Compliance & Regulation

The National Association for the Advancement of Colored People has filed a class action lawsuit against 12 major mortgage lenders alleging that they violated the Fair Housing Act by "systematically" placing blacks into higher-cost subprime loans."African Americans who received loans from these lenders were over 30% more likely to be issued higher-rate loans than Caucasian borrowers with the same qualifications," according to the lawsuit filed July 11 in a U.S. district court in California. The lawsuit argues that subprime loans are typically laden with improperly disclosed fees and excessive prepayment penalties. "African Americans are more than three times as likely as Caucasians to be put into one of these equity draining subprime loans," the suit contends. NAACP chairman Julian Bond is urging African-American borrowers who bought or refinanced a home with the named lenders to "come forward and tell us their stories, or at least re-examine their mortgages" to "help us correct these egregious and demoralizing practices." The NAACP filed the lawsuit against Long Beach Mortgage Co., Citigroup Inc., BNC Mortgage Inc., Accredited Home Lenders Inc., Bear Stearns Residential Mortgage Corp., First Franklin Financial Corp., HSBC Finance Corp., Washington Mutual Inc., Ameriquest Mortgage Co., Fremont Investment and Loan, Option One Mortgage Corp., and WMC Mortgage Corp.

U.S. banking regulators have agreed to kick the Basel Ia risk-based capital proposal aside and give regional and community banks the option of using the "standardized" RBC approach, which many foreign banks have adopted."We are pleased with the recognition of the importance of the standardized approaches, particularly that they offer more flexibility than the earlier Basel Ia proposal," said Wayne Abernathy, executive director of the American Bankers Association. While the largest and most internationally active U.S. banks will move ahead with implementation of the Basel II "advanced" RBC approach, the federal regulators were silent in regard to allowing small banks to continue to operate under the current Basel I rules. But most observers doubt that the regulators would force the small banks to adopt the more complex standardized approach, which has more gradients of risk than Basel I, plus an operational risk component. ABA senior economist Robert Strand noted, however, that some banks strongly supported Basel Ia because of the improvements in the risk weights for residential mortgages. "We will ask that those improvements be allowed as an option under Basel I," he said.

Federal regulators and mortgage lenders were "largely responsible" for the housing and mortgage crisis, which should be remedied by better enforcement of predatory-lending statutes and the adoption of "suitability" requirements and federal licensing standards for lenders, according to a white paper by Weiss Research Inc.The white paper, submitted to the Federal Reserve Board July 19, argues that the crisis is likely to worsen and that the Fed played a role in "further inflating the housing bubble that's at the root of the current crisis." Mike Larson, Weiss's interest rate and real estate analyst and the author of the report, also points the finger at lenders who "debased their standards" rather than accept a decline in lending volume, and at Wall Street, whose "large-scale transformation of mortgages into securities significantly boosted risk-taking." Among other things, the report calls for assignee liability for the secondary market and closer monitoring and prompter action by the Fed to "help avert runaway asset price inflation." Weiss, based in Jupiter, Fla., can be found online at http://www.weissgroupinc.com.

Housing industry groups are questioning the Office of Federal Housing Enterprise Oversight's authority to reduce the conforming loan limit in urging the regulator to withdraw a proposal that might lead to a 2009 decline in the loan limit."OFHEO's proposal ignores current law relating to the loan limit adjustment, which does not provide for a decline in the CLL," the National Association of Home Builders says in a letter to the regulator. The NAHB, the Mortgage Bankers Association, the American Financial Services Association, the Consumer Mortgage Coalition, the Financial Services Roundtable, and Freddie Mac contend that the mortgage market would be better served by leaving the conforming loan limit at $417,000 and netting out any declines in house prices against a future increase in the limit. Fannie Mae and Freddie Mac cannot purchase mortgages with a loan amount above the CLL, which is adjusted annually based on a housing price index. Considering the disruption the proposal would cause, "the utility of decreasing the ceiling is not worth the cost," the AFSA, the CMC, and the FSR say in a joint letter.

It is difficult for investors to make a monetary recovery from a fraudulent mortgage loan, according to an attorney at an American Securitization Forum seminar titled "Mortgage Fraud Prevention -- Tools and Resources for Secondary Market Participants."Karen Gelernt of Cadwalader, Wickersham & Taft LLP said unless there is a party with deep pockets (which originators generally don't have), investors will not be made whole if they purchase a fraudulent loan. Usually the secondary market is able to resell the loan in "scratch-and-dent" packages to firms with expertise to resolve the situation, but at a deep discount. A problem with using the judicial system as a remedy, Ms. Gelernt told attendees at the July 18 session in New York, is that the investor has to prove intent, which is difficult. "After-the-fact" legal enforcement provides some satisfaction, she said, but the money is not there to make the investor whole. Another issue, Ms. Gelernt said, is that the secondary market has been willing to accept fewer pieces of paper to document the loan file. This makes it easier to perpetrate fraud, because it makes it tougher to verify that the loan actually exists.

The Office of Federal House Enterprising Oversight is pushing Fannie Mae and Freddie Mac to stop their purchases of private-label mortgage-backed securities if the underlying mortgages don't comply with nontraditional mortgage and subprime guidance."We are working closely with the enterprises so that going forward these rules will apply to mortgages they purchase directly and through private-label MBS," OFHEO Director James Lockhart said in a speech to the Exchequer Club. The guidance issued by the federal banking regulators imposes tough underwriting standards on interest-only, payment-option, and subprime mortgages. Fannie and Freddie have agreed to comply with nontraditional mortgage guidance with respect to purchases of whole loans, and they are expected to adopt the subprime guidance soon. After his speech, Mr. Lockhart indicated to reporters that his discussions with the GSEs about their purchases of private-label MBS are going well. He said the talks are focused mainly on implementation issues.

The deterioration in the credit quality of subprime mortgages could result in losses ranging from $50 billion to $100 billion, Federal Reserve Board chairman Ben Bernanke told Congress July 19.The chairman indicated that delinquencies and foreclosures are rising faster than the Fed anticipated only a few months ago. And these problems "likely will get worse before it gets better," he said. Mr. Bernanke also told the Senate Banking Committee that he expects the Fed to issue new Home Ownership and Equity Protection Act regulations to address certain subprime lending practices, such as prepayment penalties, later this year. When asked about Federal Housing Administration reform, the Fed chairman advised the Senate to act cautiously because FHA single-family loans have high delinquency and default rates. "I would suggest moving with some caution to ensure you don't create another source of problems," Mr. Bernanke testified.

"We have a long way to go" in the subprime mortgage crisis, Countrywide chairman Angelo Mozilo told attendees in keynote remarks July 18 at the 35th Annual Western Secondary Market Conference in San Francisco.Pouring cold water on statements by other mortgage executives, including Countrywide Financial Corp.'s own Todd Dal Porto, Mr. Mozilo said the current subprime collapse is causing a paradigm shift that will bring down an avalanche of regulatory scrutiny. While declining to point blame for the subprime collapse in any particular direction, he said, "The Street stepped up to provide liquidity irrespective of underwriting" as New Century and others "went to the market time after time to get more capital" for exotic loans. The mortgage industry itself will be the real victim, Mr. Mozilo said.

The Treasury Department has announced the appointment of two key officials who will be working on issues involving finance, banking, and government-sponsored enterprises.Bob Foster is the new deputy assistant secretary for legislative affairs, who will be lobbying Congress on GSE and terror insurance issues. Mr. Foster is a former aide to Rep. Michael Oxley, R-Ohio, and served as chief of staff of the House Financial Services Committee until former Chairman Oxley retired in January. The department also announced that Deputy Assistant Secretary Jeremiah O. Norton will oversee the Office of Financial Institutions Policy, which coordinates policies on legislative and regulatory issues affecting financial institutions. Mr. Norton served on the legislative staff of Rep. Edward Royce, R-Calif., and he previously worked at J.P. Morgan Securities.

Sen. Charles E. Schumer, D-N.Y., has introduced a stand-alone bill to raise the loan limits on Federal Housing Administration single-family loans and offer homebuyers an alternative to subprime loans."My bill will raise the FHA loan limits so that more homebuyers, especially those living in high-cost areas, will have the opportunity to [get] safe and affordable FHA prime mortgages," Sen. Schumer said during a Senate Banking Committee hearing. The New York senator noted that House Financial Services Committee Chairman Barney Frank, D-Mass., supports his bill. The senator said the bill would raise the FHA single-family loan limit from $362,000 to the $417,000 conforming-loan limit in high-cost areas. A copy of the bill was not available at deadline time, but Sen. Schumer's bill is expected to raise the FHA limit in low-cost areas and set the loan limit at the median house price in other areas. These adjustments to the FHA loan limits are contained in a comprehensive FHA reform bill approved by Rep. Frank's committee. Sen. Schumer noted that the inability to get FHA loans in many areas has exacerbated the subprime crisis.