Compliance & Regulation

The deterioration of subprime lending standards can be traced to the lack of due diligence by investors in collateralized debt obligations who bought about 70% of the lower-rated classes of subprime securitizations, according to the Consumer Mortgage Coalition.CDO investors relied on the rating agencies and CDO managers and "did not even realize they were the key risk takers" in the subprime market, CMC explains in a letter to the Federal Reserve Board. CMC executive director Anne Canfield stresses that these "absentee" investors created a "dysfunctional" market that can be fixed by imposing capital requirements on all mortgage lenders and brokers and by imposing constraints on CDO managers and rating agencies to make the secondary market more transparent. In presenting this backdrop, the industry trade group urges the Fed to be cautious in amending its Home Ownership and Equity Protection Act regulations so that it does not exacerbate liquidity problems in the subprime market. "Ultimately the mortgage market can only function properly when those who bear the risk of mortgage investments are closely involved in the process of mortgage origination," Ms. Canfield says.

The current mortgage market crisis is likely to far exceed that of the early 1990s because of surging defaults and foreclosures related to interest rate resets on adjustable-rate mortgages, according to Robert Dunn, president of Oxford Funding Corp., a Houston-based asset resolution company."During the mortgage crisis of the early 1990s, I personally managed the acquisition, restructure, and resale of over $750 million in secondary mortgage assets," Mr. Dunn said in a statement. "I expect that our current mortgage market crisis will dwarf what we saw back then for a number of reasons. We see defaults and foreclosures rising dramatically in the near future, as over $650 billion of loans to subprime borrowers are scheduled to reset at higher interest rates by 2009." Mr. Dunn also said the Federal Reserve "seems intent on raising interest rates to fight inflation, and we've seen before what a rising interest rate environment does to all debt markets, especially mortgages. As underwriting standards have also been tossed to the wind over the past few years, we feel a significant spillover of defaults to the alt-A market and even into the prime credit market is highly likely." Oxford Funding can be found online at http://www.oxfordfunding.com.

The Office of Federal Housing Enterprise Oversight said Friday that it will not increase the portfolio caps on Fannie Mae and Freddie Mae, referring to the two companies -- in a letter to a key senator -- as "significant supervisory concerns."As previously reported, Fannie Mae had asked OFHEO to increase its portfolio capacity by 10% (roughly $72 billion) as a way to add some liquidity to the nonprime secondary market. In a statement, OFHEO said it is "exploring with each enterprise ways for them to enhance their support for affordable housing, both multi-family and single." The regulator said there is nothing wrong with the conventional secondary market, noting that the two government-sponsored enterprises securitized $500 billion in the first half alone. The agency recently received an inquiry from Sen. Charles E. Schumer, D-N.Y., about the nonprime liquidity crisis and the GSEs' possible role in easing conditions. OFHEO Director James Lockhart told Sen. Schumer that the GSEs have been meeting the needs of their seller/servicers, but he said they remain supervisory concerns "after more than three years of remediation efforts."

The Federal Reserve has begun providing liquidity to a market hard-hit by the subprime mortgage-sparked credit crunch and said it will continue to "provide reserves as necessary."The Fed said Friday that it is providing the support "to facilitate the orderly functioning of financial markets," noting that "in current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets." The Federal Reserve can be found online at http://www.federalreserve.gov.

Subprime lender Delta Financial, Woodbury, N.Y., has delayed its second-quarter earnings release and conference call, set for Wednesday, Aug. 8, a move that sent its shares down 40% in trading on the day.The nondepository lender had hoped to report earnings before the market opened Wednesday. The delay was posted on its website, with no further details provided. Shortly before MortgageWire's deadline, Standard & Poor's issued a statement saying it had lowered its ratings on five classes of asset-backed securities from Delta transactions. S&P said the lower ratings reflect "[m]onthly net losses that have exceeded monthly excess interest cash flow." On Wednesday, Delta's shares fell $3.20, or 40%. The company can be found on the Web at http://www.deltafinancial.com.

President Bush, at a news conference Wednesday afternoon, ruled out any type of taxpayer bailout for lenders threatened by the subprime crisis.According to news reports on the president's remarks, he also dismissed proposals to grant Fannie Mae and Freddie Mac greater leeway in increasing their balance sheets. Fannie has asked its regulator for permission to increase the cap on its on-balance-sheet portfolio, a move that could increase liquidity in the secondary market.

The National Association of Mortgage Brokers, responding to criticism of the mortgage brokerage industry by Sen. Hillary Rodham Clinton, D-N.Y., has criticized the senator for advocating policies that "single out small business America" and called instead for an examination of the entire mortgage system."The entire mortgage system needs to be examined from stem to stern -- from the home shopping phase, bankers, brokers, and lenders all the way to Wall Street and the rating agencies," the NAMB said in a statement. "NAMB welcomes Sen. Clinton's proposal to create a registry database, but it needs to go one step further -- it should be applied to all mortgage originators, not just mortgage brokers." In a recent speech, Sen. Clinton called for upfront disclosures of mortgage brokers' compensation, a ban on prepayment penalties, and a requirement that all subprime mortgages have escrow accounts. Regarding disclosures, the NAMB noted that it has also called for reform, pointing to Federal Trade Commission studies suggesting that "our entire mortgage disclosure system is broken and it needs a comprehensive fix." The association can be found on the Web at http://www.namb.org.

Rep. John Dingell, D-Mich., chairman of the House Energy and Commerce Committee, wants to end the mortgage interest tax deduction on residences with more than 3,000 square feet -- a move that could hurt the jumbo mortgage market.On Tuesday, the congressman revealed new details of his plan to cut global warming -- a plan that includes ending the mortgage interest deduction for large homes plus a 50-cents-a-gallon tax on gasoline. His effort comes just as jumbo borrowers are facing higher interest rates because of a weak secondary market for nonconforming mortgages.

The Core Mortgage Risk Index increased 4.4% in the second quarter, reflecting the pressures of rising delinquency and foreclosure rates and slow price appreciation, according to First American CoreLogic, a Sacramento, Calif.-based provider of mortgage risk assessment and fraud prevention systems.The index is "increasingly driven by the fallout caused by high delinquency rates in the subprime and alt-A markets," the company said. CoreLogic listed the five U.S. markets currently most at risk as Detroit-Livonia-Dearborn, Mich.; Warren-Troy-Farmington Hills, Mich.; Memphis; Youngstown-Warren-Boardman, Ohio-Pa.; and Dayton, Ohio. CoreLogic can be found on the Web at http://www.corelogic.com.

Freddie has issued a $105.6 million subprime mortgage-backed security as part of its $20 billion commitment to Congress to provide liquidity to the subprime market and safer underwriting standards.The subprime and alternative-A loans originated by Wells Fargo Home Mortgage include fixed-rate products along with adjustable-rate 2/28 mortgages. The maximum margin on the ARMs is 450 basis points. One group of loans in the Freddie Mac structured pass-through security (Series T-074) has FICO credit scores ranging from 550 to 752 with a weighted average score of 613. Freddie spokesman Brad German said loans have a wide range of credit scores, loan-to-value ratios, debt-to-income ratios, and other characteristics. He said Freddie does not have a cookie-cutter model with every detail worked out. But the secondary-market agency will work with lenders in putting loan pools together that meet a certain risk profile. "The prospectus will give the market a strong idea of what we are looking to buy," Mr. German said.