Compliance & Regulation

Moody's Investors Service, New York, has issued downgrades on 120 securities originated in the second half of 2005 and backed by subprime, first-lien mortgage loans.The actions follow a review of the securities rated in the second half of 2005 and affect securities with an original face value of over $1.5 billion, representing 0.7% of the dollar volume and 4.1% of the securities rated by Moody's in the second-half of 2005 that were backed by subprime, first-lien loans. The actions reflect the higher than anticipated delinquency rates of first-lien subprime mortgage loans securitized in the second half of 2005.

Department of Housing and Urban Development officials are considering a way to help certain subprime borrowers refinance into Federal Housing Administration loans, but they have not made a final decision despite pressure from the Bush administration.FHA Commissioner Brian Montgomery said HUD has to consider the impact the additional risk would have on the FHA mortgage insurance fund. "We have not made a decision. We hope to make one soon," Mr. Montgomery told MortgageWire Wednesday evening. Under the plan, FHA would refinance creditworthy subprime borrowers who have been current on their payments up to the time of the reset on their adjustable rate mortgage. FHA could roll some missed payments into the new loan, but they can't go above a 97.75% loan-to-value ratio. In most cases, lenders are going have to write down the loan amount and take a loss so the borrower can fit into a FHA loan.

Thrift institutions originated $173.3 billion in single-family loans in the second quarter, up 17% from the same period a year ago, and posted strong profits despite an increase in troubled assets.Noncurrent loans and foreclosures stood at 0.95% of total assets as of June 30 -- the highest level since 1997, according to the Office of Thrift Supervision. Single-family loans 90-days or more past due have risen from 76 basis points at the start of the year to 1.16%. OTS officials expect delinquencies to increase but they noted thrifts are increasing their reserves faster than charge-offs are rising. Meanwhile, refinancings comprised 48% of thrift originations as adjustable-rate mortgage holders continued to convert into fixed-rate loans. Thrifts generally like to sell fixed-rate loans and OTS officials noted there is a "chance" they might have problems selling loans due to current problems in the credit markets. However, OTS senior deputy director Scott Polakoff noted that thrift institutions are well capitalized and they originate high quality mortgages. "Our institutions are well positioned to weather this stressed economic time and come out very successful," Mr. Polakoff told reporters.

There is "no quick solution" to the problems in the credit markets, Treasury secretary Henry Paulson said, but he noted that the Bush administration is considering ways to help homeowners who are facing foreclosure."We are really focused on the homeowners who are in danger of losing their homes and thinking about policy options to address that segment of the market," secretary Paulson said during an interview on CNBC-TV. The secretary did not reveal any proposals for homeowner assistance. However, it is known that Department of Housing and Urban Development officials are working on a proposal that would allow delinquent subprime borrowers to refinance into a Federal Housing Administration-insured mortgage. Congress is on track to provide $100 million in additional funding for foreclosure prevention counseling and some senators want to provide funding to bolster state-sponsored foreclosure rescue funds. The Treasury secretary said it will "take a while" to workout all the excesses and bad lending practices of the past few years. But he noted that he is seeing signs of more liquidity in the jumbo nonconforming market.

House Financial Services Committee chairman Barney Frank, D-Mass., has scheduled a Sept. 5 hearing on the crisis in the mortgage and credit markets and the implications for consumers and the economy.Top Treasury Department and Federal Reserve Board officials are scheduled to testify first. Mortgage banking industry and other market participants will testify on a second panel. The committee did not release a witness list in announcing the hearing.

To calm financial markets, the Federal Reserve Board has unexpectedly cut the discount rate it charges banks and thrifts for emergency funding by 50 basis points, to 5.75%, and extended the loan terms to 30 days, with the added provision that these credits are renewable.The central bank also made it clear that the depository institutions can use home mortgages and related assets as collateral for these short-term loans. "These changes are designed to provide depositories with greater assurance about the cost and availability of funding," the Federal Reserve said. The Fed's monetary policy committee also issued a statement that lays the groundwork for a future cut in the federal funds rate, which could benefit homeowners who are facing resets on their adjustable-rate mortgages. In acknowledging that financial market conditions have "deteriorated," the committee said, "it is prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets."

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., said Friday that he plans to move "aggressively" to pass Federal Housing Administration reform legislation when Congress returns in September so that the FHA can help more subprime borrowers refinance into safer and more affordable mortgages.During a conference call with reporters, the committee chairman also applauded the Federal Reserve's actions to calm the financial markets (see item below). But he was highly critical of the Office of Federal Housing Enterprise Oversight's decision to block Fannie Mae and Freddie Mac from providing liquidity in the mortgage markets. The Democratic presidential candidate called on President Bush to show "leadership" in dealing with the "mortgage crisis" by lifting the caps on Fannie's and Freddie's portfolios. Sen. Dodd noted that he is considering legislation to address abusive lending practices (such as prepayment penalties) and the regulation of mortgage brokers. "Strong legislation may be necessary," he said. He also plans to hold hearings to examine the role the credit rating agencies played in the subprime debacle.

Sen. Charles E. Schumer, D-N.Y., says he will introduce emergency legislation to raise the caps on Fannie Mae's and Freddie Mac's portfolios if the Bush administration does not act soon.The Office of Federal Housing Enterprise Oversight recently rejected a request by Fannie Mae to lift the cap on its portfolio -- preventing the government-sponsored enterprise from providing liquidity for the subprime market. Sen. Schumer warned that the problems in the subprime sector are spilling over into the broader mortgage market and that the administration should act now. "We cannot afford a 'wait-and-see' approach when it comes to a credit crisis that threatens to derail our economy," the Senate Banking Committee member said. He said he plans to introduce his bill, if necessary, as soon as Congress returns from its August recess after Labor Day.

Fannie Mae reported 2006 earnings of $4.1 billion, down from $6.3 billion in the prior year, due to a 41% drop in net interest income and a 22% drop in the profitability of its single-family business.The mortgage giant said net income from the single-family business fell to $2.04 billion last year, despite an increase in revenues. Fannie attributed the drop-off in profitability to a $308 million increase in losses on single-family guaranty contracts, a $533 million increase in administrative costs, a $123 million increase in loan loss reserves, and a $218 million increase in foreclosure expenses. "We anticipate the losses we incur at inception of guaranty contracts will more than double in 2007 compared to 2006, primarily as a result of the decline in home prices, as well as continued investment in loans that support the company's housing goals," the government-sponsored enterprise said. Fannie executives also affirmed that the publicly traded company will file its 2007 annual report by the end of February 2008, which would be in compliance with the Securities and Exchange Commission's filing deadline. The GSE can be found online at http://www.fanniemae.com.

The 12 Federal Home Loan Banks posted $628 million in total earnings for the second quarter, down 2.8% from the $646 million recorded a year earlier, according to a report by the FHLBanks' Office of Finance.The preliminary unaudited results show that the FHLBanks have $1.04 trillion in combined assets, and advances to member banks and thrifts totaled $640 billion as of June 30. The Office of Finance can be found online at http://www.fhlb-of.com.