Compliance & Regulation

Countrywide Home Loans has agreed to improve its pricing on mortgage loans to blacks and Hispanics as a result of an investigation by New York Attorney General Eliot Spitzer into the giant lender's Home Mortgage Disclosure Act data."This agreement should serve as a model for other lenders who, like Countrywide, seek to eradicate racial and ethnic disparities in mortgage lending," Mr. Spitzer said. Based on an outside analysis of Countrywide's pricing, the New York attorney general concluded that black and Latino borrowers paid more than whites on average, especially for loans generated by mortgage brokers. Countrywide has agreed to compensate minorities who "improperly" received subprime and alternative-A loans in 2004 and to implement a $3 million consumer education program in New York. Countrywide disputed the AG's findings and conclusions but cooperated with the inquiry. "Countrywide and Attorney General Spitzer share a common goal: to assure that all individuals who apply for a mortgage loan receive equal treatment, and any pricing differences should be based on credit, property, and other risk factors," Countrywide senior managing director Rick Wentz said.

Fannie Mae and Freddie Mac may face restrictions on purchases of interest-only and payment-option mortgages if the Office of Federal Housing Enterprise Oversight decides to move ahead and issue nontraditional mortgage guidance for the two government-sponsored enterprises."We are looking at putting out a guidance similar to [that of] the other bank regulators," OFHEO Director James Lockhart said -- referring to nontraditional mortgage guidance recently issued by federal banking regulators. The guidance is expected to cover GSE purchases of private-label securities with underlying nontraditional mortgages and whole loans. But OFHEO officials declined to provide any specifics about the guidance. "OFHEO's NTM guidance for the GSEs will have sweeping market impact, although the extent of this impact will vary depending how aggressive OFHEO is in its guidance," according to Federal Financial Analytics, a Washington consulting firm. Mr. Lockhart revealed his nontraditional mortgage initiative in responding to a question about the GSEs' purchasing subprime mortgage securities that could have abusive or predatory features. "I agree, we have to be careful that they are not exploitative," the GSE regulator said at a Women in Housing and Finance symposium.

Treasury Department officials and key House members have reached an agreement on regulating the size and growth of Fannie Mae's and Freddie Mac's giant mortgage portfolios, and the House may vote on the new portfolio language during the lame-duck session, sources say.The agreement does not call for a reduction of the $700 billion portfolios, which has been the cornerstone of the Bush administration's push for government-sponsored enterprise reform. However, the new GSE regulator would "establish standards by which the portfolio holdings, or rate of growth … will be deemed to be consistent with mission and safe and sound operations," the compromise language says. The House passed a GSE regulatory reform bill (H.R. 4161) by a 331-90 vote in October 2005, and the Treasury still has objections to several provisions, including an increase in GSE loan limits. Nevertheless, House Financial Services Committee leaders are trying to arrange for another vote on H.R. 4161 with the new portfolio language later this week. Treasury officials are meeting with key senators to line up support. However, passage of H.R. 4161 by the Senate is very unlikely, sources say, since one senator can block consideration. But the Treasury/House agreement improves the chances of passing a GSE reform bill next year.

In another sign that homebuilders are pulling back, spending on residential construction fell 1.9% in October to $597.1 billion -- marking the seventh consecutive monthly decline, according to the Census Bureau.Construction spending is off 9.4% since October 2005, and builders are dealing with a 558,000 inventory of unsold homes, which represents a seven-month supply. In addition, the inventory of existing homes rose to 3.8 million in October, which is a 7.4-month supply at the current sales pace. The National Association of Home Builders has voiced concern that the large inventory of homes will make it harder for builders to sell their inventory. These concerns are heightened by a 30% jump in the number of vacant homes on the market over the four quarters ended Sept. 30. The number of vacant homes for sale totaled 1.9 million in the third quarter. "Normally, one third of existing homes are vacant, but now it is closer to half," said NAHB economist Michael Carliner. He said he suspects that a lot of these vacant homes were rentals or second homes that owners now want to sell to pocket gains or cut their losses.

The anti-predatory lending ordinance of Montgomery County, Md., has been declared unconstitutional by a state court and permanently enjoined from enforcement.In American Financial Services Ass'n v. Montgomery County, Circuit Court Judge Michael Mason said the Maryland Constitution vests the power to enact laws principally in the state legislature. "No matter how noble the purpose, a 'general' law is beyond the authority of the county to enact and is unconstitutional," the judge wrote. The ruling is good news for current and prospective homeowners, the AFSA said in response to the judge's decision. "It resolves uncertainty that has surrounded Montgomery County's mortgage market since last year and preserves borrowers' access to mortgage credit." The AFSA, along with a group of lenders, filed suit in February seeking injunctive relief. The plaintiffs argued that the bill was beyond the county's authority to enact and said the state has pre-empted the authority of the county to enact legislation that affects lending. They said the bill was vague and violated the lenders' rights to due process. According to the AFSA, courts have consistently ruled that regulatory authority for mortgage lending lies at the state level.

House price appreciation slowed considerably in the third quarter, with five states and 15 cities in California experiencing actual price declines, according to the Office of Federal Housing Enterprise Oversight.Nationally, house prices increased at a 3.45% annual rate in the third quarter, down from 5.10% in the second quarter and 13.20% in the third quarter of 2005. "House prices continued to rise through the third quarter in most of the country, but generally at only low or moderate rates," said OFHEO chief economist Patrick Lawler. The OFHEO report points out that New York, Rhode Island, Michigan, New Hampshire, and Massachusetts saw price declines from the second quarter to the third quarter. Meanwhile, 15 of California's 25 major cities experienced price declines, including Sacramento (-0.89%) and San Francisco (-0.21%). OFHEO can be found on the Web at http://www.ofheo.gov.

The next chairman of the House Financial Services Committee wants to restructure a Federal Housing Administration reform bill so that riskier borrowers don't have to pay higher mortgage insurance payments.Rep. Barney Frank, D-Mass, who is virtually certain to be the next chairman of the panel, said he is working on a bill that raises the FHA loan limit to the median house price in high-cost areas and allows the FHA to serve riskier subprime borrowers. Rep. Frank estimated that the FHA, by serving richer communities, will generate more revenues that can be recycled to cover the higher loan-loss rates associated with subprime lending. As a result, the FHA borrowers won't have to pay risk-based premiums. It would make money for the FHA or be a "wash," Rep. Frank told a Women in Housing and Finance symposium. He also told reporters that the FHA loan limit would be similar to a proposal in a House-passed government-sponsored enterprise reform bill that raises the Fannie Mae and Freddie Mac loan limit to the median house price in high-cost areas. The GSE bill caps this increase at 150% of the current conforming loan limit.

An attorney for Wachovia Mortgage Corp. tried to persuade the U.S. Supreme Court on Wednesday that the Office of the Comptroller of the Currency has not exceeded its powers in shielding the operating subsidiaries of national banks from state regulation, but his arguments did not seem to win over key justices.Chief Justice John Roberts and Justice Antonin Scalia were particularly hostile toward the OCC's pre-emptive powers regarding an operating subsidiary that is incorporated under state law. Wachovia's attorney, Robert Long, argued that the states cannot interfere with the lending activities of an operating subsidiary like Wachovia Mortgage. He cited numerous cases where the federal courts, including the Supreme Court, held that the states cannot interfere with the lending activities of national banks or their operating subsidiaries. However, Justice Scalia contended that the OCC is completely eliminating any distinction between a national bank and an operating subsidiary. The attorney for the state of Michigan argued that Wachovia Mortgage is incorporated under state law and is not exempt from Michigan's mortgage lending law. The justices are expected to hand down their decision in Watters v. Wachovia Bank in the spring.

Home sales "may be stabilizing" due to lower house prices and mortgage rates, according to Federal Reserve Board Chairman Ben Bernanke, but he says he still expects a further reduction in new construction to bring the large inventory of unsold homes back to normal levels.Single-family starts are down 35% since the peak earlier this year. But builders are carrying an inventory of 555,000 unsold homes, which is 57% above the 10-year average. The Fed chairman said this 6.4-month supply of newly constructed homes probably understates the inventory due to a sharp rise in the number of buyers that have canceled sales contracts, which do not show up in official estimates. In addition, there are 3.3 million previously owned single-family homes on the market, which is equal to a 7.2-month supply at the current sales pace. To reduce this inventory overhang, builders are likely to make "further adjustments in the production," Mr. Bernanke said. "The slowing pace of residential construction is likely to be a drag on economic growth into the next year."

The conforming loan limit will remain at $417,000 next year.Although the index used to determine the maximum loan amount Fannie Mae and Freddie Mac can purchase or guarantee showed a slight decline of $501, the Office of Federal Housing Enterprise Oversight said recently that it would not lower the ceiling if the index declined. The mere 0.16% slip in the average price of both new and existing houses, from $306,759 in October 2005 to $306,258 last month (as measured by the Federal Housing Finance Board), would have resulted in a $667 decline in the limit -- to $416,333. But OFHEO Director James Lockhart said recently that the ceiling would not be lowered in order to "avoid disrupting the end-of-year" mortgage pipeline. However, the dropoff will be used in calculating the loan limit for 2008. OFHEO took over responsibility for setting the ceiling in February 2004. Prior to this year's decline in the FHFB index, the average increase in the October-to-October price of houses over the previous five years was 8.8%. Last year's limit was 15.9% above the $359,650 ceiling in 2005.