Compliance & Regulation

Federal law enforcement officials are close to announcing settlements in several mortgage and securities fraud probes that were started in 2007, according to one litigator watching the cases. "There are some discussions that are active," said attorney James Wareham of the Paul Hastings law firm. Settlements involving lenders and even home builders could be announced in a few weeks but there are no timetables, said Mr. Wareham, who supervises 300 litigators. The Department of Justice, and the Securities and Exchange Commission want to close out some of the cases and re-direct experienced investigators to bigger cases involving packaging of mortgage-backed securities and collateralized debt obligations, Mr. Wareham said in an interview. DOJ is investigating at least 20 subprime lenders and several Wall Street firms.

With increasing portions of the $700 billion TARP bailout money being earmarked for banks and even insurance companies, credit unions are looking to develop a rescue plan of their own, according to a report in The Credit Union Journal. The Credit Union National Association, the largest trade group representing CUs, is calling on its regulator, the National Credit Union Administration, to create a "shadow" asset relief program that would purchase distressed mortgage loans and mortgage-backed securities from credit unions. (TARP stands for Troubled Asset Relief Program and was legislated into existence under the Emergency Economic Stabilization Act.) This effort would include corporate credit unions, which are sitting on more than $10 billion of losses on MBS, the newspaper reported. The program would be managed by the National CU Share Insurance Fund, which already provides emergency loans to troubled credit unions.

The average rate on a 30-year fixed-rate mortgage as tracked by Freddie Mac rose to 6.46% from 6.04% during the week ended Oct. 30. The average 30-year rate also was up from 6.26% a year ago, Freddie said. Freddie chief economist Frank Nothaft said longer-term mortgage rates have been following comparable Treasury yields higher. Both long- and short-term mortgage rates were up week-to-week: the 15-year FRM had an average 6.19% rate, up from 5.72% the week previous and from 5.91% the year before; the five-year Treasury-indexed hybrid adjustable-rate mortgage had an average 6.36% rate, up from 6.06% the week previous and from 5.98% a year ago; and the one-year Treasury-indexed ARM had an average 5.38% rate, up from 5.23% the week before and down from 5.57% a year ago. Mr. Nothaft said initial rates on ARMs might stabilize due to the Federal Open Market Committee's short-term rate cuts. Average points during the week were 0.7% on 30-, 15- and five-year loans, and 0.6% on one-year ARMs.

The Federal Funds rate's decline to 1% is unlikely to spur mortgage origination the way it did the last time it was at this level. "The risk appetite's not there, the credit's not flowing and also house prices are not going up, they're going down. The whole configuration [of the market] has changed," said Josh Feinman, chief economist at DB Advisors. Mr. Feinman, who works for Deutsche Bank's institutional asset management division, said this is in contrast to the market environment in 2003, when the Fed Funds rate last fell to 1% and originations boomed. The Fed Funds rate last fell below 1% in 1958.

Fannie Mae purchased $44.1 billion in mortgages during September, a 9% increase from the previous month, according to new figures released by the company. The rise in acquisitions occurred during a month in which the Congressionally-chartered mortgage giant was taken over by its regulator, the Federal Housing Finance Agency. Even though September's purchase volume was an improvement from August, acquisitions were down 33% compared to September 2007, reflecting residential originations in the primary market. The company reported that 1.57% of its loans were in delinquency, compared to 1.45% the prior month. A year ago, late payments on Fannie Mae loans were less than half at 0.71%. At month's end Fannie had $761.4 billion of loans and securities in portfolio, a slight rise from August. But compared to September 2007, its holdings are up 5%.

Because of so many foreclosures, Fannie Mae, Freddie Mac and the Federal Housing Administration should temporary suspend their requirements for owner-occupied units in condominiums to facilitate condo sales, according to the National Association of Realtors. Specifically, the agencies should not count bank-owned units toward the owner-occupancy requirement. Currently, the government sponsored enterprises and FHA will not finance condo units unless 51% of the units are owner-occupied. NAR also wants the 51% ratio reduced to 48%. "Reducing the owner-occupancy ratio and not including bank-owned REO properties will help condominium developments with significant percentages of REO properties," NAR says in letters to FHA and the GSE regulator.

The Federal Housing Administration is reversing a long-standing policy and now it wants to help borrowers who have filed for bankruptcy stay in their homes. "Effective immediately, mortgagees must, upon receipt of notice of bankruptcy filing, send information to debtor's counsel indicating that loss mitigation may be available, and provide instruction sufficient to facilitate workout discussions, including documentation requirements, timeframes and servicer contact information," according to a FHA mortgagee letter. Previously, FHA thought the bankruptcy courts might consider such contact by the lender to be a violation of automatic stay on collection activities. But recent discussions with bankruptcy experts have persuaded FHA to change its policy so struggling homeowners that file for bankruptcy protection can benefit from FHA loss mitigation policies. Waiting until the bankruptcy is discharged or dismissed "may be injurious to the interests of the borrower, the mortgagee and the FHA insurance funds," FHA commissioner Brian Montgomery says in the letter.

Treasury and FDIC officials are making progress on developing a loan modification program that relies on government guarantees to help up to 3 million struggling homeowners -- but a final agreement has not yet been reached. Washington sources indicate that a program being pushed by Federal Deposit Insurance Corp. chairman Sheila Bair might provide $500 billion to $600 billion in loan guarantees that would allow banks, hedge funds and other mortgage holders to restructure residential loans and lower a homeowners' monthly payments. The program could include some guarantees on second liens which might prevent HELOC investors from blocking loan modifications. The talks between Treasury and FDIC are ongoing. "While we've had productive conservations with Treasury and the Administration about options for the use of credit enhancements and loan guarantees, it would be premature to speculate about any final framework or parameters of a potential program," said an FDIC spokesman.

Now that the Treasury is handing out TARP investment money to insurance companies (or is about to), speculation is beginning to center on the nation's seven mortgage insurers. According to a new research report from Sandler O'Neill, MIs are potential participants in the "capital investment program" under TARP where Treasury buys preferred stock in selected financial service firms, including insurers. But a spokesman for the Mortgage Insurance Companies of America said the trade group has not seen any of its members apply for a capital infusion. The Troubled Asset Relief Program initially involved Treasury buying problem loans and securities from financial services firms. Instead of buying problem mortgages Treasury has earmarked $250 billion of the $700 billion bailout money to buy preferred stock in banks and others, believing the firms will use the cash to lend, freeing up the so-called logjam in the commercial paper market. The Sandler report notes that with TARP MI firms would be on "new regulatory ground," adding that, "It is unclear how insurers can or will access TARP."

Treasury Department officials will have to decide how broad it wants to make its loan guarantee program as commenters are suggesting it could be used for almost any troubled assets - mortgages, auction rate securities, collateralized debt obligations and insurance-linked securities. The American Securitization Forum and the Securities Industry and Financial Markets Associations "believe the guarantees should be considered for use for a full spectrum of financial assets." However, it could be used to guarantee single-family mortgages to promote loan modifications, the two Wall Street trade groups say in a comment letter. The American Bankers Associations and the Mortgage Bankers Associations contend the guarantee program should be used to insure against losses on residential and commercial mortgages, not mortgage-backed securities initially. "The program can be expanded to include residential and commercial MBS once the challenges in structuring such a program for securitized products have been addressed," MBA says in its comment letter. The law firm Kelley Drye & Warren recommends that Treasury use the guarantees so small and mid-size institutions can pool performing mortgages. "The guarantee program should initially focus on promoting stability in the market for performing assets that are not severely distressed," partner Paul Keenan commented.