Compliance & Regulation

The chief economist for the New York Stock Exchange says rising commodity prices coupled with the housing downturn's drag on the economy is fostering the possibility of "stagflation," a mixture of inflation and economic weakness last seen in the 1970s. Speaking at SourceMedia's second annual mortgage servicing conference in Dallas, former New York Federal Reserve economist Paul Bennett said he does not see "much sign of a bottom" in housing conditions, given the continuing declines in residential construction activity. He said home prices, already down about 10% to 15% nationally last year, may fall by a similar amount this year. Competition for oil and other scarce resources from rapidly growing economies such as China is driving up prices for many commodities, he said. That is adding to inflationary pressure despite the economic weakness in the United States. Still, he expects the Federal Reserve Board to continue reducing interest rates in the near term to help stabilize the U.S. housing sector and offset the risk that rate resets will drive up foreclosures.

One in 33 U.S. homeowners will likely be in foreclosure over the next two years as a result of subprime loans made in 2005 and 2006, according to a report released by The Pew Charitable Trusts. The numbers projected for Nevada and Arizona are much higher -- 1 in 11 and 1 in 18, respectively -- and another 40 million neighboring homeowners may see their property values and their municipalities' tax bases decline by up to $356 billion, says the report, "Defaulting on the Dream: States Respond to America's Foreclosure Crisis." Pew said states are generally in the forefront of developing policies aimed at preventing abusive lending. "Let's make certain federal laws build upon, rather than pre-empt, the strong and smart state efforts already under way and ensure that states retail flexibility to respond to local circumstances," said Shelley A. Hearne, managing director of Pew's Health and Human Services Program. Pew can be found online at http://www.pewtrusts.org.

Lenders have tightened their credit standards on residential and commercial real estate loans over the past six weeks, but there has been "some stabilization" in single-family originations, according to the Federal Reserve's Beige Book. "Banks reported mixed trends in lending activity, with fairly widespread slowing in the consumer segment, but some stabilization, at low levels, in residential mortgage activity," the April Beige Book says. The Fed's periodic report of economic activity refers to housing sales and construction as "generally anemic," with declines or downward pressure on selling prices in nine of the 12 Federal Reserve districts. Meanwhile, activity in the CRE sector has slowed, and eight districts reported "weaker" rental conditions. "The Boston, Philadelphia, Minneapolis, Kansas City, Dallas, and San Francisco districts all reported weakness in CRE sales and prices," the Fed publication said.

Freddie Mac has enlisted three major mortgage lenders to start up its jumbo mortgage program, and it is looking to enter into agreements with other lenders, according to a Freddie executive. Freddie Mac will provide 90-day forward pricing on jumbos originated by Wells Fargo Home Mortgage, Chase Home Finance, and CitiMortgage and purchase those newly originated mortgages for its portfolio, according to Freddie vice president Bob Ryan. "We expect to take some deliveries in April, and for sure in May," Mr. Ryan said. Separately, Fannie Mae said it has provided 90-day forward pricing for its lenders since April 1. "We have 90-day forward MBS commitments available as well and already have several in place," Fannie spokesman Brian Faith said. Fannie and Freddie can also purchase seasoned jumbos that were originated after June 30, 2007, under the economic stimulus bill Congress passed in February, which temporarily raises the conforming loan limit to 125% of median home prices in high-cost areas, with a maximum cap of $729,750. "We have consummated some trades" on seasoned jumbos, "but those are small amounts," Mr. Ryan said.

ValuAmerica, Pittsburgh, a developer of settlement services technology, has announced a new release of its ValuNet xsp software aimed at preventing directed appraisals and ensuring compliance with federal valuation requirements. The system will also help lenders comply with a recent agreement on appraisals between the New York attorney general and Fannie Mae, Freddie Mac, and the Office of Federal Housing Enterprise Oversight, the company said. "It's the industry's worst-kept secret: some lenders apparently would rather face a fine from their regulators than risk alienating their commission-based loan officers by preventing them from meddling in the appraisal selection and review process," said Robert Murphy, chairman and chief executive of ValuAmerica. ".... Now that Fannie and Freddie have developed their new code, lenders should be looking for new ways not only to end appraisal pressure but to document their compliance." ValuNet xsp is designed to prevent loan officers from selecting or contacting appraisers by automatically selecting appraisers based on their licensing, skill levels, location, price, workload, and past performance, ValuAmerica said. The company can be found online at http://www.valuamerica.com.

The comptroller of the currency says he is uncomfortable with the way New York Attorney General Andrew Cuomo is trying to impose an appraisal standard on all institutions through a settlement agreement with Fannie Mae and Freddie Mac. "To have a situation where a one-off agreement with a single state would have a national policy impact raises questions as to whether that is an appropriate way to make these kinds of policies," Comptroller John Dugan said. The supervisor of national banks is planning to submit a comment letter on the settlement agreement by April 30. Mr. Dugan also questioned whether the settlement's "blanket prohibition" on the use of in-house appraisers or affiliated appraisal firms is necessary to assure "real" independence between the lending and appraisal functions. "It's not at all clear to me that means the appraisal function has to be outside the institution," the comptroller told members of the Exchequer Club in Washington.

The Office of Thrift Supervision has come up with an "elegant" way to avoid moral hazard and provide an incentive for investors to write down a loan and for second-lien holders to participate in Federal Housing Administration refinancings of troubled subprime mortgages, according to Sen. Bob Corker, R-Tenn. OTS Deputy Director Scott Polakoff told a Senate panel that "negative equity certificates" could be used to balance the interests of homeowners, investors, and second-lien holders. "It seems worthy to explore the possibility that some second-mortgage holders could also share to some degree in the negative equity certificate as an incentive to subordinate their position in a refinance opportunity," Mr. Polakoff said. Sen. Corker said the certificates would avoid the moral hazard involved when a borrower "takes advantage of the program, does a quick sale, and benefits from the writedown." Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., welcomed the OTS suggestion and indicated that he might use it in refining his FHA refinancing bill. "To get the investor to step up and take that haircut, I think you've got to have a proper incentive in there," Sen. Dodd said.

The Congressional Budget Office estimates that several hundred thousand borrowers could benefit over the next few years from an expanded FHA Secure program and that it would encourage lenders/servicers to restructure more loans. Without federal involvement, restructurings will be "rare" and unlikely to involve any significant writedown of principal that would leave the borrower with positive equity, the CBO says in a paper that explores policy options for stabilizing the housing and financial markets. "Although Federal Reserve chairman Ben Bernanke has urged loan servicers to consider reducing the principal on outstanding loans, voluntary reductions are likely to be rare," the paper says. The Federal Housing Administration is implementing changes to its FHA Secure program to help more delinquent adjustable-rate subprime borrowers refinance into FHA-insured loans. The CBO admits that FHA Secure has its drawbacks and that lenders could receive a "windfall" on loans they should restructure on their own. "Despite that, lenders will be more willing to restructure more mortgages with federal subsidies than without them," CBO says.

Even though Fannie Mae and Freddie Mac have made "good progress" in fixing the operational problems that led to their respective accounting scandals, the two remain a "significant supervisory concern," according to a new report issued by their regulator. In the Office of Federal Housing Enterprise Oversight's annual report to Congress, the agency notes that the two posted a combined loss of $5.2 billion last year after writing down the value of their mortgage portfolios and taking losses on derivatives. The agency says the GSEs are a concern "due to poor financial performance and the quantity of credit risk resulting from the continued market deterioration and its dominant, adverse impact on current and future earnings." At deadline time, the two companies had not issued comments on OFHEO's findings. OFHEO can be found at http://www.ofheo.gov.

Nearly half of all loan workouts on subprime mortgages in January and February involved loan modifications, according to the latest update by Hope Now servicers. The new data show that servicers modified 81,885 subprime mortgages in the first two months of the year, compared with 90,420 subprime borrowers who ended up in repayment plans. Only 30% of troubled prime borrowers got a loan modification that included a reduction in their mortgage payments. Federal regulators have been pressing servicers to modify subprime adjustable-rate mortgages by freezing the interest rate at the starter rate. Hope Now also reported that 60,000, or 43%, of 2/28 and 3/27 subprime ARMs that were scheduled to reset in January and February had been paid off. These loans were "paid in full through refinancing or sale," the Hope Now update says.