Compliance & Regulation

Bank of America has extended the terms of its warehouse line to Option One Mortgage Corp., but reduced the facility by about half -- to just over $2 billion, according to a new public filing.H&R Block, the parent of Option One of Irvine, Calif., said in a filing with the Securities and Exchange Commission that it also amended a servicing and sale agreement with Wells Fargo Bank, but offered no details on what those changes entail. The BoA warehouse line has been extended to March 14, 2008, but is subject to several "performance triggers" tied to capital, net income, defaults, and related matters. H&R Block is trying to sell Option One and is supposed to make a public announcement regarding the sale process by the end of the week of March 25. According to the Quarterly Data Report, Option One ranks seventh among all subprime originators in the United States.

America's Community Bankers has dropped it long-standing opposition to a key provision in a GSE regulatory reform bill that raises Fannie Mae's and Freddie Mae's loan limit in high-cost areas."We are not endorsing it, we are not opposing it," ACB executive vice president Robert Davis told MortgageWire. ACB adopted this neutral stance over the winter, and it stands in sharp contrast to its previous efforts to protect the jumbo mortgage market from encroachment from the two government-sponsored enterprises. Mr. Davis would not explain the reasoning behind the change in policy. The House GSE bill (H.R. 1427) allows Fannie and Freddie to purchase loans in high-cost areas where the median sales price exceeds the $417,00 conforming-loan limit -- up to 150% of the conforming-loan limit or the median cost in that area, whichever is lower.

The news media have "overreacted" to the correction in the subprime market, and the mortgage market will settle down soon, according to a top official of the Department of Housing and Urban Development."Some of the concerns are justified because of the cooling in the housing market," HUD Deputy Secretary Roy Bernardi told the National Association of Mortgage Brokers. He stressed that the housing boom was unsustainable and that no one should be surprised by the adjustment or by the fact that subprime loans are risky. "I believe this cooling-off period will be a short-term adjustment, and it will eventually be healthy for our economy," Mr. Bernardi said. Sen. Mike Crapo, R-Idaho, told the brokers that market discipline is working but that some regulation is needed so the adjustment will not be so "severe" in the future. But the banking committee member stressed the need for a balanced approach. "We need to be careful that we don't create a disincentive to provide financial credit to those who have less than a perfect credit history," Sen. Crapo said. The NAMB can be found on the Web at http://www.namb.org.

Regulators and legislators should not go too far in reining in so-called "toxic loans," the chairman of the Mortgage Bankers Association said at the group's nonprime conference.Some loan products that lawmakers at the state and federal levels are seeking to bridle are "valuable tools" that enable people with affordability problems to achieve homeownership, San Diego mortgage banker John Robbins said. He said the market is already adjusting to the overzealousness of some originators, and today's loans are "significantly more conservative." "The market is efficient," he said. "It has [moved] and always will move at lightning speed" compared with those who oversee it. Rather than curb the use of such loans, or make it all but impossible for borrowers to qualify for them, Mr. Robbins called on lawmakers to work with the industry in repairing a lending process that includes, among other things, 21 federal forms "written in complex legal language which those within the industry cannot explain, much less understand." He said that as part of the fix, the industry's compensation structure must be "realigned" so that commissions to loan officers, account executives, and mortgage brokers do not contain excessive fees or yield-spread premiums. During his keynote address, Mr. Robbins took particular umbrage at what he said are "irresponsible" statistics being used by the Center for Responsible Lending. He said 86% of all subprime borrowers are currently paying their notes on time.

Fremont General Corp., Santa Monica, Calif., has agreed to sell $4 billion in subprime loans to an unnamed buyer (or buyers) -- but will book a $140 million loss on the deal.It is unclear whether servicing rights tied to these loans are also being sold. The lender could not be reached for comment. Fremont is trying to sell its subprime division, which services $27 billion in loans but has stopped funding new originations. Fremont, a depository, said it has received "approximately $950 million in cash from the first sale installment under the agreements, with the remaining sales under the agreements expected to be completed over the next several weeks." The company, in a filing with the Securities and Exchange Commission, said the mortgages are being sold at a discount, "reflecting current conditions in the sub-prime mortgage market."

Fannie Mae has cut ties with ailing subprime lender New Century Financial Corp., informing the company that it can no longer sell loans to the government-sponsored enterprise or service its mortgages.New Century, which is expected to file for bankruptcy protection, disclosed the news March 20 in a filing with the Securities and Exchange Commission. The Irvine, Calif.-based wholesaler also said it has been hit with cease-and-desist orders from several states, including California, Florida, and New York. The C&Ds accuse the company of not funding loans after closing. (New Century has not funded a mortgage in at least two weeks.) All of its warehouse providers cut off credit to the company. It services about $40 billion in loans, according to the Quarterly Data Report. One investment adviser told MortgageWire that New Century has enough cash to last 60 days. Its stock was delisted by the New York Stock Exchange and now trades on the "pink sheets." The companies can be found online at http://www.fanniemae.com and http://www.ncen.com.

Proposed federal underwriting guidance could create "questionable distinctions" between prime and subprime borrowers that would cut off credit to some subprime borrowers in the name of consumer protection, according to mortgage banking attorneys at K&L Gates."The natural consequence is that prime borrowers are encouraged, or at least permitted, by national housing policy to seek to finance the purchase of a home, but subprime borrowers are subjected to more rigid restrictions," the K&LG attorneys point out in an alert to clients. The proposed guidance would require lenders to underwrite adjustable-rate mortgages for subprime borrowers at the fully indexed rate, while prime borrowers would continue to qualify at the lower teaser rate. "The imposition of differing standards for subprime vs. non-subprime borrowers raises many concerns, not the least of which is that such a practice may result in a disparate impact on borrowers based upon categorizations protected under the fair lending laws," the alert says.

As part of an FHA reform bill, House Financial Services Committee Chairman Barney Frank, D-Mass., wants to cross-subsidize mortgage insurance premiums for subprime borrowers by tapping into higher revenues generated by changes to the FHA reverse mortgage program.The chairman said he plans to take up FHA reform soon that also eliminates a cap on Home Equity Conversion Mortgage originations and raises the HECM loan limit. "We will take a piece of that money, we hope, to subsidize higher loan losses on less creditworthy borrowers," Rep. Frank told the National Association of Mortgage Brokers Legislative Conference. (The Bush administration wants the Federal Housing Administration to charge risk-based premiums under its reform proposal.) The chairman also told the brokers that he wants to make it easier for them to originate FHA loans. But in a separate predatory lending bill, he said he will look at yield-spread premiums to make sure consumers know what they are being charged.

Securitizers of subprime mortgages will likely face some assignee liabilities under a predatory lending bill that House Financial Services Committee Chairman Barney Frank, D-Mass., plans to introduce in May."I do believe there has to be some assignee liability," Rep. Frank told the National Association of Mortgage Brokers Legislative Conference. He said he believes some level of liability is needed to prevent the origination and securitization of bad loans. "It is the best enforcement mechanism we could have," he said. It will also give regulators leverage to get securitizers to exercise forbearance when there are problems in the subprime market. Chairman Frank also said he will steer away from a suitability standard, which is favored by many consumer advocates, and focus on the ability of the borrower to repay the loan.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has invited the chief executives of five major lending companies, including New Century Mortgage Co., to testify at a March 22 hearing on the causes of the "subprime crisis."The CEOs of HSBC Mortgage Corp. USA, Countrywide Home Loans, WMC Mortgage Corp., and First Franklin Mortgage are also invited to explain their subprime lending practices to the committee. Sen. Dodd blames predatory and irresponsible lending practices for rising defaults and foreclosures on subprime loans. "At the very least, homeowners facing foreclosure deserve to know what factors contributed to their dire straits, and what steps are needed to fix this pressing problem," Sen. Dodd said.