Compliance & Regulation

Lenders may not be able to sign a Fannie Mae licensing agreement due to the liability exposure and restrictions on third-party vendors, according to the Consumer Mortgage Coalition."Without changes, I suspect it will be extremely difficult for lenders to sign the agreement," CMC executive director Anne Canfield said. Fannie is seeking comment on an "open license agreement" that would allow lenders -- without paying fees or royalties -- to use its patented process for customizing mortgages. Under the agreement, lenders cannot share access to the patented process with third-party vendors, which lenders depend on for a variety of services. "While large lenders could potentially reorganize their businesses to bring third-party services in house, this option is not likely to be available to smaller banks and mortgage companies," the CMC says in a paper that outlines its concerns about the agreement. The CMC also notes that the agreement caps Fannie's liability at $50,000, but damages for licensees is unlimited. "[I]f an entity were to sue Fannie Mae for violating any law or infringing on any patent that this license covers, the licensees would have to indemnify Fannie Mae for the losses," the CMC paper says.

President Bush's chief economic advisor said the housing market has been "hit harder" than expected and he isn't sure when it will bottom out."Obviously, we don't like to see any one industry get hit and hit hard. That affects people's jobs," said Ed Lazear, chairman of the President Council of Economic Advisers. But so far the downturn in the housing section has not really impacted construction jobs because commercial construction has "taken up much of the slack," the CEA chairman told reporters. Nevertheless, the President's chief economist has lowered his estimates of real gross domestic product from 3.6% in 2006 to 3.1% because of the housing sector. But he believes the most the decline in housing activity has already occurred. "Whether it's bottomed out now or whether it will take another quarter or so I think is still up for grabs," Mr. Lazear said.

Fannie Mae's proposal to allow lenders to use its patented mortgage origination process is acceptable to the GSE's regulator, but some industry groups claim it does not go far enough and there are problems with the licensing agreement.Consumer Mortgage Coalition executive director Anne Canfield called Fannie's proposal a good first step. "We appreciate the overture by Fannie Mae. However, it falls far short of a contribution to the public domain." Fannie has circulated an "open license agreement" that would allow lenders -- without paying fees or royalties -- to use its patented process for customizing mortgages to meet borrower's individual circumstances. The government-sponsored enterprise is hoping free access will calm industry concerns about the patent. A spokeswoman for Fannie's regulator said, "The Office of Federal Housing Enterprise Oversight believes this is a reasonable resolution of this issue." But CMC is concerned the licensing agreement "calls for very complicated arrangements that appear to deter usage." Nevertheless, the industry group is willing to work with Fannie. "We are hopeful that everyone can come to a mutual agreement on this very technical, but important issue, that will benefit industry and consumers alike," Ms. Canfield said.

Commercial banks and savings banks get two thirds of the single-family loan originations through their wholesale channels and only one-third through their retail branches and offices, according to new data from the Federal Deposit Insurance Corp.The Call Report data show that 575 banks originated $330.1 billion in first mortgages and $9.8 billion in closed-end second mortgages during the third quarter. It is the first time the FDIC has collected origination data, and it only requires banks with at least $1 billion in assets, or smaller banks with at least $10 million in originations over the past the two quarters, to report. The Office of Thrift Supervision requires all thrifts to report their origination activities. A breakdown shows that the reporting banks originated $226.3 billion in first-mortgage loans through their wholesale channels and $103.8 billion through their retail channels. Wholesale includes purchasing and funding loans through correspondent lenders and mortgage brokers.

The Office of the Comptroller of the Currency has agreed to field consumer complaints involving national banks that are misdirected and filed with state regulators by mistake."The burden should not be on consumers to know which agency regulates their financial institution," Comptroller John Dugan said. The referral procedures worked out with the Conference of State Bank Supervisors offer bank customers a "seamless system for ensuring that their complaints reach the right supervisory agency," the chief supervisor of national banks said. In a recent speech, Mr. Dugan urged community activists to refer complaints about national bank lending practices to the OCC's consumer assistance shop. It seems the comptroller is preparing to testify next year before the new House Financial Services Committee chairman, Rep. Barney Frank, D-Mass. Rep. Frank recently told reporters that he plans to have an oversight hearing on the OCC's consumer protection record. "I will put a lot of pressure on national regulators that have pre-empted state consumer protection laws to demonstrate that they have a capacity to do consumer protection," he said.

The Federal Housing Administration has substantially improved its estimates of defaults and claims on single-family loans, and the agency recently received a clean audit for the first time since 1990.The FHA has consistently underestimated claims over the years, raising the ire of White House budgeters and forcing outsider auditors to cite the agency's inability to predict the performance of its loans as a "material weakness." To improve estimates, the FHA recognized that loans with downpayment assistance have higher claims rates and incorporated credit scores in its performance models. As a result, the agency's claim estimate for fiscal year 2006 was "right on the money," said Judith May, director of the FHA's Office of Evaluation. The FHA predicted that lenders would submit 54,260 claims, and the actual total was 52,106. This estimate prompted the agency's outside auditor, Urbach Kahn & Werlin, to sign off on the agency's fiscal 2006 financial statement without citing a material weakness. It is the first clean audit the FHA has received since 1990, when Congress required an annual outside audit of the federal mortgage insurance fund.

Fannie Mae is circulating an "open patent license" agreement that would allow lenders to use its patented process for customizing mortgage loans without paying fees or royalties."It addresses a lot of the concerns that lenders had about the potential impact of this patent," said one industry source who did not want to identified. However, there are some concerns that sublicensing or limitations on working with vendors could pose operations problems for lenders. Another source declined to comment until a patent attorney has completed a review of the license agreement. Fannie received patent approval on Aug. 8, and it immediately raised concerns about a government-sponsored enterprise holding a patent that involves primary-market lending activities. Industry groups called on Fannie to place the patent in the public domain so lenders can use the Fannie process or design their own processes without facing the risk of litigation or penalties for patent infringement. Fannie's regulator, the Office of Federal Housing Enterprise Oversight, is also looking into the patent issue. But OFHEO declined to comment on the license agreement that Fannie is circulating.

The Treasury Department wants Fannie Mae and Freddie Mac to submit estimates of their borrowing needs for the first quarter as the department tries to exercise its authority over GSE debt issuance.The debt notification requirements have not been finalized yet, a Treasury spokeswoman said. "But the hope is to have it start at the beginning of the first quarter of 2007," she said. It seems the two government-sponsored enterprises will be expected to submit their estimates in December. And Treasury officials are promising to make a "prompt response" on the debt issuance requests. Fannie and Freddie knew something like this was coming, but they have declined to comment on the Treasury's move. "Until they officially notify us, we are not going to comment," a Freddie spokeswoman said. During the summer, Treasury Secretary Henry Paulson instructed his staff to come up with a debt approval process so that the Treasury has a practical option for limiting GSE debt. "Given Secretary Paulson's market expertise and the fact that Fannie Mae and Freddie Mac have $1.5 trillion in outstanding debt, this move to formalize the debt approval process makes sense," said House Financial Services Committee Chairman Michael Oxley, R-Ohio.

Thrift originations of single-family loans increased by 1% in the third quarter from those of the previous quarter, but loan production was down 8% from that of a year earlier.Thrifts originated $149.9 billion in one- to four-family loans in the third quarter, down from $181.3 billion in the third quarter of last year, according to the Office of Thrift Supervision. Despite the slight increase, the percentage of adjustable-rate mortgages and refinancing activity fell noticeably. An estimated 26% of thrift originations were adjustable-rate mortgages, compared with 37% in the previous quarter, the OTS reported. Refinancings accounted for 27% of originations, down from 33% in the second quarter. The 853 OTS-supervised thrifts posted $4.29 billion in earnings, despite a $195.6 million hit due to a decline in the value of servicing fees. Nevertheless, it was the seventh consecutive quarter in which thrift earnings topped $4 billion.

Doral Financial Corp., a mortgage lender based in San Juan, Puerto Rico, has announced the selection of Bear Stearns and JPMorgan to assist the company in evaluating options for refinancing its $625 million floating-rate senior notes that mature in July 2007.In September, Doral announced an agreement with the Securities and Exchange Commission under which it will pay a $25 million civil penalty in connection with the SEC's probe of Doral's restatement of financial results for 2000-2004. Doral's restatement slashed $694.4 million from its retained earnings through the end of 2004 to correct the accounting for certain mortgage loan sales and the valuation of its interest-only strips. Doral can be found online at http://www.doralfinancial.com.