Compliance & Regulation

The GSE reform bill passed by the Senate Banking Committee gives the new regulator broad powers to raise Fannie Mae's and Freddie Mac's capital requirements and determine the appropriate size of their investment portfolios, according to a Credit Suisse report. It is likely that the new regulator will determine that the government-sponsored enterprises "should be less leveraged," CS research analyst Moshe Orenbuch says. "Such a determination by the regulator could either limit the growth of the GSEs or require that they raise additional equity." He reiterated an Underperform rating for Fannie and Freddie. Freddie Mac says it supports the legislation. "We would stress, however, that if not applied carefully, the bill could adversely impact the mortgage market," a spokesman said. Fannie Mae also has concerns about "elements in the bill that could inhibit the GSEs' ability to provide the greatest possible support for mortgage markets and housing affordability," a Fannie spokesman said.

Impac Mortgage Holdings, Irvine, Calif., posted a net loss of $2 billion for 2007, compared with a $75 million loss the year before. Impac, a nondepository real estate investment trust that once specialized in alternative-A lending, is no longer funding new loans and is surviving off its servicing and master servicing portfolios. According to a new filing with the Securities and Exchange Commission, the company, in an attempt to stave off its lenders, is transferring "certain net interest margin" certificates and subordinated bonds held on its balance sheet to satisfy "reverse repurchase agreements." In 2007 it took $1.4 billion in charges to cover loan losses. It also had real-estate-owned charges of $281 million. Impac's shares continue to trade on the New York Stock Exchange. At deadline time, its stock price stood at $1.20, compared with a 52-week low of $0.20 and a high of $6.75.

The National Association of Business Economists says it expects home sales to bottom out this year, but the professional forecasters also see a significant decline in house prices. The 52 NABE respondents said they expect the Office of Federal Housing Enterprise Oversight's house price index to drop 4.8% in 2008 and edge down by 0.3% on 2009. The OFHEO HPI rose 0.8% in 2007 and the home-purchase-only index fell 0.3%. Meanwhile, the forecasters were evenly divided on whether home sales will bottom out in the second, third, or fourth quarter. They also expect a slow recovery in housing, with housing starts rising from 990,000 in 2008 to 1.12 million in 2009. "While our panel anticipates an improvement in credit markets and a bottoming out in housing this year, the forecasters have marked down their estimates of growth for both 2008 and 2009," NABE president Ellen Hughes-Cromwick said. The economists expect gross domestic product to grow at a 2.1% annual rate in the second half of this year and 2.7% in 2009.

The housing sector could get a real boost this summer if Congress can pass a housing bill with GSE and FHA reforms along with a homebuyer tax credit, according to the chief executive of the National Association of Home Builders. NAHB executive vice president and chief executive Jerry Howard said in an interview that the government-sponsored enterprises Fannie Mae and Freddie Mac have taken some positive steps in scrapping their declining-markets policies and stepping up to buy jumbo mortgages. "We are hoping with some of these [GSE] changes and what we hope will be the passage of this bill before the Fourth of July that we will see some uptick in credit availability, in construction lending, and in consumer confidence," Mr. Howard said. The homebuyer tax credit could be a "real shot in the arm for the economy and the housing sector," he said, particularly if it is improved in conference when House and Senate leaders meet to iron out a final bill.

The Mortgage Bankers Association has issued a policy paper backing its position that legal/regulatory efforts in the wake of the recent market crisis should make distinctions between mortgage bankers and brokers in four areas. The MBA's position runs counter to the National Association of Mortgage Brokers' longtime assertion that there should be a "level playing field" where legal and regulatory efforts are concerned. David Kittle, the MBA's chairman-elect, indicated during a teleconference Tuesday morning that the association has taken brokers' concerns into account. "Many of our members are brokers," he said. "We just want transparency." The MBA wants brokers to disclose "responsibilities and compensation" and to be "treated legally as agents" if they "claim to be, or act as, borrower agents." The mortgage bankers group also wants a national minimum net worth requirement for brokers, and "appropriate" bonding. The MBA can be found online at http://www.mortgagebankers.org.

A new GSE regulator should require Fannie Mae and Freddie Mac to adjust their investment portfolios in a "countercyclical manner" so they could provide more liquidity for the mortgage market the next time the housing market goes bust, according to the director of the Office of Federal Housing Enterprise Oversight. OFHEO Director James Lockhart told a banking conference that the two government-sponsored enterprises loaded up on risky loans and securities during the recent housing boom, and now they are dealing with credit losses and have been forced to raise capital. In a future downturn, Fannie and Freddie could provide more liquidity for the mortgage market if their regulator requires them to build up capital during the boom and sets standards for the operation of the portfolios so they can provide "liquidity and stability to the secondary mortgage market at all points in the credit cycle," Mr. Lockhart said. Congress is working on a GSE reform bill that would authorize the new regulator to set such standards. "An important issue for supervisory agencies is how to create incentives for institutions to behave in a less pro-cyclical manner without interfering with their ability to earn reasonable returns on capital," the GSE regulator said.

Mortgage servicers of REMIC securitizations no longer have to wait for a borrower to miss a payment before they contact and offer a homeowner a loan modification with a lower interest rate or principal reduction, according to an Internal Revenue Service ruling. Revenue Procedure (2008-28) opens the door for servicers to actively identify borrowers likely to end up in foreclosure without jeopardizing the tax status of a real estate mortgage investment conduit. "This is an important change that will allow more homeowners who may potentially get in trouble to be able to have their loans modified prior to default," said Anne Canfield, executive director of the Consumer Mortgage Coalition. The IRS recognizes that servicers have developed sophisticated programs to identify borrowers likely to default using data such as declining credit scores, falling house prices, or interest rate resets. Once they form a reasonable belief that there is significant risk of foreclosure, "then they can go ahead and contact the borrower before any payment goes late," IRS associate counsel Susan Baker said. Currently, REMIC regulations prohibit a loan modification before the borrower is in default.

Senate Banking Committee leaders were still negotiating late Thursday afternoon on GSE regulatory reform and Federal Housing Administration refinancing bills after furious negotiations Thursday morning had prompted some to predict that an agreement was near. At the request of Sen. Richard C. Shelby, R-Ala., committee Chairman Christopher J. Dodd, D-Conn., postponed a 10 a.m. mark-up session as the two sides tried to come to terms on the foreclosure prevention bill, which uses the FHA to refinance struggling borrowers with "underwater" mortgages. Sen. Dodd said Thursday afternoon that an agreement had not been reached. "We are getting closer, but we aren't there yet," the committee chairman said. Sen. Shelby says he is concerned about using taxpayer funds to refinance speculators and others who made bad decisions. "We shouldn't bail out people who probably shouldn't have bought a home to begin with and probably won't pay if they are refinanced," he said on CNBC-TV.

The second-quarter Core Mortgage Risk Index stands 16% higher than the level of a year ago, reflecting rising delinquency and foreclosure rates, flat or declining price appreciation, and slower job growth, according to First American CoreLogic, Sacramento, Calif. Among the largest 100 markets in the country, CoreLogic reported that the five with the highest risk are: Riverside-San Bernardino-Ontario, Calif.; Los Angeles-Long Beach-Glendale, Calif.; Sacramento-Arden-Arcade-Roseville, Calif.; Stockton, Calif.; and Miami-Miami Beach-Kendall, Fla. "As of March 2008, 33 states were experiencing year-over-year house price declines, up from 28 states in February, demonstrating how quickly home price declines appear to be spreading," the company reported. CoreLogic, a provider of mortgage risk assessment and fraud prevention systems, can be found on the Web at http://www.facorelogic.com.

The Senate has passed a flood insurance reform bill in a 92-6 vote that phases out subsidized premiums for certain commercial properties and vacation/second homes and requires properties protected by dams and levees to have flood insurance for the first time. The bill (S. 2284) also requires lenders to escrow flood insurance premiums and increases penalties on lenders that don't insure homebuyers in flood-prone areas. A House-passed bill expands the National Flood Insurance Program to offer dual coverage for flood and wind damage. The Senate overwhelmingly rejected such an expansion by a 73-19 vote. The Senate bill also forgives $17 billion in debt that the Federal Emergency Management Agency borrowed from the U.S. Treasury to pay flood claims after hurricanes Katrina and Rita in 2005.