Compliance & Regulation

The monetary policy-making committee of the Federal Reserve Board has once again raised the federal funds rate by 25 basis points, noting that inflation concerns have persisted despite the gradually cooling housing market and other signs that economic growth is moderating."Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained," the Federal Open Market Committee said June 29. "However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures." Stephen Stanley, chief economist at RBS Greenwich Capital, said the Fed in its statement "is telling all the pundits who are squawking about overtightening that 'Yeah, we know that the economy may be slowing down, but it doesn't matter until we make sure that inflation is under control'." The Fed can be found on the Web at http://www.federalreserve.gov.

Robert Couch, the newly sworn-in Ginnie Mae president, says the agency needs to do a better job of promoting Ginnie-guaranteed mortgage-backed securities to foreign investors.Fannie Mae and Freddie Mac have done a great job of tapping foreign capital markets, Mr. Couch told MortgageWire. "We need to get the message out that Ginnie MBS are the only ones that carry the full faith and credit of the U.S. government," he said. "That ought to be a strong message to foreign investors, particularly those looking for a safe investment." But the new Ginnie Mae president said his top priority is to actively support passage of Federal Housing Administration reform that would make FHA single-family loans more competitive and indirectly boost issuance of Ginnie MBS. Ginnie Mae and the FHA are "joined at the hip," Mr. Couch said. In recent years Ginnie MBS issuance has declined with the drop in FHA originations, but he noted that issuance has stabilized thanks to administrative changes that made the FHA program more attractive. Mr. Couch was president of New South Federal Savings Bank, Birmingham, Ala., and managing director of Collateral Mortgage, which originated FHA loans. He was chairman of the Mortgage Bankers Association from October 2003 to October 2004. Ginnie Mae can be found online at http://www.ginniemae.gov.

The Office of Federal Housing Enterprise Oversight classified Fannie Mae and Freddie Mac as "adequately capitalized" on June 30.OFHEO Director James Lockhart noted that both Fannie Mae and Freddie Mac are required to maintain capital that is at least 30% above the statutory minimum, and he suggested that the excess capital requirement will not be removed any time soon. "Operational weaknesses involving accounting systems, internal controls, and risk management continue at both enterprises," Mr. Lockhart said. As of March 31, Fannie Mae exceeded its OFHEO-directed capital requirement by $3.013 billion, and Freddie Mac exceeded its requirement by $4.015 billion, OFHEO said. The two government-sponsored enterprises can be found online at http://www.fanniemae.com and http://www.freddiemac.com, and OFHEO can be found at http://www.ofheo.gov.

Ellie Mae, Dublin, Calif., has announced the formation of a partnership with ComplianceEase, Burlingame, Calif., to offer free, automatic compliance audits to mortgage brokers using Ellie Mae's Encompass Mortgage Automation System.The compliance check, which is free of charge with every loan submission to one of the 45-plus lenders available on the ePASS Network, will work to ensure that loans comply with federal regulations and state and municipal predatory-lending laws, Ellie Mae said. (The acronym stands for Electronic Processing and Submission System.) "Compliance is essential these days, so having a compliance check built into a loan origination system provides great benefits to mortgage brokers," said Jonathan Corr, Ellie Mae's chief strategy officer. The compliance check provides an easy-to-understand "pass" or "fail" designation, but originators who want additional details on loans that failed can get an instant, in-depth report for a nominal fee, Ellie Mae said. The companies can be found online at http://www.elliemae.com and http://www.complianceease.com.

Over 16,000 Mississippians have signed up for federal grants to rebuild their homes damaged in Hurricane Katrina, but a hangup over an environmental assessment has postponed disbursement of the first checks.Lenders' groups have warned the Mississippi Development Authority that it cannot avoid making a full environmental assessment simply because it has no control over the homeowners' use of the assistance grants. "The EA fails to explain how it can conclude a direct grant program is so vague and limitless that the state cannot begin to evaluate the environmental impact of these expenditures," says a June 16 letter by the Mortgage Bankers Association, the Consumer Mortgage Coalition, and the Housing Policy Council. The MDA has asked the Department of Housing and Urban Development for a ruling on this issue, which the state agency expects to receive in a few days, a spokesman said. In developing its assistance program, Mississippi rejected lender recommendations that the assistance grants be placed in escrow accounts with the homeowners' mortgage lender. Nevertheless, the trade groups still insist that the use of escrow accounts will ensure that more of the Community Development Block Grant funds are used for rebuilding. "The program must be capable of ensuring that the money is in fact used for the purposes authorized by Congress," the trade groups say.

The Senate has confirmed Wall Street veteran Henry Paulson to be the new secretary of the Treasury and replace John Snow, who is eager to leave.The former chairman and chief executive of Goldman Sachs Group breezed through the confirmation process and is expected to take charge at the Treasury Department any day now. Treasury Secretary Snow submitted his resignation to President Bush back on May 30, and he wants to step down from his cabinet post by July 3. During his confirmation hearing, Mr. Paulson was never asked his views on strengthening regulation of Fannie Mae and Freddie Mac and the Bush administration's legislative efforts to reduce the size of the government-sponsored enterprises' giant mortgage portfolios. However, the Goldman Sachs executive made it clear that he sees himself as part of a team and supports many Bush administration policies, including efforts to simplify the tax code. In response to a written question about preserving the mortgage interest deduction, Mr. Paulson noted that the president "strongly supports" homeownership. "I also believe that any tax reform plan should be evaluated as a whole," he said.

Wall Street economists are forecasting that the Federal Reserve Board will stop raising short-term interest rates by the end of the year and that the 30-year fixed mortgage rate will hit 6.8% in September and remain at that level for the next 12 months.Members of The Bond Market Association economic advisory committee say they expect the Fed to raise the federal funds rate to 5.25% at this week's Federal Open Market Committee meeting. They are forecasting one more 25-basis-point increase before year-end and a 25-bp rate reduction in early 2007. Meanwhile, new- and existing-home sales will drop by 8% to 7.7 million in 2006 from a record level of 8.4 million in 2005, according to the forecast. But with modest economic growth and steady mortgage rates, TBMA economists are predicting that home sales will decline by only 3% in 2007. The TBMA forecast also calls for moderate house price appreciation for the rest of this year. "Panelists did indicate that regional markets that have experienced the sharpest price appreciation in recent years are most likely to see some price correction, at least on an inflation-adjusted basis if not in nominal terms," TBMA said.

The House has passed a flood insurance reform bill by a 416-4 vote that eliminates subsidized premiums on vacation and second homes and commercial buildings -- affecting an estimated 450,000 properties.Federal flood insurance premiums on those properties would increase 15% a year until they reach the "applicable risk premium rate." During congressional debate, the House also agreed that homes built before 1975 (known as pre-FIRM homes) should not enjoy subsidized premiums if they are purchased after enactment of the bill. "My amendment would simply require any purchaser of a pre-FIRM residential home to pay a phased-in, actuarially correct flood insurance price," Rep. Scott Garrett, R-N.J. said. The flood bill (H.R. 4973) also increases penalties on mortgage lenders who fail to require the purchase of flood insurance or allow coverage to lapse during the life of the mortgage. The Flood Insurance and Modernization Act raises the penalties for lender noncompliance from $350 to $2,000 per violation, with a $1 million cap. The bill also requires notice of availability of flood insurance and escrow for flood insurance in RESPA good-faith estimates.

Freddie Mac has reported that its retained mortgage portfolio declined by $700 million, to $723.1 billion, in May.The government-sponsored enterprise is under intense pressure from the Bush administration and regulators to slow the growth of its portfolio while it fixes its accounting and internal control systems. So far this year, Freddie has increased the size of its portfolio by 4.4%, whereas last year the portfolio grew by 9%. Meanwhile, Freddie Mac's issuance of mortgage-backed securities slowed in May to $25.4 billion from $26.6 billion in April -- probably reflecting an overall decline in mortgage originations. In January, Freddie issued $33.7 billion in MBS.

The Federal Reserve Board has terminated an enforcement order against Citigroup's subprime lending unit that was imposed two years ago for lending violations and for "misleading" examiners during an investigation of the company's lending practices.In May 2004, CitiFinancial Credit Co., Baltimore, agreed to pay a $70 million civil money penalty to the Fed for alleged violations of the Equal Credit Opportunity Act and the Home Owners and Equity Protection Act. The Fed also cited the subsidiary of the giant New York banking company for "alleged actions to mislead examiners in connection with their interview of CitiFinancial employees." The Fed examiners found that CitiFinancial required co-signers on loans to increase sales of joint insurance. The Fed also alleged that CitiFinancial engaged in unsafe and unsound underwriting and lending practices with respect to high-cost HOEPA loans. CitiFinancial agreed to take corrective actions and to pay restitution to borrowers who were harmed by its lending practices.