to execute the grants to the 309 state, city and county recipients by the end of this month so the funds can be disbursed in April. The massive economic stimulus bill Congress passed in February provides another $2 billion in neighborhood stabilization funds. These funds will be awarded through a competitive process. HUD is expected to solicit proposals by May 3.

An investor group that includes hedge fund mavens J. Christopher Flowers and John Paulson has closed on its purchase of IndyMac Bank FSB, a $160 billion residential servicer that became a ward of the government last summer. At press time no information was available concerning billions of dollars of loan buy-back requests that Fannie Mae had with IndyMac. A spokesman for One West Bank Group had no information on the matter and the Federal Deposit Insurance Corp., which sold the Pasadena-based depository, could not be reached for comment. Among the assets that OWBC bought is Financial Freedom, a large player in the reverse mortgage market. The investor group has pumped $1.55 billion of cash into the thrift which will be called One West Bank FSB. In a statement the new owners said it would maintain IndyMac's "national mortgage banking" business and continue to modify troubled loans under an FDIC program started last summer.

The Government National Mortgage Association is poised to play a role in easing the warehouse lending liquidity crisis but does not think it will be a direct lender.In an interview with the American Banker GNMA president Joe Murin said the agency cannot become involved in warehouse lending without a change to its government charter but noted that "we certainly could help administer a program." He said one option is for GNMA to take possession of loans three days after they close and fund, instead of the 15 to 45 days it typically takes to put the mortgages in securitization pools. Depositories that hold warehouse loans on their books face a 100% risk weighting on such debts until the mortgages can be taken off the lines. Recently two of the largest players in warehouse lending—the PNC-owned National City and Guaranty Federal Bank—made plans to exit the business.

The Federal Reserve Board has expanded its new TALF lending facility to help cash strapped mortgage servicers that pay advances to MBS investors to cover missed payments by delinquent homeowners. Starting in April, the Fed's Term Asset-Backed Securities Loan Facility will start accepting servicing advances as collateral in asset-backed securities. Details for the first TALF funding for mortgage servicing advances will be released March 24. "Accepting ABS backed by mortgage servicing advances should improve the servicers' ability to work with homeowners to prevent avoidable foreclosures," the Fed said. Scott Talbott, senior vice president for the Financial Services Roundtable, welcomed the Fed's initiative. "This will help restore liquidity in all areas of the mortgage market," Mr. Talbott said.