Compliance & Regulation

Under pressure from regulators, Freddie Mac has voluntarily agreed to limit the growth of its portfolio until it can return to reporting its quarterly financial results -- possibly sometime next year.The agreement with the Office of Federal Housing Enterprise Oversight limits the growth of Freddie's $722.2 billion portfolio to 2% a year. The government-sponsored enterprise, which is still recovering from a $5 billion accounting scandal, expects to return to regular quarterly reporting after the release of its full-year 2006 results. "We believe a constructive working relationship with our regulator is necessary to our ability to meet our mission and generate long-term shareholder value," Freddie Mac chairman and chief executive Richard Syron said in announcing the agreement. In May, Fannie Mae agreed to freeze the size of its $730 billion portfolio as part of a consent agreement with OFHEO and a $400 million settlement for alleged accounting fraud. OFHEO Director James Lockhart said the latest agreement shows Freddie's commitment to fixing its internal control and accounting systems and reducing operational risks. "I concur with the decision by Freddie Mac to limit retained mortgage portfolio growth, as recommended by OFHEO," Mr. Lockhart said.

The House has passed a controversial tax bill that combines a reduction in estate taxes with an increase in the minimum wage along with several popular tax extensions and new tax breaks, including a mortgage insurance deduction.Members of the House passed the tax bill by a 230-180 vote early July 29 just before leaving Washington for their usual August recess. Observers expect strong resistance in the Senate, which could postpone a vote on the tax bill (H.R. 5970) until September. The Senate is scheduled to adjourn at the end of this week. The MI provision would allow homebuyers with less than $100,000 in income to take a full deduction for mortgage insurance premiums paid on government and privately insured loans. If passed, the MI deduction would expire after one year. But Congress generally extends such provisions each year. Sen. Gordon Smith, R-Ore., has sponsored the MI deduction for several years -- only to see it dropped from tax legislation just before final passage. The private mortgage insurers are hoping this year will be different.

Efforts to increase the homeownership rate have made very little progress in the past four quarters, although 50% of Hispanic households now own their own home.The Census Bureau reported a homeownership rate of 68.7% in the second quarter, up slightly from 68.6% in the second quarter of 2005. With the current slowdown in the U.S. housing market, it appears that the homeownership rate peaked at 69.2% in the second quarter of 2004. The homeownership rate for Hispanics first hit 50% in the fourth quarter of 2005 and fell to 49.4% in the first quarter. Now, it has rebounded to 50%, according the second-quarter report. The homeownership rate for whites is 75.9% and 47.2% for blacks.

The Federal Housing Finance Board is signaling that it may give the Federal Home Loan Banks more time to build up their retained earnings so they won't have to cut their stock dividends by 50%.Finance Board Chairman Ronald Rosenfeld revealed the possible change in response to a congressional inquiry about proposed capital revisions that have sparked widespread opposition from FHLBank members. "Our regulation should not materially alter the value of membership in an FHLBank," Mr. Rosenfeld says in a July 26 letter. "For example, the time allowed each Bank to reach its required level of retained earnings must reflect the need for each Bank to offer value to its members, including members' expectations of a reasonable dividend yield on their investments in the Bank." The letter is addressed to House Financial Services Committee Chairman Michael Oxley, R-Ohio, and Rep. Barney Frank, D-Mass. As originally proposed, the 12 FHLBanks would have three years to meet the new retained earnings requirement, and during that transition period dividends could be cut by 50%.

President Bush is calling on the Senate to pass a Federal Housing Administration modernization bill that the House passed July 25 by a resounding 415-7 vote."This bill will improve FHA's ability to help lower- and moderate-income families achieve the American Dream," President Bush said. "I encourage the Senate to join the House and pass this critical legislation." The FHA reform bill (H.R. 5121) would give the FHA single-family mortgage insurance program the flexibility to charge risk-based premiums on low and zero-downpayment loans. It also raises FHA loan limits and expands the FHA reverse-mortgage program for seniors. In the Senate, the FHA reforms have gone nowhere. Banking Committee Chairman Richard Shelby, R-Ala, has asked the Government Accountability Office to conduct a study of the administration's FHA reform proposals, which FHA supporters consider a delaying tactic. "We realize that FHA is in need of reform," Senate Banking Committee spokesman Andrew Gray said. But he noted that Chairman Shelby doesn't have a timeline for committee action. When asked about the GAO study, Mr. Gray said completion of the study is not "necessarily a prerequisite" for legislative action. "But we would like that information," he added.

Senate appropriators are expressing concern that seniors are charged "excessive fees" on Federal Housing Administration reverse mortgages, and they want the Department of Housing and Urban Development and the Government Accountability Office to conduct a study.Fees in FHA home equity conversion mortgages range from $8,000 to $17,000, including an origination fee permitted by HUD of 2% of the loan amount or $2,000, whichever is higher. "The most troubling fee is the origination fee," says the committee reports on the HUD appropriations bill. The HUD appropriations bill eliminates a loan cap on HECM loans, but the Senate appropriators rejected a Bush administration request to raise the loan limit on HECMs to the conforming loan limit of $417,000. "The Committee directs HUD and GAO to review the HECM program with particular emphasis on the financial risk to FHA and the homeowner if Congress were to raise the HECM loan limits," the Senate report says.

The Senate has confirmed Geoffrey Bacino, a former credit union regulator and lobbyist, to be a director on the Federal Housing Finance Board, which oversees the 12 Federal Home Loan Banks.Mr. Bacino was an executive with Centrix Financial, which provides funding for subprime auto loans through credit unions, when he was nominated by President Bush to replace FHFB Director Franz Leichter, whose term has expired. He served one year on the board of the National Credit Union Administration in 2000. More than 1,000 credit unions are members of the FHLBank System.

Housing markets have "cooled" and residential mortgage lending has declined in most parts of the country, according to the Beige Book, the Federal Reserve Board's periodic report of economic activity.Except in the St. Louis and Dallas districts, the Federal Reserve Banks reported that new- and existing-home sales declined and inventories of unsold homes rose in June and the first two weeks of July. The Dallas Federal Reserve Bank reported some "cooling." But demand for housing "remains strong" and construction activity has been "robust," the district bank said. "As home demand has slipped more generally, scattered reports indicated a strengthening in demand for rental units," the Beige Book says.

A GSE bill that cleared the Senate Banking Committee last July on an 11-9 vote would impose "onerous restrictions" on Fannie Mae's and Freddie Mac's portfolios, according to all nine Democrats on the committee.In filing their objections to the government-sponsored enterprise bill (S. 190), the Democrats stress that "strong, effective regulation" will provide for safe and sound operations regarding the GSE portfolios. The minority members said they support the Office of Federal Housing Enterprise Oversight's recent action to impose a cap on Fannie's portfolio. However, the portfolio limitations in S. 190 would reduce liquidity in the mortgage market and "cause damage to affordable housing markets" by restricting purchases and investments in mortgage revenue bonds and low-income housing tax credits, the minority report says. The Democrats also stress that strengthening Fannie's and Freddie's affordable housing goals and creating an AH fund are "a prerequisite to a successful effort on GSE reform." The Democrats filed their views in mid-June for inclusion in a committee report on S. 190. But the Senate Banking Committee has not released the report yet. A committee spokesman indicated that the report would be issued once the Senate is ready to debate and vote on S. 190.

The House has passed a bill by a 412-4 vote that revamps the Federal Housing Administration program for manufactured housing loans and makes this form of affordable housing lending more attractive to lenders.The bill (H.R. 4804) authorizes the FHA to insure individual manufactured housing loans, but the lender is on the hook for 10% of losses. Currently, the FHA provides pool insurance for these house-only loans, which are not secured by real estate. FHA Commissioner Brian Montgomery said the "outdated and problematic" pool insurance forced Ginnie Mae to stop securitizing manufactured housing loans in the early 1990s. Ginnie officials have indicated that they would reconsider MH loans if Congress passes an acceptable bill. The average cost of a manufactured home was $58,000 in 2004. About two-thirds of manufactured homes are placed on a relative's or the owner's property, and the other third are on placed on leased lots. Sen. Wayne Allard, R-Colo., has sponsored a similar FHA manufactured housing bill in the Senate.