Compliance & Regulation

Bowing to pressure from Congress and industry groups, the Securities and Exchange Commission and the Financial Accounting Standards Board have issued a last-minute clarification that will allow companies to use expected cash flows to value illiquid mortgage assets in preparing their third-quarter financial reports. The two accounting bodies stopped short of suspending a fair-value accounting rule (Financial Accounting Standard 157) that some of members of Congress are trying to kill as part of a $700 billion financial stabilization bill. "When an active market for a security does not exist, the use of management estimates that incorporate current market participants' expectations of future cash flows, and include appropriate risk premiums, is acceptable," according to a joint statement by SEC and FASB staff. Critics have been complaining that FAS 157, which went into effect Jan. 1, has forced banks and other financial institutions to value some assets at fire-sale prices. This rule has exacerbated the credit crisis by forcing "massive writeoffs," according to the Consumer Mortgage Coalition. "It makes no sense to unnecessarily cripple institutions that could otherwise weather this storm of financial uncertainty by being forced to continue to mark down their assets to unrealistic fire sale prices," CMC executive director Anne Canfield says in a letter to SEC Chairman Christopher Cox.

Senate leaders want to pass the $700 billion emergency economic stabilization bill this week with minor changes that can attract more support in the House, which voted down the Bush administration's plan on Monday. "I want to reassure the American people that we intend to pass this legislation this week," said Sen. Mitch McConnell, R-Ky. "We will pass it on a board bipartisan basis, both sides cooperating to prevent this financial crisis from persisting." The Senate Republican leader stressed that Congress can "act like grown-ups" and get the job done. Senate Majority Leader Harry Reid, D-Nev., said the Democrats are committed to passing the rescue package. "I am hopeful and confident that all sides -- the House, the Senate, and the White House -- will continue working together toward this goal," Sen. Reid said. There are rumors that the Senate might vote Wednesday on the emergency bill, which would put pressure on the House to pass the bill on Thursday. But the House could make changes to the Senate-passed bill, which would require another vote on passage in the Senate. Sen. Reid wants only "one vote," a source said.

The House of Representatives failed to pass a $700 billion bill Monday afternoon to purchase troubled mortgage assets from financial institutions as two-thirds of Republicans voted against the bill and Democrats could not muster enough support to push it over the top. The final vote was 205 for passage and 228 against the bill. A close vote on the Bush administration plan was expected. However, the measure is very unpopular back home with constituents, and lawmakers were reluctant to vote for such a huge package that critics painted as a bailout for Wall Street firms and banks that profited and later got into trouble because of reckless subprime mortgage lending. The Senate was expected to pass the Emergency Economic Stabilization Act if approved by the House. Following the vote, House leaders pledged to make another effort to work together and pass a bill in the next few days -- possibly on Thursday. "What happened today cannot stand," said House Speaker Nancy Pelosi, D-Calif. "We must move forward, and I hope the markets will take that message," she said after the Dow Jones industrial average had plunged 600 points. Rep. Roy Blunt, R-Mo., said the Republicans are going to work toward a compromise that can pass and the president can sign.

The National Association of Realtors has announced the launch of a Federal Housing Administration Toolkit aimed at enabling Realtors to help buyers obtain safe and affordable FHA-backed mortgages. The toolkit includes a video on frequently asked questions and a flash-media presentation of FHA programs, as well as brochures, other reference guides, and links to useful resources. "FHA offers a safe alternative to many of the subprime and exotic loans that caused much of today's market turmoil, and the program is easier to use than ever before," said Pat V. Combs, immediate past president of the NAR. The association can be found on the Web at http://www.realtor.org.

The U.S. attorney in New York has subpoenaed Fannie Mae and Freddie Mac as part of an investigation into whether fraud contributed to the demise of these now government-owned mortgage investing giants. According to public filings, Fannie and Freddie said they face ongoing investigations from both the U.S. attorney and the Securities and Exchange Commission. The two agencies are seeking information about their accounting, financial disclosures, and corporate governance. Freddie said the subpoena it received involved matters for the period Jan. 1, 2007, to the present. Both companies -- which are operating under federal conservatorships -- said they will cooperate with the investigations. Besides the Fannie and Freddie probes, the FBI has launched preliminary investigations into the downfall of Lehman Brothers and American International Group. In addition, more than 20 subprime firms are the subject of criminal investigations by the government. The government seized control of Fannie and Freddie on Sept. 7.

The $700 billon emergency bailout bill Congress is trying to pass this week includes several fixes for a special Federal Housing Administration refinancing program to make it more attractive for lenders to help troubled homeowners and easier to pay off second lienholders who may be blocking a restructuring. Under the Hope for Homeowners program, lenders refinancing borrowers are expected to write down the mortgage to a 90% loan-to-value ratio based on a recent appraisal. The bailout bill gives the program oversight board the discretion to raise the maximum LTV to a higher percentage, possibly to 95%. "This is definitely a positive step that will make the program more attractive to lenders," said mortgage banking consultant Brian Chappelle. The bill also allows the oversight board to use the proceeds from Hope bonds to pay off second lienholders who are blocking a restructuring of the first mortgage. Currently, the lender can only offer second lienholders a share of future appreciation in the property. The Department of Housing and Urban Development is expected to issue guidelines for the Hope program Oct. 1, as required by the housing bill Congress passed their summer.

Congress is calling on the Securities and Exchange Commission to suspend fair-value accounting on distressed assets as part of a $700 billion bill to restore financial stability. The Securities and Exchange Commission and the Financial Accounting Standards Board appear to be having second thoughts about Financial Accounting Standard 157, which governs writedowns on hard-to-value assets. And many in the financial services industry blame FAS 157 for the precipitous drop in the value of subprime mortgage securities that has crippled so many companies. The bill reminds the SEC that it has the authority to suspend FAS 157 if "it is in the public interest and protects investors." In addition, the bill directs the SEC, in consultation with the Federal Reserve Board and the Treasury Department, to conduct a study of FAS 157 and report back to Congress within 90 days.

The Treasury Department must disclose within two days the price it pays for any mortgage asset, according to the pending $700 billion bailout bill. The Emergency Economic Stabilization Act mandates that the Treasury must provide to the public (in an electronic form) the dollar amount of the assets sold, the price, and a description of the collateral being purchased. The Treasury also wants any firm that gives the government warrants to guarantee that its holdings will not be diluted by stock splits.

Republican congressmen are balking at supporting President Bush's $700 billion plan to exorcise bad mortgage debt from the financial system, which could jeopardize efforts to pass the emergency legislation before the election. House Financial Services Committee Chairman Barney Frank, D-Mass., has warned that Democrats are not going to pass the president's plan without Republican votes. Democratic leaders thought they had an agreement with Republican leaders on the parameters of the $700 billion bailout bill following a closed-door meeting on Thursday. But it became clear at a subsequent White House meeting that House Republicans were not on board. A group of conservative Republicans are pushing an alternative under which the government would insure mortgage-backed securities so the banks could sell them to investors. Democrats have called it "unworkable." At the urging of President Bush, key congressional leaders resumed negotiations on Friday. The president's proposal to purchase troubled mortgage assets from banks remains the centerpiece of the talks. House Financial Services Committee chairman Barney Frank, D-Mass., said he is willing to attach the Republican MBS insurance proposal to the bill to get bi-partisan support. Negotiations will continue over the weekend and Rep. Frank said he is confident they can reach an agreement on Sunday.

The Office of Thrift Supervision seized control of Washington Mutual Thursday night and then handed the thrift over to the Federal Deposit Insurance Corp., which immediately sold the ailing servicing giant to JPMorgan Chase & Co. for $1.9 billion. The two parties -- which had been talking on and off about a deal over the past year -- agreed to terms after news reports began to surface that five mutual funds had formed a consortium to make a bid for WaMu. A handful of other bidders were looking at WaMu, a fact acknowledged by OTS Director John Reich, who noted that the pending $700 billion bailout of the industry affected the deal. "I think it was a significant distraction, and it probably played a role in the interest of some parties to decide not to make a bid," Mr. Reich said. The OTS said it closed WaMu Thursday because of a run on its "jumbo" deposits, particularly in California. WaMu had loan concentrations in California and Florida, which have the nation's highest foreclosure rates. "WaMu was a victim of one of the worst downturns in the housing market," said the OTS chief. The S&L is the nation's fifth-largest residential servicer, with $600 billion in housing receivables. It is also the nation's largest S&L, with $307 billion in assets.