Compliance & Regulation

Freddie Mac, McLean, Va., released the results of its Primary Mortgage Market Survey in which the 30-year fixed-rate mortgage averaged 6.52% with an average 0.3 point for the week ending August 17, 2006, down from last week's average of 6.55%.By contrast, the 30-year FRM averaged 6.80% four weeks ago. Last year at this time, the 30-year FRM averaged 5.80%. The average for the 15-year FRM this week is 6.20%, with an average 0.3 point, unchanged from last week. A year ago, the 15-year FRM averaged 5.40%. Five-year Treasury-indexed hybrid adjustable-rate mortgages fell to 6.18% this week, with an average 0.4 point, from last week's rate of 6.21%. A year ago, the five-year ARM averaged 5.34%. One-year Treasury-indexed ARMs averaged 5.65% this week, with an average 0.5 point, was down from last week when it averaged 5.69 %. At this time last year, the one-year ARM averaged 4.58%.

Single-family housing starts declined by 2.3% in July to the lowest level in three years as homebuilders are finally trying to come to grips with a buildup in inventories of new and existing homes.The U.S. Census Bureau reported that SF starts fell from a record seasonally adjusted annual rate of 1.49 million in June to 1.45 million in July -- the lowest level since May 2003. Since June 2005, SF starts are down 16.6% and permits are down 23.5%. "The decline in housing activity has been a little bit sharper than we anticipated," said Michelle Girard, senior economist at RBS Greenwich Capital. RBSGC economists originally forecast a 10% slowdown in housing starts and sales this year and now it looks like it will be 15% decline. "We have not seen bottom yet," Ms. Girard said. But it could be a "positive sign," she added, noting that -- as a result -- housing activity should stabilize more quickly at around late 2003 and early 2004 levels. Despite the slowdown in starts, mortgage lenders that finance new homes should have a good year due to the high level of homes under construction at the end of last year. "We are headed toward a record year in housing completions," National Association of Home Builders economist Michael Carliner said. And he noted that a slowdown in completions is still six months down the road.

The Federal Home Loan Bank of Pittsburgh reported second quarter earnings of $53.9 million, up sharply from the second quarter of 2005 when derivative losses due to its mortgage hedging activities dragged down earnings to $7.4 million.The $74.7 billion-asset FHLBank also reported that the National City Bank of Pennsylvania -- its largest supplier of single-family mortgage -- terminated its membership on July 22. NCBP-originated mortgages make up 90% of the FHLBank's $7.4 billion mortgage portfolio. The Pittsburgh FHLBank currently is carrying a $680,000 allowance for possible mortgage loan losses. As a result of a charter consolidation, National City Bank, Cleveland, has branches in seven states and it has retained its membership in the Cincinnati FHLBank, which also has a mortgage purchase program. Over 50% of the Cincinnati FHLBank's mortgage portfolio is comprised of NCB loans.

Standard & Poor's Ratings Services has announced that its AA-minus ratings of Fannie Mae remain on CreditWatch Negative in the wake of the government-sponsored enterprise's recent filing with the Securities and Exchange Commission.The ratings relate to Fannie Mae's risk to the government, its subordinated debt, and its preferred stock. "While the latest update on Fannie Mae's accounting restatement process revealed some positive developments, it also disclosed an additional accounting error that was discovered as part of the restatement process," said S&P credit analyst Victoria Wagner. S&P said the new error, which involves accounting for master servicing arrangements under the Statement of Financial Accounting Standards No. 140, is not expected to have a "significant" effect on the GSE's regulatory capital. The ratings will remain on CreditWatch Negative until "critical uncertainties" are clarified, S&P said. The rating agency can be found online at http://www.standardandpoors.com.

Treasury Under Secretary Randal Quarles, the Bush administration's point man on GSE reform, has served notice that he plans to return to the private sector after Congress adjourns for the year.The under secretary for domestic finance has served in the administration for five years. He is working on a debt-approval process that would allow the Treasury to limit the debt issuance of the three big housing government-sponsored enterprises -- Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. "I was disappointed to learn when I arrived [in early July] that Randy had long planned to return to the private sector," Treasury Secretary Henry Paulson said. "But I am fortunate that he has agreed to be very active in helping me formulate my policy agenda, and over the long term I will continue to rely on his advice and consent." Before joining the Bush administration, Mr. Quarles was co-head of the financial institutions group at the law firm of Davis, Polk & Wardwell.

Federal Deposit Insurance Corp. Chairman Sheila Bair says federal banking regulators are still a few months away from finalizing guidance on interest-only and payment-option mortgages.In an interview with American Banker, a SourceMedia publication, the new FDIC chairman said the regulators are closer to finalizing the guidance on commercial real estate lending than the guidance on "alternative" adjustable-rate mortgages. "There are ongoing discussions and I'm hopeful that both will be out in the next few months," Ms. Bair said. Under the proposed alternative mortgage guidance, lenders would be required to assess a borrower's ability to repay at the fully indexed rate, including any balances added by negative amortization, before approving an IO or option ARM. Industry groups have called the underwriting restrictions "unwarranted" and "excessive." Ms. Bair is concerned that 70% of option ARM borrowers are choosing to make the minimum payment, an FDIC spokesman said. Industry groups have also raised objections to the CRE guidance, which is aimed at making sure banks and thrifts have the capital and risk management practices in place to deal with high concentrations of CRE loans.

The Securities and Exchange Commission has issued long-awaited guidance that should make it easier for servicers to comply with the SEC's new testing and reporting requirements on asset-backed securities, which went into effect Jan. 1."We think this new guidance really will go a long way to addressing a lot of nagging questions that people have been struggling with over the past year," said Alison Utermohlen, senior director at the Mortgage Bankers Association. Under the SEC's regulation AB (Item 1122), servicers are required to assess their compliance with a list of servicing activities and hire accountants to test the accuracy of their assessment. The written guidance, which the SEC calls "Telephone Interpretations," addresses a range of issues, including testing platforms. The SEC clarified that servicers can divide ABS by asset type (residential or commercial) for testing and reporting purposes. They can also define their testing platforms by the servicing systems they use. However, platforms have to be consistent from year to year. "If there is a change, there has to be a reasonable basis for that change," Ms. Utermohlen said.

If Senate lawmakers ever break a stalemate over legislative limits on GSE portfolios, the Office of Federal Housing Enterprise Oversight says it wants to be ready to provide last minute-advice on another contentious issue -- structuring an affordable housing fund -- if asked.OFHEO Director James Lockhart told an American Bar Association meeting that his agency has a small working group looking at how an affordable housing fund that is funded by Fannie Mae and Freddie Mac should be administered. If the two government-sponsored enterprises distribute the AH funds, some people are going to want "very tight controls" to make sure Fannie and Freddie can't use it for political purposes, he said. The OFHEO working group is also looking at whether the Federal Home Loan Banks or the Department of Housing and Urban Development should distribute the funds. Mr. Lockhart told reporters he is optimistic that Congress will pass a GSE regulatory reform bill this year. He also noted that Congress has not asked OFHEO for its recommendations regarding an affordable housing fund. "Until we are, we won't volunteer one," the director said.

The monetary policy-making committee of the Federal Reserve Board has left the target federal funds rate unchanged at 5.25%, opining that "inflation pressures seem likely to moderate over time."It was the first time in more than two years that the Federal Open Market Committee has met without raising its target for the key short-term rate, which banks charge on overnight loans. "Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices," the Fed panel said Aug. 8. Despite its comment on moderating inflation pressures, the FOMC said "some inflation risks remain," citing recent core inflation levels and the prices of energy and other commodities. Swiss Re U.S. chief economist Kurt Karl said the pause was understandable, but declared that "the Fed needs at least one more interest rate hike as an insurance policy against a rising inflation." The Fed can be found online at http://www.federalreserve.gov.

Fannie Mae has reported that the price tag for its accounting scandal may be lower than its original $10.8 billion estimate when it releases a restatement of its 2001 through 2004 financial results later this year.The mortgage giant said in a securities filing that an estimated $2.4 billion loss due to its misapplication of hedge accounting on mortgage commitments will be "significantly reduced." However, Fannie admitted that it is "unable to quantify the amount at this time." The government-sponsored enterprise also disclosed that a $400 million settlement it paid to securities regulators for alleged "fraudulent" financial reporting is not tax deductible. The expense will be recorded in its 2004 financial statement. Regarding its mortgage business, Fannie said the issuance of single-family mortgage-backed securities increased to $112.1 billion in the second quarter, up 5% from that of the previous quarter. However, Fannie's issuance of multifamily mortgage-backed securities fell by 51%, to $1.2 billion. The GSE cited a "lower number of seasoned pool issuance" for the steep decline in its multifamily business. "We expect multifamily lending to decrease during the second half of 2006 due to declining apartment building sales," Fannie said in the second-quarter update of its business activities and financial developments.