Compliance & Regulation

All the Federal Home Loan Banks could use affordable housing grants to help refinance or restructure nontraditional and subprime mortgages under a proposed rule issued by the Federal Housing Finance Board. The proposal is modeled after a $10 million pilot program initiated by the San Francisco FHLBank to provide matching grants of up to $25,000 to member banks and thrifts that want to refinance troubled mortgages that are "under water" due to negative amortization or declining property values. The Finance Board approved the San Francisco pilot on Jan. 15, and now it is issuing a proposal that would allow the other FHLBanks to develop similar affordable housing programs. "The proposed rule would temporarily add authority for the banks to use the AHP direct set-aside subsidy to refinance or restructure low- and moderate-income households' subprime or nontraditional mortgages held by bank members or their affiliates," the Finance Board said. The proposed rule is being issued for a 60-day comment period.

In recent meetings at which extraordinary steps were taken, the Federal Reserve's monetary policy-making panel had concluded that "monetary policy alone could not address fully the underlying problems in the housing market and in financial markets," according to newly released minutes from the meetings. At the March 18 meeting, held in the wake of liquidity concerns at Bear Stearns and Fed assistance that helped mitigate them, members of the Federal Open Market Committee said they had seen "evidence that an adverse feedback loop was under way, in which a restriction in credit availability prompts a deterioration in the economic outlook that, in turn, spurs additional tightening in credit conditions." Minutes of a March 10 conference call, in which the FOMC decided to provide a new term securities lending facility to ease mortgage-related liquidity concerns, are sparse. But they note that participants did have concerns about the possible precedent set by the facility and how well it would work in practice. But "on balance" the minutes indicate that FOMC members considered the facility something that "could prove useful in preventing an escalation of an unhealthy dynamic that was developing in money and credit markets."

The American Financial Services Association says it could support the Federal Reserve Board's HOEPA proposal for dealing with yield-spread premiums if lenders are not held responsible for a mortgage broker's actions. The Home Ownership and Equity Protection Act proposal requires brokers to negotiate their fee in a dollar amount with the borrower upfront before an application fee is charged and to provide the lender with a signed document. Lenders are expected to rely on this document in paying the YSP to the broker. However, AFSA points out that the lender would not know when it was signed and could be liable if it is not signed and dated contemporaneously. "AFSA asks that the Board clearly and unambiguously remove liability from the lender for things that the broker controls," AFSA executive vice president Bill Himpler says in a comment letter. The Consumer Federation of America is asking the Fed to prohibit YSPs on subprime mortgages. "Negotiating fees up front is good, but it still leaves opportunities for abuse," CFA housing and credit policy director Allen Fishbein told MortgageWire.

House Financial Services Committee Chairman Barney Frank, D-Mass., is warning mortgage servicers that they could face very restrictive regulation next year if they don't cooperate in modifying loans for distressed borrowers. The chairman said he is picking up anecdotal evidence that servicers, not investors, are the reason so few mortgages are being restructured. "I want to put the servicers on notice," Rep. Frank said. "If we see a widespread refusal on the part of servicers to cooperate, they can expect much tougher regulation in the future." The lawmaker is working on a regulatory restructuring bill that he wants to pass next year. "We can't abrogate [servicing] contracts, but going forward we can be very restrictive," Rep. Frank said.

Zoot, Bozeman, Ariz., has created a set of tools to help consumer credit grantors comply with so-called red-flag regulations. Section 315 and Section 114(B) of the FACT Act mandate that financial institutions manage and reduce the risk of identity theft fraud for customers. Any organizations, including nonlenders such as brokers and auto dealers, that use consumer credit data are required to comply with red-flag regulations by Nov. 1, 2008. To satisfy red-flag requirements, programs must have reasonable policies and procedures for detecting, preventing, and mitigating identity theft; demonstrate the ability to identify relevant patterns of activity considered red flags, including address discrepancies; and undergo periodic updates to reflect changes in risks from identity theft. Zoot's tool automates the process of complying with these regulations. The vendor can be found on the Web at http://www.zootweb.com.

The credit crisis is continuing to broaden and spread to other mortgage and corporate debt markets, but emerging markets so far have been largely unaffected by the concern, according to the International Monetary Fund. "Credit deterioration, which was first evident in the U.S. subprime market, is now showing up in higher-quality residential mortgages, U.S. commercial real estate, and the corporate debt markets," the IMF said in a new report. Financial markets continue to be stressed by weakened financial institution balance sheets, a continuing deleveraging process, declining asset prices, and a "macroeconomic environment that is more challenging because of the weakening global growth," said Jaime Caruana, head of the IMF's Monetary and Capital Markets Department.

The current response to the foreclosure crisis is "inadequate," and a federally funded program to restructure subprime mortgages in bulk is crucial to avoid the wave of impending foreclosures, according to the National Housing Conference, which is supported by major mortgage lenders and affordable housing advocates. "A bulk restructuring plan, administered and funded by a new agency or division specially empowered to administer this process, would be the most effective solution to the nation's economic crisis," the NHC says in spelling out principles for addressing the mortgage and foreclosure crisis. The housing policy group calls for "substantial principal reductions" along with government assistance to close the affordability gap, which could include a "silent" second mortgage. Freddie Mac, Bank of America, Wells Fargo Home Mortgage, and HSBC Bank USA are key contributors to the nonpartisan council, which was founded in 1931. The NHC noted that the bipartisan housing bill being debated in the Senate "omits any bold plan" for restructuring existing mortgages. The NHC is urging its members to contact their senators and representative and "ask them to take more action in helping families at risk of foreclosure."

Financial institutions that file "suspicious activity reports" are getting better at detecting mortgage fraud before the loan is funded, according to a Financial Crimes Enforcement Network report. "Suspected fraud was detected prior to loan disbursements in 31% of the mortgage loan fraud SARs filed" in 2006, the FinCEN report says, compared with 21% in previous years. Reporting companies filed 37,313 SARs citing mortgage fraud in 2006 -- a 44% increase from the previous year's level -- and a sample analyzed by FinCEN showed that loans originated by mortgage brokers were reported in over half of those SARs. The SAR update report "demonstrates that in this period of mortgage crisis we also have witnessed a substantial increase in fraudulent activity that targets lenders and borrowers," said Richard Reise, an American Bankers Association executive.

A federal judge in Pittsburgh has ruled that a bankruptcy trustee can subpoena loan documents from Countrywide Financial Corp. and interview company executives under oath as part of a civil case involving the nation's largest residential servicer. Judge Thomas Agresti is overseeing a months-old case in which 293 Pennsylvania homeowners sued Countrywide, charging that the servicer sought improper fees and payments from distressed borrowers that violated bankruptcy regulations. In a Tuesday ruling, the judge said it has not been proven that Countrywide did anything wrong but that a bankruptcy trustee involved in the case "has made a showing of a common thread of potential wrongdoing" in several instances where it moved to foreclosure on bankrupt homeowners. At deadline time, a Countrywide spokesman had not returned a telephone call about the matter. Countrywide's foreclosure practices are under investigation in Florida, Georgia, and Ohio. The company is being sold to Bank of America. The sale is expected to close by the third quarter. Countrywide can be found online at http://www.countrywide.com.

The Federal Housing Administration is requiring a second appraisal on jumbo mortgages above $417,000 in declining markets and limiting the maximum LTV on cash-out refinancings to 85%. The direct endorsement lender must select the appraiser for the second appraisal if the property is located in a market where house prices are declining, according to an FHA mortgagee letter. The letter also imposes a maximum loan-to-value ratio on cash-out refinancings. If the "loan balance exclusive of FHA's upfront mortgage insurance premium will exceed $417,000, the LTV may not exceed 85% of the appraiser's estimated value," the FHA says. The economic stimulus bill signed by President Bush in mid-February temporarily raises the FHA loan limit to 125% of median home prices in high-cost areas, with a cap of $729,725.