Compliance & Regulation

The best way to "cure" the serious problems in the subprime market is to pass Federal Housing Administration reform legislation that will allow lower-income homebuyers to get safer and affordable loans, HUD Secretary Alfonso Jackson has told a congressional panel."All you have to do is read the news articles to recognize that New Century and others created serious problems in the subprime market," the secretary of the Department of Housing and Urban Development testified. The FHA single-family reform bill would give the agency more flexibility in setting mortgage insurance premiums and downpayment requirements so it can serve more subprime borrowers. "I am convinced that is the best way to save" those homeowners, Secretary Jackson said. The HUD secretary also told the House panel that discussions with industry groups could soon lead to a consensus on reform of the Real Estate Settlement Procedures Act. "I think we are pretty close," he said.

Fannie Mae and Freddie Mac would make annual contributions to an affordable housing fund based on their outstanding book of business, rather than their profits, according to a GSE regulatory bill introduced by House Financial Services Committee chairman Barney Frank, D-Mass.Rep. Frank chose this approach to address objections raised by the Bush Administration, but it also has the Mortgage Bankers Association's support. "This approach will make it more difficult for the GSEs to pass the costs of their contributions onto mortgage lenders and consumers," MBA chairman John Robbins told members of the committee at a March 12 hearing. Under the bill, the two government-sponsored enterprises would be assessed an 1.2 basis point fee on their outstanding mortgage portfolios, as well as Fannie- and Freddie-issued mortgage-backed securities that are owned by other investors. Originally, the GSE AH fund assessment was based on profits, but administration officials objected, claiming it would encourage the GSEs to grow their portfolios and it looked too much like a "tax." The new GSE regulator would be responsible for managing the AH fund and distributing the grants under the Frank bill, not Fannie or Freddie.

The Treasury Department has given the GSE regulatory reform bill introduced by House Financial Services Committee chairman Barney Frank, D-Mass., its seal of approval and it now looks like the House will easily pass the bill."On balance, this is a well-crafted bill," Treasury undersecretary Robert Steel said, that will "significantly improve the supervision" of the government-sponsored enterprises. In December, Rep. Frank and Treasury secretary Henry Paulson worked out a compromise on regulating the size and growth of the Fannie Mae and Freddie Mac's portfolios and other key areas, such as GSE capital requirements. Treasury's endorsement shows that Rep. Frank faithfully incorporated those provisions into the bill. Meanwhile, a House Financial Services subcommittee hearing on the GSE bill (H.R. 1427) showed that industry groups generally support the bill and raised few objections. National Association of Realtors president Thomas Stevens said the bill does not "over-regulate" the GSEs at the March 12 hearing. Top executives from Fannie and Freddie are expected to testify before the full committee on March 15.

House Financial Services Committee Chairman Barney Frank, D-Mass., has introduced a GSE reform bill that follows the December compromise he worked out with Treasury Secretary Henry Paulson on regulating the size and growth of Fannie Mae's and Freddie Mac's portfolios.Reps. Richard Baker, R-La., Mel Watt, D-N.C., and Gary Miller, R-Calif., are co-sponsors of the bill, which would strengthen regulation of the government-sponsored enterprises (including the Federal Home Loan Banks), create an affordable housing fund, and raise the conforming loan limit in high-cost areas. "The provisions on safety and soundness, minimum capital requirements in particular, are quite strong, and we simply must make sure they are maintained through the legislative process," Rep. Baker said. On March 12 and March 15, the House Financial Services Committee will hold hearings on the bill. The committee is tentatively scheduled to vote on the GSE bill March 28. After the House passes the GSE bill, the Senate is expected to begin work on its own bill.

There is a consensus within the National Association of Hispanic Real Estate Professionals that mortgage wholesalers and brokers should be held accountable for the loans they originate, but the trade group is still in discussions on how to formulate a suitability standard."Clearly the lenders need to have more accountability with respect to the types of loans they deliver to consumers," said NAHREP executive committee member Gary Acosta. The San Diego mortgage broker noted that mortgage brokers and other lenders at the point of sale should be more accountable than wholesalers. But wholesalers have the ability to ensure that a loan has some "tangible benefit" for the consumer, Mr. Acosta said. Meanwhile, NAHREP released a survey at its annual legislative conference in Washington showing that 65% of its members are counseling homeowners who can no longer afford their house payments due to an upward adjusting mortgage. Large majorities of the 500 respondents favor capping mortgage broker compensation and eliminating lender incentives for making loans with prepayment penalties. Nearly 50% of the respondents said they are not aware of Fannie Mae's and Freddie Mac's community-based lending programs.

Troubled B&C giant New Century Financial Corp., Irvine, Calif., secured a $265 million line of credit March 8 from a large unidentified lender but still could be headed for bankruptcy court.After the company revealed in a public filing that it had limited financing -- the $265 million -- stock analysts continued to predict its demise. Merrill Lynch & Co. issued a research report March 9 saying the nondepository's "next disclosure" likely will be a bankruptcy filing. Sources told MortgageWire that the company is trying to sell the firm, but is running out of time. According to the Quarterly Data Report, NCFC is the nation's 14th-largest subprime servicer, with $40 billion in receivables. Meanwhile, the company said it is funding little in the way of new loans -- an allegation that first appeared on the Grapevine, a broker discussion board operated by National Mortgage News. In a filing with the Securities and Exchange Commission, NCFC reported that it had been hit by $150 million worth of margin calls -- $80 million of which it had satisfied. Disclosures about a criminal probe and possible bankruptcy filing have swamped the company's stock over the past 10 days. New Century, the nation's second-largest subprime funder in the fourth quarter, can be found online at http://www.ncen.com.

Housing markets are "weak" and house prices are generally "flat or declining," according to the Federal Reserve's Beige Book."Almost all districts reported that housing markets remained weak," the Beige Book says, although a few Federal Reserve district banks reported some signs of stabilization in February. The Cleveland and Atlanta district banks noted that construction has "flattened out." The Richmond bank reported signs of a "firming" housing market. However, inventories of unsold homes in the Dallas-Fort Worth areas hit "new highs due to slowing sales and cancellations." The San Francisco bank reported "noticeable" recent price declines in some areas, while "[c]ontacts in the Boston district saw no signs that the weakness in housing was nearing an end," according to the Beige Book. Meanwhile, commercial real estate markets "continued to firm or remained solid" the Fed publication says.

David Einhorn, considered to be an "activist" shareholder of the struggling New Century Financial Corp., resigned from the company late Wednesday night, according to a new filing with the Securities and Exchange Commission.The resignation comes amid rumors that the subprime funder is negotiating a new warehouse line of credit with a major Wall Street firm to avoid being in violation of its warehouse covenants. As of MortgageWire's deadline, the company could not be reached for comment. Mr. Einhorn's hedge fund, Greenlight Capital, owns 3.49 million shares of New Century, or 6.3% of the company. Over the past week New Century's share price has plunged, causing huge paper losses for Greenlight. The subprime giant's stock now trades at just over $5, compared with a 52-week high of almost $52. New Century is the focus of a criminal probe by the U.S. attorney's office in central California regarding trading in the company's securities and errors tied to its accounting for loan repurchases.

The Federal Bureau of Investigation says mortgage fraud is "pervasive and growing" and that the incidence of such fraud has nearly doubled in the past three years.The FBI reported that it investigated 818 mortgage fraud cases in fiscal year 2006 (up from 436 in fiscal 2003), resulting in 263 indictments, 204 convictions, and recoveries of $630 million in restitution and fines. Currently pending cases total 1,014. The FBI estimates that 80% of all reported fraud losses involve collaboration or collusion by industry insiders. "The increased reliance by both financial institutions and nonfinancial institution lenders on third-party brokers has created opportunities for organized fraud groups, particularly where mortgage industry professionals are involved," the FBI's annual financial crime report says. Meanwhile, the Mortgage Bankers Association and the FBI have announced a memorandum of agreement to work together to promote the FBI's Mortgage Fraud Warning Notice. The warning states that it is a federal crime for any person to make false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property in an effort to influence the action of a financial institution. The MBA and the FBI said they will foster the use of the notice by making it available to mortgage lenders for posting on their websites.

The House Financial Services Committee will act on a long-term extension of the federal terrorism risk insurance program in April and a flood insurance reform bill in May, according to the committee chairman, Rep. Barney Frank, D-Mass.Rep. Frank told an insurance company forum he wants to expand the federal backstop to cover losses on group life and workers' compensation insurance that are due to a terrorist attack. He also said he wants a bill that covers nuclear and biological attacks and does not distinguish between international and domestic terrorism. The committee chairman said the bill to reform the National Flood Insurance Program will be similar to the bill the committee passed last year. That bill would penalize lenders that allow flood insurance to lapse on mortgaged properties in flood zones. It would also eliminate subsidized premiums on second homes and commercial properties. Premiums on those properties would be increased 15% a year until they reach the unsubsidized rate. "It will discourage people from building where they shouldn't build, and raises premiums on second homes," Rep. Frank said.