Compliance & Regulation

The House has passed a bill that would extend the National Flood Insurance Program for five years and give the policyholders the option of getting coverage for wind damage for the first time."Passage of this legislation will ensure that in future disasters, homeowners won't have to hire lawyers, engineers, and public adjusters to prove what damage was caused by wind and what was caused by flooding," said Rep. Gene Taylor, D-La. The House passed the bill by a 263-146 vote. But the Bush administration has threatened a veto because of the wind coverage. The Flood Insurance Reform bill (H.R. 3121) would phase out subsidized rates for commercial properties, vacation homes, and second homes built before 1974. It would also increase fines on lenders that do not enforce mandatory flood insurance policy purchase requirements. The Senate Banking Committee is slated to hold a hearing on flood insurance reform on Oct. 2.

Democrats on the House Financial Services Committee have drafted a predatory-lending bill that would sweep more loans into the "high-cost" category and make it very difficult for lenders to provide traditional subprime loans to borrowers facing "life events" such as bankruptcy, job loss, or foreclosure.The draft bill would lower the points-and-fees trigger of the Home Ownership and Equity Protection Act to 5% and include yield-spread premiums in the calculation. It also appears that financing points and fees would be prohibited. If so, it would make it impossible for lenders to help most borrowers facing significant problems, according to attorney Wright Andrews. "Hopefully, this is an issue the committee will address and allow such loans to continue to be made, subject to appropriate safeguards," he said. Mr. Andrews is with the law firm of Butera & Andrews.

The House Ways and Means Committee has passed a bill that removes tax penalties for homeowners involved in a mortgage restructuring or foreclosure and extends for seven years a deduction for mortgage insurance premiums."Families dealing with the pain of foreclosure should not have the double-whammy of a large tax bill for terminating their mortgage through no fault of their own," said Rep. Charles B. Rangel, D-N.Y., the committee chairman. The Bush administration proposed temporary relief from paying taxes on the forgiveness of debt, but the provision in the committee bill (H.R. 3648) is a permanent exclusion. So far, its does not appear that the White House will oppose the bill. Families with incomes of $100,000 or less who refinanced or purchased a home in 2007 can deduct the cost of their mortgage insurance premium. But this deduction is due to expire at the end of the year. By going with a seven-year extension, the House tax writers signaled that it is not appropriate to extend the MI deduction one year at a time, like many other provisions in the tax code.

Members of the Federal Home Loan Bank of Chicago could see their dividends reduced and stock redemptions delayed or denied under a cease-and-desist order being considered by the Federal Housing Finance Board, the Chicago bank has disclosed in a securities filing.The Chicago bank said it received a draft of the C&D order on Sept. 24 and is in discussions with the Finance Board. The Chicago bank paid a 2.8% dividend in the second quarter. In a letter to members, Chicago FHLBank president Mike Thomas said the C&D order would not affect any services or products. Mr. Thomas also said the "possibility of a merger with the Dallas FHLBank continues," but that an agreement has not been reached.

Mortgage lenders and servicers are not restructuring loans for troubled homeowners, according to the Center for Responsible Lending and a bankruptcy judge, who urged Congress to amend the bankruptcy code to prevent unnecessary foreclosures.Marilyn Morgan, a bankruptcy judge in Northern California, said she sees too many foreclosures and has not heard of a "single meaningful workout with a home lender." CRL executive Eric Stein told a House Judiciary panel that servicers fear being sued by investors if they restructure mortgages. Amending the bankruptcy code to allow restructurings by judges would "remove the fear" so that servicers can voluntarily modify loans. Steve Bartlett, president of the Financial Services Roundtable, testified that the industry has adopted principles that encourage loan modifications, and "we should expect more and more homeowners with subprime mortgages to get needed relief."

The long-term issuer default ratings of R&G Mortgage, San Juan, Puerto Rico, and its parent company, R&G Financial Corp., have been downgraded from CCC to BB-minus by Fitch Ratings and placed on Rating Watch Negative.In addition, the long-term IDR of R-G Premier Bank has been downgraded from BB-minus to B and placed on Rating Watch Negative. Fitch pointed to R&G's recent news release "detailing uncertainties regarding relationships with certain government agencies and [government-sponsored enterprises], along with uncertainties related to the near-term renewal of two credit facilities." Moreover, the company "indicated the need to take mortgage impairment charges and provisions for construction loans" in the third quarter, Fitch said. In addition, audited financial statements have still not been released, and "financial metrics" presented in regulatory filings for the first half "compare unfavorably" to those of other financial institutions in the BB rating range, Fitch said.

Freddie Mac added more than $12 billion in mortgage assets to its investment portfolio in August, while its issuance of guaranteed mortgage-backed securities fell slightly to the lowest level since December.At the end of August, Freddie's retained portfolio totaled $732.2 billion. Freddie's regulator recently raised its portfolio cap to $735.0 billion and $742.4 billion for the third and fourth quarters, respectively. The Office of Federal Housing Enterprise Oversight raised the cap, allowing Freddie greater flexibility in helping troubled subprime borrowers refinance their loans. Freddie's monthly activity report showed very little sales activity in its investment portfolio, which included $374.6 billion in Freddie-guaranteed MBS and $239.0 billion in private-label MBS. Portfolio liquidations are running at $12 billion to $15 billion a month. The secondary-market agency also reported the issuance of $35.3 billion in guaranteed MBS and structured securities in August, down slightly from $35.5 billion in July. Freddie Mac can be found online at http://www.freddiemac.com.

Members of the House Financial Services and Judiciary committees have fashioned a narrowly tailored bill to allow bankruptcy judges to modify "predatory" mortgages, but congressional "experts" think it has virtually no chance of passing.Rep. Brad Miller, D-N.C., told a Mortgage Bankers Association conference that the bankruptcy bill (H.R. 3609) is drafted to help troubled subprime borrowers with adjustable-rate 2/28 loans. It would allow bankruptcy judges to waive prepayment penalties and spread the principal payments over 30 years. The interest rate could be set a "couple of points" above that of the prime mortgage to recognize that the borrower is riskier than a prime borrower. The congressman noted that Sen. Arlen Specter, R-Pa., might support a similar bill on the Senate side, as opposed to a broader bill that Sen. Richard Durbin, D-Ill., is drafting to repeal other parts of the 2005 bankruptcy bill, which took 10 years to pass. MBA senior vice president Steve O'Connor told the mortgage bankers that bankruptcy experts think the chances of congressional passage of H.R. 3609 are "close to zero."

Reps. Brad Miller, D-Calif., and Linda Sanchez, D-Calif., have introduced a bill to repeal the home mortgage exception in the bankruptcy code so homeowners filing for Chapter 13 relief can get their mortgages restructured.Mortgage industry groups are concerned that the Emergency Home Ownership and Mortgage Equity Protection Act would allow bankruptcy judges to reduce interest rates and the principal amount of a mortgage, which could scare mortgage investors and damage the secondary market. Consumer groups are pushing for the bill along with some hedge funds that are betting on a decline in the value of certain mortgage securities, according to one mortgage executive who did not want to be identified. Rep. Sanchez, who chairs a House Judiciary subcommittee, is holding a hearing Sept. 25 on how to help homeowners in financial distress. The Center for Responsible Lending, the Association of Consumer Bankruptcy Attorneys, and other groups are expected to testify. The sponsors of the bill (H.R. 3608) are also talking with Democratic leaders to see how they can expedite passage of the Emergency HOME Act, one staffer said.

The government's two top economic guns believe it is only a matter of months before the jumbo mortgage market recovers and begins operating normally again.Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Henry Paulson told a congressional panel that the jumbo market is under stress but will be functioning normally again in a few months. "The jumbo mortgage market traditionally has been a very profitable part of the mortgage market, with low default rates," Secretary Paulson said. "For that reason, it seems logical that this market will right itself in the weeks and months ahead." Both agreed that allowing Freddie Mac and Fannie Mae to enter the jumbo market temporarily would provide needed liquidity. Freddie chairman and chief executive Richard Syron testified that the difference between the rates on jumbo and conforming mortgages is 92 basis points, and "far exceeds any spike in the past 20 years." Allowing Freddie and Fannie to enter the jumbo market even temporarily "might prevent declines in home prices that could lead to additional defaults," Mr. Syron said. But the Fed and Treasury chiefs contend that Congress needs to pass comprehensive government-sponsored enterprise reforms before the GSE conforming loan limit should be lifted.