Compliance & Regulation

The home building slump has resulted in a loss of more than three million jobs, according to an analysis by economists at the National Association of Home Builders. Because production has dropped by more than one million units since starts hit their peak in 2005, 1.4 million construction workers have had to seek employment elsewhere, the NAHB said at its annual convention in Las Vegas. "But the loss doesn't stop there," according to the report, which says the slump also has resulted in the loss of nearly 562,000 jobs in the businesses which make building products and nearly 583,000 jobs in such service-related industries as architects, lawyers and engineers. That adds up to 3.05 million jobs that no longer exist, and $145 million in lost wages. Home building also is generating far less tax income for federal, state and local governments. "When one million single-family homes are not built, it means a loss of $89 billion in government revenue," the report said. Also lost is the $4.9 billion that is usually spent on appliances, home furnishings and property alterations in the first year after one million fewer families move from one house to another, the NAHB claimed.

The Federal Home Loan Bank of Pittsburgh expects to take additional writedowns on its $2.73 billion portfolio of private label mortgage-backed securities in the fourth quarter, a move that could make the GSE under capitalized and endanger its shareholders -- banks and thrifts primarily. In a new filing with the Securities and Exchange Commission, the government sponsored enterprise admits that it will not complete an analysis of its private label holdings until late in the first quarter. At December 31 the Pittsburgh bank held $2.43 billion in alt-A bonds with an "unrealized" loss of $847 million. Its $20 billion subprime portfolio is now valued at $15 billion. The bank says that at the time it bought into these bonds all were rated AAA. About 10 days ago the FHLB-Seattle told members it may not meet its risk-based capital requirement for the period ending December 31, blaming accounting rules that affect the value of its investment in private label mortgage-backed securities. Seattle holds roughly $4.52 billion in alt-A private label securities which have declined in value steadily since the second-half of 2007. One executive, who works for a depository, told MortgageWire that if banks and thrifts are forced to write down the value of their FHLB stock investments similar to the way they wrote down their Fannie Mae/Freddie Mac stock, "we're going to need the second half of that TARP money fast."

The Supreme Court has decided to review a decision by the Second Circuit Court of Appeals that essentially frees national banks from all state scrutiny and pits 50 state attorneys general against the Comptroller of the Currency. The appeals court ruled that four national banks did not have to respond to former New York AG Eliot Spitzer's request for information about their mortgage lending practices. Mr. Spitzer wanted information to determine if they unfairly placed minorities into higher cost mortgages. The circuit judges ruled 2-1 that the AG's action represented an "unlawful exercise of visitorial powers" as defined by the Comptroller and previous court decisions. The circuit judges reaffirmed that state officials are not allowed to investigate or interfere with the business or conduct of national banks. But current New York AG Andrew Cuomo and 49 other AGs contend it is inappropriate to defer to Comptroller's interpretation of visitorial powers when "sensitive issues of federalism are at stake" involving possible discrimination against citizens of New York. The appeals court also erred by failing to consider the Comptroller's "agency bias and a self-serving preemption agenda," the 49 AGs argue in their filing. The Supreme Court will probably hear arguments in Cuomo v. Clearing House Association this spring. The association represents the four national banks.

Home prices have fallen 18% since 2006 and could drop another 10% in 2009, which means the average mortgage could be "underwater" soon, according to a former Fannie Mae executive who served as the GSE's chief credit officer in the 1980s. Speaking before the American Enterprise Institute, former GSE executive Edward Pinto said the average loan-to-value ratio on most single-family loans was roughly 95% at year-end 2008. Mr. Pinto, now a consultant, said that figure could rise to 109% at the end of this year, a first. He noted that a 20%-plus drop in home prices has not occurred since the Great Depression when values fell 24% between 1929 and 1933. LTVs, though, were much lower in the Depression. The consultant relies on home price indexes issued by the Federal Housing Finance Agency and S&P Case Shiller in making his price estimates. Mr. Pinto said the government is on the hook for nearly 70% of all mortgages due to its backing of Fannie Mae, Freddie Mac, the Federal Home Loan Banks, the Federal Housing Administration and Federal Deposit Insurance Corp. If Congress passes bankruptcy reform legislation that allows for mortgage cramdowns, the government will be "cramming down the loans they are responsible for," Mr. Pinto said.

Merrill Lynch & Co. -- now the property of Bank of America -- has agreed to pay $450 million to settle a subprime collateralized debt obligation lawsuit brought by lead plaintiff the Ohio State Teachers Retirement System. According to the complaint, Merrill Lynch artificially inflated the value of CDOs and other assets backed by subprime mortgages by issuing false and misleading statements about the bonds. In a public filing, Merrill says it settled the case but did not admit any wrongdoing. During the height of the subprime crisis, Merrill financed several non-bank subprime funders, bought their loans and packaged them into ABS and CDO investments, selling them worldwide. Merrill also settled a similar, $75 million case brought against it by employees. In a new SEC filing, the Wall Street firm says that even though a settlement has been reached there is no assurance that a "final" deal will be concluded and gain court approval. According to the law firm of Page, Perry LLC of Atlanta, "This development confirms that even larger, more sophisticated investors can recoup damages when they are misled into purchasing complex investments such as CDOs that are virtually incomprehensible for normal people." It adds that the settlement "may be the first in what is likely to become a trend."

Speakers at the National Association of Home Builders' annual convention are not very optimistic about the sagging housing market turning around any time soon. "At some point, new household formations will drive what we all need and we are going to get back to a run rate of over one million new home sales," Stuart Tyrie of Wells Fargo Home Mortgage told the NAHB's single-family finance subcommittee. But that won't be until 2014 at the earliest, he ventured. Mr. Tyrie, who runs Wells Fargo's National Builder Division, said the fallout from the subprime debacle is "behind us," but failures among borrowers who hold option ARMs will run "well into 2012." Mike Sivage, a builder-developer from Albuquerque who chairs the group's Financial Institutions and Capital Markets Subcommittee, said the New Mexico market is continuing to decline. "It's not getting any better where I am," he said. Even Texas, one of the lone bright spots, is starting to fade, according to Kent Conine, a past NAHB president who chairs the group's AD&C Financing panel. "We did fine until the oil prices tanked," the Dallas builder said. People are still visiting model homes, but now, like in other parts of the country, they are waiting for prices to hit bottom, he said. Daniel Finnegan, a Florida-based consultant who advises builders on construction financing, said it could be two years before lenders have enough liquidity to weather regulatory scrutiny. Until then, he said, money to buy and develop land will be hard to come by. Bill Rothman of IndyMac Bank, Irvine, Calif., agreed. "We have a lot more pain to endure," he said. The conference is in committee meetings prior to the big grand opening ceremonies scheduled for Inauguration Day.

A National Association of Home Builder task force on housing finance has recommended that the politically powerful organization adopt a policy blueprint that calls for a sharing of the interest rate and credit risk by the private sector institutions which benefit from the government's secondary market support. The task force, which was established by the NAHB's senior officers last fall, also recommends that Fannie Mae and Freddie Mac retain their federal backing but be limited primarily to providing credit enhancements for mortgage-backed securities. The sharing concept would be a "cooperative structure" loosely based on the Federal Home Loan Bank model, according to Chellie Hamecs, assistant staff vice president for housing finance. Under the proposal, lenders would be liable for a "significant portion of the risk" in direct proportion to the volume of loans they sell to the government-sponsored enterprises. As envisioned by the task force, Fannie and Freddie would be given only limited portfolio capacity and then only to accommodate mortgages and housing-related investments that have no other secondary market outlet. The report, which is being discussed at the NAHB's annual convention in Las Vegas, noted "serious structural problems" with the nation's housing finance system, including what it called "the inherent conflict" in the current Fannie-Freddie business model in which the companies are required to pursue a public mission while providing competitive returns to private stockholders. These and several other policy recommendations must pass through several committees before they are voted on by the NAHB's board on Thursday (when it meets later this week.)

After pleading guilty to charges related to his participation in a $3.6 million mortgage fraud scheme, Orlando M. Gonzalez of Wellington, Fla., was sentenced to 46 months in prison. Gonzalez was charged with two counts of wire fraud involving one property. The fraud scheme caused a $400,000 loss to National City Bank. In addition, Gonzalez was charged in another two counts with stealing an individual's identity to obtain an American Express credit account, and then using that credit account to obtain more than $33,000 in money, merchandise and services.

The Senate late Thursday voted down a resolution, sponsored by Sen. David Vitter, R-La., that would have denied the new Obama administration access to the remaining $350 billion in Troubled Asset Relief Program funds. The resolution was rejected by a 52-42 vote. The defeat clears the way for president-elect Barack Obama to use the TARP funds to inject capital into banks, guarantee bad assets and implement foreclosure prevention programs. Meanwhile, on Thursday government officials worked out a deal to invest another $20 billion of taxpayer money in Bank of America, which over the past six months acquired two of the biggest players in subprime: Countrywide Financial, the nation's largest subprime lender/servicer, and Merrill Lynch, the investment banking firm that financed and then invested in several subprime originators. Merrill, which BoA bought in early January, securitized billions of dollars in subprime loans, selling the end bonds in the form of asset-backed securities and collateralized debt obligations. Merrill also invested in CDOs itself, investments that are now on the books of BoA.

The Federal Reserve purchased $23.4 billion of GSE mortgage-backed securities for the week ending January 14 -- nearly double the previous week's amount. The Fed kicked off its $500 billion campaign to buy Fannie Mae, Freddie Mac and Ginnie Mae MBS on Jan. 2, purchasing $10.2 billion in MBS during that week. Meanwhile, the two-week buying spree is having its intended effect of driving down mortgage rates. According to a recent survey by Freddie Mac, 30-year FRMs are now being offered below 5%, depending on the points. Separately, Rep. Patrick Murphy, D-Pa., wants the Fed to provide "detailed information" about its hiring of four investment managers to run the MBS purchase program. During debate on a Troubled Asset Relief Program bill, he expressed concerns about conflicts of interest. The Treasury Department also remains active in the MBS market. It purchased $21.8 billion in Fannie and Freddie MBS in December after purchasing $23.2 billion in November. The Fed reports its MBS purchases weekly while Treasury reports its MBS purchases monthly.