Compliance & Regulation

Fannie Mae and Freddie Mac have not adopted federal nontraditional mortgage guidance yet, but their regulator is trying to get them on the same page as other financial institutions.James Lockhart, director of the Office of Federal Housing Enterprise Oversight, told reporters that he expects Fannie and Freddie to comply with the nontraditional mortgage guidance that federal banking regulators finalized last September. The guidance requires lenders to underwrite interest-only and payment-option mortgages at the fully indexed rate. The two government-sponsored enterprises have already informed OFHEO about their plans, and Mr. Lockhart said OFHEO will be seeking "some changes." He indicated that those changes would be spelled out in a letter to the GSEs, possibly this week. "So we expect them to be compliant," Mr. Lockhart said. The OFHEO director also noted that there have been discussions with the GSEs about the proposed subprime guidance the banking regulators issued March 2 for public comment. "We are asking for their comments on that," he said.

The Department of Housing and Urban Development could refinance distressed subprime borrowers into more affordable Federal Housing Administration loans in a prudent way that would not be a "bailout" for the lenders, according to the National Association of Realtors.The NAR is urging HUD to waive an underwriting requirement so the FHA can refinance borrowers who are behind on their adjustable-rate 2/28 and 3/27 mortgage payments. It is understood that the original lender would forgive a significant amount of the loan so the FHA can refinance at a 97% loan-to-value ratio reflecting the current appraised value of the property. "This would not be a bailout for lenders since they would incur significant losses," NAR president Pat Combs says in a letter to HUD Secretary Alphonso Jackson. Lenders generally lose $20,000 to $40,000 in a foreclosure. Mortgage banking consultant Brian Chappelle said there would be considerable lender interest in this program if it were implemented. A HUD official said the department has no comment at this time. "We believe FHA can design a mechanism where creditworthy borrowers could refinance subject to prudent guidelines and therefore avoid losing their homes," Ms. Combs said. The NAR can be found online at http://www.realtor.org.

Fannie Mae is becoming more involved in higher-risk loan products, but it needs additional staffing and better information systems to deal with the risks, according to the Office of Federal Housing Enterprises 2006 annual report."Systems permit adequate service to clients for traditional loan products, but their deficiencies impact the enterprise's ability to quickly introduce new products or enhancements," OFHEO says. At the same time, Fannie has new initiatives to become more involved in interest-only, subprime, alternative-A, and negative amortization loans, which are "currently about 20% of the book of business," the regulator said. OFHEO reported that Fannie's issuance of single-family mortgage-backed securities declined by 4.9% to $476.1 billion in 2006, but its purchases of single-family private-label securities increased by 16.5% to $48.1 billion. Freddie Mac's issuance of single-family MBS fell 9.4% to $359.1 billion in 2006, and its purchases of single-family private-label securities fell by 37.1% to $106.3 billion.

Fannie Mae and Freddie Mac are making progress in correcting their systems, controls, and financial reporting, but "they still have much to do," according to the Office of Federal Housing Enterprise Oversight's 2006 report on its examinations of the two government-sponsored enterprises."A key indicator of successful remediation will be the timely filing of annual and quarterly financial statements by each company with a clean audit based on a controls-based audit," OFHEO Director James Lockhart said. OFHEO urges the boards of directors at Fannie Mae and Freddie Mac to continue monitoring management's efforts to remedy internal control weaknesses. The agency says Freddie appears further along in fixing its internal controls. And OFHEO indicates that successful remediation "should permit a return to controls-based auditing and ensure a sustainable control environment for financial reporting." OFHEO can be found online at http://www.ofheo.gov.

The loss mitigation tools available to Federal Housing Administration lender/servicers have helped 36,500 thousand families who were behind in their mortgage payment keep their homes during the first half of fiscal year 2007, according to the Department of Housing and Urban Development."FHA lending relief measures continue to help families around the nation work through difficult times, stay in their homes, and avoid foreclosure," HUD Secretary Alphonso Jackson said. HUD is urging Congress to pass an FHA reform bill that would allow the federal mortgage insurance program to finance more subprime borrowers. "Modernizing the FHA would provide more hard-working families with a strong alternative to risky mortgages," the secretary added. In fiscal 2006, the FHA loss mitigation program helped 75,000 delinquent borrowers keep their homes. However, FHA foreclosures totaled 51,600 in fiscal 2006. In addition, 4,900 defaults resulted in pre-foreclosure sales.

State regulators are taking steps to ensure that mortgage brokers and state-licensed lenders adhere to the same standards as federally chartered and regulated financial institutions when it comes to subprime hybrid adjustable-rate mortgages like 2/28s.The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators have endorsed a proposed statement on subprime mortgage lending issued by federal banking regulators on March 2. The comment period on the federal interagency statement ends May 7. Now the CSBS and the AARMR are "developing a parallel statement which will significantly mirror the final interagency statement," CSBS said in its weekly newsletter. The state regulators are accepting input until May 7. The CSBS and the AARMR conducted a similar process in adopting guidance on nontraditional mortgages that addressed interest-only and payment-option ARMs.

Federal regulators should have the authority and the responsibility to end abusive lending practices, Sen. Hillary Rodham Clinton says in a letter that urges the Federal Reserve Board to act quickly in finalizing guidance on subprime lending."We should take greater steps to ensure the regulators not only have the authority but the responsibility to end the deceptive and irresponsible lending practices that drew people into adjustable rate mortgages and other hybrids they could not afford when the rates adjusted upwards," the New York senator says in the letter to Fed Chairman Ben Bernanke. The Democratic presidential candidate also argues that lending regulations should cover nonbank lenders and should be effectively enforced. "I fear that regulatory oversight has been lax and too many lenders were irresponsible or unscrupulous," the senator says. "Families and communities are now paying the price." The comment period on the subprime guidance ends May 7.

The House and the Senate have included additional funding for the Office of Federal Housing Enterprise Oversight in an emergency supplemental appropriations bill to cover litigation expenses involving former Fannie Mae and Freddie Mac executives.The $120 billion supplemental bill approved by the House includes $7.6 million, which OFHEO Director James Lockhart requested earlier this year. The Senate bill provides $4.8 million. House and Senate appropriators will meet later this month to hammer out a final bill. Meanwhile, Mr. Lockhart has informed an administrative law judge that he will not recuse himself from a case in which OFHEO has charged former Fannie chairman and chief executive Franklin Raines, former chief financial officer Timothy Howard, and former comptroller Leanne Spencer with manipulating the company's earnings to maximize their bonuses from 1998 to 2003. The former executives requested Mr. Lockhart's recusal on the grounds that he is biased and should not be in a position to make a final decision in the case. OFHEO is seeking to recover $115 million in bonuses paid to the former executives. Once the administrative judge renders a decision, which is not expected until 2008, Mr. Lockhart can accept it or reject it.

Problems in the subprime market are "largely contained" and the economy will "weather this storm," Dallas Federal Reserve Bank president Richard Fisher says, but the outlook for the housing market isn't as clear.Last year, 40% of homebuyers were subprime or alternative-A borrowers, Mr. Fisher told the Austin Mortgage Bankers Association. With the contraction in nonprime lending, "housing markets may feel some short-term pain, making it less clear whether housing construction has bottomed and how long the housing downturn may last," he said. The Dallas Fed president also said the regulators are being very careful in setting credit standards because they don't want to compound the problems in the subprime sector or stifle innovation. "I think the recent subprime mortgage statement put out by the Fed and four other regulators gets the notion of sensible risk-taking just about right," Mr. Fisher said.

Lenders are already using a number of tools to help financially stretched borrowers avoid foreclosure, but these cases need to be addressed individually rather than with a blanket moratorium, according to the Mortgage Bankers Association.Lenders and servicers have developed loss mitigation tools to help borrowers who are at risk of losing their homes, MBA chairman John Robbins said in response to calls for an immediate six-month moratorium on foreclosures. Mr. Robbins acknowledged that a credit crunch in the subprime market has left some borrowers "trapped" and unable to refinance into a more affordable loan. "They are trapped, and we are doing everything we can to help them, including looking at new products designed to help troubled borrowers," Mr. Robbins said. Four civil rights groups have called for a moratorium. Allen Fishbein, director for housing policy at the Consumer Federation, said "unprecedented action" is needed. "We certainly think the situation is serious enough that it warrants consideration of all possible solutions, including a moratorium," he said.