Compliance & Regulation

By a 415-7 vote, the House has passed a bill to reform the Federal Housing Administration single-family program so that it can be competitive again and serve its traditional borrowers, who are being steered into subprime loans.The House vote is largely symbolic because the real fight over the FHA reforms, which the Bush administration supports, will occur during a House and Senate conference on the HUD appropriations bill, which has already cleared the House. However, the House vote certainly increases pressure on Senate appropriators to include key FHA reforms in the Department of Housing and Urban Development appropriations bill. The vote shows that an overwhelming number of House members understand that the FHA can be a "benefit for their low- and moderate-income constituents," FHA Commissioner Brian Montgomery said. With the flexibility to charge risk-based premiums and offer zero-downpayment loans, the FHA can provide credit-impaired borrowers a safer and lower-cost alternative to conventional subprime loans, the commissioner said. "We think we have a pretty good argument," the commissioner said.

The strong performance of residential mortgage loans has probably peaked, according to the Federal Deposit Insurance Corp., which says it expects delinquencies to increase over the next few years, especially for interest-only and payment-option ARMs."Despite favorable delinquency and default trends so far, analysts fear that the current rising interest rate environment combined with cooling home prices will limit borrowers' options when faced with large monthly payment increases," the agency says in the latest issue of "FDIC Outlook." The FDIC also notes that the popularity of IOs and option ARMs and the easing of credit standards has moved the mortgage credit cycle into "uncharted territory," and says there is great uncertainty as to how these mortgages will perform. "Despite today's low loss rates, credit risk remains the most important long-term threat to bank earnings," FDIC chief economist Richard Brown said. "Bankers and bank regulators need to remember that rapid expansion in loan volumes often leads, over time, to declining credit quality."

Updating its earnings restatement process, PHH Corp., Mt. Laurel, N.J., says its financial statements for prior periods cannot be relied upon, but also indicated that reductions in pretax income will be offset by gains.PHH, the parent of private-label funder PHH Mortgage, also said it has entered into a $750 million line of credit with a syndicate of lenders led by Citicorp and Wachovia Bank. In a filing with the Securities and Exchange Commission, it stressed that it has adequate liquidity. Company president Terry Edwards said in a statement that "the long-term future of our private-label business is bright," adding that the company's "pipeline of prospects remains promising." Morgan Stanley has an "overweight" rating on the stock. A new report by Morgan notes that updated estimates of its accounting and tax-related issues are within $2 million of prior disclosures. PHH was spun off by Cendant Corp., New York, in the spring of 2005. It ranks 16th among residential originators in the United States, according to the Quarterly Data Report, a MortgageWire affiliate.

Consumers groups are opposed to allowing the Federal Housing Administration to charge risk-based insurance premiums, and they supported a decision by Senate appropriators to keep FHA reforms out of a HUD budget bill.The Consumer Federation of America, ACORN, the National Community Reinvestment Coalition, and five other consumer groups signed the joint letter complaining that the FHA reforms would force consumers with lower credit scores to pay more for FHA single-family loans. "We are concerned that customers priced out of the FHA market may have no other choice but to turn to subprime loans, and fear that some may fall victim of predatory lenders that operate in this market," the July 17 letter says. The letter is addressed to Sen. Christopher Bond, R-Mo., chairman of the Senate Appropriations subcommittee that oversees the Department of Housing and Urban Development's budget bill. The Senate Appropriations Committee approved a HUD budget bill last week without including FHA reforms requested by the Bush administration and housing industry groups. NCRC vice president Josh Silver noted that subprime lenders use risk-based pricing. "We think FHA should continue its role as offering an alternative to subprime lending and thereby increasing the competitive pressure on subprime lenders to lower their prices," he said.

Key senators and consumer groups are urging Congress to wait for a Government Accountability Office study before taking legislative action on Federal Housing Administration reforms -- but don't expect the study to be completed anytime soon."We haven't received the formal request, and we haven't initiated anything," a GAO official said. A spokesman for the Senate Banking Committee said a letter requesting the report would be sent to the GAO by the end of the week. At a June 20 hearing, Sen. Wayne Allard, R-Colo., said he is asking the GAO to conduct a study on the Bush administration's FHA single-family reform proposals and wants the GAO to recommend the "most viable options FHA can pursue to serve additional low-income and first-time homebuyers." Senate Banking Committee Chairman Richard Shelby, R-Ala., recently urged Senate appropriators not to include the FHA reforms in a Department of Housing and Urban Development appropriations bill, and FHA reform was kept out of the bill. "We have commissioned a study by GAO to examine the implications of the reform proposal," Sen. Shelby said in a July 17 letter. "We believe that it would be premature to legislate without this additional information."

The Securities and Exchange Commission has launched an inquiry of a senior executive of Bayview Financial, Miami, who is accused of altering loan credit data that affected his sales commissions.A top official at Bayview told MortgageWire that the event "is not material" from a financial standpoint and said the company is cooperating fully with the SEC. The official said the executive in question -- who is described in SEC documents as a "senior salesperson, managing director and limited partner of the firm" -- has been fired. The official said the executive "had been manipulating data for years." Bayview says the salesman's actions -- which entailed altering FICO scores -- have caused the privately held firm to repurchase or substitute $66 million in residential loans, or about 3% of its book of business. Bayview Financial pools mortgages and then packages the loans into mortgage-backed securities. On July 14 Bayview received a letter from the SEC indicating that its staff had launched an inquiry into the matter.

While the slowdown in the housing market has been "orderly," members of the Federal Reserve Board's interest-rate-setting committee are concerned that further tightening could spark a "sharper downturn" in the housing sector.The declines in new-home sales and starts, along with higher inventories, order cancellations, and reports from homebuilders, suggest that this "weakness" will likely be extended, according to the minutes of the Federal Open Market Committee's June 28-29 meeting. Fed Chairman Ben Bernanke and his colleagues believe the slowdown in home sales and construction activity is "broadly in line" with the tightening in monetary policy over the past two years. In addition, they seem to take comfort in the fact that housing prices continue to rise and at a much slower pace than in recent years. "Participants observed that the evidence to date indicated that the slowdown was orderly, but were mindful of the possibility of a sharper downturn in the sector," according to the FOMC minutes released July 20.

Supporters of Federal Housing Administration reforms are using a new Congressional Budget Office report to bolster their claims that Congress needs to pass legislation that allows the FHA to charge risk-based premiums.Compared with private mortgage insurers, the Federal Housing Administration is grossly underpricing its mortgage insurance -- by 50 basis points -- and subsidizing homeowners, according to the CBO report. The report shows that the FHA charges a mortgage insurance premium of 73 bps for all borrowers, while the private MIs charge risk-based premiums ranging from 109 bps for prime borrowers to 287 bps for subprime borrowers with credit scores of 575-599. (Premiums are based on what a borrower would pay annually over eight years.) The CBO estimates that the FHA should charge 123 bps for prime and subprime borrowers under its current premium structure. But this would put the FHA at a competitive disadvantage in attracting prime borrowers, who account for 63% of its business. The CBO report demonstrates that "FHA's current one-size-fits all approach overcharges the majority of its borrowers and undercharges borrowers of higher risk," the National Association of Realtors said.

Treasury Secretary Henry Paulson wants his team to develop a debt approval process that would allow his department to stop Fannie Mae and Freddie Mac from financing the growth of their portfolios, according to a Treasury official.The secretary has "instructed us to ensure that the mechanics of our debt approval process are robust enough to give Treasury the practical option of limiting the GSEs' debt issuance in accordance with our statutory authority, should that become necessary," Treasury Under Secretary Randal Quarles told a Reuters panel on government-sponsored enterprise reform on July 19. Mr. Quarles told reporters that the Treasury is still reviewing its approval process for GSE debt issuance and just had its first meeting with Fannie and Freddie executives. "There are a lot of issues that need to be thought through" before there is a "decision as to whether or not this is something we want to do," the Treasury official said. He stressed that Secretary Paulson would prefer a legislative solution to reducing Fannie's and Freddie's giant portfolios. It appears that the new Treasury secretary will wait to see whether Congress can pass a GSE regulatory reform bill before deciding whether he wants to take the next step.

The Department of Housing and Urban Development has announced $1.6 million in settlements with CitiMortgage Inc. and two major homebuilders who engaged in captive title reinsurance arrangements.The agreements, which contain no admission of wrongdoing, included a $650,000 settlement with CitiMortgage and its captive title reinsurance company, Chesapeake Reinsurance; a $675,000 settlement with M.D.C. Holdings Inc., certain homebuilding subsidiaries, and AHT Reinsurance; and a $305,000 settlement with WL Homes, a California and Colorado builder doing business as John Laing Homes. "HUD will continue to work with the states to investigate captive arrangements to make certain that they aren't created for the purpose of obscuring referral fees," said Brian Montgomery, HUD's assistant secretary for housing. (Captive reinsurance is a practice whereby a title insurance company transfers a portion of the risk and title premium to a company owned by the builder, lender, or real estate broker referring the title business.) CitiMortgage said it exited the title reinsurance business last year. "We strongly believe we were totally compliant with RESPA and HUD guidelines when we were engaged in that business, but we have agreed to a settlement in order to avoid the time and expense of protracted litigation," a CitiMortgage spokesman said. The homebuilders could not be reached for comment by MortgageWire's deadline.