Compliance & Regulation

James Lockhart, director of the Office of Federal Housing Enterprise Oversight, says he is "satisfied" with a congressional proposal to regulate Fannie Mae's and Freddie Mac's giant portfolios, even though Treasury Department officials have not endorsed it.The proposal worked out between Treasury officials and Rep. Barney Frank, D-Mass., in December would allow a new supervisor of the housing government-sponsored enterprises to regulate the size and growth of the portfolios. "I am satisfied with the language," Mr. Lockhart said, adding that it accomplishes "what needs to be done in relation to the portfolios." Mr. Lockhart also told reporters that OFHEO is studying a proposal in a House GSE bill that raises the $417,000 conforming loan limit so Fannie and Freddie can purchase mortgages in high-cost housing markets. Critics contend that the House proposal is too broad and would cover whole states, not just high-cost areas. So OFHEO researchers are testing various criteria for raising the loan limit. One test showed that only 10 to 11 metropolitan statistical areas would be affected, primarily in California and the suburbs around New York.

Fannie Mae incurred a loss in the third quarter, according to the mortgage company's regulator, and it appears that the downturn in interest rates that clipped Freddie Mac's third-quarter earnings also hurt Fannie."Their ongoing businesses are showing volatility," said James Lockhart, director of the Office of Federal Housing Enterprise Oversight. "Both lost money in the third quarter." Fannie Mae declined to comment on its third-quarter financial results. Freddie Mac recently reported a $550 million loss in the third quarter, and top executives blamed it on changes in the fair value of derivatives used to hedge interest rates, plus a 50-basis-point drop in long-term rates during the quarter. Fannie's chief financial officer recently said he expected the company's earning to show a "great deal of volatility due in large part to derivative fair-value changes." Fannie Mae can be found on the Web at http://www.fanniemae.com, and OFHEO can be found at http://www.ofheo.gov.

Informative Research, Garden Grove, Calif., has announced launch of a free fraud prevention tool, Credit Score Verifier, that offers to reduce mortgage lender risk and loan fallout.The company said the proprietary Web-based utility was developed to enable a lender to verify credit scores reported by any of the repositories before undertaking the time and expense of underwriting the file or ordering a backup credit report. The tool addresses the risk associated with the increasing popularity of nontraditional loan types that allow for no documentation and stated incomes, where fraud is always a major consideration, according to an Informative Research spokeswoman. The enhanced tool, formerly called Credit Score Validator, provides a way to assure a lender that a paper copy of a credit report has not been altered, Informative Research said. The company can be found online at http://www.informativeresearch.com.

The House has passed a bill to prevent a shutdown of the Federal Housing Administration reverse mortgage program while the federal government is operating under a continuing fund resolution.The bill (H.R. 391), sponsored by Rep. Tim Matheson, R-Utah, temporarily suspends a 275,000-loan cap on the number of home equity conversion mortgages the FHA can insure until the current continuing resolution expires on Feb. 15. The FHA's HECM program is very close to the 275,000-loan cap, and the lawmakers don't want the problems in the budget process to spill over and prevent seniors from tapping the equity in their homes. The Matheson bill, co-sponsored by Rep. Barney Frank, D-Mass., has to be approved by the Senate and signed by the president to become effective. Nevertheless, H.R. 391 supporters want to attach the same language to the next continuing resolution so that the HECM cap is suspended until Sept. 30.

Citing a declining origination market and deterioration in the subprime sector, the parent of GMAC Residential, Horsham, Pa., plans to cut 1,000 positions in its mortgage affiliates over the next nine months, according to a new public filing.As part of the cutback, ResCap will close three of its six servicing locations, leading to job losses in Blue Bell, Pa., San Diego, and Shelton, Conn. The company said severance and related expenses will cost it $10 million, but eventually will save $65 million a year. "ResCap's decision to reduce its work force and accelerate its integration process is being driven by a number of factors, including slower originations, shifts in home prices and appreciation rates, a challenging interest rate environment," and the ailing B&C sector, the company says in a new filing with the Securities and Exchange Commission. GMAC Residential and its two primary affiliates, when counted as one, rank third nationwide in production, according to the Quarterly Data Report. ResCap can be found on the Web at https://www.rescapholdings.com.

A federal regulator has lifted most of the supervisory restrictions it imposed on the Federal Home Loan Bank of Seattle two years ago, but the bank is still limited in the amount of dividends it can pay.Seattle FHLBank president James Gilleran said the Federal Housing Finance Board has terminated its written agreement with the Seattle Bank. "We are extremely pleased with the progress we've made in our business turnaround," he said. Under the supervisory agreement, the Seattle FHLBank suspended its mortgage purchase program and rebuilt its advance business. The $53.5 billion-asset FHLBank recently reported a third-quarter profit of $9.1 million and paid its first stock dividend ($0.10) in December after a long hiatus. The Seattle FHLBank will continue to limit dividends to 50% of net income, except with prior approval by the Finance Board.

Acting Pennsylvania Banking Secretary Victoria A. Reider has sent a letter alerting the commonwealth's mortgage companies about new guidelines outlining acceptable conduct for the state's 3,000 lenders and brokers.The new guidelines are part of an effort to protect consumers looking for home loans, the department said. They offer examples and definitions of practices considered dishonest, fraudulent, illegal, unfair, unethical, negligent, or incompetent. Companies that fail to conform to the new guidelines could face suspension, revocation, or nonrenewal of their licenses. The Department of Banking said it is also crafting regulations and seeking legislative reforms to better protect consumers. The changes mirror recommendations outlined in a 2005 report to the General Assembly, "Losing the American Dream: A Report on Residential Mortgage Foreclosures and Abusive Lending Practices in Pennsylvania."

Federal regulators have noticed a "modest uptick" in noncurrent construction and development loans, and banks with rapidly growing C&D portfolios need to be careful, according to Sheila Bair, chairman of the Federal Deposit Insurance Corp..C&D lending at banks has been growing at a 30% annual rate over the past two years and regulators generally expect to see "more significant problems" arise as housing markets soften, she told a California Bank Presidents meeting. However, the recently issued commercial real estate guidance should not be "interpreted as supporting a reduction in current volume," Ms. Bair said, so long as loans are prudently underwritten and risk management practices keep up with increasing concentrations. "But we also do not intend to back away from the expectations we have always placed on institutions with rapid growth and high concentrations in this sometimes-volatile line of business," the FDIC chairman said. "To the extent that an institution is already following best practice in this regard, it has nothing to worry about."

Subprime mortgage lenders are facing a "string of bad news," including the shutdown of companies that "could not operate in a slower origination environment," according to a Federal Reserve Board governor.Susan Bies told a credit union meeting that delinquency and foreclosure rates on subprime adjustable-rate products are rising, and many industry observers are blaming "looser" underwriting standards as well as "limited or no verification of borrower income and high loan-to-value transactions." Meanwhile, the regulators are "discussing what can be done to ensure that these types of loans are being originated in a safe and sound manner," she said. (The regulators are expected to propose new underwriting guidance within the next two months.) "It is not uncommon to find margins of 600 basis points or more on adjustable-rate subprime loans after the expiration of the teaser rate," the Fed governor said. She also noted that it would be prudent for lenders to require escrow accounts on subprime loans, or at least to tell borrowers how much they should set aside for taxes and insurance.

Federal banking regulators are planning to propose new interagency guidance on subprime 2/28 adjustable-rate mortgages, but they say they want to move cautiously and avoid overreaching, despite congressional pressure.Federal Deposit Insurance Corp. officials hope to propose guidance for industry and public comment in the next two months. "FDIC Chairman Sheila Bair believes all products should be underwritten at the fully indexed rate with clear consumer disclosures," an FDIC spokesman said. But the FDIC may be ahead of the other regulators. "It is an area of concern," said Robert Garsson, a spokesman for the Office of the Comptroller of the Currency. ".... We need to look at it, and we will. But we are not going to act precipitously." Six senators recently urged the regulators to expand the nontraditional mortgage guidance to subprime 2/28s, which has stirred industry opposition. The regulators are considering a revision of the nontraditional mortgage guidance along with other options -- expanding the regulators' subprime guidance, or simply issuing a new advisory to address concerns about subprime 2/28s and 3/27s. (The 2/28 and 3/27 ARMs are 30-year mortgages that have a fixed rate for the first two years and the first three years, respectively.)