Compliance & Regulation

The Federal Home Loan Bank of Des Moines has received regulatory approval to accept one- to four-family construction loans as collateral for advances at a time when many members have stepped up their borrowings from the bank.For many community banks, "construction loans are an important part of their lending portfolio," said Richard Swanson, president and chief executive of the Iowa-based FHLBank. Expanding the list of eligible collateral will help to "maximize their borrowing capabilities," he said. In August, members of the Des Moines bank borrowed $2 billion in advances. During the first six months of 2007, the Des Moines bank's advance business grew by only $700 million. Mr. Swanson noted that several other FHLBanks take construction loans as collateral, and his members expressed an interest. So an application was filed with the Federal Housing Finance Board six months ago. "We have determined that the proposed activity has sufficient controls that minimize the risk to the Bank," the approval letter says.

The Federal Trade Commission has stepped up its surveillance of deceptive mortgage advertising, and it has warned 200 mortgage brokers, lenders, and media outlets to be careful about touting low interest rates without adequate disclosures."Many mortgage advertisers are making potentially deceptive claims about incredibly low rates and payments without telling consumers the whole story -- for example, that these low rates and payments apply for a short period only and can go up substantially after the loan's introductory period," said Lydia Parnes, the FTC's consumer protection director. In June, the FTC conducted a nationwide review of mortgage advertisements that might be deceptive or violate the Truth in Lending Act. Many advertisements touted rates as low as 1% but failed to adequately disclose the actual interest rate on the mortgage or the annual percentage rate, the FTC said.

The Federal Housing Administration would be able to insure $700,000 single-family mortgages in high-cost areas under an amendment the chairman of the House Financial Services Committee wants to attach to an FHA reform bill the House is expected to vote on soon.The FHA reform bill (H.R. 1852) already raises the FHA loan limit in high-cost areas from $362,790 to the $417,000 conforming loan limit, which is the upper limit on the loans Fannie Mae and Freddie Mac can purchase. But the House Financial Services Committee chairman, Rep. Barney Frank, D-Mass., and Reps. Gary Miller, R-Calif., and Dennis Cardoza, D-Calif., have filed an amendment with the House Rules Committee to raise the maximum FHA loan limit to 175% of the conforming loan limit, or $729,750, to address problems in the jumbo loan market. "The amendment modifies FHA loan limits to permit loans up to the lower of (a) 125% of the local media home price, or (b) 175% of the 2007 GSE national conforming loan limit [indexed in subsequent years] -- with additional HUD authority to raise limits by area or unit size by up to $100,000 if market conditions warrant," according to a summary of the Frank-Miller-Cardoza amendment.

Federal Reserve officials are becoming more concerned that the turmoil in the credit and mortgage markets will prolong the downturn in the housing sector and lead to a pullback in consumer and business spending.Frederic Mishkin, a Fed governor, said in a speech to the Money Marketeers of New York that even creditworthy borrowers are finding it more difficult to qualify for a mortgage or are paying more for the loan. "At this point, housing demand seems likely to be crimped further by a marked reduction in the availability of mortgages, and consumer and business spending also could be damped as a consequence of the recent financial turmoil," the Fed governor said. Janet Yellen, president of the San Francisco Federal Reserve Bank, also warned in a speech that the financial market turmoil "seems likely to intensify the downturn in housing." She also opined that mortgage interest rates are likely to remain relatively high for some time and that "this could prolong the adjustment in the housing sector."

Sen. Charles E. Schumer, D-N.Y., has introduced a bill that would temporarily raise the caps on Fannie Mae's and Freddie Mac's portfolios as Democrats in Congress are becoming increasingly frustrated with federal regulators who insist on maintaining the caps at a time when the secondary market for many mortgage products has dried up.In a letter to the Federal Reserve Board, House Financial Services Committee Chairman Barney Frank, D-Mass., says it doesn't make sense to expect the two government-sponsored enterprises to help with the refinancing of subprime borrowers unless they have room in their portfolios to buy the loans. Forcing the GSEs to sell their best mortgage-backed securities and buy riskier assets will diminish the quality of their portfolios and raise safety-and-soundness concerns, Rep. Frank says in a letter to Fed Chairman Ben Bernanke. Separately, Office of Federal Housing Enterprise Oversight Director James Lockhart says the portfolio caps are not hindering the GSEs from helping subprime borrowers. "Most new refinance loans of such borrowers can be securitized," Mr. Lockhart says in a letter to Sen. Schumer. The New York senator's bill would raise the portfolio cap by 10% so the GSEs could purchase $145 billion in new mortgages and increase the GSE conforming loan limit from $417,000 to $625,000 in high-cost areas.

Like banks and thrifts, Fannie Mae and Freddie Mac are now bound by federal underwriting guidelines when they purchase subprime mortgages and private-label securitizations backed by subprime loans, according to the Office of Federal Housing Enterprise Oversight.OFHEO Director James Lockhart said the two government-sponsored enterprises have completed their implementation of the subprime guidance that federal banking regulators issued on June 29. The guidance requires lenders to qualify borrowers at the fully indexed rate and restricts stated-income loans and risk-layering features. Meanwhile, Treasury Under Secretary Robert Steel told a congressional panel last week that he is urging the two GSEs to develop loan products that can help refinance troubled subprime borrowers. He cited studies indicating that a large number of borrowers ended up in subprime loans when they could have qualified for a prime mortgage. "In those cases, the GSEs could help," Mr. Steel told the House Financial Services Committee. A Fannie Mae spokesman said, "Conversations are occurring. So we will see where they go."

The tightening in lending standards on residential mortgages has had a "noticeable" impact on home sales and construction activity in August, according to the Federal Reserve Board's Beige Book.Several Federal Reserve district banks "noted that the reduction in credit availability added to uncertainty about when the housing market might turn around," the Beige Book says. The Boston Federal Reserve Bank reported increases in sales and house prices in Massachusetts. But most district banks reported declining home sales and declining or stable prices along with "high" inventories of unsold homes. Commercial real estate activity was "generally stable or expanding," the Beige Book says. However, several Federal Reserve Banks reported tighter credit conditions on CRE loans.

Citing temporary rule changes by the Federal Housing Administration in response to the subprime mortgage crisis, Refinance.com has announced the creation of an online resource for borrowers seeking to refinance with an FHA loan.The company, a mortgage bank headquartered in New York, said assistance would be available online, or by phone at 1-888-FHA-1776. "A bad mortgage does not automatically make a bad borrower," said Nicholas Bratsafolis, chairman of Refinance.com. "It is unreasonable and unfair to blame the current subprime mortgage crisis solely on the borrowers. Good people may have been enticed into bad loans, and that appears to be the case quite often regarding the subprime market." The company can be found online at http://www.refinance.com, and the hotline can be found at http://www.fhahotline.com.

The Federal Housing Administration on Wednesday released details of a new program called "FHASecure" that could help delinquent borrowers struggling with higher loan payments because of "resets" on their adjustable-rate mortgages.Mortgagee letter 2007-11 notes that the agency will only insure ARMs if the consumer was current on the payments prior to the rate reset. However, it will insure loan amounts that include the missed payments, provided there is enough equity in the home. Depending on the closing costs, the FHA said it will insure loans with loan-to-value ratios as high as 98.75%.

The Bush administration is pressuring the Department of Housing and Urban Development to speed up the issuance of a Real Estate Settlement Procedures Act proposal to improve good-faith estimate disclosures of mortgage broker fees and settlement costs.HUD officials were planning to issue the proposal in January after completing the required Office of Management and Budget review, which can take up to 90 days. But Treasury Under Secretary Robert Steel testified Wednesday on Capitol Hill that HUD will issue the RESPA proposal "later this fall." It appears that the administration wants HUD to send the proposal to the OMB by Oct. 1, according to one source. Meanwhile, HUD has published the results of the consumer testing conducted on a revamped GFE form the department was working on back in 2003 and 2004. "[T]he new GFE to be proposed will reflect improvements to the prior form," HUD said.