Compliance & Regulation

Proposed changes in accounting rules that could force Fannie Mae and Freddie Mac to move certain mortgage-backed securities onto their balance sheets should not have a major impact on their capital requirements, according to the GSE regulator. The Office of Federal Housing Enterprise Oversight is working with the Financial Accounting Standards Board on changes to FAS 140, OFHEO Director James Lockhart told MortgageWire. The two government-sponsored enterprises already have a 45-basis-point capital charge on their guaranteed MBS, he noted. And investor concerns that an accounting change would trigger a dramatic rise in their capital requirements "makes no sense," Mr. Lockhart said. Wall Street stock investors dumped Fannie and Freddie shares on Monday on fears that the GSE might have to raise $75 billion in new capital due to accounting changes [see above item]. In an interview on CNBC-TV, Mr. Lockhart stressed that Fannie and Freddie are adequately capitalized and have raised $20 billion in new capital over the past seven months.

Shares of Fannie Mae and Freddie Mac fell sharply Monday after an analyst said they may have to raise more capital than anticipated. Freddie Mac's share price fell $2.59, or 18%, to close at $11.91. Fannie Mae's shares fell $3.04, or 16%, to close at $15.74. Analyst Bruce Harting of Lehman Brothers advised clients that a possible change in accounting rules would require the two government-sponsored enterprises to shift off-balance-sheet securities to their balance sheets, a move that would require them to raise additional capital to meet regulatory standards. Separately, Reuters reported that the cost of insuring the debt of Fannie Mae and Freddie Mac rose on Monday.

Assistant Housing Secretary Brian Montgomery said Tuesday that the Federal Housing Administration and Ginnie Mae should be spun off as independent federal agencies and run like a business. Speaking at a Federal Deposit Insurance Corp. summit on mortgages, Mr. Montgomery -- who noted that he has six months left in office -- said he is very concerned about the ability of the FHA and Ginnie Mae to retain high-quality employees, especially now that the FHA's insurance applications are booming. "We need to operate as a business," he said. "We're concerned about maintaining staff. Our volume has picked up significantly." Currently, the FHA and Ginnie Mae are part of the Department of Housing and Urban Development, a cabinet-level agency whose chief is handpicked by the president.

Mortgage servicers increased their loss mitigation efforts by 26% from February to March as 49,000 borrowers agreed to loan modifications or payment plans, according to the first Mortgage Metrics Report from the Office of Thrift Supervision. The new OTS report uses loan-level data to examine the loss mitigation activities of the five largest OTS-regulated thrifts and their affiliates: Washington Mutual, Countrywide Financial, IndyMac, Wachovia FSB, and Merrill Lynch. The data show that 71% of the loss mitigation actions involved loan modifications rather than payment plans. However, subprime borrowers are more likely to get a loan modification than prime borrowers. "Prime mortgages received the fewest loan modifications relative to new foreclosure actions," the OTS report says. The report also indicates that new foreclosures in the first quarter were driven mainly by prime and alternative-A loans, not subprime loans.

Hope Now servicers helped nearly 170,000 at-risk borrowers stay in their homes in May, but they could not keep up with the record pace of workouts (185,000) completed in April. Nevertheless, Hope Now executive director Faith Schwartz says the pace of workouts is accelerating and the second quarter tally will exceed first quarter workouts. The second quarter results are going to "blow away" the first quarter, said Hope Now advisor Stan Collender. The May data shows that the servicers completed 67,300 loan modifications for prime and subprime borrowers in May, compared to 77,400 in April. Hope Now also reported that 83,000 families lost their homes in foreclosures in May. The Center for Responsible Lending claims that the Hope Now initiative is failing to keep up with the accelerating foreclosure crisis. "Delinquencies and foreclosures keep going up and tens of thousands of loans 'fixed' voluntarily by the industry have already gone bad," CRL executive director Debbie Goldstein said.

Mortgage brokers that are not approved to originate Federal Housing Administration loans can be paid for counseling borrowers and referring them to FHA-approved lenders, according to Mortgagee Letter 2008-17, issued on June 20. However, the broker has to be paid directly by the borrower in cash and the fee has to be recorded on the HUD-1 settlement sheet, according to the letter. The Department of Housing and Development also expects non-approved brokers to enter into an agreement with the borrower. And FHA lenders must include a copy of this agreement or contract with other loan documents that FHA requires to insure a mortgage. "HUD is signaling that it is going to scrutinize these fees and services to make sure the borrowers are not overcharged," said K&L/Gates attorney Phillip Schulman. Due to the increasing popularity of FHA loans, brokers are rushing to become FHA-approved loan correspondents but HUD cannot process the applications fast enough. To deal with this backlog, several California congressmen are trying to insert a provision in a major housing bill that would temporarily allow FHA direct endorsement lenders to fund loans originated by non-approved brokers. The National Association of Mortgage Brokers supports this bill. The Mortgage Bankers Association and other lender groups oppose this provision.

Florida Attorney General Bill McCollum has sued Countrywide Financial Corp. and its former chairman Angelo Mozilo for allegedly engaging in deceptive and unfair trade practices in originating subprime loans. The AG's lawsuit says the Calabasas, Calif.-based lender failed to ensure that borrowers could repay their loans and even placed prime borrowers into higher interest rate subprime loans. "To foster a culture of loan approvals regardless of a borrower's capacity to pay, Defendants compensated underwriters with bonuses," says the lawsuit filed in Broward Country circuit court. "Defendants' underwriters had incentives to approve as many loans as possible, regardless of credit risk." Countrywide declined to comment on the specifics of the case. The Florida AG filed the lawsuit on June 30, one day before Bank of America completed its acquisition of Countrywide. Attorneys general in Illinois and California have filed similar lawsuits against Countrywide.

Federal Reserve Board staff members are urging staffers at the Department of Housing and Urban Development to work with them in revising key disclosures for mortgage applicants so they don't produce duplicative and inconsistent forms that confuse consumers. "We believe the inconsistencies and other differences between HUD's proposed good faith estimate and the Fed's Truth in Lending Act disclosures are likely to confuse consumers and undermine consumers' ability to make informed shopping decisions and avoid unnecessarily high settlement costs," Fed consumer affairs director Sandra Braunstein said. In commenting on HUD's Real Estate Settlement Procedures Act proposal, Ms. Braunstein points out that the Fed and HUD are on different tracks when it comes to the disclosure of mortgage broker compensation. She says consumers are confused about how brokers are compensated and reports that the Fed's consumer testing raises concerns about the terminology HUD uses to describe broker fees. "Board staff is concerned that the language on the revised GFE will contribute to consumer confusion rather than provide further clarity for consumers," the Fed's consumer affairs director says in the June 13 letter.

The Senate has confirmed Joseph Murin to be the new president of Ginnie Mae and Elizabeth Duke to be a member of the Federal Reserve Board. Mr. Murin was the owner and managing partner of Mortgage Settlement Network from 2004 through August 2007. The Pittsburgh-based company provides title, appraisal, and closing services. President Bush nominated the mortgage industry veteran to the Ginnie post back in October. The Senate also confirmed Ms. Duke, a Virginia community banker, so the Federal Reserve Board would continue to have five voting members once Fed governor Frederic Mishkin steps down on Aug. 31. The seven-member board currently has two vacancies. "In confirming Elizabeth Duke to a term through 2012, we are ensuring the Fed can function during these difficult economic times," said Senate Majority Leader Harry Reid, D-Nev.

Financial Freedom has issued the first Ginnie Mae securitization with reverse mortgages tied to the London interbank offered rate, along with the first two fixed-rate reverse mortgage-backed securities. The three issues totaled $281 million. Financial Freedom, a subsidiary of Indymac Bank, specializes in reverse mortgage lending and is one of the largest originators of Federal Housing Administration-insured reverse mortgages, which are called Home Equity Conversion Mortgages. "The fixed-rate and LIBOR [reverse MBS] are important next steps in the evolution of the secondary market for reverse mortgages," said Ginnie Executive Vice President Michael Frenz. Issuers like Goldman Sachs and Financial Freedom have securitized $648 million in FHA reverse mortgages since Ginnie launched its reverse MBS program in September 2007. Ginnie Mae, a government-owned corporation within the Department of Housing and Urban Development, can be found online at http://www.ginniemae.gov.