Compliance & Regulation

Lax underwriting and fraud may account for as much as 25% of the underperformance of the 2006 vintage of subprime residential mortgage-backed securities transactions, according to Fitch Ratings.Fitch said the high delinquency and default rates of recent-vintage subprime RMBS have many causes, including declining home prices and "the prevalence of high-risk mortgage products" such as stated-income loans and those with combined loan-to-value ratios of 100%. "In the absence of effective underwriting, products such as 'no-money-down' and 'stated-income' mortgages appear to have become vehicles for misrepresentation or fraud by participants throughout the origination process," said Fitch managing director Diane Pendley. "During the rapidly rising home price environment of the past few years, the ability of the borrower to refinance or quickly resell the property prior to the loan defaulting masked the true risk of these products and the presence of misrepresentation and fraud." The rating agency can be found online at http://www.fitchratings.com.

House prices declined by 0.36% in the third quarter, but still managed to post a gain of 1.8% from the level recorded a year ago, according to a housing price index published by the Office of Federal Housing Enterprise Oversight.The quarterly decline is the first in 13 years, and the OFHEO report shows that 21 states experienced price declines in the third quarter. Seventeen of the 20 cities having the most depreciation are in Florida and California, and the other three are in Michigan. Thirteen cities in California had price declines of 5% or more. "Rising inventories of for-sale properties are clearly having material impact on home prices," said Patrick Lawler, OFHEO's chief economist. "Until those inventories shrink, that will be a great source of resistance to prices increases."

CBC Cos., a provider of credit and risk management solutions based in Columbus, Ohio, has merged with DataVerify, a provider of mortgage risk assessment and fraud prevention systems based in Chesterfield, Mo.CBC said it will leverage DataVerify's fraud and data integrity analytics, rules, and scoring to help solve mortgage risk problems faced by financial markets and institutions. DataVerify's solutions automate most of the data validation steps in the lending process. According to CBC, the resulting benefits to DataVerify and CBC customers include: increased loan production and revenues; mitigation of financial and reputational risks; conformity with regulations; and lower operational costs. The companies can be found on the Web at http://www.cbcinnovis.com and http://www.dataverify.com.

Single-family mortgage loan originations by commercial banks and savings banks plummeted 50% in the third quarter, while thrift originations fell by only 5%.The Federal Deposit Insurance Corp. reported that 699 banks and savings banks originated 170.4 billion in one- to four-family loans in the third quarter, down from $345.9 billion in the second quarter. The Office of Thrift Supervision recently reported that thrifts originated $165.1 billion in one- to four-family mortgages in the third quarter, down 5% from the level recorded in the second quarter. Meanwhile, banks and thrifts maintained a high level of loan sales in to the secondary market. However, these FDIC-insured institutions reported a net loss of $139 million on loan sales in the third quarter -- the first quarterly loss since the FDIC started collecting the data seven years ago -- after reporting a $2 billion gain in the second quarter. FDIC-insured institutions increased their loan loss provisions in the third quarter as chargeoffs on residential mortgages rose to $676 million from $442 million in the second quarter. The chargeoff rate for 1-4s was 1.65% in the third quarter. Bank and thrift earnings for the third quarter totaled $28.7 billion, down 22% from those of the second quarter.

The Federal Housing Administration is willing to refinance certain delinquent borrowers with interest-only and payment-option adjustable-rate mortgages under the FHASecure program, which is designed to rescue subprime borrowers.However, the delinquency on an IO or option ARM must be the result of an interest rate reset or the full amortization of the mortgage, according to the Department of Housing and Urban Development. Shortly after HUD launched FHASecure on Sept. 5, lenders began asking whether IO and option ARMs would be eligible. HUD finally provided the answer in a newly revised "FHASecure Frequently Asked Questions" on the FHA website. Mortgage industry consultant Bud Carter pointed out the revision. "FHA will refinance almost any loan, except a conventional fixed-rate mortgage that is delinquent," he said. Mr. Carter is with Potomac Partners in Washington. The FHA can be found online at http://www.fha.gov.

Sen. Charles E. Schumer, D-N.Y., has urged the regulator of the Federal Home Loan Banks to undertake a special review of the loans that Countrywide Bank has pledged to collateralize $51 billion in advances from the FHLBank of Atlanta.The thrift subsidiary of Countrywide Finance Corp. increased its advance borrowings in the third quarter by $28.2 billion -- up nearly 80% from those of the previous quarter. In a letter to the Federal Housing Finance Board, Sen. Schumer urged the regulator to "probe" the underlying risk of Countrywide's collateral, which includes payment-option mortgages. The senator said in a CNBC-TV interview that he has concerns about the Atlanta FHLBank's ability to assess the risk of Countrywide's collateral. "At a time when Countrywide's mortgage portfolio is deteriorating, the Federal Home Loan Bank's exposure to Countrywide poses an unreasonable risk," the Senate Banking Committee member said. A Finance Board spokesman said the agency would "respond to Sen. Schumer," but declined to comment further.

Despite a cumulative 3.65% two-year decline in home prices, the conforming loan limit for mortgages purchased by Fannie Mae and Freddie Mac next year will remain at the 2007 level of $417,000, according to the Office of Federal Housing Enterprise Oversight.Only twice since 1980 has the average price of houses sold between one October and the next fallen, and both times, in 1994 and 1995, Fannie and Freddie elected to keep the ceiling on loans they can buy or guarantee at the then-current level. But in 2004, OFHEO, the safety-and-soundness regulator of the two government-sponsored enterprises, took over responsibility for adjusting the limit. And in October, the agency offered a revised proposal for calculating and implementing decreases as well as increases, and said the limit would not be lowered for 2008, regardless of pricing data, to avoid disruption in the mortgage market and "assure an orderly and transparent process for any downward adjustment." OFHEO is reviewing comments on its proposal. According to the monthly price survey by the Federal Housing Finance Board, the average price in October was $10,685, or 3.49%, lower than in October 2006. Between October 2005 and October 2006, the average dipped $501, or 0.16%, for a combined decline of 3.65%. Under OFHEO's proposal, if prices next year decline or rise by less than 0.65%, the limit for 2009 would decline by 3.65%, to $401,780.

The title insurance industry will not show significant improvement until 2009 at the earliest, a report from Fitch Ratings, New York, said."Fortunately, industry participants took advantage of prosperous years between 2002 and 2005 to strengthen balance sheets and should weather the current down cycle," the rating agency said in its "Review and Outlook 2007-2008: Title Insurance Industry." Fitch noted that for the six publicly traded title insurance underwriters, the average combined ratio worsened by 350 basis points to 101.8% at the end of the third quarter. The report claims "the real story" behind the problems with title insurers is the decline in operating margins, from 6.6% in 2006 to 2.3% this year. Where the subprime crisis affects the title insurance business is in fraud situations, where a default is more likely to result in a claim against a title insurer, Fitch said. Because title insurer resources were stretched thin during the refinance boom, the likelihood that thorough underwriting procedures for policies were not followed increased, it noted.

Despite congressional opposition, the Department of Housing and Urban Development is expected to move ahead with a risk-based premium structure but give Federal Housing Administration lenders more time to adjust to the changes, sources told MortgageWire.House and Senate lawmakers are urging HUD to postpone implementation at least until Congress passes an FHA reform bill. The Senate bill contains a 12-month moratorium on FHA adopting a RBP structure. Currently, FHA charges a 150 basis point upfront premium and a 50 bp annual premium for most borrowers. With RBP, FHA officials say they could increase the upfront premium to 2.25% for the riskiest borrowers with low credit scores and low downpayments and help an estimated 20,000 subprime borrowers refinance into new FHA-insured mortgages in fiscal year 2008. In moving ahead with a RBP structure, sources expect HUD will postpone the Jan. 2 implementation date -- possibly for three months. HUD officials could not be reached for comment.

Despite a broad decline in sales, the median price of existing single-family homes has fallen only 2% over the past four quarters, according to a National Association of Realtors quarterly survey of 150 metropolitan statistical areas.The national median house value was $220,800 in the third quarter, compared to $225,300 in the third quarter of 2006. The report shows that house prices rose in 93 MSAs and fell in 54 MSAs. Regionally, prices of previously owned homes rose 3.2% in the Northeast and 0.5% in Midwest, but fell 3.6% in the South and 3.8% in the West. Total existing home sales, including single-family, condominiums and co-ops, were off by 13.7% compared to the third quarter of 2006. In the West, sales were off by 21.5%. "The housing market correction is clearly focused on transaction volume and not in home prices," NAR chief economist Lawrence Yun said.