Compliance & Regulation

Ambac, a New York-based bond insurer that has been wrestling with U.S. mortgage-related woes, may be getting a capital infusion from a group of banks in the wake of recent regulatory pressure on the industry."We haven't concluded negotiations," said an Ambac spokeswoman Monday afternoon, confirming that the company is considering the possibility among its options. A spokesman for the New York Insurance Department, in noting reports that Ambac has been working with a group of banks, said only, "There is stuff going on." New York Gov. Eliot Spitzer, who said in congressional testimony that he considers bond insurers to be largely within his state's jurisdiction, gave companies in the sector a deadline to do something last week to bolster their flagging ratings, according to a Wall Street Journal article. The governor's office referred queries on the matter to the insurance department. A department spokesman said there is "no actual deadline" and that the period mentioned reflected state officials' expectations about when some action should be taken, ideally "as soon as possible." Standard & Poor's, in updating several bond insurer ratings Monday, affirmed some of Ambac's, citing "the scope of Ambac's capital-raising plans and the company's ability to implement those plans," but left them on CreditWatch with negative implications.

To expedite loan modifications, Congress may need to "step in" and shield mortgage servicers from investor lawsuits, according to FDIC Chairman Sheila Bair. "My hope is investors wake up to what's going on and push hard for loan modifications, not fight them," the Federal Deposit Insurance Corp. chairman told an audience in California's Silicon Valley. But she noted that servicers are reluctant to write down the principal amount of distressed mortgage because it could expose them to litigation. "But in this environment of declining home prices, writing down the values of loans to an amount the borrowers can pay in a sustainable manner may result in smaller losses to investors than foreclosure," Ms. Bair said.

Senate Democrats are pushing for a cloture vote Feb. 26 on a foreclosure prevention bill that would allow bankruptcy judges to restructure mortgages for distressed homeowners, and the financial services industry is mobilizing to defeat it. If the Democrats can get 60 votes, it opens the door to debate and amendments before final passage. But industry groups like the Mortgage Bankers Association are adamantly opposed to giving bankruptcy courts the leeway to reduce the principal amount or interest rate on a single-family mortgage. "We are fighting this," said MBA vice president Francis Creighton. "There is not a lot of room for compromise." The bill also provides funding for refinancing subprime borrowers and for grants to cities to purchase and rehabilitate foreclosed properties. In addition, it has a tax sweetener that allows lenders, homebuilders, and other companies to carry back 2006 and 2007 losses and receive refunds on taxes paid in prior years. Mr. Creighton said the outcome of Tuesday's vote is "really up in the air" and that the MBA is calling on its members to contact their senators.

The Department of Housing and Urban Development expects to issue the new loan limits for Fannie Mae, Freddie Mac, and Federal Housing Administration loans by March 7, sources have told MortgageWire. Congress raised the loan limits as part of the economic stimulus bill that President Bush signed on Feb. 13. And lenders are waiting for HUD to compute the new loan limits, which are based on 125% of median home prices, with a $729,750 cap. In a Feb. 20 conference call with industry groups and lenders, HUD officials indicated that separate lists of the higher-priced metropolitan statistical areas would be issued for FHA mortgages and for Fannie and Freddie mortgages. However, FHA lenders were disappointed that HUD has not decided whether the effective date should be determined by the date the lender receives an FHA case number or the date FHA insures the loan. The stimulus bill raised the FHA floor from $201,060 to $271,050, and lenders could begin making those higher-balance loans right now if HUD chose the date the loan is insured.

The Maryland Department of Labor, Licensing and Regulation is examining the servicing practices of Ocwen Loan Servicing, West Palm Beach, Fla., one of the largest subprime servicers in the United States. A spokeswoman for the agency told MortgageWire that "We don't randomly conduct exams," adding that "we saw some flags." She did not elaborate. Ocwen was singled out by Maryland Gov. Martin O'Malley at a news conference on Tuesday. Bill Rinehart, vice president and chief credit officer for the publicly traded Ocwen, said, "We received an examination request in the ordinary course of business. That's as much as we know. If they find something in the exam, we'll address it." Ocwen services $53.5 billion in loans. At year's end, its foreclosure rate was 6.47%, compared with 3.21% a year earlier. Mr. Rinehart noted that less than 1% of Ocwen's foreclosure cures result from "short sales" or "deeds in lieu."

To deal with so-called underwater mortgages, the Office of Thrift Supervision wants to develop a refinancing program that provides lender/servicers with certificates for writing down the principal amount of a mortgage to enable them to possibly recoup "some or all" of the immediate loss when the property is sold or refinanced again. OTS Director John Reich said he is trying to find a way to assist homeowners who cannot refinance to lower their mortgage costs and have negative equity in the homes. "We are concerned this reality is encouraging an increasing number of people to walk away from their homes," Mr. Reich told reporters. The OTS is looking at the Federal Housing Administration Secure program as a refinancing vehicle now that the FHA can insure mortgages above the $417,000 conforming loan limit. The OTS director said there is a potential for the certificates to be sold, like warrants, to investors and traded. OTS officials are promoting and developing the concept and say they hope to get other regulators, the FHA, and the American Securitization Forum on board in a few weeks.

All the members of the Hope Now alliance have adopted the "Project Lifeline" approach focused on helping prime and subprime borrowers who are 90-days past due avoid foreclosure, according to the Treasury Department. Six alliance members endorsed the expanded Hope Now effort last week, and now the rest of the alliance servicers, including GMAC ResCap and HSBC North American Holdings Inc., have signed up for Project Lifeline. "Now that all the Hope Alliance members have signed on, more than 90% of the subprime servicing market and nearly 70% of the entire mortgage servicing market is committed to this coordinated method of reaching more homeowners," Treasury Secretary Henry Paulson said.

The number of subprime-related cases filed in federal courts is "dramatically outpacing" the litigation filed during the savings-and-loan crisis of the early 1990s, according to Navigant Consulting Inc., Chicago. According to a Navigant study, 278 subprime-related cases were filed in 2007, nearly half the total of 559 S&L cases handled by the Resolution Trust Corp. over several years. "The S&L crisis has been a high-water mark in terms of the litigation fallout of a major financial crisis," said Jeff Nielsen, managing director of Navigant Consulting. "The subprime-related cases appear on their way to eclipsing that benchmark." Mr. Nielsen said the wave of litigation "appears to be just the beginning" and that there has been "a steady acceleration" of such cases so far this year. Navigant can be found on the Web at http://www.navigantconsulting.com.

Senate Democrats have crafted a second stimulus bill that includes bankruptcy changes lenders will oppose and a net operating loss carry-back supported by homebuilders. "This package is aimed at the bull's-eye of our economic crisis -- the housing market," said Sen. Charles E. Schumer, D-N.Y. Included in the package was a bill by Sen. Richard Durbin, D-Ill., that would allow bankruptcy judges to restructure subprime mortgages. "Small changes to the bankruptcy code could help 600,000 at-risk families keep their homes," the Illinois senator said. The Mortgage Bankers Association said there is "much in this bill to applaud." However, the MBA served notice that it will oppose the bill because the bankruptcy provision will increase the cost of mortgage credit. The National Association of Home Builders has been pushing for an NOL carry-back. But it wants a tax credit for homebuyers even more. The builders have frozen all political contributions because the first stimulus bill did not include a homebuyers' tax credit.

New York Gov. Eliot Spitzer has set a three- to five-day deadline for bond insurers hurt by certain mortgage securities exposures to bolster their flagging ratings, according to the Wall Street Journal. A call to the New York insurance department about the deadline had not been returned by deadline time. Mr. Spitzer indicated in congressional testimony Feb. 14 that he feels officials in his state should take the lead in tackling the bond insurance issue because "insurance is regulated by the states, and most of the bond insurance companies are domiciled in and primarily regulated by New York." Moody's Investors Service on Thursday downgraded some ratings of bond insurer FGIC, a New York-based company in which mortgage insurer PMI owns a 42% stake.