Compliance & Regulation

State regulators are working on nontraditional mortgage guidance for state-licensed mortgage bankers and brokers, and they want to be consistent with federal guidelines on originating interest-only and payment-option ARMs.Federal banking regulators issued underwriting guidance Sept. 29 for federally insured banks and thrifts. Now the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators want to issue similar guidance in the next few weeks, according to CSBS vice president Michael Stevens. Mr. Stevens noted that the CSBS raised some issues about the strict underwriting requirements on option ARMs during the comment period on the federal guidance. "At this point in time, we think that it is important to have consistent guidance across all the financial providers," Mr. Stevens said.

The president-elect of the National Association of Mortgage Brokers has updated attendees at the New Jersey Association of Mortgage Brokers convention in Atlantic City on several national issues, including making it easier for mortgage brokers to originate Federal Housing Administration loans.George Hanzimanolis said the group has met with Department of Housing and Urban Development Secretary Alphonso Jackson and FHA Commissioner Brian Montgomery regarding the replacement of the audit requirement for mortgage brokers with a surety bond. An audit, Mr. Hanzimanolis said, is just a snapshot that a bad actor could manipulate. An option being discussed with HUD is to allow lenders to choose which brokers they want to work with, and not have a bond or audit requirement at all. Another issue he addressed is fiduciary duty or suitability requirements. Suitability is subjective, Mr. Hanzimanolis said, maintaining that there are too many unknown factors. The best way to protect consumers is by educating them, and the industry should have education and background checks, Mr. Hanzimanolis said.

The American Mortgage Law Group, a national law firm focused exclusively on the mortgage banking industry, has been formed in Novato, Calif., according to Arthur Prieston, founder of The Prieston Group, a mortgage fraud insurance provider that will work closely with the new firm.American MLG will be headed by partners James Brody and Ryan Thomas, who have moved to the new firm from the mortgage banking group of Lanahan & Reilley, Santa Rosa, Calif., which has worked with TPG on loss mitigation. "There is clearly a need for an experienced national law firm dedicated solely to serving the unique needs of all within the mortgage banking industry, from lenders to investors to servicers to other entities," Mr. Prieston said. "The marketplace has changed, not only leaving lenders more vulnerable to fraud, but also squeezing profits for all. It is vital that the industry have access to a law firm that can effectively address all their concerns, regardless of location." TPG can be found online at http://www.priestongroup.com.

A study by the President's Working Group says the availability of terrorism insurance has improved under a government program that provides a federal backstop for private insurers."While there are inherent difficulties in evaluating the long-term nature of the terrorism risk insurance market, with the government program in place, a number of positive developments have occurred" since the September 2001 terrorist attacks, the PWG report says. The Terrorist Risk Insurance Act is due to expire Dec. 31, 2007, and the Coalition to Insure Against Terrorism will be urging Congress to make the federal program permanent next year. "Today, even with the TRIA backstop, reinsurers are not meeting the capacity demand of primary insurers for their deductible and co-insurance layers," coalition chairman Martin DePoy said. This fact "refutes" the notion that the federal backstop is negatively affecting the emergence of private reinsurance capacity, he said. The PWG report does not include a recommendation to extend TRIA.

Senate Democrats will be in no mood to compromise on GSE regulatory reform during the lame-duck session if they win control of Congress in the November elections, according to Sen. Christopher J. Dodd, D-Conn."I'm hoping both houses [the House and the Senate] are in different hands the morning of Nov. 8," Sen. Dodd told reporters. "If that is the case, I think we will have a rather short lame-duck session." If the Democrats don't win both houses, the ranking Democrat on the Senate Banking Committee indicated there might be time to negotiate. "It depends on what kind of a lame-duck session it is," Sen. Dodd said after speaking to a Congressional Hispanic Caucus conference. Supporters of government-sponsored enterprise reform are hoping the lawmakers can reach agreement and pass a bill to strengthen the regulation of Fannie Mae and Freddie Mac when Congress returns to Washington Nov. 13 for the lame-duck session. Sen. Dodd contends that Congress could have passed a GSE regulatory reform bill in September if the Bush administration had accepted the House-passed GSE bill. "I think the administration missed an opportunity," he said. "House Democrats and Republicans put together a pretty good bill." The Connecticut senator said he likes the House GSE bill (H.R. 1461) and will try to pass it next year if he chairs the Senate Banking Committee. Sen. Dodd is in line to be the chairman if the Democrats win control of the Senate.

If Congress does not pass a GSE regulatory reform bill, a Friedman Billings Ramsay analyst says he expects the Bush administration to kept a tight rein on Fannie Mae and Freddie Mac and limit their issuance of corporate debt."If the administration is handed reckless legislation or gets no legislation at all, we expect the Treasury Department would begin to flex its muscle regarding debt issuance, which if effective, could prove to be a de facto asset cap," FBR managing director Paul Miller says in a research paper. (The government-sponsored enterprises issue debt to finance the growth of the mortgage portfolios.) Mr. Miller also contends that the outlook for passage of a GSE reform bill this year is not good despite reports of negotiations to break a deadlock over GSE portfolio limits. "Following our meetings with Hill staffers, it appears to us that a compromise is further apart than many press outlets have claimed," the FBR analyst says.

A new GSE regulator could establish annual limits on the size and growth of Fannie Mae's and Freddie Mac's giant portfolios through a rulemaking process, according to James Lockhart, director of the Office of Federal Housing Enterprise Oversight.The OFHEO director told the National Economists Club that the $700 billion mortgage portfolios are too large and should be reduced gradually to a level the regulator determines is appropriate after weighing safety-and-soundness and systemic risk concerns. "If done properly, the reduction of the portfolios would be through a transparent rulemaking process," he said. And after a gradual reduction, the government-sponsored enterprises could "grow with the market," he added. The process Mr. Lockhart outlined reflects a proposal floated by Treasury Department officials to break a deadlock in the Senate over the issue of portfolio limits. No agreement on a GSE regulatory reform bill has been reached yet. "I believe the two sides are not very far apart at all," the OFHEO director said.

Members of minority groups constituted the fastest-growing segment of homebuyers obtaining new home-purchase mortgages in 2005, according to Genworth Mortgage Insurance and Compliance Technologies.In a report released at the Second Annual Mortgage Lending Industry Diversity and Emerging Markets Conference & Career Fair in Washington, conference co-sponsors Genworth and ComplianceTech said the percentage increase for minority loans in high-volume areas was three times greater than for white households in the top 20 metropolitan areas for mortgage growth. Using newly released Home Mortgage Disclosure Act data for 2005, the report ("The 2005 Minority Home Buying Surge") analyzes the change in minority home-purchase loans from 2004 to 2005 in 388 metro areas. "We are now witnessing the positive effects of the growth in immigrant households who want to own a piece of the American Dream," said Michael Taliefero, managing director of ComplianceTech, which prepared the report. "While immigration is part of the story, the lower homeownership rates among African-Americans and Hispanics represent pent-up mortgage demand that is starting to be filled." Genworth can be found online at http://www.genworth.com.

Interest-only and payment-option ARM lenders will have to qualify borrowers at the fully indexed rate with potential negative amortization added to the loan amount under final federal regulatory guidance issued Friday.Banking regulators rejected industry complaints that the new underwriting guidelines will be too restrictive. Under the mandate, payment-option adjustable-rate mortgage servicers must include in the monthly mortgage statement an "explanation" that if borrowers chooses the minimum monthly payment -- which many do -- it would increase their loan balance. "The regulators stuck to their guns," said Howard Glaser, a former Department of Housing and Urban Development attorney who runs a consulting practice. ".... It is rare for federal regulators to step in and regulate a specific product. They are doing so here out of concern that they need to protect both the borrower and the bank." According to the Alternative Products Quarterly Data Report, the largest option ARM lenders include Countrywide Home Loans, Washington Mutual, and Golden West, among others. The regulators also issued model consumer disclosures for IO and option ARM products for public comment.

Kirkpatrick & Lockhart Nicholson Graham LLP, which has a large mortgage banking and financial services practice, is in merger talks with a Seattle-based law firm that is focused on the technology industry.Preston Gates & Ellis and K&LNG are in "discussions aimed at a possible combination of their firms by year-end," the two companies said in a statement. Kirkpatrick & Lockhart merged with the London-based Nicholson Graham in January 2005.