Compliance & Regulation

The mortgage insurance industry -- after receiving certain assurances from the nation's GSE regulator -- has signaled its support for a new Fannie Mae and Freddie Mac program to refinance certain high LTV loans without using MI coverage. The refinance program is designed to lower the interest rate on at-risk risk loans that the GSEs already own or guarantee. Federal Housing Finance Agency director James Lockhart assured the Mortgage Insurance Companies of America that the MI exemption is limited and mortgage insurance will continue to be required on notes with loan-to-value ratios above 80% that are sold to Fannie and Freddie, as required by their charters. "We commend director Lockhart for offering this important clarification of the President's housing recovery plan," said MICA president Kevin Schneider. An estimated 4 million to 5 million borrowers who cannot refi because of falling house prices and tighter loan and mortgage insurance standards could be helped by the GSE refinance program. The GSEs can waive private mortgage insurance in refinancing these high LTV loans unless the borrower already has PMI. In that case, they have to "use best efforts to get the mortgage insurance rolled over to the new mortgage," Mr. Lockhart said. "Thus, it would be beneficial to the success of this initiative for the mortgage insurers to work with both companies as they move toward implementation."

Three of the nation's top four residential servicing companies -- which together control almost half of all U.S. home loans -- saw their share prices fall to new 52-week lows on Friday. The three are: Bank of America, Wells Fargo & Co., and Citigroup, which rank first, second and fourth, respectively, among residential servicing firms with a combined market share of 47.75% ($4.65 trillion in loans), according to the Quarterly Data Report. The nation's third largest servicer, JPMorgan Chase, saw its share price fall to $19.03, a dollar and change above its yearly low. At press time the share price of BoA had fallen more than 14% on the day to $3.37, while Citigroup slid about 20% to $2.01. Citigroup briefly fell below the $2 mark. The decline was stoked, in part, by concerns from analysts that Citigroup and BoA could be nationalized.

A troubled homeowner should be given every chance to modify his mortgage before filing for bankruptcy, according to the nation's GSE regulator who is concerned that changes in the bankruptcy code could actually hurt families and their bankers. Homeowners should not have to go through the "hardship and rigors" of bankruptcy to get their monthly payments reduced to an affordable level, said Federal Housing Finance Agency director James Lockhart. The Obama administration has outlined a $75 billion program to modify and refinance problem mortgages. But the administration also is supporting changes to the bankruptcy code that would allow judges to reduce or 'cram down' the principal amount of the mortgage. Although Obama's bankruptcy cramdown proposal is much more conservative than the bankruptcy bill recently passed by the House Judiciary Committee, Mr. Lockhart is concerned Congress will "go too far" and pass legislation that could be harmful. Bankruptcy sounds like a "good" solution, he said, "but it hurts individuals. And it can really dramatically weaken the balance sheets of our weak financial institutions, so we must be careful." Once a homeowner is in bankruptcy, Mr. Lockhart wants him to get one more chance at a loan modification and avoid living under a five-year bankruptcy financial plan. The bankruptcy judge should tell the servicer what the court is prepared to do and give the servicer "one more shot at it," he said.

For the second consecutive year, Stewart Information Services Corp., Houston, has posted a full year loss, but a fair amount of the loss is due to agent fraud. The title company lost $234.5 million ($13.37 per share) for the full year 2008, compared with a loss of $40.2 million ($2.21 per share) for 2007. In the fourth quarter 2008, Stewart lost $158.0 million ($8.72 per share), vs. a loss of $31.3 million ($1.74 per share) one year prior Included in the losses are a strengthening of policy reserves by $32.0 million as a result of unusually large claims payments related to policies issued in 2005, 2006 and 2007. An additional $41.7 million of charges are related to large title losses and defalcations attributable to independent agents of the company. "This difficult economy placed significant financial pressures on owners of independent title agencies which resulted in increased escrow fund defalcations and, therefore, higher title losses for us," said Malcolm S. Morris, chairman and co-chief executive. "To address this, and to reduce the overhead costs associated with low-premium volume agents, we cancelled more than 2,500 agencies during 2008. This action, while lowering revenues an insignificant amount, results in an improved risk profile and profit potential for us in future periods."

Joseph A. Baumeister of St. Louis pleaded guilty to one felony count of bank fraud in a mortgage scheme involving 16 area properties. According to court documents, between January 2007 and October 2008, Baumeister operated a scheme to defraud several mortgage lenders through his development company by using straw purchasers to buy 16 residential properties based on misrepresentations to lenders. He then took money from the closings of the properties by artificially inflating the sales price or by falsely claiming that various home improvements had been made. After the closings on these properties, Baumeister found tenants for the properties, collected rent, and made mortgage payments on occasion. Eventually, mortgage payments fell behind or were not made and the majority of these properties went into foreclosure. The funds Baumeister extracted from the closings totaled $364,523. Sentencing is scheduled for May 1.

Single-family housing starts fell 12.2% in January from December to another all-time low as demand for new homes and construction activity appears to be falling off a cliff. "Decline permits over the previous three months point to significant declines in starts during February and March," said economist Patrick Newport at HIS Global Insight. The U.S. Census Bureau reported that single-family housing starts declined from a seasonally adjusted annual rate of 395,000 in December to 347,000 in January - down 53.7% from January 2008. Mr. Newport noted that household formation has slowed and the severity of the downturn has reduced demand for first and second homes. In addition, "rising foreclosure rates have driven down the prices of existing homes, pricing new homes out of the market," the Global Insight economist said.

The Mortgage Bankers Association generally likes President Barack Obama's foreclosure plan but questions if $75 billion over three years will be enough to solve the problem. Josh Denney, associate vice president, public policy and government affairs, said MBA thinks the plan will "enhance servicers' ability to help borrowers in trouble and those who may be on the edge of trouble." Mr. Denney, who spoke to MortgageWire at MBA's annual servicing conference in Tampa, said the group was pleased that the $75 billion price tag was greater than the $50 billion figure that had been previously reported but said "it's unclear if $75 billion will be enough." He said the group is pleased with incentive payments to servicers in the plan and thinks a buy-down provision between lenders and the government to reduce debt-to-income levels to 31% is "a good structure." MBA would prefer to see incentives to Freddie Mac and Fannie Mae to make refinancings easier to go higher than 105% loan-to-value to "open it up to those a bit more underwater." The group remains opposed to judicial cramdowns other than to certain subprime mortgages of certain vintages, and Denney said the plan "doesn't seem to address mortgages in private-label securities." MBA would like to see a refi plan to assist those people who can't get loan mods because of legal provisions complicating access to a modification.

The Treasury Department has doubled its funding commitment to keep Fannie Mae and Freddie Mac afloat in an effort to reassure market participants that the government will continue to "stand firmly behind" the two federally chartered mortgage giants. Treasury extended a $100 billion commitment to each GSE when it placed Fannie and Freddie into conservatorships in September. Now it has doubled that backup support to $200 billion to ensure the government-sponsored enterprises continue to operate with a positive net worth. Fannie and Freddie are expected to request a draw from Treasury to cover their fourth-quarter losses and maintain a positive net worth. Freddie received Treasury assistance to cover third quarter losses. Treasury secretary Timothy Geithner said the increase is designed to assure market participants that the GSEs will continue to support the housing finance system. "Given the difficulties in the housing market today, we stand firmly behind their ability to provide that support," Mr. Geithner said. Treasury also increased the GSEs' portfolio limits by $50 billion to $900 billion and renewed its pledge to continue to purchase Fannie and Freddie mortgage-backed securities. In January, Treasury purchased $22.6 billion in GSE MBS.

The Obama administration is creating a Fannie Mae and Freddie Mac refinancing program to give 4 million to 5 million homeowners a chance of obtaining lower interest rate loans even though the value of their homes has eroded and they are having difficulty refinancing under existing standards. This new program is limited to homeowners that owe more than 80% of the value of the house and currently have conforming loans owned or guaranteed by the government-sponsored enterprises. Fannie and Freddie can waive mortgage insurance requirements in refinancing these loans, unless the borrower has private mortgage insurance. In that case, the borrower will continue to pay insurance premiums on the new mortgage. This program will provide "access to low-cost refinancing for responsible homeowners suffering from falling home prices," according to a summary of the president's foreclosure prevention plan. President Barack Obama, Treasury secretary Timothy Geithner and Housing secretary Shaun Donovan unveiled a comprehensive plan to address the foreclosure crisis at an event in Mesa, Ariz.

President Barack Obama is endorsing changes to the bankruptcy code that will allow judges to modify mortgages that were made in the "past few years" and don't exceed the $417,000 conforming loan limit, according to the president's foreclosure prevention plan. "This provision will apply only to existing mortgages under the Fannie Mae and Freddie Mac conforming loan limits, so that millionaire homes don't clog the bankruptcy courts," the summary says. The bankruptcy legislation being proposed by the president is designed to help families that have "run out of other options." But they must certify that they tried to get a loan modification and worked with a servicer before filing for bankruptcy. The legislation also provides authority for the Federal Housing Administration and the Department of Veterans Affairs to pay partial claims in the event of a bankruptcy or loan modification "so the holders of loans guaranteed by FHA and VA are not disadvantaged."