Compliance & Regulation

For the second consecutive month, mortgage-backed securities issuance by Ginnie Mae surpassed government-sponsored enterprises Fannie Mae and Freddie Mac, the Department of Housing and Urban Development said. The $27.1 billion issued in November brings the total for the calendar year to date to $246 billion. In the first 11 months of 2007, Ginnie Mae MBS issuance totaled $81.6 billion. By region, $6.7 billion from the West, $4.6 billion from the Midwest, $5.7 billion from the Mid-Atlantic, $8.7 billion from the South and $1.4 billion from the Southwest. "Ginnie Mae has consistently provided liquidity to the market and it is no surprise that our November MBS issuances were strong," said Joseph J. Murin, president of Ginnie Mae. "It is further proof that Ginnie Mae is continuing to thrive and provide stability."

The Securities and Exchange Commission has nearly completed a study on mark-to-market accounting and preliminary findings point to the need for additional guidance in valuing mortgage-backed securities in inactive or illiquid markets, according to SEC chairman Christopher Cox. "The work we have already done suggests that the accounting standard setters could improve upon the existing security impairment models," the SEC chairman told an American Institution of Certified Public Accountants. Congress mandated the study because financial services executives are complaining that mark-to-market accounting is forcing wholesale writedowns of assets at fire-sale prices. "Investors have also clearly indicated a view that the current concept of mark-to-market accounting increases transparency of financial information provided to investors - but that in inactive or illiquid markets, additional guidance would be useful to promote reasonable application of the standards," Mr. Cox said. SEC is slated to submit its mark-to-market study to Congress by Jan. 2.

House Financial Services Committee chairman Barney Frank does not expect changes to the bankruptcy law to prevent foreclosures will be included in an economic recovery bill that congressional leaders want to pass in late January for President Barack Obama to sign. But the committee chairman warned industry groups that Congress could pass a bankruptcy bill later next year that allows judges to modify mortgages on primary residences if the level of loan modifications does not pick up significantly. "If by February we have the same frustration. If we aren't able to have a better success rate at reducing foreclosures, then I believe political support for bankruptcy will increase," Rep. Frank said at an Office of Thrift Supervision housing forum. Chairman Frank also noted that the new president would have "plenty of legal authority" to implement an aggressive loan modification program thanks to the Troubled Asset Relief Program Congress passed in October. And the economic recovery bill does not need to address that issue. "I don't think you need legislation," he told reporters.

Congress will try to restore the $729,750 loan limit for government-guaranteed single-family loans early next year as part of the newly elected president's economic recovery/stimulus bill, according to Rep. Barney Frank, D-Mass. The maximum loan limit for Fannie Mae, Freddie Mac and Federal Housing Administration loans is slated to adjust downward to $625,000 after Dec. 31. And the Bush administration in its waning days is resisting any attempt to keep the $729,750 limit in place. "There is a chance to get them back up again," the powerful chairman of the House Financial Services Committee said. "And I believe that will be in the economic recovery plan," he told attendees at an Office of Thrift Supervision housing forum. But even a restoration after four or five weeks will cause disruption in the jumbo mortgage market. Some industry groups are hoping Sen. Mel Martinez, R-Fla., will be successful in attaching an amendment to the $15 billion auto industry rescue bill that extends the $729,750 loan limit for one year.

House Financial Services Committee chairman Barney Frank, D-Mass., does not expect changes to the bankruptcy law to prevent foreclosures will be included in an economic recovery bill that congressional leaders want to pass in late January for President Barack Obama to sign. But the committee chairman warned industry groups that Congress could pass a bankruptcy bill later next year that allows judges to modify mortgages on primary residences if the level of loan modifications does not pick up significantly. "If by February we have the same frustration. If we aren't able to have a better success rate at reducing foreclosures, then I believe political support for bankruptcy will increase," Rep. Frank said at an Office of Thrift Supervision housing forum. Chairman Frank also noted that the new president would have "plenty of legal authority" to implement an aggressive loan modification program thanks to the Troubled Asset Relief Program Congress passed in October. And the economic recovery bill does not need to address that issue. "I don't think you need legislation," he told reporters.

The financial crisis has exposed the "weaknesses" in the securitization market, FDIC chairman Sheila Bair said, and it needs to be reformed through a re-alignment of interests to improve the long-term performance of mortgage-backed securities. "The regulatory system needs to make certain that the right people have skin in the game and get paid not for short-term gains, but for taking the long view," Ms. Bair said at an event sponsored by American Banker. "Investors have lost faith" in the private-label MBS market, she said. Over $1 trillion dollars of private-label MBS was issued in 2005 and 2006, but issuance has dropped to "virtually zero" in the third quarter of this year. "Securitization will eventually come back," she said. "But fundamental reforms will be necessary to ensure that incentives are aligned to produce transparency, stability and confidence of all market participants."

Treasury Department officials don't want to see a suspension of mark-to market rules at this point in the financial crisis even though they admit the current accounting rules are "pro-cyclical" in a way that depresses valuations of mortgages and other assets. "I am not sure changing the accounting rules mid-stream is going to increase investor confidence in how much these assets are worth," Treasury assistant secretary Neel Kashkari said. "It is also hard to make these kinds of changes in the middle of a crisis," he told a Mortgage Bankers Association conference. The Securities and Exchange Commission is conducting a study on mark-to-market accounting and it is slated to submit its recommendations for changes or improvements to Congress by Jan. 2, 2009. "We all see the limitations of mark-to-market. It is clearly pro-cyclical," Mr. Kashkari said. But the man in charge of Treasury's Troubled Asset Relief Program said, "No one has come up with a better system yet to mark-to-market - at least that we've heard of."

Re-defaults of newly modified loans are "remarkably high," according to the Office of the Comptroller of the Currency. The OCC released data showing that 36% of modified loans are 30 days past due after three months. "After six months, the rate was nearly 53% and after eight months, 58%," Comptroller John Dugan said at an Office of Thrift Supervision housing forum. Using first quarter data, the OCC also found that 35% of modified loans were 60-days past due after six months. "Not all re-defaulted mortgages go to foreclosure," Mr. Dugan said. But the OCC is beginning to ask servicers why the re-default is so high. The Comptroller also gave a preview of the third quarter OCC/OTS report on loan workouts and foreclosures that will be released soon. He noted that loan modifications have nearly doubled since the first quarter and foreclosure starts fell 2.6%. Foreclosure starts totaled 288,740 in the second quarter.

The Federal Housing Finance Agency this week will release "standards" for Fannie Mae and Freddie Mac servicers engaging in loan modifications, agency chief James Lockhart said Monday. Speaking at the Office of Thrift Supervision forum on housing, Mr. Lockhart said he wants servicers to begin thinking about how they can modify loans that are in private label securities. He provided no details. Meanwhile, Federal Deposit Insurance Corp. chairwoman Sheila Bair defended the concept of government involvement in loan modifications after a new study by the Comptroller of the Currency found that in some cases half of all modified loans wind up delinquent again just months after being restructured (see related item below). Ms. Bair said the OCC study offers no "granular" detail on borrowers going delinquent after having their loans modified. She said the OCC study offers no information on debt-to-income ratios, borrower income and other metrics.

President-elect Barack Obama said his economic recovery package will include a program to stem foreclosures along with new regulations to prevent the speculation and over-leveraging that fueled the housing boom. The package will include a "strong set of new financial regulations in which banks, rating agencies, mortgage brokers, a whole bunch of folks, have to be much more accountable and behave much more responsibly," Mr. Obama said on NBC's "Meet the Press" on Dec. 7, 2008. "We've got to have transparency, openness and fair dealing in our financial markets," he added. The former Illinois senator also stressed that foreclosure prevention is going to be a "top priority" of his administration. He noted that reducing foreclosures would help stabilize the housing market and financial institutions.