Compliance & Regulation

Treasury Secretary Henry Paulson on Wednesday pulled the plug on the government's "troubled asset" purchase program, favoring instead the use of taxpayer money to prop up ailing companies and revive the asset-backed securities market, including the securitization of commercial real estate loans. At a press conference, Mr. Paulson said Treasury might make "targeted" purchases of troubled mortgages only. The ABS program, however, would not necessarily include subprime loans, instead focusing on credit card, automobile and student loan receivables, a market that has virtually shutdown. Mr. Paulson did say that if the ABS market is revitalized "new commercial" mortgage loans and even "residential" could be part of the effort. The Treasury secretary, however, was light on details about a revival of ABS. He said the effort would involve "making financing" available to buyers of ABS securities "on a non-recourse basis." Treasury is now designing an ABS program with the Federal Reserve. When President Bush signed the Emergency Economic Stabilization Act in early October, it was assumed that most of the money would be used to buy troubled mortgage-related assets from banks and Wall Street firms. Mr. Paulson said that when the bill was first passed, "Buying illiquid mortgage assets looked like the way to go." For additional coverage of recent bailout developments, American Banker subscribers can click here.

Fannie Mae and Freddie Mac have adopted a "streamlined" approach to modifying delinquent mortgages that regulators and industry groups hope will be accepted by investors of private-label nonprime mortgage-backed securities. For borrowers who are 90-days past due and not in bankruptcy, servicers of Fannie and Freddie MBS can reduce the interest rate to 3%, extend the loan up to 40 years and defer payments on part of the principal. The objective is to reduce borrowers' payments to 38% of gross income through a process that is fast and simple and helps homeowners who have seen their credit scores deteriorate and their home equity disappear. GSE regulator James Lockhart announced the new streamlined modification program and he urged private-label securities investors to quickly adopt the program as an industry standard. "Broad acceptance and effective implementation could stabilize communities and property values," he said. The two government-sponsored enterprises will require their servicers to implement the new modification program by Dec. 15.

A "dramatic" rise in interest rates during September triggered hedging and derivative losses and led to a dividend cut at the Federal Home Loan Bank of San Francisco in the third quarter, when its earnings fell 25%. The FHLBank posted $101 million in earnings for the third quarter, down from $135 million in the same period in 2007. Net interest income totaled $393 million, up 59% from a year ago. The board was planning to pay a 5.4% quarterly dividend, but reduced it to 3.85%, due to other losses. "These losses were primarily due to unrealized net losses associated with derivatives, hedged items and financial instruments carried at fair value, which resulted in net losses of $179 million in the third quarter of 2008 compared to a net loss of $28 million in the third quarter of 2007," the bank said. In terms of advances, member institutions have increased their borrowings from the San Francisco bank by 5% or $12 billion over the past three quarters.

The credit performance of Fannie Mae's guaranteed nonprime mortgages continued to deteriorate and the percentage of seriously delinquent alt-A loans jumped over 100 basis points during the third quarter to 4.92%. Fannie has guaranteed $298 billion in alt-A mortgages and mortgage-backed securities, which represent 10% of its single-family credit business but 48% of its credit losses. Nearly 7.25% of the alt-A mortgages Fannie guaranteed in 2006 are 90 days or more past due and considered seriously delinquent. The percentage of mortgages in the same category for the 2007 book of business is 6.29%. Also part of the government-sponsored enterprise's $29 billion loss for the third quarter was a $731 million fair value loss on its investments in $54.6 billion of private-label alt-A and subprime MBS.

Fannie Mae executives are worried their credit facility with the Treasury Department "may prove to be insufficient" and the company could run into liquidity problems that would impair its ability to support the mortgage market. In the management discussion of its third-quarter financial results, Fannie warns that it currently has "limited ability" to issue debt securities with maturities greater than one year to finance its operations and roll over its existing debt. In addition, the company notes there is limited availability of "reasonably priced derivatives" to hedge its short-term debt position. The Washington Post reported that Fannie chief executive Herbert Allison has approached Treasury officials to ease up on the collateral requirements and other restrictions in borrowing from the Treasury. Fannie officials could not be reached for comment. Fannie estimates it could pledge up to $190 billion in agency mortgage-backed securities to borrow from Treasury. But after a valuation haircut, the amount it could borrow would be less than $190 billion. In addition, Treasury has restricted how much Fannie can increase its aggregate indebtedness.

At the direction of Congress, the Federal Housing Administration has increased the loan limit for reverse mortgages to $417,000 in the lower 48 states. The new loan limits for FHA-insured Home Equity Conversion Mortgages in Alaska and Hawaii have not been published yet. The national mortgage limit of $417,000 is "effectively immediately," FHA says in a mortgagee letter. Congress increased the loan limit for HECMs and imposed new limits on origination fees as part of an FHA modernization bill that the President signed July 30. "The new loan limit and other provisions will allow seniors to receive more benefit at lower origination cost to meet their retirement needs," said Peter Bell, president of the National Reverse Mortgage Lenders Association. Previously, the HECM loan limits were determined by area median house prices and ranged from $200,160 in rural areas to $362,790 in high cost areas. The new loan limit is likely to encourage senior to refinance their reverse mortgage so they can tap more equity in their homes.

Regulators have closed Franklin Bank, a $5.1 billion Houston thrift that became overextended to home builders and will likely result in a $1.4 billion loss to the Federal Deposit Insurance Corp. Prosperity Bank, El Campo, Tex., assumed all the deposits and $850 million of the assets. A pioneer in mortgage-backed securities, Lewis Ranieri, was a major investor and director in the failed bank that posted a $383.3 million loss for the third quarter. The bank's Call Report shows the bank took $121.8 million in charge-offs during the first nine months of this year and it had $359.2 million in non-accrual land and construction loans that it does not expect to collect. Franklin Bank had $1.3 billion in Federal Home Loan Bank advances. Regulators also seized Security Pacific Bank, a $561 million bank, which is the 19th bank to fail this year.

American International Group Inc., New York lost $24.5 billion ($9.05 per share) for the third quarter. This included a $7.05 billion pre-tax charge related to AIG Financial Products Corp.'s super senior credit default swap portfolio and a pre-tax net loss of $1.09 billion for a credit valuation adjustment on AIGFP's assets and liabilities. There was also a pre-tax net realized capital loss of $18.31 billion on AIG's investment portfolio. The company's private mortgage insurance subsidiary, United Guaranty Corp., had operating losses of $901 million for the quarter. This loss included the establishment of a premium deficiency reserve for its second-lien business. AIG also announced it has entered into agreements with the U.S. Treasury and the Federal Reserve to obtain more capital. The company will receive $40 billion through the Troubled Assets Resolution Program by issuing the Treasury preferred stock. These funds will be used to pay down a portion of the Federal Reserve Bank of New York credit line. The credit line will be reduced to $60 billion, at a lower interest rate, lower fees and be extended to a five year maturity to give AIG the opportunity to conduct planned asset sales in an orderly manner. AIG will transfer residential mortgage-backed securities into a new entity capitalized subordinated funding of $1 billion from AIG and senior funding of up to $22.5 billion from FRBNY. A second entity funded with $5 billion from AIG and up to $30 billion from FRBNY will purchase $70 billion in credit-default swaps.

President-elect Barack Obama signaled that he wants the Treasury Department to move ahead with a loan guarantee program advocated by the FDIC that could facilitate loan modifications, but so far the Treasury and the White House are not on board. "It is absolutely critical that Treasury work closely with the FDIC, HUD and other government agencies to use the substantial authority that they already have to help families avoid foreclosure and stay in their homes," Mr. Obama said during his first press conference on Nov. 7. As part of the $700 Troubled Asset Relief Program bill, Congress provided Treasury with the option of purchasing or guaranteeing troubled mortgage loans. And section 109 of the bill allows the use of loan guarantees to facilitate loan modifications. Section 109 has "tremendous potential," a banking consultant said, but the Treasury Department hasn't "bought" into the Federal Deposit Insurance Corp.'s loan modification program. "As a result, the 109 authority, even if not deployed now, could prove formidable in the next Administration," said Karen Shaw Petrou, managing partner of Federal Financial Analytics.

The mortgage business may not like what's coming in the reform package the Bush Administration has in mind for the Real Estate Settlement and Procedures Act. But at least it will have 12 months to put the changes into effect, according to the Chief of Staff at the Department of Housing and Urban Development. RESPA reform is "imminent," David Horne told the National Association of Realtors' annual conference in Orlando. "But you'll have a one-year implementation period, so you'll have plenty of time to deal with it." Mortgage interests from top to bottom have generally panned HUD's effort at revising the ancient consumer protection law. But they have been unsuccessful in getting the White House to pull back HUD's reform package. Mr. Horne also told NAR that the transition to a new administration should be smooth, at least as far as his department is concerned. He said HUD started in June to carve out office space and computers for the transition team appointed by the President-elect, whomever he or she might be. It also has identified key career staffers and major issues for the new regime, and is just waiting for President-elect Barack Obama's team "to parachute in," Mr. Horne said.