Compliance & Regulation

Sen. Christopher Bond, R-Mo., is warning that the passage of a massive housing bill will greatly expand the Federal Housing Administration single-family program and make FHA a "repository for the worst" mortgages. "FHA is going to choke on this and I think it is a recipe for disaster," Sen. Bond said during a markup of the Transportation/Department of Housing and Urban Development appropriations bill. Sen. Bond along with a core group of Republican senators have opposed and dragged out the debate on the housing bill the Senate is expected to pass on Friday. The House of Representatives has passed a similar measure that modernizes the FHA mortgage insurance programs, creates a FHA refinancing program to help 400,000 homeowners avoid foreclosure and strengthens regulation of the housing government-sponsored enterprises. Differences between the House and Senate bills still have to be resolved. Sen. Bond is concerned that 35% of the refinanced loans for at-risk borrowers will go bad. And HUD does not have the staff and expertise to manage FHA's growing market share and higher loan limits. Sen. Christopher Dodd, D-Conn., contends FHA has $18.5 billion in reserves and the performance of FHA loans is improving. "In other words, with its hefty reserves, improving mix of business and the reforms in this bill, we can have confidence that FHA will be safe and sound for many years to come," Sen. Dodd said.

Fannie Mae's and Freddie Mac's safety-and-soundness regulator has issued a statement reassuring nervous financial markets that the big mortgage agencies are still viable. Following an extraordinary sell-off of the agencies' stocks after a former Federal Reserve Board official said they were insolvent, Office of Federal Housing Enterprises Oversight director James Lockhart said the two "are adequately capitalized." OFHEO "continues to monitor closely Fannie Mae, Freddie Mac, and the mortgage and financial markets," he said.

Treasury Secretary Henry Paulson late Friday morning issued a general statement of support for Fannie Mae and Freddie Mac while a source close to the administration ruled out nationalizing the two GSEs. The statement was issued about 11 a.m., after Freddie and Fannie's share value had plunged by 41% and 38%, respectively. A source familiar with the Administration's thinking said the Treasury will not nationalize the two. Late Thursday night sources told National Mortgage News that the Federal Reserve was weighing a plan to open its lending window to Fannie and Freddie, alleviating perceived liquidity pressures facing the government-sponsored enterprises. The two GSEs have a $2.5 billion line of credit with the Treasury Department but analysts concede that such a small borrowing authority would not take them far given the liquidity crunch facing most credit industries. Market sources note that short sellers have been targeting their stocks, betting on an eventual collapse. One investment banker noted that commercial paper lenders "are getting very nervous," but added that, "the government will not let them fail. Many things are under consideration, including the Federal Reserve window."

The Department of Housing and Urban Development is starting a pilot program in Detroit to purchase Federal Housing Administration single-family loans from lenders after all loss-mitigation options have been exhausted and foreclosure is the next step. "Under this program, we will create means for lenders or investors to sell their nonperforming mortgages before foreclosure to HUD and a joint-venture partner who will be responsible for servicing the loan and helping families stay in their homes," HUD Secretary Steve Preston said. HUD expects to purchase the FHA loans at a "significant discount" so the joint-venture partner can modify the loans and make it more affordable for the homeowners.

Sandler O'Neill Research has reiterated its Sell rating on Home BancShares Inc., citing a disclosure that an internal investigation by the company had uncovered apparent fraud at a subsidiary bank. The alleged fraud by a senior officer was estimated at approximately $2.1 million, but has apparently not resulted in customer losses, the research firm said. While noting that the bank's disclosure was hedged, Sandler O'Neill said the announcement "does not seem to be cause for significant concern." Pointing to Home Bancshares' decentralized system, with local management heading up the bank's subsidiaries, the research firm said it "would not be surprised to see management tighten its oversight of the subsidiary banks." Home BancShares, based in Conway, Ark., owns community banks in Arkansas and Florida.

Fulbright & Jaworski LLP has announced the formation of a Global Subprime and Credit Crisis Practice Group. The law firm said the group would address the needs of financial institutions, brokerage firms, title companies, corporate directors and officers, and public accounting firms. Fulbright said five co-heads from various disciplines have been designated to steer the practice group: Rodney Acker, a financial institutions litigator in Dallas; David Barrack, a bankruptcy litigator in New York; Anne Rodgers, a securities and complex commercial litigator in Houston; Richard Smith, a white collar defense and government investigations litigator in Washington, D.C.; and Chris Warren-Smith, a financial disputes and investigations lawyer in London. "Issues similar to those we now face with the subprime fallout date back to the late 1980s when many of our lawyers were handling litigation involving the failed savings-and-loan industry," said Stephen C. Dillard, the head of Fulbright's Global Litigation Department. "This is an area where we can offer our clients the advice and experience they need to successfully deal with the subprime collapse." The international law firm can be found online at http://www.fulbright.com.

Covered bonds could provide a new source of mortgage funding, Treasury Secretary Henry Paulson says, and he is encouraging the Federal Deposit Insurance Corp.'s efforts to develop a covered-bond market in this country. "As Treasury seeks to encourage new sources of mortgage funding in the United States, improve underwriting standards, and strengthen financial institutions' balance sheets, covered bonds have the potential to serve these purposes and reduce the cost for first-time homebuyers, and existing homeowners to refinance," Secretary Paulson told an FDIC mortgage forum. The FDIC has solicited comments on covered bonds, and the agency is expected to approve a final policy statement at a July 15 board of directors meeting. The Treasury secretary stressed in his remarks that improving the availability of mortgage credit is crucial for a recovery in the housing market. The "single most powerful step" Congress can take is passing a bill that strengthens the regulation of Fannie Mae and Freddie Mac, Mr. Paulson said. He reported that the Hope Now workout initiative is a success in terms of stopping preventable foreclosures. But he said he doubts whether pending legislation that would give the Federal Housing Administration more authority to refinance underwater mortgages would have a "good result" or prevent foreclosures that are "inevitable."

Senate appropriators are not providing any funds for the Federal Housing Administration to cover losses on FHA-insured mortgages with seller-funded downpayment assistance, and it could snuff out the controversial homebuyer assistance programs run by nonprofits. The Department of Housing and Urban Development has been trying to stop the downpayment assistance programs for years because of high foreclosure rates and losses. A housing bill pending in the Senate would ban seller-funded DPA on FHA loans. But House Democrats strongly support the continuation of the homebuyer assistance programs with some reforms. According to Senate Appropriations Committee staffers, the Congressional Budget Office has ruled that the appropriators must provide funding for DPA losses on a line item for contract expenses in the HUD budget. The HUD budget approved Wednesday morning by the Transportation-HUD appropriations subcommittee does not include such funding. Senate appropriators did provide an additional $39 million to meet the FHA's growing need for additional staffing and technology.

National banks need to deal fairly with all struggling homeowners when it comes to deciding who will qualify for loan workouts and who will slip into foreclosure, according to the comptroller of the currency. "It's important that borrowers aren't being foreclosed on more quickly or denied access to modification programs, because of their race," Comptroller John Dugan said. In the past, fair-lending exams used to be focused mainly on discriminatory lending practices. But now with so many mortgages going into default, banks need to make sure that "similarly situated borrowers who default or become delinquent are treated similarly," Mr. Dugan told an OCC compliance conference. The comptroller also noted that some banks made subprime mortgages that qualified for Community Reinvestment Act. And he called on those banks to continue to make "good loans that will fulfill their CRA obligation."

The Federal Housing Administration is moving ahead with the implementation of risk-based pricing for mortgage insurance premiums on July 14, and HUD officials are urging Congress not to block the move. The RBP conversion was announced by the agency back in April. Steven Preston, the recently confirmed secretary of the Department of Housing and Urban Development, said the FHA is moving ahead with the expansion of the FHA Secure program on July 14. The new lending criteria will allow borrowers who have missed two or three payments in the previous 12 months to refinance into FHA-insured loans. The expanded FHA Secure also requires that premiums be priced according to the borrower's individual credit profile. The FHA currently charges a standard premium for all borrowers. HUD officials are concerned that Congress may impose a moratorium on risk-based pricing as part of an FHA modernization bill pending in the Senate. "That would be a very big mistake," Secretary Preston told reporters. "FHA would have to increase premiums across the board for all its borrowers or seek taxpayer funds in October to cover potential losses."