Compliance & Regulation

The American Financial Services Association is urging president-elect Barack Obama's transition team to consider several options to increase consumer credit, including bond insurance for asset-backed securities issued by finance companies. "Government must play a direct and immediate role in bringing liquidity and confidence back to the securitizations market through the purchase of securities or by issuance of insurance or guarantees," according to an AFSA report sent to the transition team. "Finance companies extend 40% to 50% of all consumer lending in the United States," AFSA executive vice president Bill Himpler said. But he noted that the flow of credit from finance companies to consumers is threatened by today's financial crisis. AFSA also wants the new administration to give Community Reinvestment Act credit to banks that extend credit to finance companies that are offering workouts to struggling borrowers.

Congress returns Jan. 6 to start a new session and House Financial Services Committee chairman Barney Frank, D-Mass., has already scheduled hearings on the Federal Housing Administration and the future use of Troubled Asset Relief Program funds. The FHA hearing on Jan. 9 will focus on the agency's oversight of FHA lenders. FHA single-family originations have tripled over the past year and more and more lenders are applying to make FHA loans. On Jan. 7, chairman Frank will hold a hearing on how the new administration should use the remaining $350 billion in TARP funds. The chairman has been critical of the Bush administration for failing to fund foreclosure prevention programs and for simply capitalizing banks without any lending or reporting requirements.

The Financial Accounting Standards Board is on track to give investors in mortgage-backed securities a break in the way they determine other-than-temporary impairment for their fourth quarter financial reports. FASB has issued a proposed staff position (FSP) that amends an impairment model, which required financial institutions to use "their best estimate of the cash flows that a market participant would use in determining the current fair value" of MBS. The FSP drops "market participant" and allows management to make a "reasonable judgment" of future cash flows, which should reduce charges if the securities are performing. The comment period on the proposed FSP EITF Issue 99-20-a ends Dec. 30. The Seattle Federal Home Loan Bank recently reported a $49.8 million "other than temporary impairment" charge against three private-label MBS. The FHLBank said it only expects to see a $4.9 million principal loss over the life of the three securities.

GMAC Financial Services has received Federal Reserve Board approval to become a bank holding company, providing the struggling auto and mortgage lender with access to new funding sources and a possible capital infusion from the Treasury Department. "Today's announcement marks a turning point in GMAC's history," said GMAC chief executive Alvaro de Molina. "As a bank holding company, GMAC will be competitively positioned for the long-term to provide financing to auto and mortgage consumers and businesses, such as automotive dealers." The approval order requires General Motors Corp. and Cerberus Capital Corp. to substantially reduce their equity interests in GMAC. It also requires the conversion of GMAC Bank to a state-chartered bank, which was approved by the Utah banking department. BHC status will allow GMAC to reduce its borrowing costs and ease the burden on its mortgage lending and servicing arm, Residential Capital, which is making principal and interest advances on an increasing number of delinquent loans. ResCap services nearly $400 billion in mortgages. GMAC has applied for a capital infusion under the Troubled Asset Relief Program. Treasury has already committed to provide $250 billion in capital assistance to banking companies.

The newly revised Appraisal Code of Conduct will not require lenders to fire in-house appraisers or sell-off their interests in affiliated appraisal shops, which raised so much controversy earlier this year when the code was first proposed by Fannie Mae and Freddie Mac, along with their regulator, and the New York Attorney General. The revised code does not rely on "unwieldy procedural prohibitions" to ensure appraiser independence, according to the Mortgage Bankers Association. "This will permit lenders and others to use their existing appraiser independence and quality control practices rather than mandate structural reorganization," MBA associate vice president Michael Carrier said. The code of conduct proposed back in March as part of a settlement with AG Andrew Cuomo, banned lenders from using affiliated appraisal shops. The Office of the Comptroller of the Currency threatened legal action to block its implementation. When asked about the revised code, an OCC spokesman said officials have no comment at this time.

Fannie Mae and Freddie Mac, along with their regulator, have reached an agreement with New York Attorney General Andrew Cuomo on reforms that ban loan officers from selecting appraisers. The agreement also bans Fannie and Freddie from purchasing loans if a mortgage broker picked the appraiser. Struck back in March, the original agreement between the GSEs and the New York AG banned the use of in-house appraisers by mortgage lenders and the use of subsidiary appraisal firms. Fannie Mae said the new appraisal policies begin May 1. The GSE plans to issue guidance to its lenders on January 7. "The Federal Housing Finance Agency supports this effort by the enterprises to strengthen the appraisal process against the possibility of improper influence and coercion," said FHFA director James Lockhart. AG Cuomo said the revised appraisal rules eliminate systemic conflicts of interest. "Erecting and enforcing meaningful firewalls between appraisers and lenders, and forcing Fannie and Freddie to stop working with unscrupulous lenders and brokers, are key steps in cleaning up the mortgage industry and avoiding another crisis like this in the future."

The Treasury Department handed out $1.9 billion to 43 banks late Tuesday afternoon to prop up their capital base and help strengthen the U.S. financial system. The largest receipt, Synovus Financial Corp., Columbus, Ga., received a $968 million capital infusion. Monadnock Bancorp, Peterborough, N.H., received $1.8 million, the smallest allotment of Treasury's Troubled Asset Relief Program funds. So far, Treasury has allocated $250 million of TARP funds for its capital infusion program and it has handed out $162 billion to banks so far.

A surge in refinance applications pushed the Mortgage Bankers Association mortgage composite index up 48% to 1245.4 for the week ending Dec. 19 from 841.4 the previous week. "The refinance index increased 62.5% to 6758.6 on a seasonally adjusted basis and the purchase index increased 10.6% to 316.5. "The refinance share of mortgage activity increased to 83.2% of total applications from 76.9% the previous week," MBA said. Borrowers are taking advantage of falling mortgage rates and going for fixed-rate financing. Less than 1% of applications involved adjustable-rate mortgages. The 30-year fixed-rate mortgage averaged 5.04% during the week of Dec. 19. But MBA economist Orawin Velz said she does not expect rates to go much lower. Nevertheless, the MBA associate vice president for forecasting expects refinancings will jump from $165 billion in the fourth quarter to $230 billion in the first quarter.

The Department of Housing and Urban Development is terminating the FHA Secure program for refinancing delinquent borrowers, but it is still keeping one option that made it easier for borrowers with second liens to refinance into a Federal Housing Administration loan. "While FHA will retain its standard rate and term refinance program for borrowers who are current on their existing mortgages, the FHA Secure program ... will terminate on Dec. 31, 2008," HUD says in a letter to FHA lenders. In a separate mortgagee letter, FHA updates its refinancing guidelines and said it will allow borrowers to re-subordinate second liens, which was an option provided under FHA Secure. FHA also has tightened its appraisal requirements on cash-out refinances where the loan-to-vale ratio is above 85%, according to Bud Carter, an FHA consultant with Potomac Partners. "FHA now requires two appraisals on cash-out refinancings above an 85% LTV, regardless of the amount of the loan," Mr. Carter said. Previously, FHA required two appraisals only if the loan amount was above $417,000.

A Freddie Mac report shows the agency expanded its mortgage portfolio by over $40 billion in November, but its issuance of mortgage-backed securities remains relatively meager. The secondary market agency said it purchased $10 billion of its own MBS in November for its investment portfolio, which totaled $805.4 billion as of Nov. 30. However, Freddie issued only $14.5 billion in MBS in November, up slightly from $13.5 billion in October. Ginnie Mae issued $27 billion in single-family MBS in November. Freddie's monthly report also shows that single-family mortgage defaults continue to rise at a fast clip. Since October, loans 90-days or more past due are up 18 basis points to 1.52% as of Nov. 30. In November 2007, only 0.6% of Freddie guaranteed loans were seriously delinquent.