Compliance & Regulation

Servicers should not start foreclosure proceedings until a borrower has missed three monthly payments of principal and interest, according to a Federal Trade Commission attorney.That is a "key provision" in the Fairbanks settlement agreement, FTC attorney Allison Brown told a National Community Reinvestment Coalition conference. The 2003 settlement spelled out best practices that the FTC expects all servicers to follow. And the consumer protection agency said it does not want to find servicers charging delinquent borrowers a lot of fees and using those unpaid fees as justification for initiating a foreclosure. The FTC is also concerned that some forbearance agreements are unworkable, because the borrowers are expected to make double payments when they resume making their monthly payments. "That is an area we are looking at," Ms. Brown said, as well as "how we can encourage better forbearance practices."

The recently proposed federal subprime lending guidance reminds lenders that they should help consumers make informed choices and not steer them into 2/28 adjustable-rate mortgages when they might qualify for another product, according to Office of Thrift Supervision Director John Reich.It is an "inappropriate practice" to steer consumers into 2/28s with one-sided product descriptions that present the benefits without describing the risks, Mr. Reich told a National Community Reinvestment Coalition conference. (A 2/28 ARM is a 30-year mortgage that has a fixed rate for the first two years.) The comment period on the proposed guidance ends May 7. The thrift regulator also told the community activists that his agency is about to issue a final rule that realigns OTS's Community Reinvestment Act regulation with those of the other federal banking agencies. "We are making these revisions to our CRA rule to promote consistency and help facilitate objective evaluations of CRA performance across the banking and thrift industries," Mr. Reich said.

New York Attorney General Andrew Cuomo said Thursday that his office is investigating subprime lenders whose customers have fallen behind on their payments at the highest rate in four years, according to a published report.The Washington Post reported that Mr. Cuomo -- a former housing secretary in the Clinton administration -- revealed the investigation during a news conference but did not offer any details. According to the Quarterly Data Report, subprime foreclosures totaled 3% at the end of December. The overall delinquency rate stood at 14.35%. A year ago the foreclosure rate was 2.13%, but delinquencies totaled 15.89%, the QDR found.

LECG Corp., a global expert services and strategic advisory firm based in Emeryville, Calif., has announced that its subsidiary LECG LLC has agreed to acquire the Secura Group LLC, a privately held consulting firm specializing in financial services and regulatory compliance.The terms of the agreement were not disclosed. Headquartered in Vienna, Va., Secura was established in 1986 by William Isaac, former chairman of the Federal Deposit Insurance Corp., LECG reported. Secura works with financial industry clients in numerous areas, such as fair-lending analysis; anti-money-laundering programs; compliance management; Community Reinvestment Act ratings; subprime lending issues; and Home Mortgage Compliance Act reviews.

The contraction in subprime lending and the overhang of a large number of unsold homes on the market could lead to a 10% decline in house prices this year unless the Federal Reserve cuts interest rates, according to a Merrill Lynch economist.David Rosenberg says he expects the slowdown in housing to force the Fed to cut interest rates by 100 basis points during the second half of this year to keep the economy out of recession. Even with the Fed cutting rates, he projects that housing prices will decline by 5% in 2007 and be flat next year. Loose subprime lending practices boosted new-home sales by 20% during the boom. But now tighter credit is making it difficult for financially strained borrowers to avoid delinquency and default. "Therefore, units they vacate are going to compound what is already a record glut of unsold homes on the market and accentuate the deflationary pressure on the price front," Mr. Rosenberg said.

In a regulatory filing with the Securities and Exchange Commission, Cleveland-based National City Corp. says one of the two mortgage insurance companies covering its home equity loan portfolio has refused to make claims payments.Published reports identified the MI firm as Radian Group. In the SEC filing, NCC said one of the two providers has been paying claims on the lender-paid MI policies promptly, while the other "has been rejecting a reasonable number of claims filed for reasons that National City believes are inappropriate under the insurance contract." National City said that depending upon how the dispute on the MI coverage for the $2.2 billion second-lien portfolio is resolved, it may have to increase loss reserves by an amount in the range of $50 million. In the same filing, National City said the hedging of its mortgage servicing portfolio resulted in a $45 million pretax loss during the first two months of this year.

The Federal Housing Administration could have hundreds of thousands of subprime borrowers if Congress passes an FHA reform bill, but if not, the agency will raise its mortgage insurance premiums, Housing Commissioner Brian Montgomery has told Senate appropriators.As a fallback position, the FHA commissioner testified that he will raise the FHA upfront premium from 150 basis points to 166 bps and its annual 50-bp premium by a few basis points. Sen. Christopher Bond, R-Mo., warned the commissioner that he is skeptical that the reforms will increase FHA revenues, and he doubts that the Department of Housing and Urban Development could implement the reforms fast enough to avoid a premium increase in fiscal year 2008. "As you know, HUD does nothing quickly," Sen. Bond said. Mortgage Bankers Association chairman John Robbins said the FHA could quickly regain a 10% market share if the reforms are passed, which would generate $3 billion in new revenues. Sen. Patty Murray, D-Wash., chairman of the Senate HUD appropriations subcommittee, said, "We need to work to make sure the FHA is strong and effective." However, she said she does not want the FHA to adopt risky subprime practices such as no-downpayment loans.

Subprime lender Master Financial, Orange, Calif., closed its wholesale division late Wednesday, and another top-ranked funder -- People's Choice Financial Corp. -- pulled a key registration statement with securities regulators, suggesting that it too is in deep financial trouble.Sources told MortgageWire that People's Choice -- headed by former Aames Financial executive Neil Kornsweit -- is talking to a potential investor about a sale. The Irvine, Calif.-based company had hoped to go public. At deadline time, executives at both subprime shops could not be reached for comment. A Master Financial e-mail message provided to MW by a source states, "It is with the deepest regret that I have to announce that we are ceasing operations in our wholesale sub-prime origination unit effective today. This comes as a result of a continued strain in the secondary market and lack of liquidity for the loans we, as an industry, produce."

The House GSE bill would raise the conforming loan limit in seven high-cost metropolitan areas, but not in Massachusetts, the home state of the bill’s chief architect and sponsor, Rep. Barney Frank.The House Financial Services Committee chairman's bill would allow Fannie and Freddie to purchase loans in four metropolitan statistical areas in California and multistate areas surrounding New York and Washington where the median sales price exceeds the conforming-loan limit. However, the median sales price in the Boston-Cambridge-Quincy MSA was $406,000 in the fourth quarter, according to National Association of Realtors data, slightly below the current $417,000 conforming-loan limit. The government-sponsored enterprise reform bill (H.R. 1427) caps the loan limit in high-cost areas at 150% of the conforming-loan limit. The Realtors support "regional adjustments to the conforming loan," NAR president Thomas Stevens told committee members at a March 12 hearing. But the Mortgage Bankers Association and America's Community Bankers oppose an increase. "Jumbo loan borrowers are well served by the private sector," MBA chairman John Robbins testified.

Congress may have to act quickly to protect subprime borrowers who are in danger of losing their homes over the next 18 months, according to Senate Banking Committee Chairman Christopher J. Dodd, D-Conn."We may need to get some forbearance or something like that to give them a chance to work through their problems," Sen. Dodd told reporters after speaking to the National League of Cities. "Clearly we are looking at what we can do to help out." Before deciding whether predatory lending legislation is needed, the committee chairman told reporters he wants to see how the subprime securities market behaves and what actions federal and state regulators take to correct underwriting standards on subprime loans. If the regulators finally do a "good job" and the market is "working well," that may be enough, Sen. Dodd said.