Compliance & Regulation

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., is working on legislation that would create a new federal program to purchase "distressed" mortgages from lenders at a discount and provide a new 30-year fixed-rate mortgage to homeowners. Those mortgages could be insured by the Federal Housing Administration or purchased by Fannie Mae or Freddie Mac. The proposed Federal Homeownership Preservation Corp. is modeled after a Depression-era program that rescued 1 million homeowners from foreclosure. "It would allow us to deal with this foreclosure matter in a creative way -- one that has been tried before and, I think, worked well," Sen. Dodd told reporters. The chairman said he plans to hold extensive hearings soon on how to reduce foreclosures and stimulate the economy.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., is working on legislation that would create a new federal program to purchase "distressed" mortgages from lenders at a discount and provide a new 30-year fixed-rate mortgage to homeowners. Those mortgages could be insured by the Federal Housing Administration or purchased by Fannie Mae or Freddie Mac. The proposed Federal Homeownership Preservation Corp. is modeled after a Depression-era program that rescued 1 million homeowners from foreclosure. "It would allow us to deal with this foreclosure matter in a creative way -- one that has been tried before and, I think, worked well," Sen. Dodd told reporters. The chairman said he plans to hold extensive hearings soon on how to reduce foreclosures and stimulate the economy.

The California economy is being strangled by limited access to mortgage credit, according to California Gov. Arnold Schwarzenegger, who wants Congress to raise the Fannie Mae and Freddie Mac lending limit from $417,000 to $625,000 as part of an economic stimulus package. "Raising these limits would do more than anything else to pump badly needed credit back into the housing market and revive our economy," Gov. Schwarzenegger says in a letter to House and Senate leaders. More than 50% of California's housing stock is priced above the current GSE loan limit of $417,000. "When combined with the withdrawal of the jumbo loan market, it's no surprise that current home sales activity in California is half the pace seen in 2006," the governor said. The former movie star also pointed out that raising the loan limit for the government-sponsored enterprises automatically raises the limit on loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. "Nothing will more beneficially improve the United States economy than immediately raising these limits," he said. California Realtors, builders, mortgage bankers, and brokers are also urging Congress to raise the GSE loan limit to $625,000 as part of a stimulus package.

Jack Kemp, who was secretary of housing and urban development in the George H.W. Bush administration, is becoming a spokesman for Generation Mortgage Co., an Atlanta reverse mortgage specialist. "A strong advocate of the housing industry, Jack is a natural fit for us as he was deeply enmeshed in affordable housing issues, housing finance, and home ownership when he served as U.S. housing secretary from 1989-1993," said Jeffrey Lewis, chairman of Generation Mortgage. Mr. Kemp ran for vice president in 1996, was a member of the House of Representatives from 1971 to 1989, and prior to that played quarterback for a number of National Football League and American Football League teams, most notably the Buffalo Bills.

The Federal Reserve on Tuesday morning cut its key lending rate by 75 basis points to 3.50% in reaction to a rout in global stock markets as well as a "softening" jobs market in the United States and a "deepening" housing contraction. The cut in the target federal funds rate also came on the heels of dismal fourth-quarter earnings reports by Bank of America and Wachovia showing that credit losses and provisioning cut earnings by more than 90% compared with the levels of a year earlier. "While strains in the short-term funding markets have eased somewhat, broader financial conditions have continued to deteriorate and credit has tightened further for some businesses and households," the Fed's monetary policy committee said in explaining the sudden rate cut. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in the labor markets." The Fed committee is scheduled to meet Jan. 30, and Fed watchers had been expecting a 50-bp cut based on Fed Chairman Ben S. Bernanke's comments that he will act aggressively to keep the U.S. economy growing. However, fears that the U.S. economy is already in recession swept Asian and European markets on Monday and Tuesday and sent stock prices sharply lower. This prompted the Fed to take quicker and more decisive action before the U.S. stock markets opened.

Raising the Fannie Mae and Freddie Mac loan limit to $625,000 as part of a stimulus package could help 140,000 to 210,000 families escape foreclosure, increase home sales, and boost economic activity by $42 billion, according to the National Association of Realtors. "We believe that any stimulus package must address housing issues and increasing the conforming loan limits for these two government-sponsored enterprises," NAR president Dick Gaylord said. Congress and the Bush administration are trying to put together a $100-150 billion stimulus package that features mainly tax rebates for consumers and accelerated writeoffs for businesses. President Bush called for quick passage of a Federal Housing Administration reform bill on Friday in discussing his approach to a stimulus package. But he did not mention the GSEs. The Realtors want the GSE loan limit raised from $417,000 to $625,000 to address the lack of liquidity and the high interest rates in the jumbo mortgage market. "This is the quickest way to help the hurting housing market," Mr. Gaylord said.

Residential mortgage lending continued to contract from mid-November through December, according to the Federal Reserve Beige Book, but refinancing activity varied. The Chicago and Richmond Federal Reserve district banks reported "increased refinancing activity, but New York cited widespread declines in refinancing," the Beige Book says. The Fed's periodic report on economic activity also notes that home sales are "sluggish" in most bank districts and inventories of unsold homes remain at historically high levels. "Overall, contacts anticipate that housing markets will remain weak during the first part of 2008," it says. Meanwhile, commercial real estate activity "eased late in the year," demand for CRE loans was mixed, and credit standards have tightened in the past two months, according to the Fed report.

Federal Reserve Board Chairman Ben S. Bernanke says he expects that foreclosures on $1 trillion in subprime adjustable-rate mortgages will lead to at least $100 billion in losses, and it could go much higher. "So far, I see about $100 billion, but it certainly could be several multiples of that as we go forward and delinquency rates and foreclosure rates rise," the Fed chairman told the House Budget Committee. He noted that there are 5 million subprime ARMs, of which 20% are delinquent. The Fed chairman also testified that home prices are falling in many parts of the country. "The virtual shutdown of the subprime mortgage market and a widening of spreads on jumbo mortgage loans have further reduced the demand for housing, while foreclosures are adding to the already-elevated inventory of unsold homes," he said.

The Federal Deposit Insurance Corp. has hired First Financial Network Inc. to market and sell $40 million in residential mortgage loans from the failed Miami Valley Bank. The Lakeview, Ohio, bank had $86.6 million in assets when the FDIC closed it in October, transferred all the insured deposits to a local bank, and retained all the assets. FFN president and chief executive Bliss Morris said she expects due diligence to begin in February, and the bid date will be in early March. "We are pleased to assist FDIC with this assignment," Ms. Morris said. "We have proven our ability to transact sales of this nature on behalf of FDIC and look forward to another successful portfolio offering." Based in Oklahoma City, FFN has an online loan trading platform that provides qualified investors with immediate access to due-diligence information.

The National Association of Home Builders and the Financial Services Roundtable have decided to put aside their differences and work toward the quick passage of a GSE reform bill that temporarily increases the conforming loan limit for Fannie Mae and Freddie Mac. The two trade groups have battled over legislation to strengthen regulatory oversight of the government-sponsored enterprises for many years. But now the two antagonists have agreed to support a House-passed GSE bill in an effort to bring liquidity to the jumbo market and complete action on comprehensive GSE reform. The House bill has a provision that increases the conforming loan limit from $417,000 to $625,000 in high cost areas and allows the GSEs to securitize those higher balance mortgages. Under the compromise, the increase would expire in two years "if the jumbo market returns to a normal spread between conforming and nonconforming mortgage rates." NAHB and the FSR Housing Policy Council executives also pledged to work with other banking and housing groups to get them on board. "We also hope the [Bush] administration will embrace this," NAHB executive vice president Jerry Howard said.