Compliance & Regulation

Drawing on his hobby of whitewater rafting, Zach Oppenheimer, senior vice president for the single family business at Fannie Mae, noted that the mortgage industry has been through rough waters before, including the 1983 recession, problems in the Oil Patch States, the Russian debt crisis and the Sept. 11 attacks. But in those cases and others, Fannie Mae played a critical role in pulling the industry through tough times, he told attendees at the Regional Conference of Mortgage Bankers Associations in Atlantic City. He is confident the market will return and the lessons being learned will make the market more resilient. But first, Mr. Oppenheimer said, because things will get worse before they get better, we must "batten down the hatches." Paul Mullings, senior vice president at Freddie Mac, added he doesn't remember a period when the industry was so dependent on Freddie Mac, Fannie Mae and the Federal Housing Administration "to get us out of trouble." Freddie Mac wants standards that bring confidence and stability to the market. "When the markets lock up, our job is to unlock them."

Reflecting on how the mainstream press has treated the mortgage business in the past year, Mortgage Bankers Association chairman Kieran Quinn told attendees at the Regional Conference of Mortgage Bankers Associations in Atlantic City, "I'm convinced there is an endless supply of bad headlines and they are going to run through 2008." He called for a release of the portfolio caps on Fannie Mae and Freddie Mac as well as an expansion of the higher loan limits to all 50 states and not just selected areas. "We're not done" pushing for that to happen, Mr. Quinn said. As for dealing with troubled loans, "I'm almost ready for the second coming of the RTC," he said, but in this case the R would stand for residential. Furthermore, participation would be voluntary. He reiterated MBA's contention that if a bankruptcy "cramdown" bill is enacted, it would drive up the cost of mortgages by 150 basis points, adding there are some lenders who have told him it would be more than that. Noting the close vote that defeated the bill in the U.S. Senate, he warned the issue will be coming back, attached to a bill the industry really wants.

Single-family housing starts tumbled 6.7% in February after the government revised January starts upward by 15,000 units, which could be a sign that construction activity may be close to stabilizing in the next few months. The U.S. Census Bureau reported that single-family housing starts declined from a seasonally adjusted annual rate of 758,000 in January to 707,000 in February, which is down 40.5% since February 2007. Many economists are predicting that housing starts and home sales could bottom out this summer. "Sales and home construction can fall only so far," said Scott Anderson, a senior economist at Wells Fargo & Co. Meanwhile, many builders are struggling financially. Bank data shows that 4.25% of single-family construction and development loans were 90 or more days overdue in the fourth quarter, nearly double the third quarter rate.

The Office of Federal Housing Enterprise Oversight is talking to executives at Fannie Mae and Freddie Mac about loosening the 30% capital surcharge on the two -- a move designed to increase liquidity to the mortgage market. According to industry officials, talks have been under way for several weeks but have grown more serious as the mortgage/liquidity crisis has worsened. One idea being discussed involves reducing the 30% surcharge in exchange for a promise by the GSEs to raise new equity in the capital markets.

President Bush did not single out for criticism a Democratic plan to expand the Federal Housing Administration program in his speech about what should and should not be done in dealing with the housing correction. FHA commissioner Brian Montgomery also avoided commenting on the proposal, which the House and Senate banking committee chairmen are working on to help 1 million distressed borrowers refinance into an FHA loan. The Democratic plan would require the lender/investor to accept severe writedowns in the principal amount of the mortgage. "There are all sorts of options being floated out there," Mr. Montgomery told reporters. "We are exploring some options on our own, and we will have more to say about that in the next few weeks." Lenders are expecting the agency to liberalize its underwriting criteria under the FHA Secure program so more delinquent subprime borrowers can refinance into an FHA loan. Lenders also expect the FHA to issue a mortgagee letter soon that tightens its underwriting criteria on jumbo mortgages.

Federally regulated lenders will file more than 60,000 mortgage-related suspicious activity reports this fiscal year, a federal crime fighter said at last week's Mortgage Bankers Association's National Fraud Issues Conference in Chicago. The Financial Crimes Enforcement Network fielded nearly 15,000 SARs in the first quarter of fiscal `08, according to FBI special agent Scott Broshears. And he expects the flood of filings to continue at the same pace as the year progresses. "We'll get over 60,000" reports from suspicious lenders, the FBI's mortgage fraud coordinator said. In fiscal `07, 46,717 SARs were filed, up from 35,617 in fiscal `06. The FBI is currently working on 1,284 cases. Last fiscal year, the unit worked on 1,210 cases, some of which are still open. According to Mr. Broshears, the investigations cover "approximately $3 billion" in mortgage losses, which is the highest government estimate yet of the impact fraud has had on the lending business.

Freddie Mac is seeking public comments until April 30 on the appraisal policies it agreed to implement as part of a settlement with New York Attorney General Andrew Cuomo. Freddie Mac and Fannie Mae are slated to implement the new appraisal code by Jan. 1 under the March 3 settlement with Mr. Cuomo. "To implement the Code with minimum disruption to the market and, as required under the agreement, Freddie Mac is requesting comments on operational and implementation issues, as well as unintended consequences or risks you identify in connection with the requirements of the Code," Freddie said. The agreement bars Freddie and Fannie from purchasing mortgages from lenders that use in-house appraisers or subsidiary appraisal firms. On brokered loans, lenders must certify that the mortgage broker did not select the appraiser. Freddie Mac can be found online at http://www.freddiemac.com.

The Federal Deposit Insurance Corp. board of directors has decided to keep the assessment rates it charges banks and thrifts for deposit insurance unchanged for 2008 as it builds reserves to deal with more bank failures. The FDIC fund stood at 1.22% of estimated insured deposits at year-end 2007, and the agency wants the reserve ratio to reach 1.25% before the end of 2009. "We will closely monitor the progress of the fund along with the condition of the banking industry," FDIC Chairman Sheila Bair said. "As the fund reaches the 1.25% target, I expect the board to consider reducing rates to a maintenance level." The American Bankers Association contends that the FDIC has adequate reserves, and it wanted the assessments lowered. The ABA said it is "deeply disappointed" by the board's decision. "Every excess dollar pulled from bank capital into FDIC coffers means $10 of lending and related banking services that will not be available to support economic recovery," ABA executive vice president Wayne Abernathy said.

The Department of Housing and Urban Development has issued its long-awaited RESPA reform proposal, and it is more ambitious than the industry expected or wants to implement during the current market turmoil. Most observers expected HUD to issue a Real Estate Settlement Procedures Act proposal narrowly focused on providing consumers with concise and understandable disclosures of loan terms and settlement costs. However, HUD has "cast a wider net," according to RESPA attorney Phillip Schulman, who says the RESPA proposal is "complicated," "confusing," and "controversial." The RESPA proposal mandates the use of a standardized four-page good faith estimate that discloses loan terms and settlement costs, including the mortgage broker's compensation. HUD also wants the closing agent to read a closing scripting that summarizes important loan terms and highlights differences between the GFE and the HUD-1 settlement sheet. HUD Assistant Secretary Brian Montgomery expects industry opposition, but he told reporters it is "no longer acceptable" for industry to stand in the way of giving consumers clear disclosures. HUD has issued the proposal for a 60-day comment period. Seven major financial services trade groups, including the American Bankers Association and the Mortgage Bankers Association, have asked HUD to extend the comment period to 120 days.

Although Florida remains a hotbed for mortgage fraudsters, the crime is becoming more evenly spread among all states as opposed to being concentrated in just a few, according to the latest report from the Mortgage Asset Research Institute. MARI's 10th period fraud case report also found that while the most common types of fraud continue to involve erroneous employment histories and false income statements, the failure to disclose debts, liens, or judgments is an up-and-coming problem. "The tertiary issue of undisclosed or incorrect debts, liens or judgments increased 50% between 2006 and 2007," the report said. Merle Sharick, MARI's vice president of sales, told the meeting that "perpetrators are devising new and improved ways to beat the system." He also said that fraud for housing by individuals who fudge on their loan applications "is a much bigger deal that we thought it was." The report, which was issued in Chicago at the Mortgage Bankers Association's National Fraud Issues Conference, is based on 2007 data. But it stressed that many instances of fraud in last year's book of business have yet to be unmasked. "It will likely take three to five years to uncover most of the fraud and misrepresentation" in the `07 book, the report said.