Compliance & Regulation

The idea of creating a Resolution Trust Corp.-like entity to invest in ailing mortgage-related assets has been floating around the Treasury Department since January. One adviser familiar with the plan said former Treasury Undersecretary Robert Steel (who recently became the head of Wachovia Corp.) was instrumental in developing the idea. National Mortgage News reported on the existence of the plan in a Web column in January. However, back then the Treasury Department was not openly acknowledging that it even had a plan, much less one shaped after the RTC. The adviser, requesting anonymity, said the Treasury was hoping it would never have to use it. The RTC was created by Congress in 1989 to manage and sell billions of dollars in real estate, loans, and other assets belonging to failed thrifts. Eventually the agency was merged into the Federal Deposit Insurance Corp. Like Treasury Secretary Henry Paulson, Mr. Steel is an alumnus of Goldman Sachs. Mr. Steel became under secretary for domestic finance in October 2006. He retired as vice chairman of Goldman in 2004. He started with the firm in 1976.

The Treasury Department is readying a legislative proposal to purchase illiquid mortgage assets from financial institutions -- and will significantly boost its MBS purchase program to provide immediate support to the mortgage market. Late Thursday, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben S. Bernanke met with congressional leaders to discuss creation of a Resolution Trust Corp.-like entity to purchase problem mortgage assets. Legislation to make it happen could come early next week. Treasury and Federal Reserve officials and senior members of Congress have concluded that a more systematic approach to the nation's financial crisis is needed. At a news conference Friday morning, Secretary Paulson said he will propose a legislative package and work with members of Congress over the weekend to "flesh out the details." He did not provide specifics about the package, except to say the program will require hundreds of billions of dollars to remove the illiquid mortgage assets that are "weighing down our financial institutions and threatening our economy." Pressure to create an RTC-type entity to deal with the financial crisis has been building for several weeks. Meanwhile, Fannie Mac and Freddie Mac have been directed to increase purchases of their mortgage-backed securities. Treasury is doubling its MBS purchases this month from $5 billion to $10 billion. The agency unveiled its MBS program Sept. 7 when it placed the two government-sponsored enterprises into conservatorships.

The third-quarter Core Mortgage Risk Index, which forecasts the relative risk of residential loan delinquencies, stands 12% higher than it did a year ago, according to First American CoreLogic, Santa Ana, Calif. The risk index has risen for 11 of the late 12 quarters, the company said. "The CMRI is currently 55% above the base period of the first quarter of 2002, a period near the end of the last U.S. economic recession," said Mark Fleming, the company's chief economist. "Although significantly higher now than during this base period, the CMRI is likely to continue rising nationally over the next 18 months." Mr. Fleming said declining home prices are the "primary factor" in the most recent rise in mortgage risk. CoreLogic, a provider of mortgage risk assessment and fraud prevention systems, can be found on the Web at http://www.facorelogic.com.

"Advertising is definitely an issue" for state regulators, attorney Bonnie S. Nachamie told attendees Thursday at the New York Association of Mortgage Brokers annual convention in Melville, N.Y. The New York Banking Department has hired an advertising specialist, and state regulators are not just looking for compliance with state laws in this area, but federal ones as well. Ms. Nachamie said the banking department has "new friends" at the Federal Trade Commission. The FTC, the New York Banking Department, and the Department of Housing and Urban Development are all chatting with each other and making referrals. Another area where the banking department is spilling over into a federal issue involves mortgage brokers who are doing Federal Housing Administration loans without having a "mini-eagle," she said. There is also a crackdown by state regulators on mortgage brokers who take applications at unlicensed locations. Ms. Nachamie also warned the audience that mortgage brokers are not exempt from making a Home Mortgage Disclosure Act filing if they have 100 applications per year. This has not been on the regulators' radar screen in the past, but the issue is starting to come up.

Fannie Mae and Freddie Mac should be liquidated, according to the Shadow Financial Regulatory Committee, which has warned since 1990 of risks posed by the two government-sponsored enterprises. The panel, sponsored by the Washington-based American Enterprise Institute, said in a Sept. 15 statement that there are only three "plausible" options after the housing market has stabilized: nationalization, privatization, and liquidation. "Continuation in GSE status should not be an option," the panel said. Nationalization is unnecessary because the private sector is "fully capable" of providing more efficient means of mortgage financing, the panel said. Privatization "could be a sensible course," the committee said, but expressed concern that "in light of the history of these companies, and particularly if they are privatized as large entities, they would still be considered too big to fail or otherwise government-backed." Privatizing them as smaller units "would reduce their sale value for the taxpayers ... and still not prevent them from recombining in the future," the panel said. Liquidation is "the most promising course" because it allows taxpayers "to benefit from whatever value remains in the companies, but minimizes the risk of continuing government involvement with their activities," the committee declared. The committee's statements can be found online at http://www.aei.org/research/shadow.

The House Financial Services Committee has approved a bill that would allow nonprofit housing groups to continue to arrange downpayment assistance on Federal Housing Administration loans and give the FHA some latitude in pricing mortgage insurance premiums based on risk. The bill (H.R. 6694) would reverse provisions in a major housing bill Congress passed this summer that bans seller-funded downpayment assistance on FHA loans starting Oct. 1 and bars the FHA from using risk-based pricing for 12 months. The House is expected to pass the bill despite opposition from the Department of Housing and Urban Development. HUD has been trying to shut down the DPA programs for years because of high default and claim rates. When it comes to RBP, the department contends that the bill is too restrictive. "The RBP portion of the bill would make permanent the recently enacted [12-month] moratorium, which HUD strongly opposed, and place very tight restrictions on FHA's pricing structure," the department said. "HUD does not support it." The House is expected to pass H.R. 6694, but it will die in the Senate, according to industry lobbyists.

Housing Secretary Steve Preston vowed Wednesday morning to implement permanent changes to the Real Estate Settlement Procedures Act by year's end even though industry groups are fighting the agency's proposals on consumer disclosures. Speaking at a luncheon in Washington, HUD Secretary Preston said, "Our goal is to get RESPA completed by the end of this year and then provide the industry with a full year to implement the rule." He added, "I firmly believe this will be a big step forward for restoring trust and transparency between the industry and homeowners." Industry trade groups do not like what the Department of Housing and Urban Development has proposed and want the department to work with the Federal Reserve on simplified disclosure forms. HUD's proposal is now under review at the Office of Management and Budget. Fed staffers have urged HUD to take a more coordinated approach in revamping consumer disclosures. HUD has made major modifications to its original proposal based on conversations with the Fed and other government agencies, as well as 12,000 comment letters HUD has received, according to a HUD spokesman. It sent the final RESPA rule to the OMB on Aug. 21.

The Office of Comptroller of the Currency is checking national banks that fund brokered loans to make sure the mortgage brokers are properly disclosing their fees to consumers as outlined in a 2003 advisory letter. "We have been reviewing bank compliance with this particular section of our guidance recently since it has been more than five years since the advisory letter was issued," Michael Bylsma, the OCC's director of consumer law, told a Mortgage Bankers Association compliance conference. The OCC guidance calls for national banks to enter into written agreements with mortgage brokers to ensure they make loans that meet the consumer's "needs, objectives and financial situation," Mr. Bylsma said. These agreements "should limit total broker compensation to prevent inappropriate steering," he added. The 2003 advisory letter also calls for disclosure of broker fees to consumers, including a written agreement between the borrower and the broker. The broker's fees should be conspicuously disclosed in the agreement that is signed and dated by the consumer before the broker starts work. "National banks should have a process in place to review the written agreements," Mr. Bylsma said. The OCC officials declined to comment on the level of compliance with the advisory letter. National banks originated 45% of all home mortgages in 2007, according to the OCC.

The regulator of the housing GSEs says Fannie Mae and Freddie Mac can continue to operate their multifamily businesses as usual, and they will not have to liquidate their holdings of Low Income Housing Tax Credits or mortgage revenue bonds. The support of the government-sponsored enterprises for multifamily housing finance is "central to the enterprises' public purposes," according to a statement issued by the Federal Housing Finance Agency. "FHFA has stated that business will continue as usual at the enterprises during the conservatorship -- this applies to both the single-family and multifamily businesses." Centerline Capital Group, New York, welcomed the FHFA statement. "Our multifamily financing business is still strong," Centerline president Marc Schnitzer said. "We expect to continue doing business with both companies in our multifamily and affordable housing lending practices."

Discussions between the New York attorney general, Fannie Mae, and Freddie Mac on appraisals reforms are continuing and "progress is bring made," according to Alfred Pollard, general counsel of the Federal Housing Finance Agency. The appraisal reforms announced by AG Andrew Cuomo, Fannie, Freddie, and the GSE regulator in March have already gone through a comment period that generated a very hostile response from industry groups and federal banking regulators. "Fannie and Freddie have reviewed the comments," Mr. Pollard told a Mortgage Bankers Association compliance conference. "They have done a very good job of looking at them and making changes that would be merited." Nevertheless, discussions with the New York AG's office are continuing. "The best I can tell you now is that progress is being made," FHFA official said.