Compliance & Regulation

Tighter underwriting standards on subprime loans could have a greater impact on reducing foreclosures than banning prepayment penalties and balloon loans and other so-called predatory lending practices, according to a study by the Office of the Comptroller of the Currency.OCC researchers discovered a strong correlation between high foreclosures and refinanced loans with no- and low-document features, which they equated with "loose" lending practices. The study of foreclosures in Chicago did not find the same correlation on subprime loans with balloons or prepayment penalties (36 months or longer) or on no- or low-doc purchase loans. The OCC researchers maintain that underwriting practices that ensure borrowers can repay their loan represent a more effective approach to preventing foreclosures than "blanket" prohibitions on certain lending practices. This approach is also consistent with the proposed guidance on interest-only and payment-option mortgages, according to the study. Federal banking regulators are expected to finalize the guidance this fall.

Federal Reserve officials were still waiting to see "reliable" data on house prices when they voted to pause and keep the target federal funds rate unchanged at a Federal Open Market Committee meeting in early August."Reliable, comprehensive data were not yet available on recent house price movements, but the rate of appreciation appeared to be moderating and was likely to slow further in coming months," according to the minutes of the Aug. 8 FOMC meeting. In late July, the National Association of Realtors reported that the sale prices of existing single-family homes increased by only a 1.1% annual rate in June -- down dramatically from a 14.5% annual rate in June 2005. The FOMC minutes show that Fed Chairman Ben Bernanke and other FOMC members recognized that residential investment "contracted" in the second quarter and the housing market "continued to cool." However, they said it is still uncertain how much the slowdown in housing would "restrain" consumer spending. The Office of Federal Housing Enterprise Oversight is scheduled to release its Housing Price Index for the second quarter on Sept. 5. The Fed can be found online at http://www.federalreserve.gov.

Fannie Mae chief executive Daniel Mudd says he believes the company's retained portfolio could fall dramatically, to just $10 billion, if limits imposed by a Senate GSE bill prevail.In a 39-page letter to members of the Senate Banking Committee, Mr. Mudd writes that "in our analysis a literal reading of the bill would lead to a reduction in the size of our portfolio to a range of $10 billion to $100 billion." At the end of July, Fannie's retained portfolio totaled $731.4 billion. The letter -- penned by Mr. Mudd and company chairman Stephen Ashley -- is dated July 31 and addresses questions raised by senators before and after a June hearing on the company's accounting scandal. Mr. Mudd's estimate on the company's retained portfolio addresses loan limits imposed by S. 190, a government-sponsored enterprise reform bill introduced by Senate Banking Committee Chairman Richard Shelby, R-Ala. Mr. Mudd also said that if S. 190 became law, it would bar Fannie (and Freddie Mac) from investing in mortgage-backed securities "in almost all instances." Fannie Mae can be found online at http://www.fanniemae.com.

Construction and development lending at banks and thrifts has grown at a 30% annual rate over the past eight quarters, but delinquency rates are starting to tick up despite the rapid growth in their construction portfolios.The Federal Deposit Insurance Corp. reported that construction lending increased by $31.7 billion in the second quarter at a 32% annual rate. FDIC-insured institutions held $513.9 billion in C&D loans as of June 30, up from $389.1 billion in the second quarter of 2005 and $299.4 billion in the second quarter of 2004. The FDIC report also shows that noncurrent C&D loans have increased from 0.38% to 0.43% over the past two quarters. Banks and thrifts currently hold $2.2 billion in construction loans that are 90 days past due. Approximately $1.8 billion of those loans are classified as nonaccrual. "It is something to keep an eye on," said FDIC economist Ross Waldrop. But it is "nothing dramatic," he added.

KB Home has been notified by the Los Angeles regional office of the Securities and Exchange Commission that the SEC will conduct an informal inquiry into the Los Angeles-based homebuilder's stock option grants, according to the company.KB Home said it has informed the SEC of the status of an internal review by a committee of its board of directors in conjunction with outside legal counsel. The company said it "intends to cooperate fully" with the inquiry. KB Home also announced that three shareholder derivative suits have been filed in the past two months against the company and certain of its directors and officers. "The suits generally allege breach of fiduciary duty in connection with the company's stock option grants," KB Home reported. The company said it is evaluating the suits and does not intend to comment on them other than through the filing of responses in court. KB Home can be found online at http://www.kbhome.com.

The U.S. Attorney's Office for the District of Columbia confirmed on Thursday that it has discontinued its criminal investigation of Fannie Mae and will not bring any charges against the company.A spokesman for the U.S. attorney's office in Washington would not comment when asked whether charges would be brought against individuals, saying the agency has never confirmed that individuals are the subject of a criminal probe. The congressionally chartered mortgage giant was first notified in October 2004 that it was the subject of a criminal probe. Among the many allegations levied, regulators accused Fannie executives of manipulating accounting rules in 1998 by making adjustments to a "cookie jar" account allowing the company to meet an earnings-per-share goal (to the penny) that unlocked some $27 million in bonus payments for top officers. Fannie Mae can be found online at http://www.fanniemae.com.

Thrifts originated $148.4 billion in single-family loans in the second quarter, up 4% from the level recorded in the previous quarter, despite a reduction in adjustable-rate mortgage activity.The Office of Thrift Supervision reported that thrifts posted strong earnings in the second quarter, even though one- to four-family originations were down 12% from those in the second quarter of 2005. The OTS said ARMs accounted for 37% of thrift originations in the second quarter, compared with 44% in the first quarter. Refinancings fell to 31% of originations from 35% in the first quarter. The 854 OTS-supervised savings institutions reported total profits of $4.21 billion in the second quarter -- down slightly from the level of the previous quarter and up 4% from that of a year earlier.

The Department of Housing and Urban Development is requiring FHA-approved lenders to pay their loan officers and their underwriting and servicing employees with W-2s as part of an update of the Federal Housing Administration handbook.FHA rules prohibit such employees from working for two or three other lenders. The requirement of W-2s means that loan officers cannot be independent contractors paid with 1099s. "Employees have to be true employees -- they can't be contractors," said Bud Carter, an FHA consultant with Potomac Partners in Washington. The newly issued handbook says that all compensation -- salary, commissions, and bonuses -- must be reported on the W-2. It is the first update of the FHA handbook since 1993.

The Mortgage Insurance Companies of America is urging federal banking regulators to "quickly" finalize underwriting guidance on interest-only and payment-option mortgages to stop lenders from making risky and unsuitable loans.Private mortgage insurers are "deeply concerned about the potential contagion effect of poorly-underwritten or unsuitable mortgages, " MICA executive vice president Suzanne Hutchinson says in a July 10 letter. The comment period on the proposed guidance ended March 29, and the regulators are not expected to issue final guidance for another few months. However, MICA says it is concerned that lenders are not taking the guidance seriously and have not reduced originations of IO and option adjustable-rate mortgages with "piggyback" or simultaneous second loans. MICA said the final guidance should make clear that simultaneous second loans are "risky in and of themselves," and that the risks are heightened when layered on IOs and option ARMs. In addition, the regulators should include "clear penalties" for lenders who disregard the guidance, MICA says.

The Department of Housing and Urban Development is launching a newspaper advertising campaign this Sunday (Aug. 20) to promote the benefits of Federal Housing Administration loans for lower income, first-time and minority homebuyers."We want to spread the word that FHA mortgages are a safe, viable option for first-time homebuyers," FHA commissioner Brian Montgomery said. The advertising campaign targets 27 metropolitan markets and it also "focuses on the dangers of predatory lending and the protective nature of FHA products," HUD said. FHA ads are slated to run in 23 markets this Sunday. Advertisements in the Dayton (Ohio), Hartford, Pittsburgh, Dallas markets will start later in the week. In the spring, FHA ran a radio/newspaper campaign in 16 markets.