Compliance & Regulation

The banking industry's increased exposure to mortgage-backed securities was a contributing factor to the recent liquidity disruptions in financial markets, according to a special report by A.M. Best Co., Oldwick, N.J.Volatile interest rates and greater MBS exposure may lead to lower asset valuations for banks, A.M. Best said. "Anticipation of this has contributed to recent liquidity disruptions in the financial markets, which have forced the Federal Reserve to reassert its status as lender of last resort to assure stability in the U.S. banking system," the company said. The report cites various factors contributing to the disruptions, including greater exposure to MBS stemming from "an effort to enhance yield, which has also added risk to their balance sheets." Among the other factors is the fact that the banking industry has "taken advantage of additional funding options" in recent years, "relying less on the securities portfolio for liquidity, which has led to a steady decline in highly liquid Treasury holdings," according to A.M. Best. The company can be found online at http://www.ambest.com.

Recent problems in the mortgage markets are going to prolong the slowdown in home sales and building, according to the National Association of Home Builders, which is calling on the Federal Reserve Board to lower interest rates by 50 basis points at its next meeting.Tighter lending standards are making it harder for homebuyers to qualify for financing, according to 62% of homebuilders surveyed by the NAHB, and nearly a third of those builders said the tightening has affected sales. "The housing economy is down, it is hurting, and it doesn't look like it is going to bounce back as quickly as we'd hoped," NAHB chief executive Jerry Howard told reporters during a teleconference. NAHB chief economist David Seiders said he expects the Federal Reserve to cut the federal funds rate twice in 25-bp increments before the end of the year. But Mr. Howard urged the Fed to consider a 50-bp cut at its Sept. 18 meeting. The NAHB can be found online at http://www.nahb.com.

In early August, Federal Reserve officials were on their guard but not quite convinced that problems in the mortgage market could spread and roil other parts of the credit market, according to just-released minutes of the Aug. 7 Federal Open Market Committee meeting."However, a further deterioration in financial conditions could not be ruled out," the minutes say, and it "might require a policy response." Ten days later, the Federal Reserve Board unexpectedly cut the discount rate it charges banks and thrifts for emergency funding by 50 basis points and the FOMC issued a statement saying "it is prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets." The Aug. 7 minutes also reveal that FOMC members were acknowledging that problems in the housing markets had become "deeper and more prolonged" than they had anticipated. "However, participants also observed that mortgage loans remained readily available to most potential borrowers," the minutes say.

The National Credit Union Administration is still tallying hundreds of millions of dollars in losses accrued by two credit unions -- one in Michigan, one in Colorado -- that it took over earlier this year.The loan losses came after thousands of homebuyers walked away from failed real estate developments near Florida's Gulf Coast, thousands of miles from their home offices. According to a report in The Credit Union Journal, the NCUA is now trying to sell the two credit unions: Huron River Area FCU of Ann Arbor, Mich., and Norlarco CU of Fort Collins, Colo., both of which are buried by real estate construction loans in Cape Coral and Lehigh Acres. Norlarco, Colorado's eighth-largest credit union (with almost $400 million in assets), has seen its real estate chargeoffs rise tenfold this year to almost $60 million, with similar mortgage losses accruing at Huron River. The two credit unions were among a handful of lenders that provided mortgages to speculative investors far afield -- in Philadelphia, Miami, and Georgia. The speculators wound up defaulting on the loans when the value of the property plummeted over the past two years, according to several lawsuits filed in the case.

Kroll Factual Data, a Loveland, Colo.-based provider of business information to mortgage lenders and others, has announced an expansion of its risk assessment services with the introduction of FullFacts.The service assesses the risk of misrepresentation by brokers, appraisers, loan officers, closing agents, and other participants in the mortgage loan process. "FullFacts comprehensively identifies loan party collusion, conflict of interest, and non-arm's-length transactions for every participant involved in a mortgage loan" and determines whether any participant is included on exclusionary and compliance lists, said Jeff Gentry, vice president of Kroll Factual Data. "To streamline your workflow, Kroll Factual Data can upload your own internal exclusionary list into the FullFacts participant risk analysis." Kroll Factual Data can be found online at http://www.krollfactualdata.com.

To ensure that mortgage borrowers are treated fairly, Congress should impose a fiduciary duty on loan officers and mortgage brokers, according to a newly formed trade association of mortgage professionals."The National Association of Mortgage Professionals is calling for legislation that would establish a higher level of trust and accountability for mortgage agents who enter into a relationship with borrowers," the NAMP said. The association was launched in March to help clean up the mortgage industry, a spokeswoman said. Getting a mortgage is usually the most significant financial transaction in a person's life, and it should not be treated simply as a "retail transaction," the NAMP said. The group can be found on the Web at http://www.namp.org.

A predatory-lending bill that House Democrats plan to introduce in September will place a lot of emphasis on the borrower's ability to repay the loan as a way to prevent loan flipping and to restore investor confidence in the mortgage-backed securities market."Given the meltdown in the subprime market and the foreclosure rate, we will pay more attention to that [ability to repay] -- not just as a protection for consumers, but as a protection to reassure the market," Rep. Brad Miller, D-N.C., told MortgageWire. He said most of the protections in the bill will apply to all loans. "We want to make sure that lenders are lending to people who can actually pay back the loan according to its terms," he said. Reps. Miller and Mel Watt, D-N.C., will be the lead sponsors of the anti-predatory-lending bill that House Financial Services Committee Chairman Barney Frank, D-Mass, wants to mark up in late September or early October. "We are developing a bill that we fully expect to pass the House and the Senate," Rep. Miller said in an interview.

Fannie Mae issued $56.1 billion in mortgage-backed securities in July, up slightly from the previous month, according to the mortgage giant's monthly report.The secondary market agency has issued over $50 billion in guaranteed MBS over the three previous months and its securitization business grew at a compound annual rate of 15.5% during the month. In July 2006, the company issued $35.7 billion in guaranteed MBS. Meanwhile, Fannie purchased $21.2 billion in assets for its $730 billion mortgage portfolio last month, but it is constrained from being a more aggressive buyer. Fannie's regulator has refused to increase a cap on its $730 billion mortgage portfolio, despite demands from congressional Democratic leaders who believe lifting the cap would provide much needed liquidity for the mortgage markets. In its monthly report, Fannie notes that "option-adjusted spreads have continued to widen" in August.

Freddie Mac's Primary Mortgage Market Survey notes that the 30-year fixed-rate mortgage rate averaged 6.52% with an average 0.4 point for the week ending August 23, 2007, down from last week when it averaged 6.62.Last year at this time, the 30-year FRM averaged 6.48%. The 15-year FRM this week averaged 6.18% with an average 0.5 point, down from last week when it averaged 6.30%. A year ago, the 15-year FRM averaged 6.18%. Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.34% this week, with an average 0.6 point, down from last week when it averaged 6.35%. A year ago, the 5-year ARM averaged 6.14%. One-year Treasury-indexed ARMs averaged 5.60% this week with an average 0.6 point, down from last week when it averaged 5.67%. At this time last year, the 1-year ARM averaged 5.60%. (Average commitment rates should be reported along with average fees and points to reflect the total cost of obtaining the mortgage.)

Fitch Ratings, New York, has revised its mortgage insurer capital model. Some of these changes correspond to changes made by the U.S. Residential Mortgage-Backed Securities Group to its mortgage default and loss model.Fitch is increasing the default probability in its MI capital model by 20%. It will also be applying a 100% capital charge to all illiquid equity investments. The model will also now recognize a greater level of reinsurance credit as a partial offset to the higher level of gross losses. Fitch said this is an interim step in the development of an updated model for U.S. mortgage insurers. Fitch said there is the potential that some of the MIs will not have the level of capital for their current rating. Where any downgrades occur, it is expected to be only on notch. Fitch is reviewing the ratings of any companies affected by the model revisions and expects to provide updates within two weeks.