Compliance & Regulation

New York Attorney General Andrew Cuomo has issued generic subpoenas to about 30 mortgage lenders and servicers asking about industry practices, and he may focus on mortgage broker compensation, according to a mortgage banking attorney."Given his recent foray into the student lending world, it wouldn't surprise me if he looks at payments by lenders to mortgage brokers," said Larry Platt, a partner in the Washington office of K&L Gates. But he stressed that he has no inside knowledge. "I am just speculating." The subpoenas were issued in the past few days, and they generally relate to appraisal practices, mortgage broker practices, and the way lenders slot borrowers into different loan products. "There is no accusation of any wrongdoing," and it appears that the AG's office is trying to get a handle on how the industry operates, Mr. Platt said. "Any subpoenas that were received are part of an ongoing investigation -- that's all I can say," said Arthur Harris, a spokesman for Mr. Cuomo's office. Mr. Platt said he suspects that the New York AG will focus on payments by lenders to brokers, which are called yield-spread premiums, based on his tenure at the Department of Housing and Urban Development. In 1997, then-Secretary Cuomo tried unsuccessfully to impose strong disclosure requirements on broker compensation, which industry groups considered anti-YSP.

The Department of Housing and Urban Development is getting closer to issuing a proposed rule for public comment that restricts downpayment assistance on Federal Housing Administration single-family loans if the funds come from a person or company selling the house.This proposal would prevent nonprofit groups from cycling funds from sellers to FHA homebuyers. It essentially incorporates guidance in the FHA Handbook that downpayment and closing cost assistance cannot come from a donor that has an interest in the sale of the property. HUD data show that defaults on FHA loans with downpayment assistance from nonprofits are twice as high as on other FHA loans and the claim rate is three times as high. The HUD inspector general has been very critical of these downpayment assistance programs. The White House Office of Management and Budget has cleared the proposal, and HUD is expected to send it to Congress for a 15-day review period soon.

A partisan dispute over an affordable housing trust fund could slow passage of a Federal Housing Administration reform bill that many in Congress view as a way to help subprime borrowers get into safer and more affordable home loans.Rep. Judy Biggert, R-Ill., warned Democrats that she has "grave concerns" about the solvency of the FHA single-family program if excess FHA revenues are earmarked for a yet-to-be-created AH trust fund. "Removing the housing trust fund provision will allow us to work together on a bipartisan bill that can move expeditiously to the House floor," Rep. Biggert said. But Rep. Maxine Waters, D-Calif., warned that the FHA reform bill will not get out of the House Financial Services Committee without the affordable housing fund provision. The FHA bill, co-sponsored by Rep. Waters and the committee chairman, Rep. Barney Frank, D-Mass., does not create an AH trust fund -- that requires separate legislation that Rep. Frank plans to introduce later this year. It simply allows the future affordable housing trust fund to tap the FHA as a funding source.

Key congressional supporters of raising the conforming-loan limit are reconsidering a provision in a GSE reform bill that would require Fannie Mae and Freddie Mac to securitize and sell all jumbo mortgages.Reps. Barney Frank, D-Mass., and Gary Miller, R-Calif., commented at a hearing on rising foreclosures that securitization makes it very difficult to restructure the loans when borrowers get into trouble. Rep. Frank, chairman of the House Financial Services Committee, said it might be better for the government-sponsored enterprises to keep those loans in portfolio. On March 28, the committee approved a GSE regulatory reform bill that raises the conforming-loan limit in high-cost areas.

State regulators cannot interfere with the mortgage banking subsidiaries of national banks, according to a U.S. Supreme Court ruling that upholds the comptroller of the currency's exclusive authority over national banks and their subsidiaries.The 5-3 decision in Watters v. Wachovia Bank is a resounding defeat for state attorneys general and banking regulators who wanted to reassert their powers in providing consumer protection and regulating national bank subsidiaries. "The Conference of State Bank Supervisors is deeply disappointed," CSBS president Neil Milner said. "We see it as a setback for financial consumers and state efforts to battle predatory lending, abusive mortgage lending practices, and mortgage fraud." Comptroller John Dugan welcomed the decision, which culminates a long legal battle with the states. "We are pleased that the court's decision supports the ability of national banks to continue to conduct business activities through their operating subsidiaries as they are now doing," he said.

Federal regulators are encouraging banks and thrifts to help distressed subprime borrowers through loan modifications and other workout arrangement by awarding Community Reinvestment Act credit."The agencies want to remind their institutions that existing regulatory guidance and accounting standards do not require immediate foreclosure of homes when borrowers fall behind in the payments," an interagency statement said. The statement also points out that the financial institutions are required to inform delinquent borrowers about the availability of homeownership counseling. And the institutions should work with consumer-based organizations that help financially stressed borrowers avoid foreclosure. "Bank and thrift programs that transition low- and moderate-income homeowners from higher-cost loans to lower-cost loans may also receive favorable consideration under CRA," the agencies said.

A Federal Deposit Insurance Corp. summit may have found a way to restructure adjustable-rate 2/28s mortgages in subprime securitizations and prevent foreclosures, according to FDIC Chairman Sheila Bair.She told a congressional panel that one way to restructure or modify these loans is to continue with the starter rate on the ARM. This approach was discussed at the April 16 summit with lenders, securitizers, and servicers, where it was learned that MBS investors really don't have a realistic expectation of getting the higher reset rate. Investors will have to approve this approach, even though they will incur losses. But Ms. Bair pointed out that foreclosures would cause bigger losses. "I think they are willing to do that," she told reporters. One hurdle is an accounting interpretation that requires a securitized mortgage to be delinquent 30 days before it can be restructured. "I think that is a problem," the FDIC chairman said. She said she plans to discuss it with the Financial Accounting Standards Board.

The chairman of the Senate Banking Committee and the ranking Republican member on Wednesday ruled out any type of government bailout for delinquent subprime borrowers.At a news conference, Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., said, "This problem can be solved without using" taxpayer money. Sen. Richard Shelby, R-Ala., said "I'd be unalterably opposed" to a government bailout. At the news conference, Freddie Mac chairman Richard Syron unveiled that government-sponsored enterprise's plans to provide $20 billion worth of assistance to delinquent subprime borrowers.

Freddie Mac is speeding up the delivery of new subprime products that might offer more stable refinancing alternatives to subprime borrowers by midsummer."These products will include 30-year and possibly 40-year fixed-rate mortgages and adjustable-rate mortgages with reduced margins and longer fixed-rate periods," Freddie Mac chairman and chief executive Richard Syron told a House Financial Services subcommittee. "We expect to offer ARMs of five years or more with margins at adjustment that are as much as 200 basis points below the current step-up." Originally, Freddie Mac was not expected to introduce the subprime products until September. Mr. Syron also said modifications to Freddie's "Home Possible" products are in the works to provide subprime borrowers with additional refinancing options. Some underwriting characteristics of the HomePossible products overlap with those in the subprime market, "providing viable upstreaming opportunities for some segment of subprime borrowers," he said.

Fannie Mae is relaxing its underwriting standards to help refinance homeowners who are facing imminent payment shock due to adjustable-rate subprime mortgages.For borrowers current on their existing ARM, Fannie will overlook unpaid bills on their credit reports to get them into a safer and more affordable mortgage with a 40-year amortization period, if necessary. In congressional testimony, Fannie president and chief executive Daniel Mudd says 1.5 million borrowers could potentially be eligible for this refinancing option over the next two years. Fannie Mae calls this its "HomeStay" initiative. "Our message to lenders with borrowers facing resetting ARMs is this: If your homeowner has managed his credit over the past 12 months, there's a chance Fannie Mae can help," Mr. Mudd told a House Financial Services subcommittee that is looking for possible solutions to rising foreclosures. Fannie Mae can be found online at http://www.fanniemae.com.