Compliance & Regulation

The nation's largest mortgage trade group says it is against a pending legislative provision that would allow judges to reduce or "cram down" outstanding residential loan amounts, arguing that it could set a judicial precedent that is not needed. In a statement released late Monday afternoon, Mortgage Bankers Association chief operating officer John Courson said the new government fund that will buy up to $700 billion in illiquid mortgage assets does not need judicial approval to reduce or rewrite the loan balance. Mr. Courson said the fund can do cramdowns without a judge's approval. He added that the cramdown is "really irrelevant to the current discussion. Once the fund purchases the distressed mortgages, it doesn't need a bankruptcy judge to rewrite the loan balance without Congress giving bankruptcy judges that authority."

Before the Senate Banking Committee approves a $700 billion bailout of the credit and mortgage markets, some of its members want assurances that the government will not overpay for subprime MBS -- plus promises that taxpayers will get warrants in companies that sell to the government. At a hearing Tuesday -- attended by every senator on the committee as well as a noisy faction from ACORN that was silenced by committee Chairman Christopher J. Dodd, D-Conn. -- several elected officials wanted to know at what price the government would purchase mortgage-backed securities. "How will the assets be priced?" asked Sen. Robert Menendez, D-N.J. "If the seller doesn't like the price, will the taxpayer be asked to pay a premium?" The question was aimed at Treasury Secretary Henry Paulson, who has been putting together the bailout plan over the past few weeks. Committee members expressed dismay at having to spend so much of the taxpayers' money to help bail out Wall Street. "It's financial socialism," said Sen. Jim Bunning, R-Ky. "And it's un-American."

The Securities and Exchange Commission revealed Tuesday that it has 50 pending subprime-related investigations involving residential lenders, investment banking firms, credit rating agencies, and other players involved in the securitization process. Speaking before the Senate Banking Committee, SEC Chairman Christopher Cox said commercial banks and broker-dealers who sold subprime mortgage-backed securities are also being looked at. "We are investigating whether mortgage lenders properly accounted for the loans in their portfolios, and whether they established appropriate loan loss reserves," he told the committee. The agency, which is responsible for overseeing bond disclosures on publicly registered securities, said it is investigating whether lenders adequately disclosed the risk profiles of the mortgages they were securitizing. In late 2006 Lewis S. Ranieri, the co-inventor of the MBS, criticized the SEC in a speech at the National Press Club, saying the agency needs to play a central role in forcing issuers to increase disclosures on bonds collateralized by nontraditional residential loans. At the time, Mr. Ranieri told National Mortgage News that "this isn't an indictment of the SEC," but added that "the transparencies are not what they should be."

Bradford Bank, Baltimore, has reported being notified by the Office of Thrift Supervision that it and its holding company, Bradford Bank MHC, will be receiving a cease-and-desist order. Bradford said it expected that the order would require it to get prior regulatory approval to originate acquisition, development, nonresidential real estate, commercial, construction, or land loans. It will have to prepare a capital plan to maintain a Tier One risk-based capital ratio of 8.0% and a total risk-based capital ratio of 12.0%. To address the need for capital, Bradford Bank has filed a registration statement with the Securities and Exchange Commission for an initial public offering of between 2.125 million and 2.875 million shares of common stock at $10 per share. "Due in part to the deterioration in our loan quality, and resulting provisions for loans losses, coupled with our inability to raise capital through a stock offering to support the asset growth resulting from our previously completed acquisitions, our regulatory capital ratios were negatively impacted," Bradford said in the filing. "Our regulatory capital ratios were reduced below the 'well capitalized' status and at June 30, 2008, we were classified 'adequately capitalized'."

BankUnited Financial Corp., Coral Gables, Fla., has announced layoffs of approximately 160 workers and an agreement on regulatory consent orders that, among other things, bar the bank from originating payment-option adjustable-rate mortgages. The company said the layoffs will come primarily from BankUnited FSB's residential lending operations and will reduce the bank's work force by about 12%. The consent orders with the Office of Thrift Supervision require the company and the bank to take various actions and impose restrictions designed to improve their financial strength, BankUnited said. The orders bar the origination of any loans that may result in negative amortization (including option ARMs) and require the bank, by Dec. 31, to maintain a minimum Tier One core capital ratio of 7% and a minimum total risk-based capital ratio of 14%. The company can be found online at http://www.bankunited.com.

The Federal Deposit Insurance Corp. is offering no guidance on when it will hold the first round of bids on IndyMac Bancorp and its assets. Bids on the thrift -- or its assets -- were originally due on Sept. 15, according to one investment banker who has the offering circular. The investment banker said the FDIC's adviser on the IndyMac auction was Lehman Brothers, which filed for bankruptcy protection on Sept. 15. An FDIC spokeswoman declined to comment on the auction and called the original bid deadline of Sept. 15 "a rumor." Investment banking sources said investors were originally told by the agency that they could bid on the entire franchise or its individual assets, which have been segmented into different pieces. According to one source, the assets include: the thrift's gargantuan servicing portfolio ($180 billion in mostly residential rights) and platform; its home equity line of credit portfolio; a whole loan portfolio; its reverse mortgage business; a construction loan portfolio; and its depository franchise. Some of its commercial mortgage assets are being auctioned off separately. The FDIC took control of IndyMac in July, placing the thrift into a conservatorship.

Credit union leaders were working through the weekend to ensure that the massive government bailout of the mortgage industry includes their industry, too -- especially corporate credit unions, which are treading water amidst huge portfolios of underwater mortgage-backed securities. According to a report in Credit Union Journal, a sister publication to National Mortgage News, corporate CUs have accrued some $10 billion in unrealized losses on their mortgage-backed securities -- more than the capital of the entire corporate network. Almost every corporate CU is holding underwater mortgage securities, and more losses are expected to come to light this week and next as the corporates report their August financials to their members, the newspaper reported.

Under legislation now being debated on Capitol Hill, any financial institution headquartered in the United States can be a seller of mortgage-related assets to the Treasury, which will be the "market maker" and sole determiner of price. On Monday, Treasury and Bush administration officials continued their talks on an estimated $700 billion bailout of the capital and mortgage markets. Meanwhile, financial service executives were trying to figure out the most important part (for them) of the historic bailout plan: at what price will Treasury buy their troubled assets? "The biggest outstanding question is how the price of purchased assets will be determined," said Merrill Lynch analyst Akiva J. Dickstein in a new research report. "While the government will not purchase assets at par, the scope of the program plus the fact that the government is unlikely to demand the same yields as private sector purchases means that spreads are likely to tighten." As negotiations on the bill continue, there is talk that the Treasury might liberalize its guidelines and eventually become a purchaser of assets backed by credit cards, automobiles, and commercial real estate. Meanwhile, over the weekend, Goldman Sachs and Morgan Stanley -- the last two of the remaining independent investment banking giants -- said they would transform themselves into bank holding companies, a move that will allow them to accept more bank deposits but will subject them to greater regulatory scrutiny. Goldman owns Litton Loan Servicing, one of the largest "scratch-and-dent" servicers in the United States. Morgan owns Saxon Mortgage, which services $50 billion in subprime loans.

The state's top mortgage regulator told attendees at the New York Association of Mortgage Brokers annual convention Thursday what kinds of things the New York Banking Department is looking for as it moves its examination process toward "safety and soundness." Rholda Ricketts, deputy superintendent of the mortgage banking division, used the acronym FILM to describe what the regulator wants to see: financial, internal controls, legal, and management systems. In the financial area, the department wants mortgage brokers to have real net worth. She said regulators are not looking for a specific number at this point and are addressing each broker on an individual basis. If a business has more monthly expenses than revenues, it needs to work on establishing financial reserves, she said. "If you are in this business to be in this business ... you realistically have to have some cushion" to cover the bad times, Ms. Ricketts said. The department is "trying to encourage people to build a strong industry," she continued. The image of the mortgage broker is "here today, gone tomorrow," and the industry "can't leave that impression on the table any longer," Ms. Ricketts warned. The NYAMB convention was held in Melville, N.Y.

Efforts by House and Senate banking committee leaders to reach a deal on a flood insurance reform bill have reached an impasse, and they may settle for a simple seven-month extension of the National Flood Insurance Program. "I am disappointed that a permanent solution is not before us, but we can and should extend the program while we work on that final bill," said House Financial Services Committee Chairman Barney Frank, D-Mass. Rep. Frank has introduced a bill that provides for a seven-month extension. The current authority to run the NFIP expires Sept. 30. The House and the Senate have passed separate flood insurance reform bills. The House bill provides new coverage for wind damage, which has complicated negotiations.