Compliance & Regulation

The Community Reinvestment Act may have deterred banks from engaging in the kind of risky mortgage lending that has led to the foreclosure crisis, according to a Traiger & Hinckley LLP study of 2006 loan data. The company said the study indicates that banks making loans in their CRA assessment areas were less likely to make high-cost loans, charged less for the ones they did make, and were "substantially more likely" to avoid the secondary market and retain high-cost loans and other loans in their portfolios. "Without the CRA, the foreclosure crisis might have negatively impacted even more borrowers and neighborhoods," said Warren Traiger, a partner in the law firm. The study is available at http://www.traigerlaw.com.

Servicers participating in the Hope Now alliance are working at an "intense pace" to implement streamlined processes for loan modifications and refinancings, according to Treasury Secretary Henry Paulson, who said he wants to see tangible results in a few weeks. "We expect most servicers to begin fast-tracking borrowers in the next few weeks," Mr. Paulson told the New York Society of Securities Analysts. Fast-tracking is supported to move troubled borrowers into refinances and interest rate freezes quickly. The secretary said he wants servicers to "fully implement connections" to the Federal Housing Administration and other lenders to facilitate refinancings. The Treasury secretary also stressed that the alliance members need to develop a standard reporting process to monitor their progress. "We need to see all the servicers reporting results to Hope Now to measure effectiveness and then to make adjustments as needed," Mr. Paulson said. Outreach efforts by Hope Now have prompted 45,000 borrowers who are facing possible foreclosure to contact their servicers for assistance.

Sen. Christopher J. Dodd, D-Conn., chairman of the Senate Banking Committee, has decided to drop out of the race for the Democratic presidential nomination after finishing sixth in the Iowa caucuses with less than 1% of the vote."Only when you try can you truly make a difference in the world," Sen. Dodd told his supporters. "I am glad I tried." His early exit from the race will allow the committee chairman to move quickly in completing action on a Federal Housing Administration modernization bill. The Senate passed the FHA bill in December, and now it has to be reconciled with the House version. Supporters of the FHA bill are hoping the House and Senate conferees will be able to agree on a final version by mid-February. The Senate bill would raise the FHA loan limit to $417,000 in high-cost areas. House Financial Services Committee Chairman Barney Frank, D-Mass., wants to push it higher so the FHA can finance loans in high-cost areas of Massachusetts and California. One compromise being kicked around is a temporary increase -- to $525,000 for one year.

The Mortgage Bankers Association has changed course and is now backing stand-alone legislation that would allow Fannie Mae and Freddie Mae to purchase jumbo loans of up to $625,000 nationwide on a temporary basis.In a letter to the GSEs' regulator, the MBA contends that liquidity problems in the jumbo market have led to higher interest rates on loans above the conforming loans limit ($417,000) and fewer financing options for borrowers. "The increase should be in effect for no less than 12 months, and up to 24 months if market conditions warrant," the MBA says in a letter to James Lockhart, director of the Office of Federal Housing Enterprise Oversight. The MBA previously opposed a temporary hike in the conforming lending limit unless it was part of a comprehensive bill to strengthen the regulation and supervision of the government-sponsored enterprises. The association can be found online at http://www.mortgagebankers.org.

Members of the Federal Reserve's monetary policy committee are concerned that rising foreclosures and the huge supply of unsold homes on the market could put additional downward pressure on house prices and lead to "further disruptions in the financial markets."The minutes of the Dec. 11 Federal Open Market Committee also reveal that members did not expect that the housing market would continue to deteriorate after their last meeting on Oct. 31 or that the reduced availability of jumbo mortgages would last so long. The FOMC members "agreed that the housing correction was likely to be both deeper and more prolonged than they had anticipated in October," the Dec. 11 minutes say. The committee voted to lower the target federal funds rate 25 basis points to 4.25%. But Boston Federal Reserve Bank president Eric Rosengren advocated a more aggressive cut due to a "deteriorating housing sector, slowing consumer and business spending, high energy prices, and ill-functioning financial markets."

As Bush administration officials look for more ways to shore up the housing market, a conservative scholar is suggesting that policymakers take a look at a Depression-era agency that purchased defaulted mortgages to prevent foreclosures.American Enterprise Institute resident fellow Alex Pollock stresses in a Dec. 31 paper that the Home Owners' Loan Corp. refinanced more than 1 million loans from 1933 and 1937 and was later liquidated at a profit to the government. "The fundamental idea was that the HOLC would acquire defaulted mortgages from lenders and investors, giving its bonds in exchange, and then refinancing the mortgages on more favorable and more sustainable terms," Mr. Pollock says in the paper entitled "Crisis Intervention in Housing Finance." However, the lender would take a loss on the principal of the mortgage due to a new appraisal and lower property value. The HOLC was liquidated after 18 years and the government's initial $200 million investment produced a modest return of $14 million. "As the housing and mortgage bust of 2007 continues into 2008, the lessons of the HOLC again are relevant and well worth studying," Mr. Pollock says.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators launched a Web-based mortgage licensing system on Jan. 2, as promised, with the initial participation of seven states.Four years in the making, the Nationwide Mortgage Licensing System is designed to automate and streamline state licensing of mortgage lenders and brokers. It will also help regulators track and identify bad actors, including originators that move from state to state. "NMLS provides the underpinnings of a regulatory framework to address the weaknesses of our current fragmented and complex system of mortgage origination and supervision," said CSBS executive vice president John Ryan. Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, and Rhode Island are participating in the initial start-up. Forty other states have indicated their intent to transition to the system. The House recently passed a predatory-lending bill (H.R. 3915) that requires the creation of a nationwide mortgage licensing system and registry.

Allegations that Washington Mutual's appraisal practices may have led to inflated property values have prompted the Office of Thrift Supervision to start a review of WaMu and the appraisal practices of other thrifts, according to an OTS spokeswoman."I don't know if it would be fair to say we are singling [WaMu] out," said Barbara Shycoff, the OTS's external affairs director. The OTS decided it is a "good time" to look at WaMu and other thrifts to make sure that "we are comfortable with the practices out there," she said. The Seattle-based thrift maintains that the allegations of pressuring appraisers -- first raised by New York Attorney General Andrew Cuomo in November -- are without merit. "After spending a month and a half investigating these allegations, we can say with confidence that there has been no systematic effort by WaMu to inflate home appraisals," the company said in a recent statement. WaMu also disclosed in the Dec. 21 statement that the Securities and Exchange Commission and the OTS are reviewing its appraisal practices.

Distressed homeowners who used the equity in their homes to finance debt consolidation or vacations will still face a tax penalty if a lender reduces their mortgage debt under the recently enacted Mortgage Forgiveness Debt Relief Act.Only the forgiveness of mortgage debt used to finance the acquisition of a borrower's primary residence and improvements to the property will escape being treated as ordinary income for tax purposes, according to a mortgage banking alert by two tax attorneys at K&L Gates. Attorneys Kenneth Wear and Roger Wise also point out that only borrowers who have lived in their homes for at least two years can qualify for tax relief. This provision weeds out speculators but it also denies relief for new homeowners who got in over their heads and defaulted early. Meanwhile, the tax relief measure "places no additional burden on lenders," the tax attorneys say. The borrowers have to determine whether they qualify for relief. Lenders simply provide borrowers with Internal Revenue Service Form 1099-C (Cancellation of Debt).

The Federal Trade Commission has published a four-page report advising consumers to continue making mortgage payments "as usual" in the event that their lender closes or files for bankruptcy.The FTC informed consumers that loans and the rights to service loans are often bought and sold, so that the originating lender may not end up servicing its loan. The FTC noted that even if a servicer files for bankruptcy, its assets are typically sold under the supervision of a bankruptcy court and the servicing rights will be transferred to another lender.