Compliance & Regulation

The Treasury secretary will be able to use loan guarantees and credit enhancements to facilitate loan modifications under the newly passed Emergency Economic Stability Act, which gives the Treasury broad authority to purchase $700 billion of troubled mortgage assets. Such guarantees may give the Treasury a carrot to get institutions to modify their loans without directly acquiring the loans. "It has the ability to create incentives to leverage the private sector with minimal initial cash outlays," said FDIC Chairman Sheila Bair. "I am particularly pleased the bill includes provisions for loan guarantees and credit enhancements on whole loans." The Treasury is expected to conduct its first auction to purchase troubled assets in about four weeks, and it is planning to hire 5-10 asset managers to service and modify the assets, sources say. In addition to private asset managers, the Treasury also can contract with Federal Deposit Insurance Corp. to manage residential mortgages and mortgage-backed securities.

The House of Representatives, by a vote of 263-171 early Friday afternoon, approved a $700 billion rescue package of the credit and mortgage markets paving the way for the bill to be sent to President Bush. The president signed the bill almost immediately and thanked members of Congress for passing the legislation so quickly. "By coming together on this legislation, we have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country." Mr. Bush warned, however, that it will take time to implement an effective troubled-asset purchase program and it will take some time before it has an impact on the economy. Treasury Secretary Henry Paulson said he will move rapidly, but carefully, in implementing the new tools provided in the rescue bill. "In the coming days, we will work with the Federal Reserve and the FDIC to develop strategies to deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system," the secretary said. Rep. Judy Biggert, R-Ill., said during the debate Friday that market volatility, changes to the bill, regulatory commitments, and Republican attempts to limit its price tag helped persuade her to come on board after voting no on Monday. "I reluctantly support the bill and look forward to revisiting the issue as Congress monitors the program to ensure that we minimize risks and that taxpayers see a return on this investment," she said.

Commercial banks, investment funds, and even a reported consortium of hedge funds, are interested in making a bid on IndyMac Bancorp of Pasadena, Calif., which is operating under a federal conservatorship. The Federal Deposit Insurance Corp., IndyMac's conservator, continues to give little guidance on the sale process. Investment bankers that have clients who want to bid said they understand the offering deadline has been moved several times because of negotiations concerning the $700 billion bailout bill. One adviser said the agency's preference continues to be a sale of the whole institution, but potential buyers are being given the option of making a "whole bank" bid or offers on certain business segments or loan pools. "The FDIC is getting more interest now," said the adviser, requesting that his name not be used. "Investors are hungrier."

The Department of Housing and Urban Development is shooting for a Nov. 1 increase in the loan limit for Home Equity Conversion Mortgages to $417,000. The new single, nationwide maximum isn't as great as some had hoped, but it will still be higher than the current $200,160 floor or the $362,790 maximum in high-cost markets. Lending interests tried to persuade the FHA to go along with the new national $625,000 ceiling on Fannie Mae-Freddie Mac loans, which took effect Oct. 1. But at this week's Mortgage Bankers Association's reverse mortgage lending conference in Atlanta, FHA Commissioner Brian Montgomery revealed that the lower figure prevailed. "We tried to convince HUD that [reverse mortgages] should be tied to the higher limit," said Daryl Hicks, vice president of communications at the National Reverse Mortgage Lenders Association, "but the lower ceiling is still going to be very helpful." Mr. Montgomery also said that HECM origination fees would be capped at $6,000. While HUD is aiming for Nov. 1, the exact effective date will not be finalized until Mr. Montgomery issues a mortgagee letter on the new loan limit.

Asset flippers beware -- the Treasury Department doesn't want you to profit unjustly by selling your mortgage bonds to Uncle Sam. According to details of the financial rescue bill, investors that want to sell assets to the Treasury cannot do so at a price higher than the one they bought them at. In other words, if an investor buys discounted mortgage-backed securities from a seller, he cannot turn around and unload the bonds to Treasury at a higher price. However, the legislation leaves a loophole: if a seller of bad assets took control of mortgage bonds through a merger/acquisition or bought them out of a conservatorship, they are exempt from the Treasury's "unjust enrichment" clause. The bill also allows Treasury to aid ailing depositories of less than $1 billion in assets if their capital positions were damaged by their investments in preferred stock issued by Fannie Mae and Freddie Mac. The legislation stipulates that the executive in charge of the Troubled Asset Relief Program must be an assistant secretary of the Treasury appointed by the president.

Deutsche Bank -- once a key player in subprime financing -- believes that as soon the Treasury Department begins purchasing troubled mortgage assets, liquidity will return to the market. In a new research report, chief economist Joseph LaVorgna predicts that even if the Treasury buys a "small amount" of assets, "liquidity will return." He says he believes that, in time, it could lead to a dramatic improvement in pricing. He cautions, however, that Treasury's Troubled Asset Recovery Program could run into problems if financial institutions are valuing their illiquid assets "meaningfully above the government's eventual purchase price." Deutsche Bank says if that's the case, sellers (banks, thrifts, and investment banks, among others) might not participate, defeating the purpose of the program, or they would face significant markdowns as they revalue their assets at the new price, which could raise solvency concerns.

Just after 9:30 Wednesday night, the full Senate passed a $700 billion rescue plan to revive the credit and mortgage markets. The final tally was a lopsided vote of 74 to 25. The passage came two days after Republicans -- fearing a voter backlash at the polls -- torpedoed the House version of the bill. However, senators stuffed their version of the bailout legislation with tax breaks and other sweeteners. House members were slated to return to work Thursday redrafting the bill that was defeated on Monday. It appears that mortgage "cramdown" language will not be included, but some liberal members of Congress are still holding out hope that it may be.

Just past 9:30 Thursday night the full Senate passed a $700 billion rescue plan to revive the credit and mortgage markets. The final tally was by a lopsided vote of 74 to 25. The passage comes two days after Republicans -- fearing a voter backlash at the polls -- torpedoed the House version of the bill. However, Senators stuffed their version of the "bailout" legislation with tax breaks and other sweeteners. Come Thursday morning House members will go back to work redrafting the bill that was defeated on Monday. It appears that mortgage "cram down" language will not be included but some liberal members of Congress are still holding out hope that it may be.

A national ban on seller-funded downpayment assistance programs linked to third-party reimbursements has gone into effect. The ban, which took effect Oct. 1 with the beginning of the new fiscal year of the federal government, had been fought by several nonprofit groups that provided assistance to consumers. Opponents of the ban estimate that 50,000 homeowners a month could be knocked out of the housing market because of the ban.

The Hope for Homeowners program will allows lenders to conduct "trials" to see if troubled borrowers can make their payments under a newly refinanced Federal Housing Administration mortgage. Congress directed the Department of Housing and Urban Development to establish the special FHA refinancing program, and the department is issuing lender and servicer guidance on Oct. 1. "I strongly encourage homeowners and lenders to look into this program," HUD Secretary Steve Preston said. At the request of lenders, the Hope program provides for a "minimum three consecutive month trial modification" for borrowers with higher-than-normal debt-to-income ratios. The origination guidance also allows second lienholders to share in future appreciation of the property, if they waive all rights to collect existing debt.