Compliance & Regulation

Freddie Mac also announced plans to raise an additional $5.5 billion in new core capital, prompting the Office of Federal Housing Enterprise Oversight to say it would reduce Freddie's surplus capital requirement from 20% to 15% upon completion of the effort. Freddie Mac said the new capital would be divided about evenly between the issuance of preferred stock and common stock. Freddie chairman and chief executive Richard Syron said the additional capital will help the company provide liquidity for the mortgage market and build shareholder value. The government-sponsored enterprise can be found on the Web at http://www.freddiemac.com.

Beazer Homes USA, an Atlanta-based homebuilder that is under investigation by various state and federal agencies regarding mortgage origination practices, has filed restatements of earnings that reflect an increase of $27.6 million in retained earnings from 1998 through 2006. Beazer announced last year that an internal investigation had found that its mortgage unit, Beazer Mortgage Corp., violated Federal Housing Administration rules, especially regarding downpayment assistance programs. In addition to such violations, Beazer said its Audit Committee discovered accounting errors and irregularities resulting primarily from "inappropriate accumulation of reserves and/or accrued liabilities associated with land development and house costs" and inaccurate revenue recognition related to certain home sale/leaseback provisions. The company said it is still under investigation by the U.S. Attorney's Office in the Western District of North Carolina and other state and federal agencies regarding the matters that have been the subject of the Audit Committee's independent investigation. Beazer can be found online at http://www.beazer.com.

Senate Banking Committee Chairman Christopher J. Dodd, D- Conn., says his committee will mark up two bills on May 15 that will address the housing crisis -- an FHA refinancing bill and a GSE regulatory reform bill. The Federal Housing Administration bill is similar to a House-passed measure that authorizes the FHA to refinance "underwater" mortgages if the investor/servicer writes down the principal amount to 85% of the current appraised value. The government-sponsored enterprise bill would strengthen regulation of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Efforts to craft a compromise with Sen. Richard C. Shelby, R-Ala., have failed so far, and Sen. Dodd introduced the two newly drafted measures on his own. The Bush administration says it hopes to get a "strong" and "balanced" GSE bill but is likely to oppose the FHA refinancing bill. President Bush has already threatened to veto the House FHA bill (H.R. 3221). FHA Commissioner Brian Montgomery said H.R. 3221 "forces taxpayers to pay for bad loans" and creates "hundreds of thousands of risky loans." The commissioner told the National Association of Realtors that there is room for compromise if Congress is willing to take a "workable" approach that is fiscally sound.

GSE regulator James Lockhart says he expects Fannie Mae's and Freddie Mac's capital-raising efforts to allow them to increase their investment portfolios dramatically and bolster the mortgage market. Fannie Mae recently announced that it is raising $6 billion in additional capital through issuances of common and preferred stock. Mr. Lockhart, director of the Office of Federal Housing Enterprise Oversight, said it looks as if Fannie will raise "significantly more than that. There is large demand." He also said he expects Freddie Mac to announce a capital-raising plan soon. (The government-sponsored enterprise is slated to release its first-quarter financial report May 14.) Raising the capital is "extremely important for the mortgage market," the regulator said, because it will allow the GSEs to purchase hundreds of billions of dollars of mortgages for their investment portfolios and securitize over $1 trillion in mortgages. "So they have the wherewithal to serve the market," Mr. Lockhart told a legislative conference sponsored by the National Association of Realtors.

Federal banking regulators have closed ANB Financial after finding that the Bentonville, Ark., national bank was undercapitalized and likely to fail. The $1.9 billion-asset bank reported a $59 million loss in the fourth quarter, with nearly $400 million in noncurrent loans. Its parent, ANB Bancshares, closed its wholesale subprime lending business in March. The Federal Deposit Insurance Corp. arranged for Pulaski Bank and Trust Co., Little Rock, Ark., to take over the national bank's nine offices, along with $212.9 million in insured deposits and $39.2 million in uninsured deposits. The Little Rock bank also agreed to purchase $235.9 million of the failed bank's assets.

Federal Housing Administration single-family mortgage originations took off in the first three months of this year, as FHA applications doubled to 181,900 between Dec. 31 and the end of March, according to Department of Housing and Development data. The data also show that FHA-insured loans jumped by 64%, to 89,000, from December to March. Mortgage banking consultant Brian Chappelle estimates that FHA lenders are now taking 200,000 FHA mortgage applications per month and insuring 100,000 loans per month. There are concerns that the FHA might not be able to handle the increase in business. But Mr. Chappelle said the FHA direct-endorsement lenders manage the whole approval process. From an origination standpoint, "there are no backlogs because the lender controls the process," he said. Mr. Chappelle is with Potomac Partners in Washington.

Stewart Information Services Corp., Houston, has revised its first-quarter 2008 results following the discovery of an agency defalcation. As a result of the fraud, the company took a pretax charge of $4.6 million, which affected its results on an after-tax basis by $3.0 million, or $0.16 per share. Stewart is now reporting a first-quarter loss of $25.2 million ($1.40 per share). On April 30, it reported a loss of $22.3 million ($1.24 per share).

The Federal Housing Administration will start charging upfront mortgage insurance premiums based on the borrower's credit score and downpayment starting July 14, according to the Department of Housing and Urban Development. Upfront premiums paid at closing will range from 1.25% to 2.25% under the new pricing schedule that will apply to all FHA loans. Currently all FHA borrowers pay a 1.5% upfront premium regardless of risk. By charging slightly higher premiums based on credit risk, HUD expects to create a more financially sound FHA program and reach more borrowers struggling to keep up with their payments on high-cost subprime mortgages. Risk-based pricing will also be used for refinancing delinquent borrowers under the FHA Secure program starting in July. HUD is expanding the FHA Secure program so that borrowers who have missed two or three payments in the previous 12 months can be refinanced into FHA-insured mortgages. The risk-based pricing notice and a mortgagee letter with the underwriting standards for the expanded FHA Secure program are posted on the FHA website, which can be found at http://www.fha.gov.

Bowing to congressional pressure, the Department of Housing and Urban Development has extended the comment period on its Real Estate Settlement Procedures Act reform proposal for 30 days. But HUD acting Secretary Roy Bernardi says he is determined to finalize the RESPA rule before the end of this year. "In light of congressional and industry requests to extend the comment period for the rule, and our desire to develop the best possible rule, we are allowing additional time," Mr. Bernardi said. "However, we remain committed to finalizing the rule before the end of the administration." Nearly 150 members of Congress have signed a petition seeking an extension. Industry groups began clamoring for an extension as soon as the proposal was issued because it goes beyond revising the good-faith estimate to provide consumers with a clear and concise disclosure of loan terms and settlement costs. The HUD proposal is more ambitious and opens the door to volume discounts and other issues that have raised concerns among many settlement service providers. The comment period was due to expire May 13.

Mortgage-backed securities investors and servicers should start thinking about becoming landlords so a troubled borrower can remain in a house with an option to buy the property back, according to a conservative academic panel that monitors regulation of the financial services industry. The Shadow Financial Regulatory Committee says it would be less disruptive and costly to offer homeowners facing foreclosure a lease in exchange for the deed to the property. Investors would incur a loss as part of the deed-in-lieu transaction, but avoid foreclosure maintenance and resale costs, according to Kenneth Scott, professor of law and business at Stanford University. The shadow committee noted that the Treasury Department's Hope Now initiative does not address the problem of delinquent borrowers with negative equity. This approach "might be able to deal with a large portion of these delinquencies without the taxpayer bailing out the homebuyer or the investor." Mr. Scott said.