Compliance & Regulation

Downey Financial Corp., Newport Beach, Calif., has announced that the company and its subsidiary, Downey Savings and Loan Association, have agreed to consent orders with the Office of Thrift Supervision relating to regulatory capital and real estate disposition, among other things. Downey said the orders "to a large extent, formalize certain measures previously announced by the company to enhance the bank's financial strength." As a result of the orders, Downey also announced the sale of certain noncore real estate assets that produced aggregate cash proceeds of $110 million, adding that it expects to report a net pretax gain of approximately $68 million from the sale. The gain, combined with a dividend to the bank from a wholly owned subsidiary, will result in an increase of approximately $109 million in the bank's regulatory capital, Downey said. Downey chairman Michael Bozarth said the orders "reflect a number of measures that Downey has already taken and, in some cases, is close to completing." The company can be found online at http://www.downeysavings.com.

On Sunday morning the new GSE regulatory agency placed congressionally chartered mortgage giants Fannie Mae and Freddie Mac into separate conservatorships, as the government committed $100 billion to each while removing their CEOs and laying the groundwork for a radical and historic restructuring of the entire U.S. mortgage market. As part of the restructuring plan for the government-sponsored enterprises, the Treasury Department is providing capital and funding support in an effort to boost investor confidence in Fannie's and Freddie's $5.2 trillion worth of debt and mortgage-backed securities. "Monday morning the businesses will open just as usual, only with stronger backing for the holders of MBS, senior debt, and subordinated debt," said James Lockhart, director of the Federal Housing Finance Agency. The Treasury has committed to purchase new Fannie and Freddie MBS, a move that will add liquidity to the mortgage bond market. It will purchase $5 billion worth of agency MBS in September alone. The FHFA dismissed Fannie chief executive officer Daniel Mudd and Freddie chairman and CEO Richard Syron. The two men will stay on in transition roles. Herb Allison, a former vice chairman at Merrill Lynch, was named CEO of Fannie, and David Moffet, former vice chairman of U.S. Bancorp, will lead Freddie. The new CEOs will be charged with examining Fannie's and Freddie's "guarantee fee structure with an eye toward mortgage affordability," Treasury Secretary Henry Paulson said. "The primary mission of these enterprises now will be to increase the availability of mortgage finance," he said. The FHFA director placed the GSEs in conservatorships due to their ailing financial condition and their deteriorating ability to support the mortgage market. Secretary Paulson made conservatorship a prerequisite for providing the two GSEs with quarterly capital infusions to ensure that they maintain a positive net worth. "I support the director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs," Mr. Paulson told reporters Sunday morning. In agreeing to a conservatorship, the GSEs each issued $1 billion in senior preferred stock to the Treasury. With each capital infusion, the Treasury will accumulate more preferred stock. The Treasury also will be issued warrants that give the agency the right to purchase 79.9% of the common shares in each GSE. Meanwhile, the GSEs can increase their MBS purchases by about $100 billion each. But the investment portfolios are capped at $850 billion through 2009. The senior preferred stock covenants also require the GSEs to reduce their portfolios by 10% a year starting in 2010 until the portfolios reach $250 billion. The new conservatorships will not pay dividends on common or preferred stock. The Treasury secretary advised banks and thrifts with large exposures to GSE common and preferred shares to work with their regulators in developing a capital restoration plan.

First Financial Network Inc., Oklahoma City, has announced the offering of a $190 million loan portfolio consisting partly of commercial real estate loans from the recently failed ANB Bank, Bentonville, Ark. The portfolio is being marketed on behalf of the Federal Deposit Insurance Corp., which is the receiver for the failed bank. In addition to CRE loans, the portfolio consists of commercial and industrial loans and consumer loans that have been stratified into pools based on loan type, performance, collateral, and geographic concentration, First Financial said. Bids will be taken on Oct. 14. First Financial can be found on the Web at http://www.firstfinancialnet.com.

The increase in troubled residential mortgages and construction loans is far from over, and more banks will run into problems and fail this year, according to Sheila Bair, chairman of the Federal Deposit Insurance Corp. "You simply must accept that the credit downturn is far from over," the FDIC chairman told the Florida Bankers Association. "It's a tough slog, but there's no easy way out." Ms. Bair stressed that it is critical for banks and thrifts to get control of their balance sheets, raise capital, and pay particular attention to liquidity. "Asset quality problems are putting pressure on the funding side of the balance sheet" Ms. Bair said. And she noted that liquidity problems have contributed in "varying degrees" to the failures of 10 banks this year. The FDIC chairman also stressed that the deposit insurance fund is "strong" and that she does not expect the FDIC will need to borrow against its line of credit with the U.S. Treasury to cover additional losses. To ensure that that doesn't happen, the FDIC board will consider a premium increase in October, she said.

First American Field Services and First American Real Estate Tax Service have announced the availability of a new vacant-property registration service aimed at helping lenders and servicers comply with changing municipal ordinances. The service identifies properties in a lender's servicing or real-estate-owned portfolio that require vacant-property registration and then manages the registration process, including the disbursement of fees. "As new ordinances are passed in various jurisdictions, our vacant-property registration database is updated and we are able to revise the registration information on behalf of our clients as needed," said Paul Dauterive, president of First American Field Services. ".... This new service reduces the lender's risk of compliance-related penalties by ensuring that all necessary properties remain properly registered throughout the default process." The First American Corp., the Dallas-based parent company of the two units, can be found online at http://www.firstam.com.

In response to Hurricane Gustav, the Department of Housing and Urban Development has declared a 90-day moratorium on Federal Housing Administration foreclosures in the Gulf Coast disaster areas. "HUD is ready to support families in getting back on their feet as quickly as possible," HUD Secretary Steve Preston said. "One way to do that is call a time-out on foreclosures in these disaster areas and call on the rest of the mortgage lending community to follow suit." The moratorium applies to counties that have been declared disaster areas by the federal government. Freddie Mac told its servicers to be lenient with Gulf Coast homeowners and that they have the "discretion to reduce or suspend mortgage payments or foreclosures for up to 12 months." Fannie Mae has told its servicers they can suspend or reduce borrowers' mortgage payments for up to four months or offer loan repayment plans that may extend up to 18 months, a company spokeswoman said. Fannie servicers also have the discretion to suspend foreclosures on a case-by-case basis.

Lenders and servicers choosing to participate in a special Federal Housing Administration refinancing program will have to worry about "second guessing" by FHA, which has a reputation for seeking indemnification for losses when loans go into default, according to mortgage banking attorney Laurence Platt. "Presumably, lenders that closely follow the new underwriting requirements developed by the [Hope for Homeowners Oversight] Board will be insulated from attack by FHA," the K&L Gates partner says in a Mortgage Banking Alert to clients. However, the Hope program loans are expected to have high default rates because lenders will be refinancing subprime borrowers that have defaulted or are expected to default. "It will be interesting to see how 'squishy' the new underwriting guidelines are, because the risk of second-guessing is greater when the standards are more ambiguous," the Sept. 2 alert says. Meanwhile, the House Financial Services Committee is holding a hearing Sept. 17 to see if FHA and the oversight board will be ready to launch the Hope program by Oct. 1. Committee chairman Barney Frank, D-Mass., also wants to know if servicers are holding off on foreclosures for borrowers who might be refinanced through the Hope program.

The Federal Reserve Board needs to adjust its benchmark for subprime loans so it does not "misclassify" prime jumbo loans, as well as prime loans with government or private mortgage insurance, and reduce the availably of mortgage credit, according to five major trade groups. Without adjustments for these types of loans, the Home Mortgage Disclosure Act data will misclassify prime loans and many prime loans will be treated as subprime under the Home Ownership and Equity Protection Act, according to their comment letter. The American Bankers Association, American Financial Services Association, Consumer Bankers Association, Consumer Mortgage Association and Mortgage Bankers Association sent the Aug. 29 letter in response to a HMDA proposal. "Applying the new HOEPA rules - and liability - to large segments of the prime market will decrease the availability and affordability of mortgages," the signers warn. As part of an overhaul of its HOEPA regulations in July to stop deceptive subprime lending practices, the Fed adopted the weekly Freddie Mac primary mortgage market survey plus 150 basis points as its benchmark for determining subprime loans. Now the Fed is proposing to use the same benchmark for HMDA reporting. The industry commenters point out that the interest rate on the average jumbo loan has exceeded the benchmark for almost every week for the past six months.

Unused commitments on home equity lines of credit shrank by $9 billion in the first quarter and by $31 billion in the second quarter as banks and thrifts reduced their exposure to rising losses. Federal Deposit Insurance Corp. data also show that chargeoffs on HELOCs have jumped from 50 basis points in the third quarter of 2007 to 200 bps in the second quarter. And chargeoffs on closed-end junior liens have jumped to 3% during the same period. "The chargeoffs are beginning to look like unsecured consumer loans," said FDIC senior banking analyst Ross Waldrop. He noted that the chargeoff rate in credit card loans is 5%. But junior liens are at 3% and climbing.

Delinquencies and chargeoffs on residential mortgages and construction and development loans accelerated during the second quarter as banks and thrifts reported an 87% drop in profits, according to the Federal Deposit Insurance Corp. Bank earnings fell to $5 billion, compared with $36.8 billion in the second quarter of 2007, after FDIC-insured institutions set aside $50.2 billion in loan loss reserves and charged off $26.4 billion in bad loans. The serious delinquency rate (90-days or more past due) on single-family loan mortgages rose to 3.1% in the second quarter from 2.1% at year-end 2007. Chargeoffs on those residential mortgages totaled $6.6 billion, up from $4.2 billion in the first quarter. Meanwhile, the serious delinquency rate on residential C&D loans rose to 8.66% in the second quarter and chargeoffs totaled $1.7 billion. FDIC officials are expecting more bank failures this year, especially among institutions with high concentrations of residential and commercial C&D loans. The number of institutions in the FDIC's problem bank list rose from 90 to 117 during the quarter.