Compliance & Regulation

New Century Financial Corp., Irvine, Calif., disclosed late March 2 that it 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.In trading Monday morning, its share price was down 60% to just over $6. (Its 52-week high is $51.97.) In a filing with the Securities and Exchange Commission, the nation's second-largest subprime funder said it expects to violate certain warehouse lending covenants stipulating that it must earn a profit for a minimum of two consecutive quarters. New Century notes that lenders on six of its 11 warehouse agreements have executed waivers. The company says it currently has $13 billion in committed lending facilities and $4.4 billion in uncommitted borrowing capacity. Over the past six months, company insiders have sold 796,445 shares while buying none, according to Thomson Financial. New Century recently cut 300 jobs, or about 4% of its work force, including 124 positions in Orange County.

Subprime giant New Century Financial Corp., Irvine, Calif., says it expects to tell the Securities and Exchange Commission that it will delay the filing of its annual 10-K report for the year ending Dec. 31.A few weeks ago, the publicly traded nondepository said it would report a loss for the fourth quarter and restate earnings for the previous three quarters. According to the Quarterly Data Report, New Century ranked second among all subprime originators in the fourth quarter, funding $12.2 billion in loans, an 8% decline from the level of the fourth quarter of 2005. HSBC Finance, Prospect Heights, Ill., ranked first, with $12.2 million.

Rural Opportunities Inc., a multistate rural development organization based in Rochester, N.Y., has announced the formation of a partnership with Fannie Mae to protect affordable rental properties in the Northeast."The net loss of affordable units in rural communities is of particular concern in the face of mounting challenges to the development of new projects in smaller communities," said Lee Beaulac Sr., vice president of ROI, which is part of the national NeighborWorks network. The ROI/Fannie Mae partnership will focus in particular on properties that have been financed by the Department of Agriculture's Rural Housing Service and, to a lesser extent, by the Department of Housing and Urban Development. Fannie and ROI were joined in the announcement by Sen. Hillary Rodham Clinton, D-N.Y., who "played a key role in encouraging the formation of the partnership," they said. Fannie Mae can be found online at http://www.fanniemae.com.

Single-family house prices increased by 5.9% in 2006, but the rate of increase has slowed considerably from 13.2% in 2005, when the housing market was booming, according to new Office of Federal Housing Enterprise Oversight data.The OFHEO House Price Index also shows that appreciation increased by 1.1% in the fourth quarter and 1.03% in the third quarter. House prices are still rising but are now "more in line with historical norms," OFHEO Director James Lockhart said. Separately, the S&P/Case-Shiller House Price Indices released Feb. 27 indicate that house prices declined in 20 metropolitan areas by 0.4% in 2006. Some economists are coming to view the Case-Shiller HPI as more representative of housing price trends than OFHEO's because they track all purchase transactions. The OFHEO index includes refinancings and is limited to transactions involving conventional conforming loans purchased by Fannie Mae and Freddie Mac.

The Department of Housing and Urban Development will not seek a zero-downpayment option as part of its Federal Housing Administration reform package, HUD Secretary Alphonso Jackson has told a congressional panel."We will remove from the legislation the zero downpayment," Secretary Jackson told House appropriators. The HUD secretary noted that there is resistance in the Senate to the zero-down option, and he has agreed to maintain a minimum downpayment. "Whether it is 1% down or 2% down, there should be something paid down to give the people incentives to make sure they understand what it takes to be a homeowner," Mr. Jackson said. The FHA now has a 3% downpayment requirement, and it wants the flexibility to adjust the downpayment along with mortgage insurance premiums based on the borrower's credit profile and resources.

Mortgage brokers would be required to disclose all fees they receive from borrowers and lenders seven days prior to closing under a bill that Rep. Luis Gutierrez, D-Ill., plans to introduce soon.The Mortgage Broker Licensing and Predatory Loan Disclosure Act calls for clearer disclosures on exotic and subprime mortgages. It also establishes liability for brokers that violate the new law. "The legislation will bring accountability, transparency, and stricter standards to this loosely regulated industry," said Rep. Gutierrez, who is a senior member of the House Financial Services Committee. "It will ensure that people understand the hazards of high-risk loans and the subprime market, and it will ensure that mortgage brokers are properly licensed and are operating in good faith." The bill also requires all mortgage brokers to be bonded, and it directs the Department of Housing and Urban Development to establish minimum licensing requirements for mortgage brokers. The National Association of Mortgage Brokers says it supports better and clearer disclosures. However, brokers should be treated like other lenders and not singled out, according to the association. "Everybody should live under the same standards," NAMB president Harry Dinham said.

The House Financial Services Committee is scheduled to mark up a GSE regulatory reform bill on March 28, according to Chairman Barney Frank, D-Mass., but he still hasn't finished drafting the section of the bill that creates an affordable housing fund.Rep. Frank wants the AH fund, which depends solely on Fannie Mae and Freddie Mac contributions, to funnel $500 million to the Gulf Coast states this year to rebuild affordable housing that was damaged or destroyed in the 2005 hurricanes. These funds will go to local governments with appropriate safeguards and "bypass" the Department of Housing and Urban Development, Rep. Frank told a National Low Income Housing Coalition conference in Washington. During the second year, contributions by the two government-sponsored enterprises would go directly to a newly created National Housing Trust Fund. Chairman Frank said he plans to introduce a trust fund bill this spring.

The 12 Federal Home Loan Banks posted $2.6 billion in combined net income in 2006, up from $2.5 billion in 2005, according to a report by the FHLBanks' Office of Finance.The preliminary unaudited results show that the FHLBanks have $1.02 trillion in combined assets, and advances to member banks and thrifts totaled $641 billion as of Dec. 31. The Office of Finance said it expects to publish the 2006 Combined Financial Report for the FHLBanks on March 30, which would "mark a return to timely combined financial reporting." The agency can be found online at http://www.fhlb-of.com.

The National Association of Home Builders wants assurances added to a GSE regulatory reform bill that would prevent a regulator from ordering Fannie Mae and Freddie Mac to make "massive" cuts in their mortgage portfolios.In a letter to key lawmakers, the NAHB said it supports efforts to reach a compromise on regulation of the portfolios maintained by the two government-sponsored enterprises. However, the association expressed concern about recent comments by GSE regulator James Lockhart. In the Feb. 23 letter, NAHB executive vice president and chief executive Jerry Howard says Mr. Lockhart's comments indicate that the compromise language could be "interpreted broadly by the new regulator to require massive portfolio cuts that would severely disrupt the mortgage markets and impede the enterprises' pursuit of their housing mission. We would like to see revision in that language to prevent such an outcome." The homebuilders also want changes to a section of the bill that creates a GSE affordable housing fund so that for-profit companies can qualify for funding on the same footing as nonprofit housing groups.

AARP, AFL-CIO, Consumer Federation of America, Center for Responsible Lending, along with scores of community activist, civil rights and religious groups are urging federal and state banking regulators to tighten underwriting standards on subprime 2/28 ARMs and protect consumers and minorities from payment shock and foreclosures.In a letter, the 80 diverse groups call on the regulators to extend the nontraditional mortgage guidance to subprime 2/28 adjustable-rate mortgages so those loans are unwritten at the fully indexed rate. "We remain concerned that millions of high-risk, unaffordable loans are not covered by the guidance and that massive payment shock built into these loans could cause a foreclosure crisis that eclipses the displacements caused by Hurricane Katrina," the Feb. 21 letter said.