Compliance & Regulation

Countrywide Financial Corp., Calabasas, Calif., has announced that it intends to convert its national bank charter to a federal savings bank (or thrift) charter.The company said it has notified the Federal Reserve Board of San Francisco, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency of the decision, which came after "several months of strategic analysis." Upon the approval of the application, Countrywide Bank NA would be converted to a thrift and Countrywide Financial Corp. would become a savings-and-loan holding company, with the OTS as the regulator of both entities. "In our continuous efforts to maximize efficiencies, the company has determined that Countrywide is better positioned for future growth as a savings institution with a single primary regulator, as opposed to the current dual-regulator structure," said Angelo R. Mozilo, Countrywide's chairman and chief executive officer. "Based on our analysis, we believe that the OTS's focus on the housing market and its unitary supervisory approach aligns more closely with Countrywide's existing business activities and future diversification efforts." The company can be found online at http://www.countrywide.com.

The White House has denied that there will be a change at the Department of Housing and Urban Development and maintains that rumors that Secretary Alfonso Jackson will be removed are "absolutely baseless."White House Press Secretary Tony Snow told reporters that "Alphonso has been reassured that he is going to remain the HUD secretary." Mortgage Wire reported earlier that Secretary Jackson would resign in the next few weeks. Despite the White House denial, industry sources indicate that Secretary Jackson plans to leave HUD by Christmas and that HUD Deputy Secretary Roy Bernardi is expected to become the acting secretary. In related developments, HUD General Counsel Keith Gottfried left the department Nov. 3 and Ginnie Mae President Robert Couch is filling in as HUD's chief legal officer.

A multiyear restatement of earnings by the 12 Federal Home Loan Banks resulted in a $38 million reduction in retained earnings, according to the FHLBanks' newly issued combined financial report for 2005.It is the first combined audited statement by the banks since the second quarter of 2004, when they started a stock registration process with the Securities and Exchange Commission and ran into questions about their accounting for derivatives and hedging activities. The restatement for 2001, 2002, and 2003 resulted in a reduction in retained earnings of $168 million. But after the sale of certain securities, the net cumulative effect was a $38 million decline in retained earnings. The audited results show that the FHLBanks had $2.5 billion in net income in 2005, up 27% from that of 2005. The 12 banks have $997 billion in total assets. Federal Housing Finance Board Chairman Ronald Rosenfeld said the 2005 financial report shows that the FHLBanks have gotten "their financial house in order." Separately, the Chicago FHLBank received Finance Board approval to redeem $375 million in excess capital stock.

The National Association of Mortgage Brokers is calling on federal banking regulators to delay implementation of their underwriting guidance on nontraditional mortgage products until state regulators are ready to implement similar guidance.NAMB president Harry Dinham said the guidance will be "ineffective" unless it applies to all mortgage originators. "Uneven or uncoordinated implementation of the federal guidance will simply create consumer confusion and marketplace inefficiencies," according to a resolution adopted by the NAMB's board of directors. State regulators are working on nontraditional mortgage guidance for state-licensed mortgage bankers and brokers that is similar to federal guidance on interest-only and payment-option adjustable-rate mortgages. The state guidance is expected to be issued very soon. Under the federal guidance, banks and thrifts are required to monitor broker originations and take corrective action if a broker does not follow the federal guidance.

The Office of Federal Housing Enterprise Oversight has issued examiner guidance that establishes corporate governance and compensation standards for Fannie Mae and Freddie Mac.OFHEO Director James Lockhart said many provisions of the guidance are "designed to prevent a recurrence of the serious problems found in OFHEO's special examinations" of the two government-sponsored enterprises. One provision requires employee agreements and contracts to include "claw-back" provisions so that anyone terminated for misconduct can be forced to return past compensation. The corporate government provisions call for a GSE chairman to be an independent board member. In addition, the guidance states that board members have broad responsibilities that "go beyond a short-term focus on maximizing shareholder value." OFHEO can be found online at http://www.ofheo.gov.

Federal banking regulators are seeking more information about nontraditional mortgage products, and all banks will be required to report their holdings of one- to four-family loans with negative amortization features starting with the first-quarter 2007 call report.The regulators are also proposing additional reporting requirement for banks with large exposures. They might have to report the total maximum remaining amount of negative amortization contractually permitted on interest-only and payment-option ARMs and the total amount of negative amortization that is included in the carrying amount of these loans. The additional reporting requirements would be phased in, and the regulators are seeking comments on the appropriate reporting thresholds. "The banking agencies request comment on the specific dollar amount and percentage of loans that should be used in setting the size threshold," says the joint notice and request for comments.

Democrats have won control of the House, which will allow Rep. Barney Frank, D-Mass., to chair the Financial Services Committee and press for new housing production programs and predatory-lending legislation.In the Senate, the Democrats may have won a one-seat majority, depending on the outcome of a probable recount in Virginia. Despite the uncertainty, Senate Democrats will probably act as if they have won control when Congress returns for a lame-duck session next week to complete unfinished business, such as appropriation bills and regulatory reform for the housing government-sponsored enterprises. Floyd Stoner, the top lobbyist of the American Bankers Association, said it is difficult to tell what the lawmakers will do after the "shock" of the election results wear off. However, GSE reform is an issue where both the House and the Senate have acted, and it is "pretty clear where a resolution would be," he said. "But even with all that, getting anything done will be difficult." The election results boosted Fannie Mae's and Freddie Mac's stock prices as investors realized that the Republicans have lost their chance to scale back the GSEs' mortgage portfolios.

Class-action lawyers are ready to pounce on payment-option adjustable-rate mortgage lenders once resets and delinquencies start to pile up in the second quarter of next year, according to an industry litigation attorney."This is going to be an absolute nightmare for the industry," attorney Andrew Sandler told a Consumer Bankers Association fair-lending conference. The partner at Skadden Arps reported that the class-action bar is counting on property value declines and rate resets that will triple monthly payments for homeowners who have relied on the minimum-payment option. The class-action attorneys will contend that lenders did not properly warn homebuyers about the risks associated with negative amortization and the potential for payment shock, Mr. Sandler said. And they will point to recent underwriting guidance issued by federal banking regulators to show that lenders placed their clients in unsuitable loans.

Fidelity National Information Services Inc., Jacksonville, Fla., has announced the acquisition of Watterson Prime LLC, a Bellevue, Wash.-based provider of due diligence services to financial institutions that invest in and securitize mortgage loans.The terms of the transaction were not disclosed. Fidelity said the due diligence services will be integrated with service offerings such as the FIS Hansen Quality HQ Score, a collateral risk score designed to protect clients against property valuation fraud and overvaluation risk. "This acquisition expands our product breadth and our ability to assess risk and certify the quality of mortgage portfolios," said Eric Swenson, president of the FIS Mortgage Information Services Division. "It also enables us to develop innovative products and provides us with a competitive advantage in the marketplace." The companies can be found online at http://www.fidelityinfoservices.com and http://www.wprime.com.

The Office of Federal Housing Enterprise Oversight has the regulatory authority to force Fannie Mae to relinquish control of a patent on a process for customizing mortgages and turn it over to the public domain, according to the Consumer Mortgage Coalition.In addition, the CMC maintains that its legal research shows that Fannie violated its government charter by acquiring a patent involving the mortgage origination process. "OFHEO has authority to address such charter act violations by the company," CMC executive director Anne Canfield says in a Nov. 2 letter to OFHEO Director James Lockhart. An OFHEO spokeswoman declined to comment specifically on the CMC letter. But she did say that Mr. Lockhart "has discussed the issue with interested parties and anticipates a resolution shortly." The CMC, along with six other industry groups, is pressing Fannie to place the patent in the public domain so that everyone can use it or design their own systems without fear of potential litigation or monetary penalties for patent infringement. Fannie Mae contends that it has a right to protect its intellectual property and has no plans to pursue the loan customization process. "We plan on allowing primary-market participants to use this tool, which, after all, is intended to help people get fair mortgages," Fannie spokesman Brian Faith said.