Compliance & Regulation

Treasury Secretary Henry Paulson says he expects foreclosures and inventories of unsold homes to remain elevated into next year but that the worst of the housing correction could be over in the coming months. "I believe we can move through the bulk of the correction in months rather than years," he told financial services executive and lobbyists July 31 at the Exchequer Club in Washington. But to turn the corner, the Treasury secretary says the availability of affordable mortgage financing must be increased. He noted that the housing bill signed by the president strengthens supervision of Fannie Mae and Freddie Mac and grants their regulator new powers to set minimum capital requirements and address the risks posed by their $700 billion mortgage investment portfolios. "We have long sought this result, and our work is far from done," Mr. Paulson said. "All parties must get to work immediately to begin to address the systemic risk issues posed by the GSEs."

The housing bill signed by President Bush raises the loan limit in Federal Housing Administration reverse mortgages to at least $417,000 nationwide, but it could be much higher under some interpretations. Peter Bell, president of the National Reverse Mortgage Lenders Association, said he is "getting conflicting feedback" about the section of the bill that raises the loan limits for FHA-insured reverse mortgages, which are formally known as Home Equity Conversion Mortgages. Some believe the loan limit for HECMs could be $625,500 nationwide. Others say the loan limits above $417,000 should be determined by multiplying the median home price by 115%, up to a maximum of $625,000. It looks like the Department of Housing and Urban Development will have to make the final call. "In the end, it will be whatever HUD's attorneys, in consultation with Capitol Hill, decide it is," Mr. Bell said. NRMLA can be found online at http://www.reversemortgage.org.

The Federal Reserve has authorized the Federal Reserve Bank of New York to extend through Jan. 30 its term securities lending facility, including the TSLF 2 that allows primary dealers to collateralize draws with certain mortgage-related securities. Collateral for the TSLF 2 includes mortgage-backed securities issued or guaranteed by federal agencies, federal agency debt securities, triple-A rated private-label residential MBS, commercial MBS, and asset-backed securities. The move is one of a series of steps the Fed has taken to provide a wider range of liquidity facilities. Some related actions have also been taken by the European Central Bank and the Swiss National Bank.

The Securities and Exchange Commission has extended its emergency order designed "to enhance protections against naked short selling in the securities of Fannie Mae, Freddie Mac and primary dealers at commercial and investment banks" until Aug. 12. The SEC said it would not extend the order beyond that date. "The order is designed to protect legitimate short-selling in these securities, but helps prevent illegitimate, naked short-selling and potential 'distort and short' manipulation," said SEC Chairman Christopher Cox. "In addition to continuing the existing order against naked short-selling, the commission will continue to explore other remedies for the broader marketplace to further protect investors from 'distort and short' artists." Under the emergency order "anyone effecting a short sale" in the securities specified must "arrange beforehand to borrow the securities and deliver them at settlement."

Scott Syphax, president and chief executive of The Nehemiah Corporation of America, Sacramento, Calif., has called on President Bush to save the controversial seller-funded downpayment assistance program that would be banned by the housing bill he is expected to sign into law. The elimination of DPA programs "will negatively impact generations to come," Nehemiah said. Mr. Syphax stressed in his letter that what is being ignored is that "seller-funded downpayment assistance is the only remaining safety net available to millions of families today seeking home ownership." The Department of Housing and Urban Development "has spent more than 10 years fighting to shut us down rather than work with us to determine how to improve a downpayment assistance program that has helped more than 1,000,000 American families," he wrote.

Hoping to revive the private-label mortgage-backed securities market, the Treasury Department on Monday issued a best- practices guide aimed at underwriters that are interested in issuing "covered bonds" backed by nonconforming loans. "The private-label market is severely constrained," said Treasury Secretary Henry Paulson at a news conference. "Fannie Mae and Freddie Mac are funding more than 70% of all mortgages today." A covered bond is a debt instrument backed by a specific pool of mortgages. The underlying collateral is held on the balance sheet of the institution issuing the security. Mr. Paulson called covered bonds a "new funding source" for nonagency loans and said he is hoping the Treasury's guidance will create "greater risk awareness and investor discipline." He said his agency is looking to support the nascent market for covered (housing) bonds, and noted that four major banks -- Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo -- are creating covered-bond programs for mortgages [see item below]. Capital Research and Management of Los Angeles, an investment adviser, said, "We expect the covered-bond initiative will provide an important new source of long-term funding in the mortgage market. We also believe that the Treasury Department's best-practices guide, especially its requirement for high-quality collateral, will provide the structure needed for the covered-bond market to develop over time."

The Office of the Comptroller of the Currency has seized First National Bank of Nevada, Reno, and First Heritage Bank NA, Newport Beach, Calif., both formerly owned by First National Bank Holding Co., Scottsdale, Ariz. On June 30, First National Bank of Arizona -- the nation's 39th-largest wholesaler and 65th-largest mortgage lender overall in 2006, according to the latest edition of the Mortgage Industry Directory -- was merged into First National Bank of Nevada. The branches and deposits were acquired by Mutual of Omaha Bank, Omaha, Neb. Mutual of Omaha purchased $200 million in assets from the receiverships at a 4.41% premium, but it said most of the First National loan portfolio will be retained by the Federal Deposit Insurance Corp.

The Senate voted 72-13 on Saturday to pass a landmark housing bill that will provide up to $300 billion in new FHA money for distressed homebuyers and create a new, tougher regulator for Fannie Mae, Freddie Mac, and the other housing GSEs. President Bush is expected to sign the bill by midweek. The House passed the bill last week. Among other things, the "Housing and Economic Recovery Act of 2008" permanently raises the Fannie/Freddie loan limit to $625,000 and bans downpayment assistance programs in regard to Federal Housing Administration loans. It also allows for the Treasury Department to invest in Fannie/Freddie securities, if need be. "For Americans out there today with distressed mortgages and worried about their economic future, we hope this legislation could be the first piece of good news in a long time," Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., told reporters over the weekend.

Some members of Congress are pushing for additional legislation to strengthen regulation of mortgage servicing practices and mandate additional forbearance relief for troubled borrowers. At a House Financial Services Committee hearing Friday, several Democratic lawmakers -- including Reps. Barney Frank, D-Mass.; Maxine Waters, D-Calif.; and Melvin Watt, D-N.C. -- expressed skepticism about the ability of current voluntary homeowner relief programs to stem the growing tide of foreclosures. Consumer advocate Julie Gordon of the Center for Responsible Lending said her group supports several bills that may require servicers to reduce the principal of outstanding mortgage balances in some circumstances. The group also supports legislation that would create a foreclosure "timeout" and mandate court-supervised loan modifications in some circumstances. "Despite the loss mitigation encouragement by Hope Now, the federal banking agencies, and state agencies, voluntary efforts by lenders, servicers, and investors have failed to stem the tide of foreclosures," Ms. Gordon said.

Noting that the FHA foreclosure stabilization provisions of a bill passed by Congress Thursday do not become effective until October, the chairman of the House Financial Services Committee is urging mortgage servicers to hold off on foreclosure in applicable cases "so borrowers can take advantage of the program." Rep. Barney Frank, D-Mass., noted that an earlier version of the bill would have made the Federal Housing Administration refinancing program for troubled borrowers available immediately. However, the housing bill that eventually passed both the House and the Senate does not make the FHA foreclosure prevention program effective until Oct. 1.