Compliance & Regulation

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has revealed that he is working on a comprehensive predatory-lending bill that would prohibit lenders from steering borrowers into subprime loans and impose a fiduciary duty on mortgage brokers.The bill also holds lenders who pay brokers a yield-spread premium responsible for the brokers' actions. "Predatory lending needs to be stopped, which is why I intend to introduce legislation that will put an end to the practices that have forced thousands of Americans into foreclosure," said Sen. Dodd, who is seeking the Democratic presidential nomination. The Dodd bill would include YSPs in the points-and-fees test for determining whether a loan is a "high-cost loan" under the Home Ownership and Equity Protection Act. It would also prohibit prepayment penalties on subprime loans and require escrow accounts. The senator's bill also addresses servicing abuses.

Treasury Under Secretary Robert Steel has cautioned a congressional panel that volatility in the credit and mortgage markets is "far from over," but said he expects economic growth to continue despite weakness in the housing sector.The under secretary also told the House Financial Services Committee that the president's Working Group on Financial Markets will be examining recent market events, including the impact of securitization and the role of the rating agencies in the credit and mortgage markets. "The Treasury Department will be releasing early next year a blueprint of structural reforms to make financial services industry regulation more effective, taking into account consumer and investor protections and the need to maintain U.S. capital market competitiveness," Mr. Steel said.

The Department of Veterans Affairs has quietly promoted Keith Pedigo and appointed his former deputy Judy Caden to be the new director of the VA home loan program.Mr. Pedigo served as director of the VA Loan Guarantee Service for 20 years, and he said in an interview that he appreciated the industry's support for his efforts to improve the VA loan program. In his new position as associate deputy under secretary for policy and program management, Mr. Pedigo is responsible for coordinating the activities of VA benefit programs, including the home loan program. Ms. Caden was deputy director of the home loan program until she left in 2000 to be the director of education benefits and later the director of vocational rehabilitation and employment services. "When the opportunity to return to loan guarantee came up, I grabbed it," she said.

Federal and state regulators are urging mortgage servicers to be "proactive" and assist homeowners who are facing a jump in their monthly payments due to an approaching reset of their adjustable-rate mortgage.Servicers should assess the full extent of their authority under pooling and servicing contracts to see if they have the flexibility to contact borrowers in advance of loan resets, according to a joint Statement of Loss Mitigation Strategies for Servicers issued by the regulators. "With declines in housing prices in some areas and tighter credit for subprime loans, it is vital that mortgage servicers work proactively with borrowers facing much higher payments as their interest rates reset," FDIC Chairman Sheila Bair said. "Our work with leading accountants, attorneys, trade groups and market participants has confirmed that servicers of securitized mortgages have the authority under the accounting and tax rules, as well as securitization documents, to proactively help deserving borrowers."

To augment its recently announced FHASecure program, the Department of Housing and Urban Development plans to take administrative action to implement a risked-based pricing system by Jan. 1 so the Federal Housing Administration can price its mortgage insurance premiums based on a borrower's risk profile, according to a senior HUD official.With risk-based pricing, the FHA would be able to help an additional 20,000 subprime borrowers refinance into new FHA-insured mortgages in fiscal year 2008 and help finance 120,000 new homebuyers who have fewer options due to the contraction in subprime lending, the official told reporters. The Bush administration still wants Congress to pass an FHA reform bill that would give the agency even more flexibility in setting premiums and downpayment requirements. HUD estimates that the FHA will refinance 101,000 subprime borrowers into FHA loans by the end of this fiscal year (Sept. 30) and the agency would probably refi another 160,000 subprime borrowers in fiscal 2008 without any changes to its program. With the FHASecure program (which allows the FHA to refinance delinquent borrowers and risk-based pricing), HUD expects that the FHA can help another 80,000 troubled borrowers avoid foreclosures. But it could do even more if Congress passes FHA reform. HUD officials also revealed that they plan to issue a Real Estate Settlement Procedures Act proposal in January aimed at improving disclosures of mortgage broker fees and settlement costs.

The Federal Reserve Board is concerned that problems in the subprime and jumbo mortgage markets could lead to further weakening in the housing sector and consumer spending."Obviously, if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy," Fed chairman Ben Bernanke told an economic symposium in Jackson Hole, Wyo. "We are following these developments closely." The Fed chairman noted that mortgage-backed securities investors are demanding stronger protections and better incentives for originators to underwrite prudently. "In recent months we have seen a reassessment of the problems of maintaining adequate monitoring and incentives in the lending process, with investors insisting on tighter underwriting standards and some large lenders pulling back from the use of brokers and other agents," Mr. Bernanke said. The Fed can be found online at http://www.federalreserve.gov.

President Bush has announced that the Federal Housing Administration will roll out a new program in a few days that will provide certain subprime borrowers facing default with a refinancing option.The "FHASecure" program will help many families who are struggling to refinance into FHA-insured mortgages and keep their homes, the president said. The program is designed to refinance creditworthy borrowers who have been current on their monthly payments up to the time of the reset of their subprime adjustable-rate mortgage. It is understood that borrowers would be able to roll up to six missed payments into their new FHA loan, but they can’t go above a 97.75% loan-to-value ratio (based on a new appraisal). For the program to have a real impact, investors or lenders will have to write down the amount of the existing mortgage so the borrower meets the FHA LTV requirement. Or else someone will have to put up a "cash transfusion to cover the shortfall," said consultant Brian Chappelle of Potomac Partners in Washington. President Bush stressed that the new FHA program is not a "bailout" for lenders, and he called on lenders to work with homeowners to modify or restructure their mortgages. "I believe lenders have a responsibility to help these good people," the president said.

The Federal Housing Administration might be a better agency for helping subprime borrowers than the government-sponsored enterprises Fannie Mae and Freddie Mac, according to Federal Reserve Board Chairman Ben Bernanke."Congress might wish to consider FHA reforms that allow the agency more flexibility to design new products and to collaborate with the private sector in facilitating the refinancing of creditworthy subprime borrowers facing large resets," Mr. Bernanke says in a letter to Sen. Charles E. Schumer, D-N.Y. The Fed chairman noted that the GSEs' current programs can only help a relatively small share of subprime borrowers. "The GSEs should be encouraged to provide products for subprime borrowers to the extent permitted by their charters," he says. Mr. Bernanke also says the GSEs should be encouraged to "increase their mortgage securitization efforts, which are not constrained by their portfolio caps."

Ginnie Mae has announced that it will begin securitizing Department of Veterans Affairs guaranteed jumbo loans with balances above the $417,000 conforming loan limit starting Sept. 1.Currently, VA loans going into Ginnie Mae mortgage-backed securities cannot exceed the conforming loan limit. "We expect this change will expand the availability of low-cost financing and increase homeownership opportunities for America's veterans, particularly in high-cost areas, by encouraging lenders to make more VA loans," Ginnie executive vice president Michael Frenz said. Approximately 30% of the loans that back Ginnie MBS are VA-guaranteed loans. Ginnie Mae, a government-owned corporation within the Department of Housing and Urban Development, can be found online at http://www.ginniemae.gov.

Sen. Charles E. Schumer, D-N.Y., is calling on Countrywide Financial Corp. to stop steering customers into high-cost mortgages and to help its troubled subprime borrowers by waiving prepayment penalties and refinancing them into more affordable loans."I am calling on Countrywide -- as the nation's largest lender --- to bury its bad business practices and reverse some of the damage it has already inflicted on our housing market," the Senate Banking Committee member said. The New York senator referred to abusive lending practices reported in a New York Times article, which Countrywide says "contained numerous inaccuracies and 'facts' taken out of context." The Calabasas, Calif.-based lender said its business processes prohibit steering and that it does not pay its loan officers higher commissions for making subprime loans with prepayment penalties. The Office of Thrift Supervision has initiated a review of Countrywide's lending and servicing practices based on complaints by Countrywide borrowers that the Neighborhood Assistance Corporation of America brought to the regulator's attention. Countrywide can be found online at http://www.countrywide.com.