Compliance & Regulation

Veterans that want to get out of subprime mortgages will find it easier to refinance into Department of Veterans Affairs guaranteed loans thanks to a bill recently passed by Congress and signed by President Bush on Oct. 10. The Veterans' Benefits Improvement Act allows veterans with conventional mortgages to refinance into a zero-down VA loan with a loan limit of $729,750. Previously, lenders could only offer to refinance those veterans into a $144,000 loan with 10% down and still get the full benefit of VA's 25% loan guarantee. "With these changes to the refis we can help more veterans -- where we couldn't before. So I am really pleased," said Judy Caden, director of the VA home loan program. The VA benefits bill (S. 3023) also extends VA's authority to guarantee 1-year adjustable rate mortgages and hybrid ARMs to September 30, 2012.

The Treasury Department has set up two teams to identify troubled mortgage-back securities and whole loans to purchase as the agency readies its first asset management hires. "We are moving to implement the TARP as quickly as possible while working to ensure high quality execution," said Neel Kashkari in his first speech as director of Treasury's "Troubled Asset Relief Program." Treasury's whole loan team is working with bank regulators to identify what type of residential mortgages will be purchased first. "Regional banks are particularly clogged with whole residential mortgage loans," Mr. Kashkari told a meeting of the Institute of International Banking on Monday. The interim assistant Treasury secretary for financial stability noted that TARP will employ several tools to free up the flow of credit, including purchasing equity stakes in financial institutions and insuring MBS and whole mortgage loans. Treasury is soliciting public comment for "good ideas" on how to structure this program to insure troubled assets, he said. "We are requiring responses [to a Federal Register notice] within 14 days so we can consider them quickly, and begin designing the program," Mr. Kashkari said. Meanwhile, the TARP director has recruited several experienced government officials to manage TARP, including Jonathan Fiechter who will serve as interim chief risk officer and Donna Gambrell Hammond who was named interim chief of homeownership preservation. Both worked at the Resolution Trust Corp. Mr. Fiechter is a past director of the Office of Thrift Supervision. Treasury requires that managers who purchase assets to disclosure any conflicts of interest. "Treasury will only hire firms when we are confident in our and their ability to manage any conflicts," Mr. Kashkari said.

The Federal Deposit Insurance Corp. has simplified its rules on insuring mortgage servicer accounts so that mortgage-backed securities investors and homeowners are better protected in the event of a bank or thrift failure. Effective October 10, mortgage servicing accounts of principal and interest(P&I) are insured for up to $250,000 per mortgagor/homeowner at all depositories, according to an interim rule adopted on Friday by the FDIC's board of directors. Previously, insurance coverage was determined by the lenders/investors interest in the P&I accounts, which could lead to unexpected losses for MBS investors. FDIC staff noted that mortgage securitizations have become too complex, difficult and time consuming when it comes to deciphering investors' interests. The agency also noted that servicing accounts are an important source of liquidity for institutions and need better protection to prevent withdrawals. In response to the board's action, Fannie Mae said it is rescinding a recently adopted policy that required certain servicers to place P&I payments in trust accounts for safekeeping.

Prosecutors in Houston have indicted five individuals for scheming to defraud residential lenders out of $17 million. According to Don DeGabrielle, U.S. attorney for the Southern District of Texas, the indictment alleges that Anthony Wayne Hawkins, Brandon Alonzo Crenshaw, Nehemiah Jamal Douglas, Babette Jammer and David Vasser engaged in a mail and wire fraud conspiracy which resulted in the defendants and their co-conspirators fraudulently obtaining more than $17 million in loan proceeds. The defendants and their co-conspirators are accused of recruiting individuals to purchase residential properties with the intent to deceive mortgage lenders concerning the borrower's ability and incentive to repay the loans. According to the indictment, falsified documents were prepared and provided to the mortgage lenders to support loan applications.

Residential foreclosures continued to climb in September, though at a decelerating pace, and are on track to surpass 1 million by yearend, according to a new report issued by ForeclosureS.com, Sacramento, Calif. Foreclosures rose 82.6% last month compared with a year earlier and were up 6.6% from August. One bright spot: Preforeclosure filings fell 2.4% in September from a year earlier, with double-digit declines in the hardest-hit states of California and Michigan, though it was unclear whether the drop in preforeclosure filings could be attributed to changes in state laws or to more loan modifications by lenders and servicers to keep defaulted borrowers in their homes. According to a report in American Banker, the company warned that the slumping U.S. housing market still faces significant problems. "The gains likely are temporary and not necessarily indicative of the foreclosure crisis' easing just yet," said Alexis McGree, president of ForeclosureS. This summer California passed legislation to establish detailed procedures requiring lenders to assess the financial condition of defaulted borrowers and explore options for avoiding foreclosure.

Two Federal Home Loan Banks with multiple interest rate swap transactions with a Lehman Brothers unit are suing the bankrupt investment bank to recover $220 million in collateral. The Atlanta FHLB is suing Lehman for the return of $179 million in excess collateral and the Pittsburgh FHLB is suing for the return of $41 million in cash. Lehman Brothers Special Financing Inc. filed for bankruptcy in early October. "At this early stage of the bankruptcy proceedings, the Bank is unable to predict whether, and to what extent, it will be able to recover the claimed amounts," the FHLB Atlanta said in a public filing. The bank said it is analyzing the impact to its financial statements of the Lehman and LBSF bankruptcy filings, including any necessary loss contingencies, "which could be significant." The 12 FHLBs have aggregated credit exposure to Lehman entities of approximately $260 million, according to the Office of Finance, which issues consolidated debt securities for the FHLB system.

Freddie Mac is ordering its seller/servicers to suspend all foreclosure sales on properties with Freddie Mac-owned mortgages in federally declared disaster areas caused by Hurricane Ike, primarily Texas and Louisiana. "Freddie Mac is taking this step because the extensive damage Hurricane Ike caused has made it difficult for our servicers to get the information they need to make case-by-case decisions about forbearance or other workout options," said Ingrid Beckles, vice president of servicing and asset management at Freddie Mac. The suspension will extend from October 8 to December 31, 2008 and include mortgages that were in default prior to Hurricane Ike. Servicers will be required after the suspension ends to consider individual circumstances in determining whether additional foreclosure relief should be extended or whether to proceed with foreclosure.

Wells Fargo & Co. will wind up as the owner of Wachovia Corp. after all, a purchase that will help the San Francisco-based bank battle Bank of America for control of the residential lending and servicing arenas. Late Thursday Citigroup ended its pursuit of the ailing Wachovia but said it will follow through on a $60 billion damage claim against Wells for striking a deal after it had already agreed to buy the company. (The Federal Deposit Insurance Corp. had sanctioned Citi's purchase in late September -- but that was before Wells made a higher bid.) With Wachovia under its belt, Wells will control 17.65% of the $9.6 trillion housing receivables market compared to Bank of America's 21.06%. In lending, Wells/Wachovia will have an origination share of 17.73% to BoA's 19.99%. (The market share figures are based on June 30 data and take into account BoA's July 1 purchase of Countrywide Home Loans.) The deal also gives Wells a major retail deposit base in the mid-Atlantic where the housing market has held up well compared to states like California, Florida, and Nevada. Wells' takeover price for the Charlotte-based bank is valued at just under $6 a share.

Even though the wholesale residential lending channel appears to be on the ropes, it will return one day, according to Joe Falk, past president of the National Association of Mortgage Brokers. In an interview with MortgageWire Mr. Falk said that the some lenders are factoring in such costs as loan fraud and appraisal problems, concluding -- based on the book of business of the past few years -- that retail is cheaper. "Lenders have to ask if retail is now cheaper," he said. He noted that firms that have exited the wholesale arena this year (like National City and Wachovia) have reached such a conclusion. But Mr. Falk believes that when the loan market begins to stabilize, lenders will once again conclude that wholesale is a more cost effective way to do business. He said that Citigroup's recent decision to slash its wholesale broker network was not a surprise.

The Department of Housing and Urban Development wants to extend the 'FHA Secure' program past its December 31 sunset date and is seeking approval from the White House budget office. "We are in discussions right now with the White House," Federal Housing Administration commissioner Brian Montgomery told MortgageWire. He noted the FHA Secure program has certain nuances and flexibilities that complement the newly launched 'Hope for Homeownership' program, which Congress created to help more distressed borrowers refinance into FHA loans. FHA Secure was launched in September 2007. To date the program has helped 375,000 borrowers with subprime, payment option ARMs and even conventional mortgages refinance into safer and less expensivee FHA products. In July, HUD expanded the program to help delinquent borrowers refinance into FHA loans. The National Association of Realtors and Mortgage Bankers Association support an extension of the FHA Secure program.