Compliance & Regulation

The House has passed key Federal Housing Administration reforms advocated by the Bush administration as part of a HUD appropriations bill that is now pending in the Senate.The provisions would increase FHA loan limits, allow the agency to charge risk-based premiums, and eliminate a 3% downpayment requirement. These provisions would get the FHA back into the market so that it could serve borrowers who are being steered into subprime loans, according to Brian Chappelle, an FHA consultant. At a Senate Banking Committee hearing on Tuesday, housing subcommittee Chairman Wayne Allard, R-Colo., said there are a lot of unanswered questions about the FHA's ability to implement risk-based pricing. Only Sen. Mel Martinez, R-Fla., supported the administration's reform efforts. However, it appears that the legislative fight over the FHA reforms will occur in the Senate Appropriations Committee, not the banking committee. Sen. Christopher Bond, R-Mo., is expected to mark up the Department of Housing and Urban Development appropriations bill in mid-July. Meanwhile, Sen. Allard and banking committee Chairman Richard Shelby, R-Ala., have asked the Government Accountability Office to conduct a study on the administration's FHA reform package and recommend the "most viable options FHA can pursue to serve additional low-income and first-time homebuyers."

The U.S. Supreme Court has decided to review the Comptroller of the Currency's preemption regulations that shield the mortgage subsidiaries of national banks from state regulation and consumer protection laws.Although three U.S. appeals courts have upheld OCC's interpretation of the National Banking Act, the high court has decided to review a case that pits Michigan state banking commissioner Linda Watters against Wachovia Mortgage Corp. In petitioning the court, commissioner Watters argues that OCC has preempted the states from regulating national bank operating subsidiaries without clear authority from Congress. In addition, OCC "essentially federalizes a State corporation" by converting it into a federal entity. "Such an effort is a significant intrusion on State sovereignty and is a violation of the Tenth Amendment," her petition says. Conference of State Bank Supervisors general counsel John "Buz" Gorman said the 10th Amendment issue probably "intrigued the justices the most, but that is pure speculation." Thirty-two state attorneys general filed an amicus brief in support of the banking commissioner's petition for Supreme Court review. The Supreme Court is expected to hear arguments in the Watters case this fall and render a decision next spring.

Senator Jim Talent, R-Mo., has introduced a Federal Housing Administration reform bill -- boosting chances the Senate will take some action this year on the reform measure that has the backing of the Bush administration.The Talent bill (S. 3535) is designed to revitalize the FHA single-family program so that it can be competitive again in the mortgage market and serve more prime and subprime borrowers. The House Financial Services Committee has approved a similar bill. "This legislation will help hundreds of Missouri families receive safe and affordable assistance to purchase a home and become part of the American Dream," Sen. Talent said. Senators Mel Martinez, R-Fla.; Johnny Isakson, R-Ga.; and Saxby Chambliss, R-Ga.; are co-sponsors of S. 3535. Sen. Hillary Clinton, D-N.Y. has introduced a more limited FHA reform bill. "I appreciate Senator Talent's leadership and urge prompt Senate consideration of this priority legislation," housing secretary Alphonso Jackson said. The Mortgage Bankers Association also welcomed Sen. Talent's decision to sponsor the FHA bill. MBA "looks forward to working with the Senate to pass much needed FHA reform," MBA chairman Regina Lowrie said.

Single-family housing starts unexpectedly rose 2.1% in May even though builders are taking an increasingly negative view of market conditions.The U.S. Census Bureau reported that SF starts increased from a record seasonally adjusted annual rate of 1.54 million in April to 1.59 million in May. So far, SF starts are down only 2.1% compared to the first five months of 2005, but that doesn't show the extent of the slowdown, according to National Association of Home Builders economist Michael Carliner. "It is not falling off a cliff, but it is falling more sharply than we anticipated," Mr. Carliner said. NAHB is forecasting that SF starts will be off 9% from last year's record 1.72 million pace. One month ago, NAHB economists expected a 7% decline. The downward revision in starts reflects a pickup in contract cancellations by new homebuyers, which is eating into the large backlog of builders' unfilled orders.

The Federal Housing Administration wants to offer a LIBOR-rate ARM product to catch up with market trends and to increase demand for FHA adjustable-rate mortgages and hybrids.FHA ARMs currently are indexed to the one-year U.S. Treasury securities rate, which closely tracks the one-year London Interbank Offered Rate (LIBOR). "LIBOR-based ARMs have become very popular in the secondary market, and this greater liquidity allows lenders to offer lower margins to borrowers," FHA says in a proposed rule. The public comment period ends Aug. 18. "With a large number of lenders now offering LIBOR-based ARM loans. It no longer makes economic sense for FHA to restrict itself to the Treasury index," FHA says.

State regulators are working on underwriting guidance for interest-only and payment-option mortgages and they are soliciting comments on a federal proposal from state-licensed mortgage lenders and brokers.The Conference of State Bank Supervisors and American Association of Residential Mortgage Regulators support the proposed federal guidance on nontraditional mortgage products and CSBS and AARMR are developing guidance for state non-bank licensees, Chuck Cross of the Washington Department of Financial Institutions told a Federal Reserve Board hearing. (Mr. Cross is the department's director of consumer services). The Fed is holding public hearings on abusive lending practices, nontraditional mortgage products, and the need for better consumer disclosures. "We agree with the proposed guidance that lenders who choose to underwrite nontraditional products with less stringent income and asset verification requirements must be governed by policy guidance," Mr. Cross said at the June 16 hearing in San Francisco. Federal banking regulators are expected to issue final guidance later this summer. The Washington state regulator also said the current Truth-in-Lending Act disclosure system "does not work" and it only protects lenders who "accurately complete the forms."

A relative decline in inflation over the past few decades appears to be behind the "conundrum" of lower long-term rates and flatter yield curves seen around the world, but that doesn't make global inflation any less of a concern today, according to Federal Reserve Governor Randall S. Kroszner.Speaking at a Bankers Association for Finance and Trade conference in New York, Mr. Kroszner said inflation looks lower today than it did in decades past. But "that's not to say one can be complacent" about it, he said when asked whether the global market was wrong to react as strongly as it did recently to inflation fears given the historical trend. Mr. Kroszner, a recent addition at the Fed, told the BAFT Conference for International Financial Institutions that while inflation is no less of a concern today, it is "in a different context" than it was 10 or 20 years ago.

The Federal Housing Finance Board should withdraw a proposed rule that would require the Federal Home Loan Banks to increase retained earnings and buy back excess stock, according to six financial services trade groups.The capital proposal could cause "irreparable harm" to the FHLBank System and would negate a multiyear effort by the 12 FHLBanks to convert to a risk-based capital system mandated by the 1999 Gramm-Leach-Bliley Act, according to a joint letter to the regulator. "We are not trying to take them on and just say no," said Joe Pigg, senior counsel for the American Bankers Association. "We're trying to engage them and say we want to work constructively to address concerns they have raised about retained earnings and the whole capital structure." The ABA, America's Community Bankers, the Consumer Bankers Association, the Financial Services Roundtable, the Independent Community Bankers of America, and the Mortgage Bankers Association signed the June 16 letter.

The Senate has confirmed the president's picks to head the Office of Federal Housing Enterprise Oversight, Ginnie Mae, and the Federal Deposit Insurance Corp.By unanimous consent, the Senate cleared the way for Rob Couch to be the new Ginnie Mae president and Sheila Bair to be the new FDIC chairman. The Senate also confirmed James B. Lockhart, who has served as the acting OFHEO director for the past six weeks. Mr. Couch, a former Mortgage Bankers Association chairman (from October 2003 to October 2004), was the president of New South Federal Savings Bank, Birmingham, Ala. Ms. Bair served as Treasury assistant secretary for financial institutions during the first two years of the Bush administration. She resigned in 2002 to become a professor at the University of Massachusetts-Amherst. The other banking regulators have been waiting for Ms. Bair's confirmation to begin drafting final underwriting guidance on interest-only and payment-option mortgages.

The Office of Federal Housing Enterprise Oversight is continuing to press Freddie Mac to limit the growth of its $723.8 billion portfolio, but director James Lockhart says he is negotiating from a "relatively weak" position because of his agency's limited powers.Freddie cannot produce audited accounts and still has risk management and internal controls problems, the OFHEO director told reporters June 15 after testifying before the Senate Banking Committee. "To be growing a portfolio is a questionable practice from a safety-and-soundness standpoint," Mr. Lockhart said. Mr. Lockhart told the committee that a House-passed GSE regulatory reform bill and the GSE bill pending in the Senate would strengthen OFHEO's powers to supervise Fannie and Freddie. However, the Senate bill provides "better guidance" on regulating the size of the GSE portfolios, and that would be "helpful," Mr. Lockhart said. OFHEO sent its 2005 annual report to Congress on June 15, highlighting the fact that Freddie increased the size of its portfolio by 9% last year. "Despite having accounting, control and systems problems similar to Fannie Mae, Freddie Mac grew its retained portfolio in 2005 and at a more rapid pace than the previous year," the OFHEO report says. OFHEO imposed a cap on Fannie Mae's $730 billion portfolio as part of a May 23 consent agreement.