Compliance & Regulation

The AA-minus risk-to-the-government, subordinated debt, and preferred stock ratings on Fannie Mae have been affirmed by Standard & Poor's Ratings Services and removed from CreditWatch.The outlook is negative. "The rating action reflects Fannie Mae's progress in its accounting restatement process and the build-up of a stronger capital position," S&P said. The rating agency said Fannie has maintained a mandated 30% capital surplus above its regulatory minimum capital for four consecutive quarters, chiefly through management of balance sheet growth and lower returns to shareholders. S&P noted that Fannie Mae has now filed its 2004 annual report, including restatements, with the Securities and Exchange Commission and has made "extensive changes" in its senior management and board over the past two years. Fannie Mae's recent SEC filing is a "significant milestone," S&P said, but added that "we continue to view the pervasiveness of the deficiencies discovered in its internal controls over financial reporting as a concern" and noted that Fannie's 2005 and 2006 quarterly financial statements remain outstanding. S&P can be found online at http://www.standardandpoors.com.

The Office of the Comptroller of the Currency has fined Grant Thornton $300,000 for its audits of a West Virginia high-LTV lender that inflated its assets by nearly 25%.The accounting firm said it would appeal the comptroller's action. Comptroller John Dugan said the audit of the failed First National Bank of Keystone departed "so far" from accepted standards that it represents "reckless conduct" on the part of the accounting firm. Grant Thornton filed an unqualified opinion of Keystone's financial statement a few months before the OCC closed the bank in September 1999. Examiners discovered that the $1.1 billion bank did not own the servicing rights reported on its books and that the residuals on its securitizations of home improvement loans and loans with 125% loan-to-value ratios were overvalued. A Grant Thornton spokeswoman said the OCC ignored the recommendations of an administrative judge in levying the $300,000 civil money penalty. The judge concluded that Keystone's management had perpetrated a "pervasive fraud" to confuse auditors and examiners, the spokeswoman said. The Federal Deposit Insurance Corp. told MortgageWire that Keystone-related losses to its insurance fund totaled $563.1 million.

Before adjourning for the year, Congress passed a $45 billion tax bill that includes a deduction for mortgage insurance premiums for the benefit of low- and moderate-income homebuyers in 2007.The MI deduction is limited to homebuyers with incomes of less than $110,000. First-time homebuyers are expected to benefit the most from the deduction, but it is not limited to first-time buyers. Passage of the tax deduction is a major victory for the Mortgage Insurance Companies of America, which has been lobbying for this provision for several years. "We are pleased that policymakers have recognized mortgage insurance as a cost of finance just like mortgage interest," said MICA executive vice president Suzanne Hutchinson. The MI deduction will help families that cannot afford a 20% downpayment on conventional conforming loans as well as homebuyers using low-downpayment financing guaranteed by the Federal Housing Administration and the Department of Veterans Affairs. The tax deduction is limited to the 2007 tax year and is expected to cost the government $91 million in lost revenues. Congress will have to pass an MI deduction next year so homebuyers can use the deduction in 2008.

Congress is on track to pass a tax bill before the lawmakers adjourn for the year that would allow most first-time homebuyers to deduct the cost of mortgage insurance premiums for the first time ever.Passage of the tax deduction would be a major victory for the private mortgage insurance companies, which have seen their market shrink in recent years as homebuyers opted for piggyback loans (80-10-10s) to avoid paying MI premiums. It also applies to insurance premiums in Federal Housing Administration single-family loans. "If passed, MI tax deductibility will be a positive development for the mortgage [insurers] as it would remove a competitive advantage enjoyed by 80-10-10 loans," a research brief by Friedman Billings Ramsay says. The MI deduction is limited to first-time homebuyers with incomes of less than $110,000. Mortgage industry consultant Howard Glaser noted that the MI deduction would also benefit Fannie Mae and Freddie Mac, since the two secondary-market agencies securitize most of the mortgages with private mortgage insurance.

Federal banking regulators have issued final guidance on commercial real estate lending that raises supervisory concerns about banks with CRE concentrations above 300% of capital, but the Office of Thrift Supervision has taken a different approach and dropped the numerical thresholds.Bankers and key members of Congress have complained that thresholds will effectively force community banks to restrict their CRE lending. However, the banking regulators contend that the thresholds "do not constitute limits on CRE lending," and examiners will be instructed to consider other factors, such as portfolio diversification and risk characteristics, in evaluating an institution's CRE lending program. There is a 300% concentration threshold for all CRE and construction-and-development loans and a 100% threshold for C&D loans, including single-family construction loans. OTS Director John Reich stuck to his guns and dropped the concentration thresholds in issuing final guidance for federally chartered thrifts. Mr. Reich told Congress earlier this year that he was concerned that thresholds will be viewed as caps by institutions and examiners. Reps. Barney Frank, D-Mass., and Spencer Bachus, R-Ala., said they are "disappointed" that the banking regulators included thresholds in the final guidance.

The director of the Office of Federal Housing Enterprise Oversight continues to press for what he acknowledges have been "sticking points" in the passage of proposed GSE reform legislation, he told attendees at the SourceMedia Secondary Market Conference on Dec. 6.James B. Lockhart III said he believes the sticking points -- portfolio constraints on the government-sponsored enterprises as a means of controlling "systemic risk," and the structure of a proposed affordable housing fund -- can be resolved, and likely will be, to allow passage of legislation next year.

Key House leaders and Treasury Department officials may have reached an agreement on GSE portfolios, but they are still at loggerheads over increasing the loan limits on Fannie Mae and Freddie Mac.The two government-sponsored enterprises currently cannot purchase loans with a principal balance greater than $417,000. Rep. Barney Frank, D-Mass., who will chair the House Financial Services Committee starting in January, wants to raise the limit up to the median house price in high-cost areas so the GSEs can finance homebuyers in Massachusetts and California. But Treasury officials oppose such an increase, and the future chairman is complaining that their intransigence about this provision in the House GSE regulatory reform bill does not make any sense. "There is no rational argument for treating housing prices as one national uniform figure," Rep. Frank told reporters. The Massachusetts congressman also wants to raise Federal Housing Administration loan limits, which could stall passage of an FHA single-family reform bill next bill year.

Sen. Christopher Dodd, D-Conn., the incoming chairman of the Senate Banking Committee, is planning an ambitious housing agenda next year that includes GSE, RESPA, flood insurance, and Federal Housing Administration reform.Sen. Dodd said he has not reviewed the compromise on the government-sponsored enterprise portfolios worked out between Treasury Department officials and his House colleagues, but he wants to reach a compromise on regulatory reform for Fannie Mae and Freddie Mac early next year. He also says he wants to work with the Bush administration to modernize the FHA single-family program. With regard to reforming the Real Estate Settlement Procedures Act, Sen. Dodd said he wants to "simplify the homebuying process so consumers don't have to wait until closing on their new home to know the terms of their mortgage." The Connecticut senator, who is considering a run for president, also said the Senate Banking Committee approved a good flood insurance bill last year and that he hopes to get it passed this year.

First American Title Insurance has completed its one-millionth order for FACT, the company's accelerated title and settlement product that protects home equity lenders against losses resulting from undisclosed liens, poor legal descriptions, fraud, and forgery.Introduced in 2003, FACT helps lenders complete same-day closings while also mitigating their risk. Because a pre-closing title search is not required, "FACT speeds the origination process," said Paul Dorman, equity division director at First Am Title's Lenders Advantage. With mortgage fraud on the rise, FACT's insuring provisions are particularly useful for lenders operating highly automated, "low-touch" origination channels, Mr. Dorman said. A recent enhancement includes fraud prevention notification prior to closing. First American Title is a subsidiary of First American Corp., which can be found on the Web at http://www.firstam.com.

Federal banking regulators are proposing a capital surcharge on nontraditional mortgages to address negative amortization as part of a new risk-based capital regime called Basel Ia.The Basel Ia is designed to be more risk-sensitive than the current Basel I standard by incorporating loan-to-value ratios and increasing the risk buckets for one- to four-family mortgages. The funded portion of an interest-only or payment-option mortgage would be treated like any other mortgage. However, there is an additional capital charge for the "unfunded portion of the maximum negative amortization amount" in nontraditional mortgages, according to the Federal Deposit Insurance Corp. Currently, the lowest credit risk weighting for 1-4s is 50% and the highest is 100%. Under Basel Ia, the lowest risk weight is 20% on loans with 60% LTVs or less and 150% for loans with LTVs above 95%. (Loan-level private mortgage insurance lowers the LTV.) Adoption of Basel 1A would be optional for most banks, except for certain institutions sticking with Basel I to avoid higher capital requirements, an FDIC official said. The FDIC board has approved the Basel Ia proposal, but it won't be issued for a 90-day comment period until later this month or January.