Compliance & Regulation

House Financial Services Committee chairman Barney Frank, D-Mass., is pushing the nation's GSE regulator to stop approving retention bonuses for Fannie Mae and Freddie Mac executives and to recoup past bonuses. In a letter to Federal Housing Finance Agency director James Lockhart, the powerful committee chairman stressed that the companies being propped up with public funds should not be paying large bonuses. "I am writing to urge strongly that you rescind the retention bonus programs at Fannie Mae and Freddie Mac, prohibit any further payment of bonuses to executives under that program, and pursue repayment of any already-paid bonuses," Rep. Frank says in a March 19 letter. A FHFA spokeswoman said the director will respond to chairman Frank's letter soon. Chairman Frank has drafted a bill that prohibits companies receiving TARP funds and Fannie and Freddie from paying bonuses until they repay all federal assistance. The Financial Services Committee is scheduled to markup the bill on Wednesday (March 25).

To protect consumers from aggressive lending practices, Congress should consider "curtailing" the powers of federal banking regulators to preempt state consumer protection laws, according to FDIC chairman Sheila Bair.In testimony submitted to the Senate Banking Committee, Ms. Bair said federal preemption was seen as a way to improve efficiencies for federally chartered banks and lower costs for consumers. "While that may have been true in the short run, it has now become clear that abrogating sound state laws, particularly consumer protection laws, created an opportunity for regulatory arbitrage that frankly resulted in a 'race-to-the-bottom' mentality," she said. The Comptroller of the Currency and Office of Thrift Supervision routinely preempted state predatory lending laws during the subprime lending boom. The FDIC chairman said setting a "floor" for consumer protection, based on state and federal laws, would be better than current system of establishing a "ceiling" at the federal level. She suggested that Congress could use a newly proposed financial products safety commission to establish the appropriate floor for consumer protection.

Negotiations over bankruptcy cram down provisions in a housing bill have hit a snag and Senate Democratic leaders have put off legislative action until late April. "(I)t looks likely that we will not be able to take up this housing bill until the next work period," said Regan Lachapelle, a spokeswoman for Senate majority leader Harry Reid. "We will continue to work with Senator Durbin and Senator Dodd to ensure we have the votes when we move this bill forward." Democratic Sens. Richard Durbin (Ill.) and Christopher Dodd (Conn.) are leading the effort to pass the housing bill (H.R. 1106) with the bankruptcy cram down provisions. Lenders are seeking strong language in the bill to prevent homeowners they can help with a Treasury Department-compliant loan modification from opting into Chapter 13 bankruptcy where a judge can reduce the principal amount of the mortgage. Such bankruptcy protection seems acceptable to consumer groups. But the Center for Responsible Lending wants provisions to ensure low-income borrowers are protected if they cannot afford the monthly payments under a Treasury loan modification. Lenders are concerned this could be a big loophole. Other issues also need to be resolved. CRL president Michael Calhoun told a Women in Housing and Finance symposium that he is optimistic the Senate will pass a bankruptcy bill. "I think a bankruptcy package will come out of the Senate within the next four to six weeks," Mr. Calhoun said. The Senate returns from a two-week spring recess on April 20.

After its stock price dipped to under a dollar earlier this month, Citigroup, the nation's fourth largest residential lender, has seen its stock price more than triple, trading at $3.20 Thursday morning. The company said it plans to both increase the number of shares outstanding and undertake reverse stock split as part of the company's effort to exchange common stock for preferred securities, pending shareholder approval. Late last month, Citi announced that it is seeking to exchange about $27.5 billion in public and private preferred securities as part of its agreement with the Treasury Department, which has pledged to match up to $25 billion of the conversions.

The level of commercial/multifamily mortgage debt outstanding grew by 0.7% in the fourth quarter of 2008, to $3.5 trillion, according to the Mortgage Bankers Association's analysis of the Federal Reserve Board flow of funds data. The total was an increase of $166 billion, or 5% from the end of 2007. The $3.5 trillion in commercial/multifamily mortgage debt outstanding recorded by the Federal Reserve was an increase of $23 billion from the third quarter of 2008. Multifamily mortgage debt outstanding grew to $900 billion, an increase of $5.4 billion or 0.6% from the third quarter. "Counter to what many expected, investors increased their holdings of commercial and multifamily mortgages during the fourth quarter," said Jamie Woodwell, MBA's vice president of commercial real estate research. "Banks, thrifts, Fannie Mae, Freddie Mac, life insurance companies and other lenders extended additional credit to the market during the fourth quarter, lending more in new commercial and multifamily mortgages than they saw paid off or paid down on existing loans." Commercial banks continue to hold the largest share of commercial/multifamily mortgages at $1.55 trillion, or 44% of the total.

The average rate on a 30-year fixed rate mortgage returned to a point near record lows during the week ending March 19 when it dropped below 5% on the heels of a decline in bond yields, according to Freddie Mac."Long-term mortgages followed bond yields lower," said Freddie's vice president and chief economist Frank Nothaft. The average 30-year FRM rate, at 4.98%, has not been lower since the week ending Jan. 15 when it hit an all-time low of 4.96%. It was down from 5.03% the previous week and 5.87% a year ago. The average 15-year FRM was 4.61%, a low not seen since the week ending June 13, 2003 when it averaged 4.60%. The average 15-year FRM rate was down from 4.64% the previous week and 5.27% the previous year. Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 4.98%, down from 4.99% the previous week and 5.56% the previous year. One-year Treasury-indexed ARMs averaged 4.91%, up from 4.80% the previous week and 5.15% the previous year. Average points were 0.7 for all aforementioned loan categories.

The Federal Reserve has made plans to buy another $750 billion of agency mortgage-backed securities, another $100 billion of agency debt and purchase up to $300 billion of longer-term Treasury securities, causing the benchmark 10-year Treasury yield to experience its largest one-day drop seen since 1987. The drop to roughly 2.5% from closer to 3% was the largest one-day decline in that security's yield since Oct. 20, 1987, according to Freddie Mac chief economist Frank Nothaft. "The Fed is now trying to influence not just the spread between private interest rates and Treasuries (through its mortgage-backed securities purchases, for example), but to pull down the entire spectrum of interest rates by driving down the rate on benchmark Treasuries," said IHS Global Insight chief U.S. economist Nigel Gault in a report on the Fed's move. The current coupon in the agency MBS market as of midday Thursday was "just a little tighter" than it had been the previous afternoon when the Fed's announcement was made Wednesday afternoon, but otherwise market conditions were largely unchanged, Art Frank, director and head of agency mortgage-backed securities research at Deutsche Bank Securities, told MortgageWire. Wednesday afternoon agency MBS had been "more than keeping up with swaps but not keeping up with Treasuries," he said. Mr. Frank said agency MBS at that time had rallied on the news without any huge volume. Ensuing investor activity was fairly modest with some servicer convexity-related buying but not to any large extent, he said.

The House of Representatives is weighing legislation that would place a 90% tax on any retention bonuses paid to officials at American International Group as well as Fannie Mae and Freddie Mac. If the bill becomes law it would affect some of Fannie's top executives including chief operating officer, Michael Williams, who is entitled to retention-related pay of $1.48 million. Kenneth Bacon, EVP of housing and community development for the GSE would be taxed on almost $1 million worth of retention pay. At least two other Fannie executives would face the tax: single-family chief Thomas Lund and CFO David Hisey who stand to receive retention pay of $1 million, and $577,526, respectively. The four are set to receive some of their payouts in April. Congress was spurred to consider the tax after public anger rose in the wake of news that AIG officials received $165 million in bonuses even though the company accepted $182 billion in taxpayer funds. At press time no retention bonus figures were available on Freddie Mac's executives. GSE regulator James Lockhart issued a statement saying he supports the retention bonuses, noting that, "As the previous senior management teams left, it would have been catastrophic to lose the next layers down and other highly experienced employees."

The yield on the benchmark 10-year Treasury plummeted to 2.5% Wednesday afternoon after the Federal Reserve said it would give a $1 trillion-plus shot in the arm to the housing and mortgage markets by purchasing $750 billion of agency MBS, $100 billion of Fannie/Freddie debt as well as $300 billion of longer-term Treasury securities. "The Fed is now trying to influence not just the spread between private interest rates and Treasuries (through its mortgage-backed securities purchases, for example), but to pull down the entire spectrum of interest rates by driving down the rate on benchmark Treasuries," said IHS Global Insight chief U.S. economist Nigel Gault in a report. The agency MBS market shortly after 4 p.m. Thursday was "more than keeping up with swaps but not keeping up with Treasuries," Art Frank, director and head of agency mortgage-backed securities research at Deutsche Bank Securities, told MortgageWire. He said agency MBS rallied on the news without any huge volume. Ensuing investor activity was fairly modest with some servicer convexity-related buying but not to any large extent, Mr. Frank said.

After pleading guilty to bank fraud in connection with a mortgage fraud scheme, Robert C. Culp of New Carlisle, Ind., a police officer, was sentenced to 54 months imprisonment, followed by three years of supervised release and was ordered to pay $1.19 million in restitution. Culp was charged with devising and executing a scheme to defraud mortgage lenders and to obtain money, funds, credits and other property owned by or under the custody or control of mortgage lenders by fraudulent pretenses and representations. According to his plea, Culp purchased inexpensive homes, frequently in need of substantial repair and renovation and then arranged to sell these properties at inflated amounts to persons who obtained mortgage loans based upon falsified mortgage loan applications. Culp, who remains on release, must begin serving the sentence on April 24.