Compliance & Regulation

A judge in Massachusetts has temporarily barred Fremont Investment & Loan from initiating or advancing foreclosures on "presumptively unfair" mortgage loans unless certain conditions are met, according to Buckley Kolar LLP. However, in granting the state attorney general's motion for a preliminary injunction, a Suffolk County Superior Court judge found that there was no evidence that Fremont had made false representations or had violated any federal or state consumer credit law, the law firm reported. Rather, the court found that the loans at issue fell within the "penumbra" of a state predatory-lending law governing high-cost mortgage loans. The court defined a loan as presumptively unfair if it is an adjustable-rate mortgage with an introductory period of three years or less, has a teaser rate at least 3 percentage points lower than the fully indexed rate, and meets two other tests. The other tests are that it has a loan-to-value ratio of 100%, or carries a substantial prepayment penalty (or a prepayment penalty that extends beyond the initial period), and the borrower has a debt-to-income ratio that would have exceeded 50% if the debt had been measured by the amount due under the fully indexed rate. Buckley Kolar, which serves the financial services industry, can be found online at http://www.buckleykolar.com.

Senate Republicans have blocked Democrats from rushing to the floor a foreclosure prevention bill that allows bankruptcy judges to restructure subprime and certain nontraditional mortgages. Democrats mustered only 48 of the 60 votes needed to invoke cloture and start debate on the bill (S. 3221), which also provides revenue bonds for refinancing subprime borrowers and federal grants to purchase foreclosed properties. Senate Majority Leader Harry Reid called the vote a "big victory" for Wall Street, big banks, and mortgage bankers. But as for the millions of people facing foreclosure, "they lost," Sen. Reid said. The American Financial Services Association's top lobbyist, Bill Himpler, said the industry could support the foreclosure prevention bill if the bankruptcy provision is stripped from the package. With all the market turmoil, this is not the time to consider changes to the bankruptcy code that would "essentially undermine investor confidence in mortgage lending," he said. The Democrats will likely push for another vote before March 15, when the Senate takes a two-week break. Meanwhile, the Senate Judiciary Committee has scheduled a March 6 mark-up of two competing mortgage bankruptcy bills. The bill sponsored by Sen. Richard Durbin, D-Ill., was included in S. 3221. The other bill, sponsored by Sen. Arlen Specter, R-Pa., allows bankruptcy judges to reduce or freeze the interest rate on adjustable-rate mortgages.

Congressional policy proposals targeting the subprime mortgage crisis do not distribute the costs and benefits equitably, according to a study released by the Washington-based FreedomWorks Foundation. The study, conducted by Todd Sinai, associate professor of real estate at the University of Pennsylvania's Wharton School, found that the proposals "inappropriately reward people who made riskier decisions over those who made prudent decisions" and benefit high-income earners at the expense of others. Titled "The Inequity of Subprime Mortgage Relief Programs," the study also said that proposals to increase the conforming loan limit raise questions of fairness and boost the risk borne by Fannie Mae and Freddie Mac. The foundation can be found on the Web at http://www.freedomworks.org.

Senate Democrats have narrowed the scope of the bankruptcy provisions in a foreclosure prevention bill so that only nontraditional and subprime mortgages could be restructured by bankruptcy judges. The Democrats were pushing for a cloture vote on the bill Thursday (Feb. 28), and the financial services industry was lobbying to defeat it because of the bankruptcy provisions. The White House has threatened to veto the bill. If the Democrats can get 60 votes, it opens the door to debate and amendments before final passage. The original bill (S. 2636) would have given the bankruptcy courts the authority to reduce the principal amount or interest rate on any single-family mortgage. In trying to get Republican support, the authors limited the scope to nontraditional and subprime mortgages originated before the date of enactment. The Democrats also allow lenders to recoup any increase in the property's value if the bankruptcy filer sells the house within five years.

House and Senate banking committee leaders are close to an agreement on a Federal Housing Administration reform bill, and it could clear the way for final passage in a few weeks. "We had a very good meeting on the FHA bill," said House Financial Services Committee Chairman Barney Frank, D-Mass. "I am very optimistic that we are going to get an FHA bill pretty soon." Rep. Frank said he agreed to drop a controversial provision in the House bill that would require the FHA to contribute excess revenues to an affordable housing trust fund. It appears that the major outstanding issue is raising the maximum FHA loan limit to $417,000 or higher. Some observers expect the final bill to include a Senate provision that prohibits seller-funded downpayment assistance on FHA loans. The Mortgage Bankers Association recently signaled that it is changing its position on DPA. "A consensus of our members is moving towards the Senate position," MBA vice president Francis Creighton told MortgageWire.

Single-family loan originations by commercial banks and savings banks fell 8.5% in the fourth quarter to $253.1 billion, and the entire decline occurred in the wholesale channel, according to Federal Deposit Insurance Corp. call report data. Wholesale originations of one- to four-family loans totaled $161.8 billion in the fourth quarter, down from $179.6 billion in the third quarter. In the second quarter of last year, when Wall Street was still buying subprime and alternative-A loans, wholesale originations totaled $236.3 billion. Meanwhile, retail originations by the 688 reporting banks edged up slightly to $91.3 billion in the fourth quarter. The FDIC data also show that banks sold $262.7 billion in single-family loans in the fourth quarter. Only commercial banks and FDIC-supervised savings banks with at least $1 billion in assets, or smaller banks with at least $10 million in originations over the past the two quarters, are required to report origination data to the FDIC.

The Office of Federal Housing Enterprise Oversight is lifting the portfolio caps on Fannie Mae and Freddie Mac, which will allow the two government-sponsored enterprises to provide more liquidity to the mortgage market and invest in jumbo mortgages. "OFHEO will remove the portfolio growth caps for both companies on March 1, 2008," OFHEO Director James Lockhart said. The unexpected action gives the GSEs more room to use their new authority to purchase jumbo mortgages and hold them in portfolio until they can securitize the higher-balance mortgages. Mr. Lockhart noted that Fannie and Freddie are filing their 2007 annual financial reports on time, which shows they have made "substantial progress" in fixing their accounting systems and internal controls as specified in separate consent orders. The consent orders also require the GSEs to maintain a 30% capital surplus. The OFHEO director signaled that he will begin discussions with Fannie and Freddie to gradually lower the capital surplus.

Any lenders (not just mortgage brokers) who receive a fee from another lender in the origination process will have to disclose their total compensation on the new standardized good-faith estimate developed by HUD as part of its Real Estate Settlement Procedures Act proposal. An "exclusive agent of the lender who is not an employee of the lender, but who renders origination services in a table funded or intermediary transaction, would be subject to the mortgage broker disclosure requirement set forth in the proposed rule," according to a copy of the RESPA proposal obtained by MortgageWire. The Department of Housing and Urban Development is expected to publish the proposed rule soon. The narrative in the proposal describes how HUD continued to consumer-test and make changes to the four-page GFE so that consumers can identify the lowest-cost loan without being confused by yield-spread premiums, which are called ''an adjusted origination charge" on the front page. "HUD is now convinced that by making these changes, any disadvantage to brokers is virtually eliminated," the agency said. The RESPA proposal allows lenders to use "average cost pricing and discounts" in listing the cost of third-party settlement services on the GFE, subject to a 10% tolerance.

Federally insured banks and thrifts have reported earnings of $5.8 billion for the fourth quarter, an 84% drop from those of a year earlier, as turmoil in the credit and mortgage markets produced large trading loses, record-high loss provisions, and the largest increase in noncurrent one- to four-family loans in 17 years, according to the Federal Deposit Insurance Corp. Noncurrent loans (90 days or more past due) rose by $26.9 billion, or 32.5%, in the fourth quarter, and residential and commercial real estate loans accounted for more than 80% of the increase. Noncurrent one- to four-family loans grew by $11.1 billion, or 31.7%, in the fourth quarter, and chargeoffs were up $1.3 billion, or 144%. The percentage of noncurrent one- to four-family loans rose from 1.57% in the third quarter to 2.06% in the fourth quarter -- the highest level in 17 years. Meanwhile, noncurrent construction and development loans increased by $8.4 billion, or 73.2%, in the fourth quarter. The FDIC is keeping a close eye on housing, CRE, credit card, and small business loan portfolios. "All of these are showing signs of stress, as weakness in the housing market continues," FDIC Chairman Sheila Bair said.

Fannie Mae and Freddie Mac may stop accepting appraisals ordered by mortgage brokers by Sept. 1 as part of a settlement the two secondary-market agencies are negotiating with New York Attorney General Andrew Cuomo. In selling loans to Fannie and Freddie, lenders would have to certify in representations and warranties that they did not rely on appraisals provided by the brokers. "This could, in effect, require lenders to always secure their own appraisal of any property purchased through a broker," according to an outline of the "talking points" obtained by MortgageWire. The talking points also show that the AG wants mortgage lenders to curtail their use of in-house appraisers or subsidiary appraisal firms. The settlement talks stem from the New York AG's lawsuit against First American's appraisal unit, which allegedly provided inflated appraisals to one of Fannie's and Freddie's large customers. The New York AG's office could not be reached for comment by deadline time.