Compliance & Regulation

The Federal Housing Administration section of a massive housing bill is causing heartburn for lenders because they will have to abandon a newly implemented risk-based pricing structure. The Department of Housing and Urban Development mandated implementation of the RBP structure by July 14, but the housing bill imposes a 12-month moratorium on risk-based pricing starting Oct. 1. "Lenders are angry at HUD and Congress," said Brian Chappelle, a mortgage banking consultant in Washington. It cost millions of dollars to implement risk-based pricing, and "now it will cost millions of dollars to straighten it out," he said. HUD also has to convert back to charging a standard upfront mortgage insurance premium for all borrowers. "Now, FHA will be required to increase prices on all customers," HUD Secretary Steven Preston said. And it will require HUD to eliminate the newly expanded FHA Secure program that relies on RBP, he added. Before July 14, the standard upfront premium was 1.5%. Some expect the FHA to raise the premium to 2%, but HUD could raise it up to 3% under a provision of the housing bill.

The House has passed a landmark housing bill that includes a financial backstop for Fannie Mae and Freddie Mac by a 272-152 vote, and the measure now goes to the Senate, where a few Republican stalwarts might delay final passage for a few days. The bill increases Fannie's and Freddie's line of credit at the U.S. Treasury and authorizes the Treasury secretary for the first time to purchase stock in the two government-sponsored enterprises, if necessary. The bill also strengthens regulation of Fannie and Freddie, and passage of the bill should make it easier for the mortgage giants to raise additional capital, according to James Lockhart, director of the Office of Federal Housing Enterprise Oversight. Freddie has pledged to raise $5.5 billion in additional capital. "We are hopeful passage will help them do that quicker," Mr. Lockhart told Bloomberg TV. Once the bill is signed by President Bush, Mr. Lockhart will become the chief regulator for Fannie, Freddie, and the Federal Home Loan Banks. The massive housing bill also updates the Federal Housing Administration mortgage insurance programs and creates an FHA refinancing program to help 400,000 homeowners avoid foreclosure. The foreclosure rescue program will begin Oct. 1. Tax provisions in the bill provide a $7,500 tax credit for first-time homebuyers.

In May, home prices nationwide fell to a level 4.8% below that of a year earlier, but values may be firming up on the West Coast, according to new figures released by the Office of Federal Housing Enterprise Oversight. OFHEO said prices rose 0.3% from April to May in the Pacific region, which includes Alaska, California, Hawaii, Oregon, and Washington. Nationwide, values fell 0.3% from April to May. "It is very hard to draw conclusions from a one-month number, especially in these uncertain times," said OFHEO Director James Lockhart. The index is calculated by the agency using information on mortgages bought or guaranteed by Fannie Mae and Freddie Mac.

Office of Thrift Supervision Director John Reich is urging thrifts to prepare for rising defaults and foreclosures on payment-option adjustable-rate mortgages. "As home values continue to drop and ARMs (particularly option ARMs) continue to adjust upward, management should establish loss mitigation strategies, which might include increasing servicing staff levels; designating loan modification and short-sale criteria; and appropriate ongoing accounting for troubled debt restructurings and REO," Mr. Reich told an industry group. Bank of America just reported that Countrywide Financial Corp. held $26.4 billion in option ARMs on its books as of June 30, and 12.7% are nonperforming. BoA completed its acquisition of Countrywide and its federally chartered thrift on July 1. "Delinquencies and foreclosures continue to rise and borrowers with option ARMs face headwinds from loan recasts due to negative amortization triggers," the OTS director told the American Bankers Association summer meeting in Orlando.

The Congressional Budget Office estimates that there is a greater than 50% chance the Treasury Department will need to invest in Fannie Mae or Freddie Mac, which could add up to $25 billion to the federal budget during fiscal years 2009 and 2010. The Treasury is asking Congress to pass emergency legislation that would allow it to invest in Fannie Mae and Freddie Mac securities if necessary. Such investment authority would end in 2010. The CBO notes that if legislation is passed, "private markets might be sufficiently reassured to provide the [government-sponsored enterprises] with adequate capital to continue operations without any infusion of funds from Treasury." The CBO unveiled its estimates in a letter to Rep. John Spratt, D-S.C., chairman of the House Budget Committee.

More than 10,000 people with criminal records were allowed to work in Florida's mortgage industry, according to a report in The Miami Herald. Of those, more than 4,000 cleared background checks despite committing crimes that state law requires regulators to screen, including fraud, racketeering, and extortion. The state's chief financial officer, Alex Sink, is calling for an executive order to stop issuing and renewing mortgage broker licenses to convicted felons. He has also requested that Florida's chief mortgage regulator, Don Saxon, step down. Mr. Saxon is commissioner of the Office of Financial Regulation.

Freddie Mac has reaffirmed its commitment to raise $5.5 billion in new capital, and the publicly traded company said it has finally become a Securities and Exchange Commission registrant. "Becoming an SEC registrant marks an important milestone for the company and demonstrates our commitment to enhanced transparency and financial reporting," Freddie Mac chairman and chief executive Richard Syron said. The government-sponsored enterprise was expected to register its stock in 2003, but a $5 billion accounting scandal forced Freddie to concentrate on repairing its accounting systems and internal controls. Back in May, Freddie and Fannie Mae pledged to issue stock to raise additional capital. Fannie has issued $7.4 billion in common and preferred stock, but so far Freddie has not followed through. In the past two weeks, both GSEs have seen the value of their stock plummet. And the Federal Reserve Board granted Fannie and Freddie access to its lending window to head off any short-term funding problems. Freddie Mac has not set a date for its offering of common and preferred stock. The company said the date will depend on a "variety of factors, including prevailing market conditions."

The Securities and Exchange Commission has issued an emergency order effective July 21 designed "to enhance protections against naked short selling in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks." Under the emergency order "anyone effecting a short sale in these securities" must "arrange beforehand to borrow the securities and deliver them at settlement." The SEC said its emergency order will terminate on July 29, but "may be extended for no more than 30 calendar days in total duration." The commission said it plans on following up the emergency order with marketwide rulemaking. The SEC can be found at http://www.sec.gov.

The mortgage broker industry has long sought licensing of all originators, no matter who they work for, and "that dream is almost a reality," said Joe Falk, past president of the National Association of Mortgage Brokers. Mr. Falk, who is also past president of the Florida Association of Mortgage Brokers, was speaking at that group's annual convention in Kissimmee, Fla. He was referring to the housing bill being considered in conference committee by Congress. In his presentation, Mr. Falk also spoke of the Federal Reserve Board and its recently released "ground-breaking rulemaking" for the subprime industry, which for the first time contains a regulatory definition of a subprime loan. The Fed is now a source "of great activism," he said, and in coming months will be issuing new rules on Regulation Z. The NAMB can be found on the Web at http://www.namb.org.

The Department of Housing and Urban Development should withdraw its RESPA proposal and work with the Federal Reserve Board in developing "more simplified mortgage and real estate settlement cost disclosure forms," according to a "dear colleague" letter being circulated in the House. Reps. Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill., are leading the effort to get Housing Secretary Steve Preston to abandon HUD's proposed Real Estate Settlement Procedures Act rule. The two House Financial Services Committee members are urging fellow members of Congress to sign a letter that petitions HUD to immediately commence a joint rulemaking process with the Fed, which is working on improving Truth in Lending Act disclosures for mortgage borrowers. "It is critically important for consumers that any revision to RESPA achieve the following goals: simplify, clarify and reduce the cost of mortgage and real estate settlement processes," the letter to the HUD secretary says. However, HUD's RESPA proposal does not meet those goals, according to Reps. Hinojosa and Biggert. "We are profoundly concerned that HUD's proposed RESPA rule will hinder rather than help the recovery of the housing market." Over a dozen banking, mortgage, and settlement provider trade groups will be lobbying lawmakers to sign the letter.