Compliance & Regulation

The Department of Housing and Urban Development has initiated a rulemaking process to crack down on downpayment assistance programs that have bolstered Federal Housing Administration single-family loan originations but also led to rising FHA defaults and foreclosures, according to the HUD inspector general."We are just happy that this thing is going forward on downpayment assistance," HUD IG Kenneth Donohue told MortgageWire. The HUD IG has been critical of the DA program for several years because it allows builders and sellers to funnel cash assistance through nonprofit groups to homebuyers. The sellers usually recoup the assistance through inflated property prices or fees. Mr. Donohue said he could not discuss specifics about the proposed rule, which is currently being reviewed by the White House Office of Management and Budget. However, the current DA program -- in the way it was designed and applied -- should be eliminated, Mr. Donohue said.

Fannie Mae's board has voted to withhold $44.4 million in bonus money slated for 46 former and current senior executives, including CEO Daniel Mudd.The bonus money -- in the form of stock rewards -- covers two different timeframes (2001-2003 and 2002-2004). The money will be taken into income by the congressionally chartered mortgage giant. (The first installment of the 2001-2003 was paid out but the rest was not.) Fannie Mae is still working its way through a $6 billion accounting scandal that came to a head in late 2004 when then chairman and CEO Franklin Raines and chief financial officer Timothy Howard were forced out. Regulators have accused Messrs. Raines, Howard and others of manipulating accounting rules to meet earnings and bonus targets. In total, 46 former and current executives are affected by the board's decision. Current CEO Mudd was slated to receive $4 million in stock bonus money. Mr. Raines was owed $11.2 million, Mr. Howard $3.3 million.

Fannie Mae and Freddie Mac have jointly developed master and short form security instruments that lenders can download and use in 27 states.The new forms, which will be available this spring, give lenders the option of filing a master deed of trust with the recording district and attaching the three-page short form to the closing documents of each mortgage transaction. "These documents are a tool that will allow lenders to better serve their borrowers, help streamline the process and save money on recording costs," Fannie senior vice president Marianne Sullivan said. Arizona, California, Florida, New York and Texas are some of the states where lenders can use the new forms.

Key Democrats on the House Financial Services Committee are putting pressure on federal and state banking regulators to extend nontraditional mortgage guidance to adjustable-rate 2/28 and 3/27 mortgages to make sure those loans are underwritten at the fully-indexed rate."If financial institutions underwrite (or purchase loans underwritten) only for initial 'introductory' rates … they are placing consumers at unnecessarily greater risk of foreclosure and other financial harm," the five Democratic lawmakers say in a Feb. 16 letter to the regulators. "We consider this an important safety and soundness issue," said Committee chairman Barney Frank (Mass.), Rep. Brad Miller (N.C.), along with three subcommittee chairs -- Carolyn Maloney (N.Y.), Maxine Waters (Calif.) and Mel Watt (N.C.). At a Feb. 15 hearing, Federal Reserve Board chairman Ben Bernanke said the regulators are working on guidance and had not yet determined whether 2/28 ARMs should be underwritten to the fully indexed rate. In a separate letter, 23 committee members urged the regulators not to penalize institutions for extending forbearance when exotic mortgages and other ARMs reset, resulting in "enormous" payment shocks for borrowers.

State regulators have agreed with industry groups on a set of principles that the states should consider as they adopt legislation to participate in national licensing system for state-licensed mortgage lenders and brokers.The Conference of State Bank Supervisors and American Association of Residential Mortgage Regulators also agreed with industry groups on sample legislative language that participating states should consider. "Our hope is that by issuing these principles, we can dispel many of the concerns that have been raised to date about the system and begin working with industry in developing legislation that will help to build a modern state licensing system," AARMR president George Kinsel said. The American Financial Services Association said it is now willing to support the new mortgage licensing system. "In particular, we are pleased the principles clarify that the system is not intended to promote the licensing of mortgage loan originators who work for already licensed companies," AFSA president and chief executive Chris Stinebert said. The Mortgage Bankers Association said they support the principles and the sample legislation language.

The American Securitization Forum has released a draft template report that issuers, especially mortgage securitizers, may find helpful in complying with item 1122 of the Securities and Exchange Commission's new Regulation AB.An ASF working group created the draft to aid issuers using a new interpretation of the item to avoid compiling audit attestation reports from what can be a large number of nondiscretionary servicing vendors by having their primary servicer take responsibility for those vendors' compliance. The forum will be open to feedback on the draft and plans to have the final version available by the end of February.

The Federal Housing Administration reverse mortgage program is up and running again due to Senate passage of a continuing funding resolution that renews the agency's authority to insure more loans.The president signed the continuing resolution Feb. 15. The increasingly popular FHA Home Equity Conversion Mortgage program hit a statutory 275,000-loan cap Feb. 14, forcing the agency to stop approving HECM loans for two days. The CR includes a provision that suspends the HECM cap until Sept. 30, which is the end of the federal government's fiscal year. As part of FHA reform legislation, the Bush administration will be asking Congress to eliminate the statutory loan cap. Reverse mortgage lenders originated 76,276 HECMs in fiscal year 2006, up 77% from the level in fiscal 2005. Since Sept. 30, the FHA endorsed over 32,000 HECMs, which triggered the temporary shutdown.

The principles outlined in the federal government's nontraditional mortgage guidance should apply to subprime hybrid ARMs, says Federal Reserve Board Chairman Ben Bernanke, and the new guidance will be issued "fairly soon."The Fed chairman told the House Financial Services Committee that lenders should use "good underwriting" in making subprime adjustable-rate mortgages. However, regulators are still working on the guidance and have not determined whether 2/28 ARMs should be underwritten to the fully indexed rate, he said. The guidance issued in September requires lenders to qualify borrowers of interest-only and payment-option ARMs at the fully indexed rate. They can no longer underwrite based on the teaser rate.

Federal Reserve Board Chairman Ben Bernanke says there are "tentative" signs that the housing market is beginning to stabilize, but that it is too early to tell whether the downturn is over.He noted that the "ultimate extent of the housing market correction is difficult to forecast" because of large inventories of unsold homes and trends in house prices. "It is early to say this problem is over," the Fed chairman told the Senate Banking Committee, and he said he wants to wait until the spring selling season to gauge the demand for housing. In response to a question, the Fed chairman said distress in the subprime market is a concern. "I am following it very carefully," Mr. Bernanke said.

Federal banking regulators are still working on guidance involving subprime 2/28 ARMs and they are not ready to issue anything yet, according to a letter the regulators are preparing to send to Senate Banking Committee Chairman Christopher J. Dodd, D-Conn."We are committed to issuing clarifying guidance for these types of products," the letter says. The letter indicates that the regulators are concerned about prepayment penalties and the practice of underwriting to the teaser rate. And they are considering an update of the existing subprime lending guidance and other approaches to address these practices. In December, Sen. Dodd and five other senators urged the regulators to extend the nontraditional mortgage guidance to subprime hybrid adjustable-rate mortgages. Sen. Dodd called the response a "little inadequate" during a committee hearing on monetary policy. "The notion 'We're thinking about it' was nice to know," Sen. Dodd said. "But I think many of us would like to know they're taking some additional steps." He asked Federal Reserve Board Chairman Ben Bernanke to respond in writing.