Compliance & Regulation

Mayer Brown, a global law firm based in Chicago, has announced the formation of a Subprime Lending Response Team to help clients deal with issues related to the nosedive in the subprime mortgage market.Noting that the subprime mortgage swoon is "reverberating worldwide," with rising regulatory scrutiny in the United States and Europe, the firm said it has "assembled an interdisciplinary team of lawyers from our offices in the U.S., the U.K., and Germany whose practices include securitization, banking, real estate, securities, and litigation." Mayer Brown touted its expertise in the international securitization and collateralized debt obligation markets, financial services regulation, and financial restructuring and bankruptcy. "The Subprime Lending Response Team will enhance the firm's recognized position as the leading legal adviser in these markets by also offering dispute management and regulatory services to clients facing the increased risks of litigation and regulatory inquiry," the firm declared. The law firm can be found online at http://www.mayerbrown.com.

Congress is considering legislation to raise the loan limits for Fannie Mae, Freddie Mac, and the Federal Housing Administration, which could give the government-sponsored enterprises and the FHA a large share of the jumbo mortgage market, according to banking expert Karen Shaw Petrou."Atop this is talk from Treasury that the GSEs could also go beyond their current charter to rely on self-insurance for high-risk mortgages," she told a group of general counsels from large banks. Treasury Secretary Henry Paulson recently suggested that the mortgage insurance requirements on Fannie Mae and Freddie Mac could be relaxed to facilitate refinancings of subprime borrowers with little or no equity in their homes. "I think lenders and securitizers are looking at legislation that would put the federal government -- directly through the FHA and indirectly through the GSEs -- into every segment of the mortgage market from the highest-risk subprime loans to jumbo, prime-quality loans," she said. Ms. Petrou is the managing partner of Federal Financial Analytics in Washington.

National banks should have high standards for underwriting residential mortgages even if they are selling the loans to Wall Street conduits or other investors, according to the comptroller of the currency.National banks "simply cannot cede underwriting standards" to third-party purchasers of mortgages, Comptroller John Dugan told the American Bankers Association at its annual convention in San Diego. He warned that examiners expect banks to adhere to regulatory guidance in making subprime and nontraditional mortgages, including loans originated for sale. There can be some deviation, "but only so long as the risk differences are manageable" and there is a "credible prospect of repayment," Mr. Dugan said. The comptroller noted that national banks avoided significant losses on subprime loans because they sold their weaker credits in the secondary market. But he stressed that banks are not "primarily responsible for the worst abuses and losses arising from subprime credit." The ABA can be found on the Web at http://www.aba.com.

Servicers of private-label mortgage-backed securities are concerned that some investors are preparing to sue them for approving loan modifications, according to the Consumer Mortgage Coalition."We are aware of securities holders that have begun scrutinizing the actions of servicers and the ways the servicers' actions have allegedly improperly hurt the interests of the securities holders by insufficient adherence to the [servicing contract's] restrictions on modifications and related actions," CMC says in a letter to Sheila Bair, chairman of the Federal Deposit Insurance Corp. The FDIC chief recently said she is "frustrated" with the slow pace of modifications to help subprime borrowers avoid foreclosure. The CMC letter also points out that "global" remedies, such as forgoing interest rate increases on 2/28s and 3/27s, would violate servicing contracts. "We believe that the 'loan by loan' methods we use are appropriate and allow all the stakeholders -- the borrower, the investor and the servicer -- to reach the correct outcome…," CMC executive director Anne Canfield says in the Oct. 6 letter.

The House has passed a tax relief bill by a 386-27 vote that removes a tax penalty on homeowners when the principal amount of their mortgage is reduced due to loan modifications, short sales, or deeds in lieu.Up to $2 million in debt reduction could be taken by a homeowner facing foreclosures without a tax penalty under the Mortgage Forgiveness Debt Relief bill (H.R. 3648). The bill would also extend for seven years a tax deduction on mortgage insurance premiums. "The Administration supports House passage of H.R. 3648, which advances the President's proposal to help financially troubled homeowners by shielding mortgage write-offs from taxation," the White House Office of Management and Budget said in a Statement of Administration Policy. However, the Bush administration "strongly believes" the relief should be temporary. The SAP also says the administration does not believe it is "necessary" to change the capital gains rules for second homes to offset the costs of the debt forgiveness provisions. An effort to strip the capital gains provision from the bill failed on a 201-212 vote. The Senate has not taken any action on a mortgage debt forgiveness bill.

Miami Valley Bank was cited by federal regulators for purchasing poor-quality subprime mortgages before they closed the Lakeview, Ohio, bank Oct. 4 and placed it in receivership.The bank had $86.7 million in total assets when it failed, including nearly $30 million in subprime mortgages, according to the Federal Deposit Insurance Corp. In April, the FDIC ordered the bank to reverse a purchase of $7 million in mortgages from affiliate MVB Mortgage Corp., Southfield, Mich. The temporary cease-and-desist order said the bank's mortgage activities were "likely to cause insolvency or significant dissipation of assets or earnings." The FDIC also fined a former owner of the bank. The Citizens Banking Co., based in Sandusky, Ohio, paid a 2% premium for the $62 million in insured deposits. The failed bank had $14 million in uninsured deposits, and the depositors will become creditors of the receivership. The FDIC has retained all the assets of failed bank.

State attorneys general and bank commissioners have initiated an effort to monitor the top 20 subprime mortgage servicers to ensure that borrowers get the loan modifications they need."We feel this is a serious effort to avert a foreclosure avalanche that we potentially face," Iowa AG Tom Miller told MortgageWire. A working group of 11 AGs and three bank commissioners recently met with the top 10 subprime servicers in Chicago to discuss loan modifications. The working group expects the servicers to provide regular reports on their loss mitigation efforts. The state officials also expect to have contact with the servicers on a weekly or even daily basis.

By a 5-4 vote, a House Judiciary subcommittee has approved a controversial bankruptcy bill that would allow distressed homeowners to file for bankruptcy and get their mortgages restructured.During the mark-up of the bill, Rep. Chris Cannon, R-Utah, agreed to withdraw a key amendment that would cap the amount of principal that could be reduced in bankruptcy at 10% of the fair value of the property after Rep. Mel Watt, D-N.C., pledged to work with the congressman to perfect the language. Rep. Watt signaled that he is "sympathetic" to the intent of the amendment but is concerned that it might create a long, drawn-out process for determining the value of the property. Democrats are planning to mark up the bankruptcy bill (H.R. 3609) soon in the full Judiciary Committee and move it quickly through the House, despite opposition from the financial services industry. Sen. Richard Durbin, D-Ill., has introduced a similar bankruptcy bill in the Senate.

Department of Housing and Urban Development officials are finding that non-FHA-approved mortgage brokers are charging "exorbitant" fees on Federal Housing Administration loans in possible violation of HUD rules."We are seeing exorbitant fees," HUD officer Mark Ross told a Mortgage Bankers Association conference, adding that HUD officials are reviewing the matter. Mr. Ross also reported that some FHA direct-endorsement lenders are soliciting nonapproved broker business with misleading advertisements implying that the broker can take the application or close the loan. "That is not allowed," he said. In addition, HUD has seen a "flurry" of applications for direct lending branches that are supposed to be used as call centers or Internet portals to solicit and take mortgage applications directly from borrowers. But some FHA direct-endorsement lenders are using the direct lending branches to solicit loans from nonapproved brokers throughout country. "That wasn't the intent," Mr. Ross said.

The Federal Deposit Insurance Corp. is beginning to field inquiries from potential buyers looking at Market Street Mortgage, Clearwater, Fla., a subsidiary of the failed NetBank Inc. of Atlanta.In the spring, Market Street Mortgage was actually looking at buying other lenders, investment banking sources said. But in the summer, when it appeared that its bank parent would fail, the company began searching for new owners. According to the Mortgage Industry Directory, a SourceMedia publication, MSM funded $3.1 billion last year, ranking 96th nationwide. At deadline time, an FDIC spokesman had not returned a telephone call regarding MSM. One adviser said, "I think the company will be sold in chunks." The lender does not own a servicing portfolio. Market Street can be found online at http://www.marketstreetmortgage.com.