Compliance & Regulation

Up to 70% of mortgage early payment defaults can be linked to fraud, according to a new study by BasePoint Analytics, a Carlsbad, Calif.-based provider of fraud scoring software.The study, aimed at probing the link between fraud and payment trends in the early life of a loan, found that loans with "egregious misrepresentations" on the loan application were up to five times more likely to default in the first six months than other loans. "Many lenders are facing increases in repurchase requests and early payment defaults," said Tim Grace, president and chief executive of BasePoint. "We can demonstrate for lenders and investment banks how they can substantially reduce their EPD losses, and often within a short period of time." The company can be found online at http://www.basepointanalytics.com.

The for-profit subsidiary of America's Community Bankers and 32 member banks have formed a joint venture to achieve better secondary-market execution for their mortgage loans.ACB Mortgage LLC, consisting of member banks from 20 states, will act as a negotiating agent with aggregators, government-sponsored enterprises, and Wall Street firms, according to Michael Young, president and chief executive of Cenlar FSB, Ewing, N.J. "This newly formed venture was created to leverage the power of joint ownership by like-minded community banks to obtain the best execution possible from a full range of secondary-market investors," Mr. Young said at ACB's annual convention in Las Vegas. The trade group's for-profit subsidiary, ACB Business Partners, has alliances with Fannie Mae, Freddie Mac, and private wholesalers. ACB can be found online at http://www.americascommunitybankers.com.

Freddie Mac chairman Richard Syron is warning legislators not to hamstring his mortgage company at a time when the subprime market is going through a sharp correction and the need for the housing government-sponsored enterprises will only increase.Legislative proposals that impose higher capital requirements, limit retained portfolios, and restrict new products and programs will make Fannie Mae and Freddie Mac "less competitive, less profitable and less relevant," Mr. Syron told the National Association of Home Builders convention. "All of which begs the question, why overly hamper us just when you're going to need us most?" he said. Fannie chairman Daniel Mudd also spoke in harsh terms about the effort to squeeze the GSEs, telling the NAHB's executive board that he and his counterpart at Freddie ought to be able to run their businesses successfully. The GSEs should be placed under the wing of a strong regulator, Mr. Mudd said, but that should be the end of it, and the regulator should be allowed to regulate. "If it's not right," he said, "the regulator will say so." The House and Senate banking committees are expected to mark up and vote on a GSE regulatory reform bill before the end of March. Freddie Mac can be found online at http://www.freddiemac.com.

The Mortgage Partnership Finance program of the Federal Home Loan Banks has announced a new partnership with the U.S. Department of Agriculture's Rural Development Program.Under the arrangement, approved FHLBanks participating in the MPF program can purchase RHS Section 502 government-guaranteed loans from qualified members, including commercial banks, thrifts, credit unions, and insurance companies. USDA Rural Development Guaranteed Loans are offered to qualifying low- and moderate-income families to purchase or refinance homes in rural areas with a population of less than 10,000 and non-metropolitan communities with populations of 10,000-25,000, the MPF reported. The partnership enables the FHLBank of Chicago, which pioneered the MPF program, and the FHLBank of Pittsburgh to buy such loans from their members as "a competitive alternative to the secondary mortgage market." The MPF program can be found online at http://www.fhlbmpf.com, and the Rural Development Program can be found at http://www.rurdev.usda.gov.

To help attorneys handle a mounting volume of foreclosed properties amid the tangle of state regulations, Bellevue, Wash.-based DepotPoint has introduced "the mortgage industry's first fully integrated intelligent foreclosure regulatory knowledgebase."Leveraging an automatic document-processing system embedded directly into the TrackPoint suite, this newest enhancement is designed to help attorneys remain in compliance with state foreclosure laws and manage processing foreclosure property files more efficiently, DepotPoint said. TrackPoint receives regular electronic communications from each jurisdiction detailing any changes to regulatory guidelines and updates the knowledgebase to reflect these modifications. Privately held DepotPoint was founded by technology veterans from InfoSpace and Microsoft, plus experienced trustees from national foreclosure firms. It can be found online at http://www.depotpoint.com.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., says federal banking regulators need to "step up" and tighten the underwriting of certain subprime mortgage products that he contends are responsible for rising defaults and foreclosures.The committee chairman also said he is "annoyed" that the regulators have not responded to his December letter regarding subprime 2/28 adjustable-rate mortgages. In the letter, six members of the committee, including Sen. Dodd, urged the regulators to extend the protections of the nontraditional mortgage guidance to borrowers of 2/28 ARMs, who are disproportionately black and Hispanic. "It is unacceptable to me that they have gone this long without responding to the letter," Sen. Dodd told reporters after a hearing on subprime lending and foreclosures. Mortgage industry representatives presented evidence that there is nothing unusual about the recent rise in foreclosures. But Sen. Dodd maintains that certain subprime practices and loan products are causing the problem. "This is a problem that you cannot attribute to the kind of shocks that normally cause a spike in foreclosures rates," he said. The banking committee chairman is planning to call the regulators to testify before the committee in a few weeks.

A recent Federal Reserve Board survey found that 15% of banks have tightened their residential underwriting standards in the past three months -- "the highest net fraction posted since the early 1990s," the Fed said.The tightening could be a response to the nontraditional mortgage guidance issued by federal and state banking regulators last fall that set out new underwriting standards for interest-only and payment-option mortgages. It also could be a response to rising delinquencies and defaults. The survey of senior loan officers found that nearly half the banks see the credit quality of their traditional and nontraditional mortgages deteriorating "somewhat" this year. A few large banks expect to see a substantial deterioration in their nontraditional mortgage portfolios during 2007, according to the January survey. In the commercial real estate sector, 35% of domestic banks said they have tightened their underwriting standards -- a "somewhat smaller" percentage than in the October survey. The banks also reported "weaker" demand for CRE loans, the Fed said. The Fed can be found online at http://www.federalreserve.gov.

Consumer and civil rights activists are taking Fannie Mae and Freddie Mac to task for their purchases of subprime mortgage-backed securities and "profiting" from abusive lending practices.The two government-sponsored enterprises have lending guidelines so they don't purchase predatory loans directly from lenders, the Rev. Jesse Jackson testified Feb. 7 before the Senate Banking Committee. However, the president and founder of the Rainbow PUSH Coalition said Fannie purchases subprime securities that are "stripping working-class people of their precious home equity.... In short, Fannie Mae and other GSEs are doing through the back door what the law prohibits through the front door. This must change." Center for Responsible Lending chief executive Martin Eakes maintained that Fannie and Freddie are "supporting and condoning lenders who market abusive, high-risk loans" through their investments in the senior tranches of subprime MBS. The GSEs should not get credit toward their affordable housing goals by "investing in loans that generate massive foreclosures," Mr. Eakes said in his testimony. The two GSEs purchased about 25% of the total subprime MBS sold in the first nine months of 2006, according to the CRL.

A top Department of Housing and Urban Development official agreed during congressional testimony Feb. 6 that a legislative proposal to get Fannie Mae and Freddie Mac to contribute $500 million toward affordable housing would help with the rebuilding effort in the Gulf Coast states.HUD Deputy Secretary Roy Bernardi said "yes" he would support the additional resources provided by a GSE affordable housing fund, in response to persistent questioning by House Financial Services Committee Chairman Barney Frank, D-Mass. Mr. Bernardi insisted that he does not make housing policy for the Bush administration. But Rep. Frank took it as an endorsement for his proposal to create a GSE affordable housing fund that would funnel the first year's contributions by the two government-sponsored enterprises to rebuilding affordable rental housing destroyed by Hurricane Katrina. Chairman Frank and other Democrats argue that the GSE affordable housing fund is an essential part of a bill to strengthen the regulation of Fannie and Freddie. The Bush administration has softened its opposition to the AH fund over the past year.

The Federal Housing Administration is willing to consider backing acquisition, development, and construction loans for single-family houses.FHA Commissioner Brian Montgomery did not mention the possibility of insuring ADC loans to builders during his talk at the National Association of Home Builders Convention in Orlando, Fla. But Dallas builder Kent Conine, a former NAHB president, said Mr. Montgomery was "intrigued" by the idea when the two met in Washington recently. The FHA commissioner "asked for a cost-benefit analysis," Mr. Conine said. "If we can show him how it would work and how it would benefit consumers, he said he would do a pilot." According to the Dallas builder, Mr. Montgomery "made no promises." Nevertheless, he called the commissioner's willingness to entertain a proposal "good news." "If we can get our nose under the tent, sooner or later we can get a full-scale program," he told an NAHB leadership committee. Mr. Conine said he believes ADC funding is "an area where the FHA could really shine," especially in rural markets and places where builders find it difficult to secure financing from conventional lenders.