Compliance & Regulation

Federal Deposit Insurance Corp. Chairman Sheila Bair says accounting firms and industry groups have concluded that there is latitude in the accounting rules governing securitizations that allow servicers to actively restructure subprime loans facing foreclosure.She noted that the industry groups are committed to working with borrowers to prevent foreclosures and with community activists to reach borrowers that need to restructure their loans. The Mortgage Bankers Association has asked the Financial Accounting Standards Board for guidance on the FAS 140 servicing issues. "MBA believes restructurings of certain securitized residential mortgage loans that are widely anticipated to go into default will not cause qualified special-purpose entities holding restructured loans to be disqualifying, thereby forcing the transferors to record a repurchase of the loans," the association said. The FDIC chairman also reported that the regulators are near agreement on the subprime lending guidance when it comes to curbing stated-income loans and other issues. She said she expects the guidance to be issued no later than July.

Adjustable-rate mortgages made up only 13% of thrift originations in the first quarter, down 44% from the level recorded a year earlier, according to the Office of Thrift Supervision.It marked the second consecutive quarter in which the percentage of total originations represented by ARMs was in the lower teens. But this time it prompted thrifts to sell $177.7 billion in mortgages into the secondary market -- the highest level of sales since the third quarter of 2003. Thrifts generally specialize in ARMs, and these depository institutions like to sell fixed-rate mortgages and hold ARMs in portfolio. Overall, the ARM share for all lenders was 11% in the first quarter, compared with 25% in the same quarter of 2006, according to the Federal Housing Finance Board. Freddie Mac's forecast calls for the ARM share of the mortgage market to be 12% in 2007, down from 21% in 2006.

Ginnie Mae president Robert Couch says his agency is on track to securitize its first pool of Federal Housing Administration-insured reverse mortgages in September."We think it is going to improve pricing for consumers and help originators find an efficient secondary-market execution," Mr. Couch told a Mortgage Bankers Association government housing finance conference. The Ginnie Mae home equity conversion mortgage structure will allow reverse mortgage lenders to securitize lump-sum payouts as well as monthly draws in pools as small as $1 million. Once there is significant volume, Wall Street dealers will be able to aggregate the HECM mortgage-backed securities into real estate mortgage investment conduits. "It is a fairly simply structure for investors," Mr. Couch said in an interview. The complexity comes with the servicing, because one reverse mortgage could have participations in multiple securities. "Ginnie has one servicer ready for the September rollout, and we've got others that may be ready," the Ginnie president said. Mr. Couch is in line to be the new general counsel for the Department of Housing and Urban Development. If confirmed by the Senate, he will give up his post at Ginnie Mae.

Anne V. Lee has been named acting president and chief executive officer of Coast Financial Holdings Inc., Bradenton, Fla., to replace Brian F. Grimes, who was fired in part because of a federal and state cease-and-desist order involving its residential construction loan program.Coast Bank, a subsidiary, recently agreed to the entry of the C&D order from the Federal Deposit Insurance Corp. and the Florida Office of Financial Regulation relating to the bank's residential construction-to-permanent loan portfolio. James K. Toomey, chairman of Coast Federal, said the company has "already addressed a large number of the corrective actions outlined in the C&D, and several of these issues have already been resolved." The FDIC order directs Coast Bank to take measures regarding board oversight, management planning and auditing, equity management, loan-loss allowance, loan portfolio review, liquidity management, and information technology, Coast Financial reported. Ms. Lee will be the company's chief liaison with state and federal regulators regarding the residential construction loan program. The company can be found online at http://www.coastfl.com.

Senior Republicans on the House Financial Services Committee are supporting efforts by Comptroller of the Currency John Dugan to curb "stated-income" loans, for which subprime lenders don't verify the borrower's income."We were interested to see Comptroller Dugan's recent remarks on stated-income loans, or 'liar loans,' and are deeply concerned about the explosion in originations of these mortgages in the subprime market," Reps. Spencer Bachus (Ala.), Paul Gillmor (Ohio), and Judy Biggert (Ill.) say in a letter to federal banking regulators. As previously reported, Comptroller Dugan wants to place curbs on stated-income loans in the subprime guidance that regulators are finalizing. The representatives acknowledge there should be a "small niche" for stated-income loans. But they also contend that "these low-doc or no-doc loans with a high LTV and [prepayment] penalties" increase the risks of default. "Current circumstances in the housing market have exposed these poorly underwritten loans, and we would ask the regulators to closely examine the role the use of liar loans may have played in the subprime market defaults we are experiencing," the committee members said.

Refinancings constituted 47% of thrift single-family originations in the first quarter, but overall origination activity was flat compared with that of the fourth quarter, according to the Office of Thrift Supervision.The OTS first-quarter report actually shows that one- to four-family originations jumped 33.5% to $149.6 billion in the first quarter, but OTS officials said the increase in mortgage activity is mainly due to Countrywide Financial Corp.'s conversion of its national bank into a federally insured thrift. The report also shows that sales of single-family loans increased by 44%, to $177.7 billion. Refinancing activity accounted for 47% of all originations in the first quarter, up from 39% in the previous quarter and 35% a year earlier. Meanwhile, the 838 federal thrifts reported total earnings of $3.6 billion, up 15% from their level in the fourth quarter and down 14% from that of a year earlier.

Mortgage Bankers Association chairman John Robbins has urged Congress and federal regulators to refrain from mandating underwriting standards that could precipitate a credit crunch.Mr. Robbins told the National Press Club that the mortgage industry has the tools and the capacity to help distressed subprime borrowers avoid foreclosure. The subprime market is already correcting itself, the most aggressive lenders have been punished, and the most aggressive lending programs have been eliminated, Mr. Robbins maintained. Mandating tougher underwriting would force lenders to shut the door on homeowners who need to refinance out of adjustable-rate 2/28 mortgages and exacerbate delinquencies and foreclosures, he warned. "We hope the regulators take a realistic view and allow the industry to deal with the issue and not try to regulate or legislate," Mr. Robbins said. The MBA chairman did call for the licensing and regulation of mortgage brokers.

Federal banking regulators could issue subprime mortgage guidance in the next few weeks, and it will look a lot like the original proposal, according to John Reich, director of the Office of Thrift Supervision.In speaking to reporters, Mr. Reich indicated that the final guidance will require lenders to underwrite adjustable-rate 2/28 mortgages at the fully indexed rate and that it should satisfy the demands of Senate Banking Committee Democrats. However, he wants to be sure that lenders have the flexibility to modify or refinance existing subprime ARMs that are due to reset over the next 12 months so the monthly payments remain affordable and the borrowers are not forced into foreclosure. "That is an issue that the regulators need to address," Mr. Reich said, and he indicated that the issue is still being worked on. Separately, Comptroller of the Currency John Dugan said he wants the guidance to curb the practice of making "stated-income" subprime loans and emphasize the importance of verifying a borrower's income.

The House has passed the GSE regulatory reform bill by a 313-104 vote after reaffirming that the new regulator cannot use systemic risk as a reason for scaling back the size of Fannie Mae's and Freddie Mac's mortgage portfolios.The bill (H.R. 14270) tightens supervision of the two government-sponsored enterprises and requires Fannie and Freddie to make annual contributions to an affordable housing fund. Just before voting on final passage, the House approved by a 383-36 vote an amendment introduced by Reps. Randy Neugebauer, R-Texas, and Melissa Bean, D-Ill., that limits the GSE regulator's authority over the portfolios. The amendment was approved by a voice vote on May 17, but Fannie Mae wanted a recorded vote. "We're pleased the Bean/Neugebauer amendment was passed because it clarifies an important aspect of regulatory discretion over the GSE mortgage portfolios," Fannie Mae spokesman Brian Faith said.

The Department of Housing and Urban Development has promoted Paul B. Manchester to head up the research division that analyzes Fannie Mae and Freddie Mac data for mission compliance.Mr. Manchester previously served as a senior economist at the financial institutions regulation division, which provides analytical support for HUD's regulatory oversight of the two government-sponsored enterprises. This includes research for setting the affordable housing goals and evaluating the GSEs' loan-level data to ensure compliance with the goals. If Congress passes GSE reform legislation, Mr. Manchester's division might be transferred to a new regulatory agency created to supervise Fannie, Freddie, and the Federal Home Loan Banks.