Compliance & Regulation

Senate Banking Committee chairman Chris Dodd, D-Conn., wants Fannie Mae and Freddie Mac to use a 30% capital surplus to buy subprime loans and restructure the loans to prevent foreclosures, but the GSE regulator indicated he is reluctant to lower the capital requirement. Office of Federal Housing Enterprise Oversight director James Lockhart said the two government sponsored enterprises have done a good job of purchasing refinanced subprime loans and they have enough capital to securitize those loans. The director also said the OFHEO is in discussions with the GSEs to free up the capital surplus that was imposed several years ago because of operational problems associated with their accounting and internal controls. But he told Sen. Dodd that Fannie and Freddie are facing new stresses due to raising delinquencies and loan losses. "We need to be careful about taking it off," Mr. Lockhart said. "I would be more comfortable," he added, if OHFEO had more authority to set minimum and risk-based capital requirements.

In an effort to warn more delinquent borrowers about a widespread form of foreclosure fraud, Freddie Mac has re-edited the custom-made video it posted to YouTube for Spanish-speaking homeowners. The new Spanish language version of Freddie Mac's anti- fraud video can be found at http://www.youtube.com/AvoidFraud. Like the English-language Internet video Freddie Mac produced and posted in 2007, the Spanish language version uses professional actors to demonstrate how con artists can get copies of foreclosure notices at City Hall or a county courthouse, persuade distressed borrowers to give up the deeds in exchange for suspicious promises to solve their financial problems, use the deeds to secure new loans for themselves and let the new loans go into foreclosure, which means the homeowners looking for help end up losing their house. Freddie Mac decided to produce the anti-fraud videos when a new survey of delinquent borrowers found 25% going to the Internet first for information about managing their mortgages and avoiding foreclosure.

The Office of Management and Budget is expected to complete its review of HUD's RESPA Rule in a "few days" so it can be issued for public comment by the end of February, according to a Housing and Urban Development official. HUD Deputy Assistant Secretary Gary Cunningham said the Real Estate Settlement Procedures Act proposal will enhance the Good Faith Estimate so mortgage applicants receive a clear disclosure of the loan terms and settlement costs. The new GFE will also provide a better disclosure of the mortgage broker fee. Once OMB clears the RESPA proposal, HUD will submit it to Congress for a 15-day review before it is published for a 60-day comment period.

The Department of Housing and Urban Development completed a regulatory review of Fannie Mae and Freddie Mac's activities last year and it will be informing the GSEs of its findings in separate letters before the end of March. "The review provided a baseline of information on Fannie Mae's and Freddie Mac's business and program activities and examined specific transactions to determine if these are consistent with the GSEs' charter authorities," according to documents included in the President's budget request to Congress. HUD is the mission regulator for the two government sponsored enterprises and it is responsible for determining which activities and programs are consist with their charter. The letters might include some adverse findings that would require the GSEs to stop or modify some activities.

The Department of Housing and Urban Development completed a regulatory review of Fannie Mae and Freddie Mac's activities last year and it will be informing the GSEs of its findings in separate letters before the end of March. "The review provided a baseline of information on Fannie Mae's and Freddie Mac's business and program activities and examined specific transactions to determine if these are consistent with the GSEs' charter authorities," according to documents included in the President's budget request to Congress. HUD is the mission regulator for the two government sponsored enterprises and it is responsible for determining which activities and programs are consistent with their charter. The letters might include some adverse findings that would require the GSEs to stop or modify some activities.

Fannie Mae has priced a new issue of 2.50% two-year Benchmark Notes maturing April 9, 2010 and a new issue of 3.25% five-year Benchmark Notes maturing April 9, 2013, each $3 billion in size. The two-year issue (CUSIP 31398AMV1) was priced at 99.750 with a 2.620% yield at a spread of 68.5 basis points over the 2.125% Treasury bill due Jan. 31, 2010. The five-year issue (CUSIP 31398AMW9) was priced at 99.527 with a 3.351% yield at a spread of 72 basis points over the 2.875% Treasury bill due Jan. 31, 2013. The joint lead managers for the two-year offering are Deutsche Bank Securities Inc., Lehman Brothers Inc. and Morgan Stanley & Co. and the joint lead managers for the five-year offering are Citigroup Global Markets Inc., Merrill Lynch Government Securities, and J.P. Morgan Securities Inc. Both issues are slated to be listed on the EuroMTF market of the Luxembourg Stock Exchange, settle Feb. 7 and have payment dates on April 9 and Oct. 9 starting this April.

Over 70% of commercial banks expect the performance of their single-family loan portfolios will deteriorate in 2008, but most don't expect the streamlined loan modification plan endorsed by the Hope Now Alliance will have a significant impact on their loan mitigation efforts. The vast majority of banks expect to take a "case-by-case" approach to loan modifications, according to a Federal Reserve Board survey of senior loan officers. Only six of the 45 banks surveyed in January said streamlined modifications endorsed by the Hope Now alliance would play a "very significant" role in their attempts to prevent foreclosures. A large number of respondents indicated they expect to refinance subprime borrowers into Federal Housing Administration or conventional loans. More than 65% of respondents also anticipate using short sales or deed-in-lieu of foreclosure as a significant loss mitigation strategy, the Fed said.

The Financial Accounting Standards Board has rejected a request by the Mortgage Bankers Association for relief from having to treat all loan modifications as troubled debt restructurings. As the secondary market seized up in last year, many mortgage bankers got caught with mortgages on their books that they couldn't sell. MBA claimed these lenders do not have the computer systems to project discounted cash flows on principal and interest, as required by FAS 114, to calculate loan impairment or losses. MBA suggested an alternative standard, FAS 5, which measures impairment based on the amount a principal the lender does not expect to recover. At a Jan. 30 meeting, FASB members noted that FAS 114 was designed to prevent lenders from avoiding losses on restructurings and they unanimously rejected MBA's request. "We are disappointed by the decision. But our members have accepted the decision and they are now working to enhance their computer systems to apply FAS 114 as necessary," MBA's accounting expert Alison Utermohlen said.

Over 70% of commercial banks expect the performance of their single-family loan portfolios will deteriorate in 2008, but most don't expect the streamlined loan modification plan endorsed by the Hope Now Alliance will have a significant impact on their loan mitigation efforts. The vast majority of banks expect to take a "case-by-case" approach to loan modifications, according to a Federal Reserve Board survey of senior loan officers. Only six of the 45 banks surveyed in January said streamlined modifications endorsed by the Hope Now alliance would play a "very significant" role in their attempts to prevent foreclosures. A large number of respondents indicated they expect to refinance subprime borrowers into Federal Housing Administration or conventional loans. More than 65% of respondents also anticipate using short sales or deed-in-lieu of foreclosure as a significant loss mitigation strategy, the Fed said.

The Federal Housing Administration will have to increase its standard mortgage insurance premiums, according to the President's 2009 fiscal year budget, unless Congress passes FHA reforms that allow the agency to charge risk-based premiums. Budget documents show that FHA is in trouble and expects to pay $8.4 billion in claims due to defaulted loans in FY 2008, up from $5.1 billion in FY 2007. The Office of Management and Budget estimates that FHA will pay $9.8 billion in claims in FY 2009. "Because of deteriorating market conditions, as well as adverse loan performance," FHA will use its authority to increase the upfront premium by 45 basis points to 1.95% and the annual premium by 2 bp to 52 bps. The President's budget also suggests that FHA should stop insuring mortgages with seller-financed downpayment assistance unless Congress wants to provide funding to cover the losses. FHA has tried to curtail the downpayment assistance programs run by nonprofit groups for years. But the courts and Congress have blocked the agency's efforts despite the high default rates on those loans. "The Budget proposes no new loan guarantees under this program; and provides no funding for its credit subsidy costs," the budget says.