Compliance & Regulation

Single-family housing starts dropped 12% in September to a level not seen in 26 years and construction activity has fallen by 70% since the peak of the housing boom in January 2006. The U.S. Census Bureau reported that single-family housing starts, on a seasonally adjusted annual rate, declined to 544,000 units in September compared to 618,000 in August. Compared to the year ago starts are down a stunning 42%. The multifamily sector has held up well. Single-family construction has not been this weak since the 1982 recession. The National Association of Home Builders is calling on Congress to pass another economic stimulus package with a "real" tax credit to stimulate home buying and reduce inventories. The $7,500 first-time homebuyer tax credit that Congress passed in July is really an interest-free loan that the buyer has to pay back to the government. NAHB executive vice president and chief executive Jerry Howard said fixing the tax credit and raising it to $10,000 is his group's top priority. "We want to make it a little bit richer, drop the recapture and extended it to all buyers," Mr. Howard said.

Federal Housing Administration lender and Ginnie Mae issuer Lend America, Melville, N.Y., said it is finalizing a "structured transaction" designed to help "a major global financial institution" refinance a roughly $1 billion pool of sub-performing loans into mortgages with more affordable terms. Lend America declined to name the client. The effort is being done through the government's new "Hope for Homeowners" program. The company said the move is part of a new effort to help first-lien holders, including Wall Street banks and hedge funds, "maximize principal recapture and help homeowners avoid foreclosure" by tapping the new government program. Lend America said it has 300 FHA mortgage specialists in a central location who receive a mandatory 10 hours of H4H classroom training and certification. It said these specialists are able to "contact delinquent borrowers, assess affordability and work under appropriate guidelines to refinance a mortgage within as little as 10 days." Under the H4H program, lenders can refinance struggling borrowers -- who obtained mortgages prior to January 2008 -- into more affordable loan programs.

To counter rising mortgage rates, the National Association of Realtors is urging the Treasury Department to "aggressively" increase its purchase of Fannie Mae and Freddie Mac mortgage-backed securities. "We believe that more active MBS purchases will reduce spreads and therefore mortgage interest rates and help bring more homebuyers into the market," NAR says in a letter to Treasury secretary Henry Paulson. Treasury purchased $5.1 billion in agency MBS in September and has pledged to purchase more in an effort to increase market liquidity. Fannie and Freddie also are expected to increase purchases of their MBS. But so far, market watchers say the impact has been minimal. The trade group says that "investment is flooding away from agency MBS to bank credit products" now that the Federal Deposit Insurance Corp. has guaranteed unsecured bank debt. This "unintended" consequence, NAR says, has pushed mortgage rates up to 6.5%. "For this reason, we urge Treasury and Federal Housing Finance Agency to more aggressively participate in the MBS market by increasing purchases of agency MBS." The FHFA regulates Fannie and Freddie.

The current financial crisis is a direct result of federal regulators that encouraged risky lending practices and ignored consumer protection, according to Senate Banking Committee chairman Christopher Dodd, D-Conn. "The lessons of this crisis are already becoming clear," Sen. Dodd said during a committee hearing on the genesis of the economic crisis. "Never again should we permit the kind of systematic regulatory failures that allowed reckless lending practices to mushroom into a global credit crisis. Never again should we allow federal financial regulators to treat consumer protection as a nuance or of secondary importance to safety and soundness regulation," the Connecticut senator said. Congress is expected to enact tough mortgage lending standards next year and revamp the financial regulatory system. "If we learn one thing from all of this, it is that the consumer remains the backbone of the American economy and that consumer protection and safe and sound operation of financial institutions are inextricably linked," Sen. Dodd said. The House Financial Services Committee will be looking at financial regulatory issues at an Oct. 21 hearing.

The National Association of Realtors is calling on Congress to return after the elections and pass a housing stimulus bill that makes the Fannie Mae, Freddie Mac and FHA maximum $729,750 loan limit permanent and fixes the first-time homebuyer tax credit so it stimulates sales. "It is vital to the economy that Congress take specific actions to boost the confidence of potential homebuyers in the housing market and make it easier for qualified buyers to get safe and affordable mortgage loans. We are asking Congress to act right away," NAR president Richard Gaylord said. NAR wants Congress to eliminate the repayment requirement on the tax credit and make it a real tax credit that it is available to all homebuyers. The maximum limit on Fannie and Freddie and Federal Housing Administration loans is scheduled to drop down from $729,750 on Dec. 31 to $625,500 on Jan.1. "Housing has always lifted the economy out of downturns, and it is imperative to get the housing market moving forward as quickly as possible," Mr. Gaylord said.

The Treasury Department said it hired Bank of New York Mellon to provide custodial, accounting, and auction management services for the fledgling Troubled Asset Relief Program. The Mellon bank also will serve as a financial agent for the troubled mortgage assets Treasury purchases and provide pricing and valuation services to TARP. "In addition, the financial agent will support acquisition of securitized assets by serving as auction manager and conducting reverse auctions for the troubled assets," Treasury said. In related news, Treasury has issued executive compensation limits for participating TARP firms. Under the three-year contract, TARP's financial agent will track executive compensation at firms that sell assets or receive capital injections from Treasury. Separately, LandAmerica Financial Group Inc., Richmond, Va., said it is competing to be one of the TARP whole loan asset managers. Treasury is expected to select its first asset managers this week.

The extraordinary series of actions taken by the Treasury Department and federal regulators - which include the injection of capital into the banking system and guaranteed inter-banking lending - should provide enough tools to address the current crisis, Federal Reserve Board chairman Ben Bernanke said. "I am not suggesting the way forward will be easy, but I strongly believe that we now have the tools we need to respond with the necessary force to these challenges," Mr. Bernanke told the Economic Club of New York. The Fed chairman noted that the housing market "continues to be a primary source of weakness in the real economy as well as the financial markets." However, Treasury's plan to purchase troubled mortgage assets from financial institutions should increase liquidity, promote price discovery and unclog the mortgage securities markets, he said. "With time, the provision of equity capital to the banking system and purchase of troubled assets will help credit to flow more freely, thus supporting economic growth."

A Democratic landslide in the upcoming elections could lead Congress to impose a 90-day moratorium on foreclosures early next year. Democratic presidential candidate Barack Obama wants any bank receiving a capital injection from Treasury to "abide by a 90-day moratorium on foreclosures for families making a good faith effort to pay their mortgages." Sen. Obama, D-Ill., said the $250 billion capital plan should be "implemented in a way that helps homeowners and does not enrich Wall Street CEOs at the taxpayers' expense." Meanwhile, Senate Banking Committee chairman Christopher Dodd, D-Conn., told reporters that he supports a 90-day foreclosure moratorium. And he would try to attach a moratorium provision to any economic stimulus or regulatory reform bill that Congress takes up. Sen. Dodd said 9,800 families enter foreclosure each day. "We should declare a temporary moratorium on foreclosures so that lenders, servicers and homeowners can come together to try to restructure their loans on terms agreeable to all."

The Federal Deposit Insurance Corp. is continuing to keep a "cone of silence" on the bidding for IndyMac's assets but, according to one investment banker familiar with the process, a second round of bids is now under way. The investment banker, requesting his name not be used, said, "there's a decent amount of interest." It is still unclear whether the thrift - now a ward of the FDIC - will be sold mostly in one piece or as an ongoing franchise or broken up. Investors have been offered the option of making one bid for the entire company or just making an offer on certain portfolios or the servicing platform. The thrift services about $190 billion in mostly home loans, ranking ninth nationwide, according to the Quarterly Data Report. The FDIC took control of IndyMac in July.

Rapid Reporting, Ft. Worth, Texas, has released EmploymentChek, a third-party employment verification service offering verbal verification of employment. VVOE picks up where automated employment verification services leave off by providing confirmations that come from live, person-to-person contact with the employer. With EmploymentChek, lenders and brokers can get definitive answers on a borrower's employment in 24 hours or less. All mortgage loans contain four major risk factors for fraud: identity, income, employment and collateral. The mortgage industry is particularly challenged by employment fraud because of the labor-intensive and paper-laden, manual process of verification, which opens lenders up to a variety of errors, oversights and opportunities for fraud. In most mortgage shops, the verification process is not measurable or accountable, and the mortgage companies do not capture the data. Rapid Reporting's EmploymentChek solves those issues with a process that validates the existence of the employer thorough a search of public and private records, and also provides a person-to-person verbal verification of employment conducted by a trained employment fraud specialist.