Compliance & Regulation

Housing markets "continued to weaken" in March and early April, while many Federal Reserve banks reported declining home construction activity in their districts, according to the Fed's Beige Book."Residential real estate activity continued to weaken, with sales declining in many districts and flat in a number of others," the Beige Book says. The Dallas Federal Reserve Bank reported rising inventories of unsold homes, and builders that were "significantly curbing home starts." However, the Boston bank reported that the volume of residential sales across New England showed signs of increasing, though prices remained below 2006 levels. Meanwhile, commercial real estate markets continued to be strong, with reports of robust construction activity in several districts.

The ranking members of the House Financial Services Committee have asked the Government Accountability Office to conduct a study into the recent surge of foreclosures and promptly report back to the committee.The request by committee chairman Barney Frank, D-Mass., and Spencer Bachus, R-Ala., directs the investigative and auditing arm of Congress to assess the magnitude of the foreclosure problem as well as its causes and possible solutions. "Developing workable solutions to the current problems in the subprime market is a high priority for members of both Houses and both parties, and our committee will be considering legislation on the subject in the coming months," the April 25 letters says. The congressmen also want the GAO to look at the impact of "exotic" and subprime mortgage products on foreclosures, as well as the securitization of these loans. "It seems clear that the type of mortgages that have been offered to borrowers in recent years is one factor, but there is no reason to conclude that it is the only factor," the letter says. "Moreover, even if the types of mortgages recently being offered are the predominant factor, the question is why they have only now begun to lead to higher foreclosure rates."

Rapid Reporting, Fort Worth, Texas, has announced a partnership with Calyx Software, a broker loan origination vendor based in San Jose, Calif., to help brokers detect fraud earlier in the process.Rapid Reporting said it will offer mortgage fraud detection capabilities to users of Calyx's core group of products and services, including the company's flagship loan origination application, Calyx Point. As part of the agreement, Calyx Software users will be able to interface to Rapid Reporting's Web-based IncomeChek and DirectChek tools. Through established relationships with both the Internal Revenue Service and the Social Security Administration, Rapid Reporting enables users to detect and reveal potential mortgage fraud associated with deceptive income and identity information, the company said. Rapid Reporting can be found on the Web at http://www.rapidreporting.com.

While rejecting the idea of a government bailout for delinquent subprime borrowers, a top government housing official said Wednesday that the Federal Housing Administration can come to the aid of "tens of thousands" of consumers through the refinancing process.Roy Bernardi, deputy secretary for the Department of Housing and Urban Development, said, "If a refi is doable, FHA would look at it and work with servicers." Mr. Bernardi noted that the agency could do more to help subprime borrowers if FHA reforms are passed by Congress, including a proposal that would allow the agency to charge risk-based premiums. "We must reach out to help the borrower," he said, speaking before a policy meeting sponsored by the Mortgage Bankers Association. "But we can't simply throw money at the problem."

Banks and thrifts can earn Community Reinvestment Act credit by placing their troubled subprime borrowers into newly refinanced loans, but not for ordinary workouts and loan modifications, according to regulators.When it comes to their own loans, "I don't think there is any question whether banks will do workouts and accommodate those individuals appropriately," said Robert Mooney, acting deputy director of the Federal Deposit Insurance Corp., at a CRA conference sponsored by the Consumer Bankers Association. The main thrust of the April 17 interagency statement is to encourage banks to work with nonprofit groups in helping subprime borrowers with adjustable-rate 2/28 and 3/27 mortgages that have been securitized. Mr. Mooney noted that a lot of the borrowers are trapped and facing foreclosure. And it isn't easy to "shake" those loans out of the securitizations so responsible banks can do the workouts, he said. Meanwhile, the regulators want to ensure that "you get the credit you deserve" in the CRA lending or service tests "for taking that extra step and going the extra mile," Mr. Mooney said. The CBA can be found on the Web at http://www.cbanet.org.

Democrats on the Senate Banking Committee are turning up the heat on the Federal Reserve Board, demanding that it establish an ability-to-repay standard on subprime mortgages and designate the failure to escrow homeowners' insurance and property taxes as a deceptive lending practice.Under pressure from the committee, Fed Chairman Ben Bernanke had agreed to review the board's power under the Home Ownership and Equity Protection Act. Now the Democrats are demanding at least some minimum action. "The Board should create a presumption that a loan that requires a borrower to pay more than 50% of his or her income to cover the cost of principal, interest, taxes, and insurance is not a sustainable loan" and fails the repayment test, the 10 Democratic senators say in a letter to the Fed. The Democrats also stress that the failure to escrow taxes and insurance puts homeowners at risk. "Subprime lenders and brokers seem to routinely quote monthly payments to prospective borrowers that do not include taxes and insurance as a way of deceiving the borrowers into thinking their monthly obligations will be lower than their true costs," the April 23 letter says. "This is clearly a deceptive practice."

Core Mortgage Risk Monitor's foreclosure index has "increased dramatically" in the second quarter, although the risk index overall is showing signs of stabilization, according to First American CoreLogic, a Sacramento, Calif.-based provider of mortgage risk assessment and fraud prevention systems.The foreclosure index posted a 10.5% quarterly increase that was attributed to rising delinquency rates in the subprime sector. "While house prices are stabilizing, we are transitioning the risks to a period of rising delinquencies and foreclosures that is going to have concentrated and contagious impact on local markets," said Mark Fleming, CoreLogic's chief economist. "Fraud and collateral risk has stabilized at a relatively high level not seen in recent years, and foreclosures are expected to continue to rise despite relatively unchanged employment conditions and stabilization of house prices." CoreLogic said the five U.S. markets currently most at risk are Detroit-Livonia-Dearborn, Mich.; Memphis; Warren-Troy-Farmington Hills, Mich.; Youngstown-Warren-Boardman, Ohio-Pa.; and Dayton, Ohio. CoreLogic can be found on the Web at http://www.corelogic.com.

Although subprime defaults are rising in Florida and the West Coast, a market correction is under way and Congress should leave it to regulators and the mortgage industry to help troubled subprime borrowers, according to a top housing regulator."Between the regulators, financial institutions, mortgage servicers, and the brokers, I think it can be worked out," James Lockhart, director of the Office of Federal Housing Enterprise Oversight, told reporters. "There is going to be some pain." And the correction will be "drawn out" as the resets on adjustable-rate subprime mortgages take effect over the next two years. But the best way to address this problem is "not to overreact, and not cause an unnecessary credit crunch that would end up just hurting the people you are trying to help," Mr. Lockhart said. Until recently, subprime defaults were concentrated in the Rust Belt states and the hurricane-affected states -- principally Louisiana and Mississippi. "We are beginning to see rapid growth in the West Coast and Florida," the OFHEO director told an Independent Community Bankers of America meeting in Washington.

Fannie Mae and Freddie Mac are some of the biggest investors in subprime securities, and their regulator -- the Office of Federal Housing Enterprise Oversight -- is looking for ways to ensure that their purchases of private-label securities comply with federal subprime underwriting standards."It would make a lot of sense if they can get a representation from the packagers of these securities that they are following reasonable underwriting standards," OFHEO Director James Lockhart told reporters. In a speech to the Independent Community Bankers of America, the OFHEO director said unregulated lenders and mortgage brokers largely contributed to the deterioration of subprime underwriting standards. "OFHEO is now working with the enterprises on guidance that would have the effect of applying -- through the GSEs' market activities -- the strictures of federal guidances on these unregulated firms," Mr. Lockhart said. Fannie chief executive Daniel Mudd told a congressional panel April 17 that his company will comply with the proposed subprime underwriting guidance issued by federal banking regulators in March. The comment period ends May 7.

Citing a need to improve accountability in the mortgage industry and keep families from losing their homes, Pennsylvania Acting Banking Secretary Victoria A. Reider has urged swift action on legislation to stop abusive lending practices blamed for many foreclosures.Legislation was introduced in the state House and the state Senate earlier this year. The six bills are the result of a 2005 Pennsylvania Department of Banking report on foreclosures, which cited abusive lending practices as a significant contributing factor to the state's above-average foreclosure rate. The bills would amend state laws to require individual licenses for mortgage professionals. Currently, the department has the authority to license mortgage companies, but not their employees. "In Pennsylvania, the people who cut your hair are licensed," Ms. Reider said. "The people who sell insurance and stocks are licensed. But the people who guide, for most of us, the largest financial transaction of our lives are not licensed. This legislation would create a new licensing category for individual mortgage loan originators."