Compliance & Regulation

Office of Thrift Supervision Director John Reich broke ranks with his fellow regulators Sept. 14 over proposed guidance on commercial real estate lending and warned at a congressional hearing that banks and thrifts might view the concentration thresholds as caps and limit their CRE lending.The OTS director testified that he supports issuing guidance to raise awareness that high concentrations of CRE loans need to be effectively managed, but not with the threshold numbers. "I do have a concern that they will view them as limits and caps," Mr. Reich said. Multifamily and commercial property loans (plus land, development, and construction loans) that exceed 300% of equity capital would be considered a high concentration under the proposed guidance. Residential and commercial ADC loans that exceed 100% of equity capital would also be considered a high concentration. The OTS director told the panel that it is "inappropriate" to lump multifamily loans with shopping mall and office building loans in determining high concentrations of CRE loans. FDIC Chairman Sheila Bair testified that the guidance will emphasize that the "stated thresholds are not limits" and will recognize that different property types have different risk characteristics.

Federal banking regulators and mortgage banking professionals will have their say on "exotic" mortgages on Sept. 20 when two Senate Banking subcommittees host a joint hearing on the hot new products.The subcommittees on housing and on economic policy have invited five federal banking regulators to testify, as well as representatives from lending, mortgage insurance, and consumers groups. The hearing comes just as banking regulators are trying to finalize guidance that would strengthen underwriting and improve consumer disclosures on interest-only loans and payment-option adjustable-rate mortgages. Federal regulators are close to agreeing on IO and option ARM guidance, but are hung up on how to treat negative amortization and whether it should be added to the principal amount of an option ARM for purposes of qualifying a borrower. Mortgage lenders originated $83.3 billion in option ARMs in the second quarter, which accounted for almost one in 10 of residential loans funded, according to survey figures compiled by National Mortgage News and the Alternative Products Quarterly Data Report.

Countrywide Financial Corp., Calabasas, Calif., originated $5.4 billion in payment-option ARMs in August, a 48% decline from the level recorded a year ago.Overall, the nation's largest mortgage banker originated $40 billion in product during the month, a 24% decline from that of August 2005. However, its overall fundings rose 11% compared with those of July of this year. Payment-option adjustable-rate mortgages have come under the scrutiny of federal banking regulators and some legislators. Next week the Senate Banking subcommittee on housing will hold a hearing on "exotic" mortgages, which include option ARMs and interest-only loans. This past summer, Countrywide chief executive Angelo Mozilo said publicly he is concerned about resets on option ARMs.

Roughly 18% of the mortgage bankers and mortgage brokers in New York state have not yet paid their general assessment and are in immediate suspension, according to a New York Banking Department official who addressed the New York Association of Mortgage Brokers convention in Melville, N.Y.If the bill, plus a $100 late fee, is not paid by Oct. 10, the registration is considered to be expired, and if it is not paid by Dec. 10, the expiration is considered permanent, said Robert A. Mengani, assistant deputy superintendent of banks in the department's mortgage banking division. The department is seeing an increasing number of violations of advertising regulations, which Mr. Mengani attributed to the shrinking mortgage origination market. A particular problem involves materials using the words "United States of America" or having a picture of the Statue of Liberty, which are protected words and images. Violators open themselves up to a $15,000 fine and must send out retraction letters, he said.

After a 20-year wait, a mortgage originator education bill is awaiting the signature of New York Gov. George Pataki, the outgoing president of the New York Association of Mortgage Brokers announced Thursday at the group's annual convention in Melville, N.Y.The NYAMB executive, Don Romano, said the bill also requires that originators who work for any state-regulated entity, including mortgage bankers and state-chartered banks and thrifts, be registered and that the background check be performed by the New York Banking Department. As for specifics, Mr. Romano said there are no rules established for the law, which would go into effect on Jan. 1, 2007, although implementation would be one year later. But among the people who would have to be registered is "anyone with direct contact with the consumer," he said. The law establishes an even playing field among state-regulated entities, and "it is going to be a plus for us" in competing with federally chartered entities, Mr. Romano said. The NYAMB is going to push the idea that, by dealing with a mortgage broker, a consumer is dealing with someone who is regulated by a local authority, he said.

Senate leaders may be too far part to agree on a compromise on GSE legislation that restricts Fannie Mae's and Freddie Mac's mortgage portfolios, but negotiations are continuing, according to Sen. Chuck Hagel, R-Neb."We may not be able to work it out -- but we have to try and we are trying," Sen. Hagel told an American Enterprise Institute seminar on strengthening regulation of the housing government-sponsored enterprises. The Nebraska senator reported that he talks to Senate Banking Committee Chairman Richard Shelby, R-Ala., three times a day about the GSE bill. Both senators support tough GSE portfolio limits. And he said Treasury Secretary Henry Paulson has brought new "vitality and credibility" to the effort to find compromise before Congress adjourns in a few weeks for the elections. Besides the portfolio issue, another "hang-up" is a provision that would require Fannie and Freddie to fund affordable housing grants. Sen. Hagel indicated that it could be worked out if there are enough controls over the AH funds. But the House AH fund provisions are not acceptable to the senator. "If that is the cost or price of a bill, I will not support a compromise," he said.

The Office of Federal Housing Enterprise Oversight says it is likely to sue former top officers who were involved in Fannie Mae's $11 billion accounting scandal.Speaking to the news media at an American Enterprise Institute meeting, OFHEO Director James Lockhart said, "We will more than likely be filing litigation against them," but he did not single out any individuals. When asked if the agency might sue former chairman and chief executive Franklin Raines and former chief financial officer Timothy Howard, he responded, "they are the top two." A source noted that Mr. Lockhart offered no details about possible litigation. In public reports, OFHEO has blamed Messrs. Raines and Howard -- and others -- for the accounting mess at the government-sponsored enterprise. The two men were forced out by Fannie's board in December 2004. To date, they have maintained that they have done nothing wrong.

The Committee on Capital Markets has been formed to assess the degree to which U.S. public markets are competitive globally, and U.S. Treasury Secretary Henry Paulson has indicated that he will review its findings."The issue is important to the future of the American economy and a priority for me," Mr. Paulson said. Members of the group include executives from Wall Street and accounting firms.

Originations of Federal Housing Administration reverse mortgages are on a tear this year, but lenders are worried that election politics could lead to a shutdown in the first quarter and disrupt the program designed to help seniors tap the equity in their homes.Lenders are expected to bump up against a cap on FHA home equity conversion mortgages by February or March, according to the National Reverse Mortgage Lenders Association. "We are very nervous," said NRMLA president Peter Bell. "Lifting the cap is a do-or-die issue for the HECM business." The House has passed a bill, sponsored by Rep. Michael Fitzpatrick, R-Pa., that eliminates a 250,000-loan cap on the number of HECM loans the FHA can insure. But the Senate has not acted on the Fitzpatrick bill (H.R. 2892) or a similar bill introduced by Sen. Rick Santorum, R-Pa. "We are anxious to see the Senate move before they adjourn before the election," Mr. Bell said. With political control of the House and the Senate up for grabs, "who knows what will happen after the election?" he added.

One week after facing withering congressional criticism, Federal Housing Finance Board Chairman Ronald Rosenfeld dropped several hints at a board meeting that he plans to move ahead and finalize a controversial capital rule that would require the Federal Home Loan Banks to increase their retained earnings.Republican and Democratic members of the House Financial Services Committee urged Mr. Rosenfeld to withdraw the capital rule at a Sept. 7 hearing. But the Finance Board chairman seemed unfazed at the board's meeting this week and commented that a meeting to finalize the capital rule would probably be a very long session due to the number of comment letters the proposal generated. In acknowledging former director Franz Leichter's contributions to the agency and the capital rule, Mr. Rosenfeld said the final rule "will have your fingerprints on it." At the Sept. 13 meeting, the Finance Board approved a final rule to streamline the affordable housing program and establish new rules for FHLBanks to approve and fund out-of-district housing projects. The board also agreed to issue a proposed rule for a 30-day comment period that creates an examiner rating system for FHLBanks. The Finance Board can be found online at http://www.fhfb.gov.