Compliance & Regulation

The Senate Banking Committee will hold a hearing Sept. 16 to quiz Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart about their decision to seize control of mortgage giants Fannie Mae and Freddie Mac. According to the committee, Chairman Christopher J. Dodd, D-Conn., will ask about the eventual cost of the takeover, whether the move will stabilize financial markets, and what it means for mortgage affordability. Fannie's and Freddie's regulator, the newly created FHFA, working with the Treasury, placed the two government-sponsored enterprises under a government conservatorship on Sept. 7. About a month before the takeover, Mr. Lockhart said the two GSEs had enough capital to weather the housing crisis. Rep. Barney Frank, D-Mass., plans on holding a related hearing, but has yet to set a date.

Long-term mortgages became more affordable this week as the market digested news of the Treasury's rescue plan for Fannie Mae and Freddie Mac. The average rate on conforming, 30-year fixed-rate mortgages declined to 5.93% this week, a decline of 42 basis points from that of last week. It was the first time the average 30-year mortgage rate had dropped below 6% since May. The average rate on 15-year fixed-rate mortgages declined to 5.54%, down 36 basis points from the level recorded the week before. But the rate drop may not spark a refinancing boom. Brian Koss, executive vice president of national production at Mortgage Network Inc., Danvers, Mass., told American Banker, "Most borrowers don't have the equity in their homes or don't meet current guidelines, so a lot of people who want to refinance, can't."

Originations of piggyback loans declined by 63% in 2007, but Fannie Mae and Freddie Mac continued to purchase about the same number of such loans, according to just-released Home Mortgage Disclosure Act data. The HMDA report indicates that the number of piggybacks (where a first lien and a second lien are made simultaneously) fell from 1.1 million in 2006 to 389,150 in 2007. However, the mortgage giants purchased nearly 30% of the 2007 piggybacks, compared with 12.5% in 2006. The Federal Reserve commentary on the HMDA data notes that piggybacks are usually originated to avoid buying mortgage insurance or to make sure that the first lien is below the conforming loan limit (which was $417,000 last year). As expected, the HMDA report also shows a sharp decline in subprime lending. Subprime or "higher-priced" loans fell to 1.9 million in 2007 from 2.9 million the previous year. Nearly 170 lenders closed up shop in 2007 and did not file HMDA reports. In 2006, those lenders reported making nearly 400,000 subprime loans.

Lender Technologies Corp., a wholly owned subsidiary of the Mortgage Bankers Association, has released the final request for proposal for the creation of a national database to help prevent and detect mortgage fraud. Respondents will have until Nov. 6 to review and respond to the RFP. LTC said the primary focus of the project is to develop and maintain a database that will improve a mortgage lender's ability to identify and stop fraud at the point of origination. The project will be implemented in phases. "The database will allow lenders to better protect themselves -- as well as consumers, taxpayers, and communities -- from the substantial costs associated with mortgage fraud," said MBA chairman Kieran P. Quinn. "Lenders, servicers, and investors will be able to interface with the database directly as well as through authorized agents."

EMC Mortgage Corp. has agreed to $28 million settlement with the Federal Trade Commission for allegedly engaging in "unlawful" servicing practices, abusive collection practices, and charging unauthorized fees. The FTC conducted a multiyear investigation of the Lewisville, Texas, servicing company and found that the subsidiary of Bear Stearns & Co. "allegedly paid inadequate attention to the integrity of consumers' loan information" and made inaccurate claims on consumers. "Like other companies that send a bill, mortgage servicers must make sure that the amount they say is due is really the amount due," said Lydia Parnes, the FTC's director of consumer protection. "Consumers have a right to expect accuracy from the company that collects their mortgage payments." The $28 million will be distributed to homeowners affected by EMC's practices. JPMorgan Chase & Co. acquired Bear Stearns and EMC last May following the collapse of Bear Stearns. The settlement does "not apply" to JPMorgan Chase, the final order says. JPMorgan Chase declined to comment on the settlement. EMC serviced $86.5 billion in mortgage loans as of March 31.

Lenders participating in the Hope for Homeowners program want to restructure underwater mortgages on a trial basis for three or six months to make sure the borrower can make the payments and the Federal Housing Administration will insure the new loan, MortgageWire has learned. During a conference call with industry executives, Department of Housing and Urban Development officials seemed receptive to this idea, sources said. Lenders are expected to reduce the principal to a 90% loan-to-value ratio under the Hope program. And they don't want to take the writedown until they are sure the FHA will insure the new loan. Under HUD rules, the FHA cannot insure a loan if the borrower misses the first payment. Meanwhile, HUD is under tremendous pressure to issue guidelines for the Hope program before Oct. 1. Industry groups are telling HUD that they cannot begin to identify borrowers who could benefit from the foreclosure rescue program until they see the guidelines.

Home equity lenders need to do some deep soul-searching, or consumer-friendly lawmakers in Washington will do it for them, according to a high-ranking official in the Office of the Comptroller of the Currency. Timothy Long, senior deputy comptroller for bank supervision policy and the OCC's chief banking examiner, told the Consumer Bankers Association's annual Home Lending Conference in Austin, Texas, that as lenders work their way through the current crisis, they also need to perform a "lessons-learned" evaluation. "You need to take an introspective look at what you did wrong and make some fundamental changes," he said. Mr. Long said the national banks overseen by the OCC can expect "stronger guidance" from the agency, especially regarding underwriting. He also said lenders can expect changes in how the Federal Reserve Board looks at unfair and deceptive practices, particularly concerning suitability. And he warned that Congress could get in on the act, too. "There is an overall sense in Washington that there has been a lot of victimization -- that borrowers have been taken advantage of and need protecting," the OCC official said.

An emergency credit facility that will give Fannie Mae and Freddie Mac access to short-term loans of seven to 30 days is also open to the 12 Federal Home Loans Banks, even though the banks are unlikely to need it, according to a GSE regulator. "The Federal Home Loan Banks have performed remarkably well over the last year," Federal Housing Finance Agency Director James Lockhart said. All but one is profitable, and "therefore it is very unlikely that they will use the facility," he added. The Chicago FHLBank posted a $74 million loss in the second quarter following a $78 million loss in the first quarter. The FHLBanks can put up advances or agency mortgage-backed securities as collateral to borrow at Treasury's credit facility at an interest rate of 50 basis points above the London interbank offered rate. "We can issue [consolidated] debt at much more attractive rates than that," said John Fisk, director of the FHLBank System Office of Finance. However, FHLBank consolidated debt is backed by all 12 FHLBanks. Individual banks can tap Treasury's credit facility. "We are pleased that Treasury has created this liquidity facility as a backstop," Mr. Fisk said. "Treasury created it to ensure stability and market access, and that is a good thing."

The Mortgage Bankers Association is hoping to open up a dialogue with the Federal Housing Finance Agency on reducing guarantee and delivery fees charged to Fannie Mae and Freddie Mac seller/servicers. In an interview with MortgageWire, new MBA chief John Courson said, "We'll encourage the new conservatorship management to take a fresh set of eyes" to both types of fees, especially those charged on mortgages with high loan-to-value ratios. According to company figures, the average g-fee on a newly delivered Fannie Mae loan was 27.8 basis points in the second quarter. The charge on Freddie loans were much lower -- 22 bps, which indicates that the company was having a harder time passing on costs to its lending customers. The MBA says the two government-sponsored enterprises had also been tacking on delivery fees in the range of 25-50 bps. One executive, requesting that his name not be used, said some delivery fees were as high as 100 bps.

Denver-based idBusiness, a provider of information security systems for small to medium-size businesses, has announced the launch of the Red Flag Compliance Module. The module is designed to enable mortgage companies to meet the requirements of the so-called red-flag rules under the Fair and Accurate Credit Transactions Act, idBusiness said. "A mortgage banker or broker is facing about 20 serious challenges to his business every day, one of which is red-flag compliance," said idBusiness chief executive Scott Brooks, himself a mortgage professional. "With the Compliance Module, we created a simple tool that achieves compliance first, but second, gives you a tool to build your business in a tough market." The module goes beyond the 26 identity theft "red flags" outlined by the legislation, providing customers with 37 potential signs of identity theft and integrating them into the day-to-day functions of a mortgage company's employees, idBusiness said. The company can be found online at http://www.idbusiness.com.