Compliance & Regulation

Restricting Fannie Mae's and Freddie Mac' portfolio investments to affordable housing loans won't help very many low-income people, according to House Financial Services Committee Chairman Barney Frank, D-Mass.Chairman Frank said Federal Reserve Board Chairman Ben Bernanke's recommendation [see item above] to refocus and limit the size of the GSE portfolios won't be effective in creating additional affordable housing unless there is a subsidy. "Affordable housing is not market-rate housing," he said. Rep. Frank's GSE bill would require the two government-sponsored enterprises to make annual contributions to an affordable housing fund that would subsidize the construction and rehabilitation of affordable rental units. If the GSEs "do only loans with no subsidy it won't be for very low-income people," Rep. Frank told reporters. Chairman Bernanke has not taken a position on the AH fund.

If Congress limited Fannie Mae's and Freddie Mac's portfolio investments to affordable housing mortgages, it would reduce systemic risk and ensure that the two government-sponsored enterprises are providing a clear public benefit, according to Federal Reserve Board Chairman Ben Bernanke."Tying the portfolios to a purpose that provides measurable benefits to the public would help to ensure that society in general -- not just GSE shareholders -- receives a meaningful return for accepting the risks inherent in the portfolios," the Fed chairman said. "Moreover, defining the scope and purpose of the portfolios in this way would reduce the unbridled growth in those portfolios while avoiding the imposition of arbitrary limits or caps." Each of the two GSEs has a $700 billion portfolio with a significant portion invested in highly rated subprime mortgage securities. Mr. Bernanke told the Independent Community Bankers of America annual convention that such investments do little to enhance liquidity for mortgages extended to below-median-income homebuyers that banks try to serve through their Community Reinvestment Act programs. Refocusing the GSE portfolios to invest in affordable housing mortgages would create a new secondary-market outlet for those CRA-originated mortgages, the Fed chairman said.

Fannie Mae and Freddie Mac would be able to expand their mortgage portfolios again under a legislative proposal supported by the Bush administration, according to the administration's point man on GSE reform.James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said a recent compromise on government-sponsored enterprises legislation instructs the new GSE regulator to consider the size and growth of the mortgage market in regulating the portfolios. Once Fannie and Freddie get their houses in order, "it is certainly possible that a mission-focused regulation would allow the portfolios to grow with the mortgage market," the OFHEO director told an America's Community Bankers meeting in Washington. Mr. Lockhart appeared to be responding to concerns expressed by Freddie and some of its allies that the new GSE regulator could order massive portfolio cuts. "Using the legislative guidance focusing on mission, it is unlikely that there would be drastic reductions in those portfolios, but rather a reallocation," Mr. Lockhart said.

Considering the turmoil in the subprime market, it is a "positive sign" that the federal banking regulators have responded by issuing underwriting guidance on "exploding" adjustable-rate mortgages, according to Sen. Jack Reed, D-R.I."I think [the regulators] are beginning to recognize this is a systemic problem, not just an individual problem," Sen. Reed told reporters after speaking before the America's Community Bankers Washington conference. Sen. Reed told the ACB members that the Senate Banking Committee is working on legislation that increases the availability of housing and foreclosure prevention counseling. The bill would also provide homeowners facing foreclosure with assistance for a few months so they can recover from temporary financial problems. Federal regulators issued proposed guidance on subprime ARMs on March 2 for a 60-day comment period. "I hope everyone in the market will quickly embrace these new guidelines, so we can move forward and work together to address the looming foreclosure problems that may lie ahead," said Senate Banking Committee Chairman Christopher J. Dodd, D-Conn.

Countrywide Financial Corp., Calabasas, Calif., has announced that it has received formal approval from the Office of Thrift Supervision to convert its national bank charter to a federal savings bank (or thrift) charter.The company said Countrywide Bank NA will begin operating as a thrift on March 12, and Countrywide Financial Corp. will become a savings-and-loan holding company, with the OTS as the regulator of both entities. "The conversion to a savings bank charter aligns the regulatory supervision of the company with our strategic objectives, and will help us better leverage our real-estate-finance-focused business model for competitive advantage in the current marketplace," said Angelo R. Mozilo, Countrywide's chairman and chief executive officer. The company can be found online at http://www.countrywide.com.

The chief executive officer of the nation's largest mortgage lender says new proposed federal underwriting guidelines for so-called "exotic" mortgage products would do more harm than good.Speaking at the recent Midwinter Conference in Utah, Countrywide Financial CEO and chairman Angelo Mozilo said the proposed rules -- which require, among other things, that lenders underwrite loans at their fully indexed rate -- will all but wipe out liquidity in the marketplace and cause problems up and down the housing "food chain." National Mortgage News was the only news organization at the conference, which is run by former Merrill Lynch managing director Richard Pratt. (For full details of the conference, see the March 11 issue of NMN.)

After foreshadowing his decision in public statements over the past few weeks, Department of Housing and Urban Development Secretary Alphonso Jackson has put a halt to Clipper Equity LP's attempt to buy Starrett City, a large apartment complex in Brooklyn, N.Y.HUD has jurisdiction "pursuant to Paragraph 22 of the Housing Assistance Payments Contract between HUD and Starrett City Associates, to grant or withhold consent to 'any sale, assignment, or conveyance or transfer' of Starrett City Associates' ownership interest in Starrett City," Mr. Jackson says in a letter to Clipper Equity. The letter lists a menu of items for the company to fix before approval could be considered. A number of politicians have come out against the sale, including former HUD secretary and current New York Attorney General Andrew Cuomo. Clipper's attorney could not be reached for comment by MortgageWire's deadline.

A senior member of the Senate Banking Committee believes Congress will place the government-sponsored enterprises under a new, more powerful regulator before the end of the current session, but the Mortgage Bankers Association's chief lobbyist isn't nearly as optimistic.The MBA's Kurt Pfotenhauer told the Midwinter Conference in Park City, Utah, that there's less than a 50-50 chance the House and Senate will see eye to eye on legislation to place Fannie Mae and Freddie Mac under stricter supervision. And he said that if Congress doesn't act this year, there's a strong possibility the next Congress won't, either. However, Sen. Robert Bennett, R-Utah, told the conference that now that Treasury Secretary Henry Paulson has shown an interest in the question of how best to oversee the GSEs, there's a strong chance the two chambers can reach agreement. "With Secretary Paulson in the mix, the discussions have been more fruitful, and I think we'll get a bill," said Sen. Bennett, who is the second-ranking minority member of the banking panel. But Mr. Pfotenhauer, the MBA's senior vice president for government affairs, said that if a bill doesn't pass in the 110th Congress, "the odds are it will never be passed." And once the GSEs get beyond their financial problems, he added, "the whole issue fades away until there is another triggering event."

The Federal Bureau of Investigation's estimate that mortgage fraud costs the lending business $1.2 billion a year is off the mark by more than $3 billion, according to a fraud analyst speaking at the Midwinter Conference in Park City, Utah.And others say the FBI's calculation could be shy by more than that. The FBI's calculation is based on Suspicious Activity Reports that it receives from lenders and others who think they may have been cheated in one way or another. But Arthur Prieston, chairman of the Prieston Group, a California firm that offers integrated fraud protection, loss mitigation, and insurance services, puts fraud losses at $4.4 billion annually. He bases that figure on his firm's claims data for clients represented by its legal services affiliate, the American Mortgage Law Group, which chases down fraudsters. And he says the loss severity is at least 50% greater for lenders that are not insured and don't chase down perpetrators. At the same time, a former fraud detection specialist who asked to remain anonymous because he no longer works in the field said the annual take as a result of mortgage fraud is more like $6 billion and growing. He said "fraud for commission," in which originators will "do anything" to earn a fee, is just as prevalent as fraud for profit. "It's pervasive throughout the industry," the source said. "It's growing because the accountability is not there. If they do it and get away with it, they do it again."

Fremont General Corp., Santa Monica, Calif., is in discussions to sell its subprime division -- one of the largest in the nation -- after agreeing to a cease-and-desist order with the Federal Deposit Insurance Corp.The news broke late March 2. In trading Monday morning its share price was once again spiraling downward. The company said it will remain a commercial real estate lender and will continue to gather deposits. (FGC is the parent of an industrial loan company and subprime wholesaler called Fremont Investment & Loan.) In a filing with the Securities and Exchange Commission, FGC says it is exiting the subprime arena in light of "recent regulatory events, as well as changing competitive dynamics in the sub-prime market." The C&D order from the FDIC says FI&L will cease and desist from a long list of activities, including "Operating with a large volume of poor quality loans." According to the Quarterly Data Report, the company ranks seventh among subprime funders and 14th among servicers. After the SEC filing, Fitch Ratings downgraded Fremont General's long-term issuer default rating from B-plus to CCC, its short-term issuer rating from B to C, and its long-term senior debt from B to CC.