Compliance & Regulation

Top Bush administration officials are urging Congress to pass Federal Housing Administration reform legislation before the end of the year, and they appear ready to compromise on a risk-based premium structure for FHA mortgages."We are working with the leadership in Congress to resolve differences on this issue," a Department of Housing and Urban Development spokesman said. A few weeks ago, it appeared that HUD was ready to move ahead administratively with a risk-based premium structure despite congressional opposition. But now HUD does not want to antagonize Congress while there is still a chance the Senate could act on FHA reforms in the next few weeks, which would increase refinancing options for troubled subprime borrowers. "It has been sitting in the Senate for too long," HUD Secretary Alphonso Jackson told an Office of Thrift Supervision housing forum. "Each day of delay unnecessarily places thousands of families at risk of foreclosure."

The Treasury Department's "teaser freezer" plan to help subprime borrowers facing resets will have a "limited" impact on the total number of loan modifications and the coming wave of foreclosures, according to some Wall Street analysts.Reports by UBS and Friedman Billings Ramsey & Co. point out that the group of homeowners targeted for modifications -- where the servicer freezes the interest rate at the starter (or "teaser") rate -- would likely get their loans modified without a government-sponsored plan. "That is why we suspect this effort will have only marginal impact on total modifications and little impact on the coming wave of foreclosures," said Thomas Zimmerman, a managing director at UBS Investment Bank. FBR analyst Paul Miller contends that the teaser freezer plan simply represents what is already being done in the market. "In our opinion, the plan will affect a limited number of borrowers, many of whom might receive a loan modification even without a government-sponsored plan," Mr. Miller says. "The plan will not enable borrowers who are unable to pay their mortgages to keep their homes or support home prices."

Sen. Hillary Rodham Clinton, D-N.Y., is urging the Bush administration to impose a 90-day moratorium on subprime foreclosures so that at-risk borrowers are not harmed before lenders and servicers are able to implement a freeze on interest rates.The presidential candidate said she is "encouraged" by news that Treasury officials are working with the mortgage industry to curb foreclosures and freeze interest rates on adjustable-rate subprime mortgages. A freeze of at least five years or until the mortgage is converted to an affordable fixed-rate mortgage will "give the housing market time to stabilize," Sen. Clinton says in a letter to Treasury Secretary Henry Paulson. In March, Sen. Clinton called for "foreclosure timeout," which the Bush administration dismissed as unnecessary. "While you and others in the administration misdiagnosed the problem, over 1 million additional foreclosure notices were sent out," the New York Democrat said.

The FBI's Mortgage Fraud Report indicates that up to 70% of early payment defaults may be linked to borrower misrepresentations on mortgage loan applications, according to Rapid Reporting, a Fort Worth, Texas-based provider of fraud prevention products and services.The study found that mortgage defaults were largely concentrated in adjustable-rate loans, but occurred among other types as well. The report also revealed that seven of the 10 states with the highest concentration of mortgage fraud were also among the top 10 states for foreclosures: California, Florida, Georgia, Indiana, Michigan, Ohio, and Texas. "While it would be naïve to assume that we could narrow the cause of every foreclosure down to one single factor, this FBI information clearly indicates that borrower fraud plays a significant role in the record number of defaults and foreclosures we've been seeing over the past couple of years," said Jay Meadows, chief executive officer for Rapid Reporting. He said lenders can "significantly reduce" defaulted and foreclosed loans by implementing a good fraud prevention program. Rapid Reporting can be found online at http://www.rapidreporting.com.

Mortgage servicers are going to face many challenges in processing loan modifications of subprime adjustable-rate mortgages, including the capacity of their systems to deal with the loan impairment requirements of Financial Accounting Standard 114.Mortgage servicers are concerned that "they don't have the systems infrastructure in place today" to manage loan modifications in compliance with FAS 114, Steve Davies of PricewaterhouseCoopers told a meeting of the American Institute of Certified Public Accountants on Nov. 30. Once a loan is modified, it has to be evaluated for impairment on an individual basis to determine the loss. Servicers generally evaluate groups of mortgages segmented into loan types. Industry groups are expected to ask the Financial Accounting Standards Board for some relief.

A panel of mortgage professionals -- including the chief executives at Fannie Mae and Washington Mutual -- have told an OTS-sponsored forum that they believe a series of interest rate cuts by the Federal Reserve could help alleviate the current liquidity crisis facing the nonconforming mortgage market."The Fed needs to keep cutting rates," WaMu chairman and CEO Kerry Killinger told the Office of Thrift Supervision housing forum, adding that "We need liquidity for the immediate future, not three years from now." Mr. Mudd said lower rates could help banks clear out their inventory of collateralized debt obligations and specialized investment vehicles. North Carolina Banking Commissioner Joseph A. Smith Jr. cautioned that too many rate cuts "could cause another mess" by adding too much liquidity.

A pickup in loan modifications could be an important factor in keeping the U.S. economy out of recession, according to Mark Zandi, chief economist of Moody's Economy.com.Speaking at a housing forum sponsored by the Office of Thrift Supervision, Mr. Zandi argued that the Federal Reserve Board has to be aggressive in cutting interest rates and said 20% to 30% of adjustable-rate mortgages need to be modified before they reset to give the housing and mortgage markets any chance of a recovery. Countrywide Financial Corp. chairman and chief executive Angelo Mozilo said he supports the Bush administration's effort to increase loan modifications. However, he stressed that the lack of liquidity in the secondary market (except for Fannie Mae, Freddie Mac, and Federal Housing Administration-eligible loans) is putting downward pressure on sales and house prices. Mr. Mozilo called on the administration to relax its grip on Fannie and Freddie so the two mortgage giants can use their resources to "jump-start" the secondary mortgage market and restore investor confidence.

Hope Now alliance members are close to agreeing on a systematic approach for dealing with resets on adjustable-rate mortgages, but they are still developing criteria for determining which borrowers will be eligible for streamlined refinancings and loan modifications."I am confident they will finalize these standards soon," Treasury Secretary Henry Paulson told a housing forum sponsored by the Office of Thrift Supervision. Secretary Paulson also stressed that he expects the industry to implement the streamlined procedures "quickly" and create benchmarks for measuring their success in preventing foreclosures. One mortgage industry executive said he expects that an agreement on the criteria and for freezing the initial interest rate for borrowers facing an unaffordable reset will be worked out by the end of the week. Meanwhile, Secretary Paulson saluted the Hope Alliance members for expanding the capacity and hours of its 888-995-HOPE hotline so that struggling homeowners can talk with a mortgage counselor 24 hours a day.

Treasury officials and mortgage servicers agree on the need to expedite loan modifications for certain subprime borrowers but have yet to reach a consensus on the specifics of a plan that could lead to a massive restructuring of ARMs that will reset in 2008 and 2009.As one veteran mortgage banker put it: "Who's going to pay for this plan?" The plan centers on identifying borrowers who cannot afford a reset and freezing the interest rate for at least three (and maybe five) years to prevent a default. Several servicers are already allowing borrowers to remain at the starter rate for five years. Treasury Secretary Henry Paulson wants a commitment from large servicers to take an aggressive approach and expedite such loan modifications. However, there are concerns about litigation risk and restrictions in servicing contracts, as well as the losses that lenders, investors, and servicers might take. At a Washington forum scheduled for Dec. 3, Secretary Paulson is expected to discuss the status of the loan modification talks he has held with servicers, including Bank of America, Countrywide Home Loans, Washington Mutual, and Wells Fargo.

A "glut" of unsold homes is putting downward pressure on prices and construction, while mortgage delinquencies have "increased significantly" in many areas, according to the Federal Reserve Board's Beige Book."Most districts pointed to further increase in inventory of available homes, with the earlier tightening of credit conditions for mortgage lending continuing to create barriers for some buyers," says the Fed's survey of economic conditions in the 12 Federal Reserve districts. The November survey also noted that local contacts generally don't expect a pickup in home construction until well into next year at the earliest. Meanwhile, "residential mortgage lending continued its downward slide," the Beige Book says.