Compliance & Regulation

Thrifts have reported $5 billion in losses for the second quarter after socking away $14 billion in loan loss reserves and taking $5.6 billion in chargeoffs, according to the Office Thrift Supervision. Over the previous three quarters, thrift institutions had reported $14.7 billion in losses, as the serious delinquency rate on one- to four-family loans jumped 100 basis points from 2.8% in the fourth quarter to 3.8% in the second quarter. The 829 OTS-supervised institutions have $32.8 billion in troubled one- to four-family loans on their books that are 90 days or more past due or real estate owned. Meanwhile, OTS data show that thrifts originated $107.5 billion in one- to four-family loans in the second quarter, down from $115.3 billion in the first quarter. Federal Deposit Insurance Corp. data show that bank originations totaled $283 billion, down slightly from $289 billion in the first quarter.

The Federal Deposit Insurance Corp. is planning to sell IndyMac Bank as a whole unit or in pieces, and the marketing will probably begin in September. "We will widely market it, and we hope to generate a lot of interest," FDIC Chairman Sheila Bair said. The FDIC took over the failed $32 billion Pasadena, Calif.-based thrift on July 11. The agency originally estimated that the failure would cost the FDIC insurance fund $4 billion to $8 billion. However, further evaluation of the assets showed that the insurance fund may have to pay out $8.9 billion to cover losses. Bank failures this year have reduced the FDIC reserve ratio below the statutory minimum 1.05% level, and the FDIC board will consider a "restoration plan" in early October that likely will increase deposit insurance premiums. The FDIC board will also be proposing changes to the current assessment system to shift the burden to riskier banks, Ms. Bair said, including banks that rely heavily on brokered deposits and secured liabilities, such as Federal Home Loan Bank advances.

Starting Oct. 1, the Federal Housing Administration says it will charge homebuyers a 1.75% upfront mortgage insurance premium on single-family loans and a 3% upfront premium on FHA Secure loans for delinquent borrowers. Borrowers with loan-to-value ratios above 95% will pay a 55-basis-point annual premium. Borrowers with LTVs of 95% or less will pay a 50-bp annual premium. A recently passed housing bill requires the FHA to abandon risk-based pricing for 12 months. So the agency has notified lenders that it is temporarily returning to standard pricing. Before July 14, the FHA charged a 1.5% upfront premium and a 50-bp annual premium on all single-family loans. The agency is raising the premiums to reflect higher loss rates and higher risks of refinancing delinquent borrowers. The upfront premium for existing FHA borrowers to refinance will remain at 1.5%.

Interthinx, Agoura Hills, Calif., has launched specific FHA Requirement Solutions to help lenders ensure compliant Federal Housing Administration lending programs. Interthinx said its features and services -- such as income verification, identity validation, occupancy status, automated regulatory compliance checks, and third-party certifications -- provide data validation to meet many requirements to support the rapidly growing share of FHA business. For training purposes, a multitude of Interthinx Red Flags have been mapped to specific FHA requirements to help underwriters understand exactly what loan information needs further scrutiny. For example, the company noted, section 4155.1 of the FHA handbook states that the FHA will insure owner-occupied principal residences only -- at least one borrower must occupy the property. Interthinx provides a minimum of 11 Red Flag alerts around the issue of occupancy that, under various circumstances, will trigger and notify an underwriter of potential fraud or risk. The company can be found on the Web at http://www.interthinx.com.

A house price index based on Fannie Mae and Freddie Mac mortgage data shows that house prices plunged in key states -- California and Florida -- where the mortgage giants suffered most of their credit losses in the second quarter. The Office of Federal Housing Enterprise Oversight HPI said house prices (based on purchase mortgage and refinancing data) fell by 6.9% in California, 5.6% in Nevada, 5.3% in Florida, and 4.4% in Arizona in the second quarter. Nationally, the OFHEO HPI fell 1.4% in the second quarter and 1.7% since the second quarter of 2007. "Tighter credit conditions and relatively high inventory levels have led to some sharp price declines in the second quarter," OFHEO Director James Lockhart said in releasing the second-quarter report. OFHEO's purchase-only HPI shows that house prices fell 1.4% in the second quarter and 4.8% since the second quarter of 2007. The purchase-only HPI was flat from May to June. However, the inflation-adjusted price of homes is down 10% from that of a year ago.

State Farm's federally chartered thrift can use the insurance company's independent agents to market residential mortgages and home equity loans without complying with state licensing requirements, according to a U.S. appeals court. However, the circuit judges noted that their decision may be moot once a new federal law goes into effect that sets registration and licensing requirements for all mortgage originators. The 6th Circuit Court of Appeals ruled that operations of State Farm Bank are not subject to an Ohio law that would require the independent agents to be licensed as mortgage brokers. "We reach this conclusion because the Ohio Act's application to State Farm Bank's exclusive agents fits within the categories of state laws that are expressly preempted by OTS regulations," the appeals court said. Banking attorney Steven Kaplan, a partner at K&L Gates, said, "We have to see how this plays out with the new federal [licensing] law. But at the moment, it is a significant victory for federally chartered entities. It allows them flexibility in how and to whom they solicit customers." The NAMB can be found on the Web at http://www.namb.org.

Reported incidents of residential mortgage fraud in the United States increased by 42% in the first quarter from the level recorded a year earlier, according to a new report from the Mortgage Asset Research Institute. Florida led the states in mortgage fraud, accounting for 24% of all properties with material misrepresentation for loans originated in the first quarter, according to the MARI Quarterly Fraud Report. California ranked second, followed by a three-way tie for third place among Illinois, Maryland, and Michigan. The top fraud incident type was in general application misrepresentation, followed closely by misrepresentations related to income and employment, MARI said. The report is based on data submitted by MARI subscribers about loans originated in the first quarter that have since been classified as fraudulent. MARI, a ChoicePoint company, can be found online at http://www.marisolutions.com.

Nearly 60% of 278 economists expect a special Federal Housing Administration refinancing program to reduce mortgage foreclosures, according to a survey by the National Association of Business Economists. But "only 34% feel it will help hasten the housing recovery and only 31% say it will help stabilize housing prices," said the NABE, which polled its members from July 25 to Aug. 11. President Bush signed the housing legislation that recreated the FHA refinancing program on July 30. The housing bill also expanded Fannie Mae's and Freddie Mac's lines of credit at the U.S. Treasury and granted the Treasury secretary the authority to purchase stock in the two government-sponsored enterprises. "With regard to possible Treasury support of the GSEs, fully 75% agree that these institutions are 'too important to fail,' and only 20% felt that such assistance would necessarily amount to nationalization," the NABE said.

Citigroup, in a new report, says it is unlikely that the federal government will nationalize Fannie Mae and Freddie Mac, while admitting that in time some type of federal action may be necessary. The report says the government-sponsored enterprises are not entirely without options, adding that their new regulator, the Federal Housing Finance Agency, could ease "the arbitrary capital surplus requirement further." It adds, "given our analysis, which shows that both [Fannie Mae and Freddie Mac] should have sufficient capital through (at least) year-end 2008 under a variety of negative credit scenarios, all parties could wait-it-out until market conditions improve." In Monday's trading, Freddie's share price was up 15% at one point to $3.26, while Fannie's was up 5% to $5.24.

Nonprofit housing groups and the National Association of Home Builders are forming a coalition to press Congress to reverse a ban on seller-funded downpayment assistance on Federal Housing Administration-insured loans. "We would like to see it happen this year, but the prospects are bleak," said Jerry Howard, executive vice president and chief executive of the NAHB. Nevertheless, the builders will be talking to the presidential candidates and their campaigns along with senators and congressmen to "make sure we can move this bill early next session," Mr. Howard said. Congress passed a major housing bill in July that bans seller-funded downpayment assistance on FHA loans starting Oct. 1 because of high defaults rates and losses to the FHA insurance fund. The builders are working with Nehemiah Corporation of America, AmeriDream, and other nonprofit housing groups on a grassroots effort to pass a bill sponsored by Rep. Al Green, D-Texas. The Green bill protects the insurance fund by allowing the FHA to charge higher premiums on DPA borrowers with low credit scores.