Compliance & Regulation

The Office of the Comptroller of the Currency is proposing to give national banks more "flexibility" in selecting indices for adjustable-rate mortgages as part of a proposed rule to reduce regulatory burdens and update OCC regulations."Specifically, the amendment permits national banks to use a combination of indices to which changes in the interest rate will be linked, in addition to a single index," the proposed rule says. The agency is also making it easier for national banks to apply to use ARM indices that are not already permissible under OCC rules. The 36-page OCC regulatory relief proposal appeared in the July 3 issue of the Federal Register. It addresses various regulatory areas, including permanent capital, electronic banking, and community development investments. The comment period ends Sept. 4. Separately, the OCC has posted on its website illustrations of consumer information for nontraditional mortgage products in Spanish and English that can be downloaded and printed for easy production. The OCC can be found on the Web at http://www.occ.treas.gov.

Subprime lending grew at the expense of the Federal Housing Administration's market share as minorities and lower-income homebuyers opted for teaser rates and other subprime features that are ultimately "more costly" than FHA loans, according to a Government Accountability Office report.The FHA's share of the home purchase market dropped from 31.6% in 1996 to 6.9% in 2005, while the conventional subprime market jumped from a 2.0% share to a 26.0% share. Now that subprime defaults and foreclosures are rising, the FHA could provide those borrowers with "lower-price and more sustainable mortgages," GAO says in the report to Congress. However, a second GAO report urges "caution" in allowing the FHA to offer zero-downpayment loans at a time of stagnant or declining housing prices. The GAO auditors recommended that Congress require the FHA to use a pilot program to test its zero-down products. The GAO also told Congress that legislation to increase the FHA's loan limit in high-cost areas would have boosted FHA loan production by 9%-10% in 2005. The GAO can be found online at http://www.gao.gov.

With interest rates on millions of adjustable-rate mortgages predicted to reset in Pennsylvania and nationally over the next two years, Pennsylvania Gov. Edward G. Rendell is urging homeowners with these types of loans to prepare for possibly significant increases in their monthly payments."Many working families are facing tough situations as their monthly payments increase," Mr. Rendell said. "Homeowners with adjustable-rate mortgages should contact their lenders to confirm when, and by how much, their payments will increase." The Pennsylvania Banking Department wants to change the regulations to require mortgage originators to qualify borrowers under the fully indexed rate and amortized repayment schedule. "This would help to protect consumers from being put into loans they can't afford to pay back," he said. "There also needs to be clearer disclosures to help borrowers better understand their loans." Consumers can learn more about Pennsylvania's Homeowner's Emergency Mortgage Assistance Program by calling a toll-free help line, 800-PA-BANKS, or visiting the banking department's website at http://www.banking.state.pa.us.

In finalizing the subprime mortgage guidance, federal banking regulators rejected industry requests for flexibility in helping subprime borrowers by refinancing them into another adjustable-rate 2/28 mortgage.The guidance, issued June 29, suggests that workout arrangements should provide permanent affordability, and that lender/servicers might consider converting ARMs into fixed-rate mortgages to provide "financially stressed borrowers with predictable payment requirements." Comptroller John Dugan said the emphasis is on putting borrowers into loans they can afford. "It doesn't do any good to keep putting people into loans that they can't repay," he said. In underwriting subprime 2/28 ARMs, regulators expect lenders to qualify borrowers at the fully indexed rate, "regardless of any interest rate caps that limit how quickly the fully indexed rate may be reached." The payment schedule should be fully amortizing over 30 years, unless it is a balloon loan.

Federal financial regulators have issued final subprime guidance cautioning against the use of stated-income and reduced-documentation mortgage loans unless there are "documented mitigating factors that clearly minimize the need for verification of a borrower's repayment capacity."The Statement on Subprime Mortgage Lending calls for "a fully indexed, fully amortized qualification for borrowers" and "prudent" consumer protection standards. The standards should include "clear and balanced product disclosures to customers and limits on prepayment penalties that allow for a reasonable period of time, typically at least 60 days, for customers to refinance prior to the expiration of the initial fixed interest rate period without penalty," the statement says. The Mortgage Bankers Association characterized the guidance as "a strong statement that will help curb abuses" but that will likely "constrain consumer credit choices." The association urged Congress to do two things. "First, quickly pass FHA modernization in order to restore affordable credit options for worthy borrowers, and second, refrain from passing legislation that will further constrain credit by forcing lenders to deal with rigid underwriting standards and litigation risk," the MBA said. "Instead, Congress should focus on legislation to improve transparency and accountability throughout the mortgage transaction."

Fannie Mae purchased about $79 billion in interest-only mortgages from lenders in 2006 and Freddie Mac purchased about $56 billion, according to a report by the Office of Federal Housing Enterprise Oversight.Both secondary-market agencies increased their purchases of IOs last year. OFHEO said 15% of Fannie's single-family loan purchases were IOs, compared with 10% in 2005. Freddie Mac sharply increased its IO purchases to 16% of single-family loan purchases, up from 6% in 2005. The OFHEO report says about one-eighth of Freddie's purchases were fixed-rate IOs and the rest were IO hybrid adjustable-rate mortgages.

In response to growing demand for reverse mortgages, Wolters Kluwer Financial Services, Minneapolis, is equipping lenders with a new line of electronic documents they can use to help comply with regulatory requirements tied to Home Equity Conversion Mortgages.A HECM, the most common form of reverse mortgage in the United States, allows borrowers aged 62 or older to convert the equity in their homes into income through a lump sum, monthly payments, or a line of credit offered by lenders. The WKFS line of electronic upfront disclosures and closing documents for HECMs allows lenders doing business in the top 10 states underwriting HECMs to create compliant document packages. The top 10 states are: California, Florida, Texas, New York, Michigan, New Jersey, Colorado, Illinois, Massachusetts, and Pennsylvania. The company plans to expand its HECM document line to other states based upon lender demand. WKFS can be found on the Web at http://www.wolterskluwerfs.com.

House Financial Services Committee Chairman Barney Frank, D-Mass., has introduced legislation that fleshes out the details of how his affordable housing trust fund would distribute $800 million to $1 billion in grants annually.Rep. Frank said he plans to finance the trust fund with mandated contributions by Fannie Mae and Freddie Mac, savings from Federal Housing Administration reforms, revenues from the Expanding Americans' Home Ownership Act, and possibly other sources. (The House has already passed government-sponsored enterprise reform legislation that would require Fannie and Freddie to contribute $600 million, and the committee has approved an FHA bill expected to generate nearly $500 million in new revenues, mainly by expanding the FHA reverse mortgage program.) The fund would provide grants for the construction and rehabilitation of affordable housing for low-income families, with 60% allocated to local communities and the remainder to states, insular areas, and American Indian tribes. The Department of Housing and Urban Development would be required to develop an allocation formula based on factors such as population, housing affordability, percentage of very and extremely low-income families, and cost of construction. Rep. Frank said he plans to hold hearings on the trust fund bill on July 12.

The Pew Charitable Trusts has announced a $1 million investment with the Center for Responsible Lending aimed at curbing abusive subprime home loans by strengthening underwriting standards.Pew noted that federal financial regulators are poised to issue guidance on subprime lending, but that more than half of subprime mortgages are issued by lenders not subject to such guidance. "With Pew's support, the Center for Responsible Lending will work to protect all subprime borrowers by urging other federal and state policymakers with jurisdiction and industry leaders to adopt basic, much-needed standards," the organization said. Pew said its two-year investment in CRL is intended to strengthen underwriting standards by pushing lenders to verify a borrower's income and ensure that borrowers can repay the loan after scheduled interest rate increases. The organization can be found on the Web at http://www.pewtrusts.org.

Bear Stearns & Co. said Wednesday that it has reduced by half a $3.2 billion line of credit to one of its two subprime-related hedge funds, citing asset sales from the High-Grade Structured Credit Fund.In a statement, Bear said it is continuing efforts to de-leverage both the High-Grade Fund and a related hedge fund called High-Grade Structured Credit Enhanced Leverage Fund. Bear's line of credit to the High-Grade Fund now stands at $1.6 billion. Both funds, according to sources, have been hit with margin calls from lenders, including Merrill Lynch, Goldman Sachs, and Bank of America. Bear has moved to prop up the High-Grade Fund with loans. Market sources say it may liquidate, in an orderly fashion, the Enhanced Fund. A Bear Stearns spokeswoman did not return a telephone call placed by MortgageWire. Meanwhile, according to combined news reports, the Securities and Exchange Commission has opened an informal inquiry into these two Bear Stearns managed funds, which have billions of dollars in subprime-related investments. An SEC spokeswoman said the agency neither confirms nor denies investigations.