Compliance & Regulation

The Senate voted 94-1 Tuesday to begin debate on a foreclosure prevention bill after Republican leaders agreed to stop a filibuster and work with Senate Majority Leader Harry Reid, D-Nev., on a consensus bill. The consensus bill was scheduled to be introduced on Wednesday (April 2) and will probably include tax-exempt revenue bonds for refinancing subprime borrowers, Community Development Block Grants for cities to purchase and rehab foreclosed properties, additional funding for housing counseling, and a net-operating-loss carry-back provision for homebuilders. "I think industry can get behind that," said American Financial Services top lobbyist Bill Himpler. He noted that there is also a lot of support for a homebuyer tax credit, which might be included in the package or offered as an amendment. The AFSA lobbyist is wary, however, that Sen. Richard Durbin, D-Ill., might offer a controversial amendment that allows bankruptcy judges to modify mortgages. There are also discussions about attaching a Federal Housing Administration modernization bill to the foreclosure package.

The Federal Home Loan Bank of Chicago posted earnings of $98 million for 2007, down 50% from the level of the previous year, and the troubled bank expects to report a loss in the first quarter, according to its 2007 annual financial report. "We expect to incur losses beginning in the first quarter of 2008 and that those losses will continue for some period of time," the Chicago FHLBank says in its 10-K filing with the Securities and Exchange Commission. Net interest income fell 37%, or $155 million, due to several factors, including the higher cost of financing its Mortgage Partnership Finance portfolio. As a business segment, the $34.6 billion mortgage portfolio recorded a $29 million loss for the year after posting a $121 million profit for 2006. The Chicago FHLBank indicated that merger talks with the Dallas FHLBank are continuing. But after seven months, it says the "banks have not reached an agreement." The Dallas bank has said that it incurred $2.5 million in expenses related to the "potential merger."

The Federal Deposit Insurance Corp. has sent Fremont General Corp., Brea, Calif., and its subsidiary Fremont General Credit Corp. a supervisory prompt corrective action directive ordering them to recapitalize Fremont Investment & Loan by May 26. The FDIC issued the directive with the concurrence of the California Department of Financial Institutions, which regulates FIL, a chartered industrial loan company. The directive gives FGC three options: the sale of enough shares or obligations of FIL to raise the money to capitalize it adequately; a merger with or acquisition by another insured depository; or the divestiture of FIL by FGC and FGCC. In its statement, FGC noted that it had hired Credit Suisse Securities (USA) LLC and Sandler O'Neill & Partners LP at the end of February to develop and implement strategic options. The FDIC directive says FGC, FGCC, and FIL had failed to comply with the capital maintenance provisions in a cease-and-desist order issued March 7, 2007. FGC did submit a revised capital restoration plan to the FDIC on Nov. 9, 2007, that FIL admitted was obsolete on March 17, 2008.

Ginnie Mae is opening the door for issuers to combine single-family mortgage-backed securities with reverse mortgage securities in a new real estate mortgage investment conduit, which should give the agency's fledging HECM mortgage-backed securities program a boost. A Ginnie official said the new REMIC program will be ready in a few weeks and they are aiming to complete the first forward/reverse mortgage REMIC this summer. "We don't expect to see a deal until the summer," the official said. Back in September, Ginnie rolled out an MBS program for Federal Housing Administration-insured reverse mortgages, which are called Home Equity Conversion Mortgages, or HECMs. Only one HECM MBS transaction has been completed. But Ginnie executives say they expect the new H-Class REMIC to allow Wall Street to structure the cash flows so it is more attractive to investors and provide a better execution for HECM MBS issuers.

Housing Secretary Alphonso Jackson is "stepping down" on April 18 after being dogged by allegations of using his office to help friends and Bush supporters as well as recent calls for his resignation by two senators that oversee the Department of Housing and Urban Development. HUD officials said they didn't know whether the White House is ready to appoint Mr. Jackson's successor. Under normal circumstances, Deputy Secretary Roy Bernardi, a former mayor of Syracuse, N.Y, would be in line to become the acting secretary. At a HUD news conference, Mr. Jackson said he is stepping down to attend to "personal and family matters" and abruptly left the room without taking questions from the news media. In testifying before two Senate panels, the secretary refused to answer questions about a lawsuit by the Philadelphia housing authority, which alleges that HUD tried to punish the agency for refusing to sell land to one of Mr. Jackson's friends. Sens. Christopher J. Dodd, D-Conn., and Patty Murray, D-Wash., called for the secretary's resignation on March 21 after he declined to answer questions about his conduct. At a time when the country is facing a national housing crisis, the "allegations of cronyism and favoritism against Secretary Jackson are a worsening distraction at HUD," Sen. Murray said. "It is time for Secretary Jackson to go." Sen. Murray chairs a HUD appropriations subcommittee.

The Treasury Department is proposing a federal Mortgage Origination Commission that would rate the adequacy of state regulation and licensing of mortgage lenders and brokers as part of a larger plan to restructure the financial regulatory system. Treasury Secretary Henry Paulson said the MOC would provide "important information to the marketplace about the strength of each state's mortgage compliance standards." If a state is rated "weak," mortgages originated in that state "should be viewed cautiously before being securitized," he said. The secretary noted that a large percentage of "problematic" subprime loans were originated by state-licensed lenders. (The Office of Thrift Supervision, which oversees thrifts, would be incorporated into the Office of the Comptroller of the Currency under the Treasury plan.) The "powerful" new commission, coupled with the Federal Reserve's Home Ownership and Equity Protection Act rules to ban abusive lending practices, "should go a long way in preventing recent issues from recurring," he said. The Conference of State Banking Supervisors responded that the Treasury plan "disregards" recent improvements in state licensing standards and reporting systems. In addition, the CSBS supports legislation currently under consideration in Congress that would strengthen the states' initiatives.

High loan limits for Federal Housing Administration reverse mortgages could help refinance seniors out of subprime loans and enable them to stay in their homes free from monthly mortgage payments, according to the National Reverse Mortgage Lenders Association. "A significant proportion of subprime loans have been made to older homeowners," said NRMLA president Peter Bell. "As they look to refinance out of those onerous loans, a HECM should be an option for them." (The FHA's reverse mortgage is called a home equity conversion mortgage.) The FHA reform bill, currently stalled in conference, raises the HECM loan limit to $417,000 nationwide. But there are discussions about raising the FHA loan limit for single-family loans higher, and NRMLA wants HECMs included. The trade group also has reopened negotiations with AARP, a lobbying group for older Americans, on HECM origination fees. Last year the two parties agreed to reduce the 2% HECM fee to 1.5%, and it was written into the FHA reform bill. But the credit markets have changed since then, and NRMLA says it wants an adjustment because it is no longer profitable to make HECMs if the property value is less than $250,000. "We are in negotiations," Mr. Bell said.

Although the comment period isn't over until April, the Federal Reserve Board is already working with other federal and state regulators to enforce the Fed's proposed new rule to combat abusive lending practices. "It is not too early to emphasize that the effectiveness of the final rule will depend critically on effective enforcement," said Fed Governor Randall Kroszner at the National Association of Hispanic Real Estate Professionals' annual legislative conference in Washington. The Fed's initiative will apply to all mortgage lenders, not just federally supervised banks. And in that regard, the central bank is leading a pilot project with other agencies to conduct compliance reviews of nondepository lenders and "other industry participants." The "expansive scope" of the proposal is essential, and enforcement is key, Mr. Kroszner said. Whatever shape the final rule takes, if it is not enforced, it will not be effective, he said.

Senior management at New Century Financial Corp. "largely rejected or ignored" staff recommendations to tighten credit standards in 2004, which evidentially lead to a "tsunami of impaired and defaulted mortgages" and the subprime lender's bankruptcy, according to a court-appointed investigator. "The increasingly risky nature of New Century's loan originations created a ticking time bomb that detonated in 2007," according to 550-page report filed in a U.S. Bankruptcy Court by investigator Michael Missal. The Irvine, Calif.-based company was the second-largest subprime lender when it filed for bankruptcy in April 2007. The examiner found numerous accounting problems and faulted KPMG, New Century's independent auditor, for allowing the publicly traded company to reduce its repurchase reserve in 2006 when it was being "flooded with repurchase claims" from investors. "New Century understated its repurchase reserve by as much as 1000% in the third quarter of 2006, reported a profit of $63.5 million ...when it should have reported a loss," the Missal report says. A KPMG spokesman said the firm "strongly" disagrees with the report's conclusions. A New Century representative said the submission of the report will allow the bankruptcy process to continue, and "we can take the next steps of confirming the liquidation plan."

Losses from mortgage fraud will reach $2.5 billion in 2008 and comparable losses will continue for several years thereafter, according to new research from TowerGroup, Needham, Mass. The report says the substantial rise in mortgage fraud over the past 10 years is an important factor in mortgage credit woes, though falling home prices and poor mortgage underwriting have been given most of the blame in recent months. TowerGroup anticipates that lenders will respond by deploying technology to assist in the detection and prevention of mortgage fraud and that their annual spending on such tools will reach several hundred million dollars in the next few years. The research and advisory company can be found on the Web at http://www.towergroup.com.