Compliance & Regulation

Federal banking regulators are reminding financial institutions to continue to exercise forbearance for hurricane victims along the Gulf Coast who are still waiting for insurance payments and other financial assistance."Given the extent of the devastation caused by Hurricane Katrina, many uncertainties remain," and "some customers may need additional time to resolve financial uncertainties related to the effects of the hurricane," the regulators say in a letter to examiners and bankers in Alabama, Louisiana, and Mississippi. The letter stresses that previously issued Katrina guidance remains in effect. "Effective loan workout and recovery programs may involve protracted resolutions, but should be ultimately targeted toward loan repayment," the reminder says. The regulators are issuing the reminder in response to a request by House Financial Services Committee members.

Federal budget documents indicate that the FHA Mutual Mortgage Insurance Fund could incur a loss next year -- the first in the program's 70-year history -- unless the Federal Housing Administration increases premiums or Congress approves a Bush administration FHA reform proposal.The president's budget proposal warns that the cost of rising single-family defaults could exceed revenues in fiscal year 2008. However, the Bush administration is not providing any funds to cover a shortfall. It appears that the administration expects the MMI fund to break even if the FHA increases premiums. The budget documents also indicate that the passage of the FHA reform proposal would put the MMI fund back in the black.

The Bush administration is renewing its efforts to pass a Federal Housing Administration reform bill, according to the president's budget proposal, which also calls for the FHA to charge risk-based premiums for its reverse mortgage, condominium, and 203(k) home improvement loan programs.The president's budget also proposes to merge those residential programs into the FHA single-family mutual mortgage insurance fund, which is self-sustaining and does not rely on appropriations to cover losses. "Under the Budget policy proposals, FHA will be able to set premiums that are based on risk and are sufficient to avoid the need for credit subsidy appropriations," according to budget documents released Feb. 5. Although the administration came up short last year, it is asking Congress again to pass legislation that would allow the FHA to insure single-family loans up to the $417,000 conforming loan limit and to charge risk-based insurance premiums.

The Bush administration's new budget relents on the issue of portfolio limits for Fannie Mae and Freddie Mac, but calls for greater "clarity" on where the primary mortgage market begins and ends.Released Feb. 5, the 2008 budget says "technological advances" have blurred the line between the primary and secondary markets, arguing that a "new level" of clarity "is required to establish permissible activities" under their charter acts "including the development of intellectual property." Up until last year, the White House had hoped to cap, or even shrink, the $1.4 trillion in on-balance-sheet holdings of the two government-sponsored enterprises. In the face of congressional -- and GSE -- opposition, the budget indicates that the White House will settle for GSE legislation that creates a "world class regulator" with the ability to "mitigate the risks" posed by their retained portfolios. The administration said it believes Fannie and Freddie pose a systemic risk to the U.S. financial system because their combined mortgage-backed securities and debt -- held by an array of financial institutions -- total $5.2 trillion, "higher than the total publicly held debt of the United States."

In addressing predatory lending, Rep. Maxine Waters, D-Calif., says she also wants to make sure that blacks and Hispanics have access to prime mortgages and are not forced into higher-priced subprime loans."I am very much focused on the fact that we continue to get substantial documentation that people of color pay more for loans," the new housing subcommittee chairwoman told the National Association of Affordable Housing Lenders. "We cannot have African-Americans and Latinos, who earn the same amount of money as a Caucasian, pay their bills equally as well, but they are only offered subprime loans and pay more for their mortgages. That has got to stop." Rep. Waters said the new leaders of the House Financial Services Committee recognize the seriousness of this kind of discrimination. "We are going to fix it," she said.

The Federal Deposit Insurance Corp. has extended for one year a moratorium on the acquisition of industrial loan companies by commercial firms, but opened the door to acquisitions by financial services companies.The FDIC's action prevents Wal-Mart from acquiring an FDIC-insured ILC to process payments and credit cards and eventually get into other banking and lending activities. FDIC Chairman Sheila Bair said the growth of commercial ownership of industry loan companies raises public policy questions about the separation of banking and commerce. "The moratorium will provide Congress with an opportunity to address the issue legislatively while the FDIC considers how best to respond to any safety-and-soundness issues surrounding commercial ownership under existing law," she said. House and Senate banking committee leaders, as well as the American Bankers Association and America's Community Bankers, welcomed the FDIC's decision to extend the moratorium.

Three key Republicans on the Senate Banking Committee have criticized Fannie Mae and its regulator for approving a 25% pay raise for the government-sponsored enterprise's president and chief executive officer, Daniel Mudd, who received $14.4 million in compensation last year."We are quite surprised that the board of Fannie Mae would sign off on this compensation package at a time when they have paid $1.4 billion in accounting and consulting fees to clean up their financial mess, and they are still two years behind in financial reporting," says a statement issued by GOP Sens. Chuck Hagel of Nebraska, John Sununu of New Hampshire, and Mel Martinez of Florida. (Sen. Martinez is a former housing secretary.) Mr. Mudd received base pay of $950,000 in 2006, plus a $3.5 million bonus and 176,506 shares of restricted common stock. (In recent days Fannie's stock has been trading at $56. Based on that figure, the restricted stock would be worth $9.8 million.) "We are equally surprised that the Office of Federal Housing Enterprise Oversight approved this pay raise," the three said. The senators have asked OFHEO for an explanation.

Wayne Lee, a 15-year veteran of Ameriquest Capital Corp., is suing the company, alleging that it reneged on a $50 million consulting deal, while its owner -- the current ambassador to the Netherlands -- blocked badly needed operational reforms.Filed late last week, the lawsuit alleges that company owner Roland Arnall (currently an ambassador) "blocked" reforms that might have helped the subprime giant stem allegations that it engaged in abusive lending practices. A year ago Ameriquest agreed to pay $325 million to settle claims with 49 states that it engaged in abusive lending practices. Mr. Lee headed Argent Mortgage, an Ameriquest company, until June 2004 when he was promoted to chief executive of ACC Capital Holdings, where he oversaw both Ameriquest Mortgage (Ameriquest's retail arm) and Argent, a wholesaler. (Argent was not a party to the Ameriquest/ACC settlement.) Mr. Lee resigned 11 months later, agreeing to a $20 million lump sum payment and five installments of $6 million a year. He contends that ACC paid the $20 million, but not the first installment that was due in mid-June of last year. In a statement, Ameriquest's attorney Bernard LeSage called Mr. Lee's complaint a "ridiculous work of fiction." (For the full story, see the Feb. 5 issue of National Mortgage News.

The chairman of the House Financial Services Committee, Rep. Barney Frank, D-Mass., is reworking the GSE affordable housing fund so that Fannie Mae and Freddie Mac would make annual contributions to a National Housing Trust Fund, which the National Low-Income Housing Coalition has advocated for several years.Rep. Maxine Waters, D-Calif., told the National Association of Affordable Housing Lenders about the concept and later told reporters that it is "Barney's idea" and she supports it. Annual contributions by the two government-sponsored enterprises would go to the trust fund, which would distribute grants to states, cities, and local nonprofits that put up matching funds to build and preserve affordable rental housing. The GSE contributions, estimated at $500 million a year, would provide a "substantial basis for the trust fund," said Rep. Waters, the new chair of the housing subcommittee. One source indicated that the legislation to create the National Housing Trust Fund would be on a separate track from the GSE bill to strengthen regulatory oversight of Fannie and Freddie.

Mortgage industry representatives will have a chance to calm fears that a wave of subprime foreclosures could reach crisis proportions over the next few years when they testify before the Senate Banking Committee on Feb. 7.Committee Chairman Christopher J. Dodd, D-Conn., has scheduled the hearing, entitled "Preserving the Dream: Predatory Lending Practices and Home Foreclosures," largely in response to a Center for Responsible Lending study indicating that 20% of all adjustable-rate subprime mortgages originated in 2005 and 2006 will end up in foreclosure. Citing the CRL study, Sen. Dodd said recently that 2.2 million families with nontraditional or subprime loans made since 1998 "have faced or will soon face foreclosures because of mortgage lending practices that have been described as 'predatory' in nature." Executives from the CRL, the Mortgage Bankers Association, the National Association of Mortgage Brokers, and others will testify, including two consumers.