Compliance

Senate leaders want to pass the $700 billion emergency economic stabilization bill this week with minor changes that can attract more support in the House, which voted down the Bush administration's plan on Monday. "I want to reassure the American people that we intend to pass this legislation this week," said Sen. Mitch McConnell, R-Ky. "We will pass it on a board bipartisan basis, both sides cooperating to prevent this financial crisis from persisting." The Senate Republican leader stressed that Congress can "act like grown-ups" and get the job done. Senate Majority Leader Harry Reid, D-Nev., said the Democrats are committed to passing the rescue package. "I am hopeful and confident that all sides -- the House, the Senate, and the White House -- will continue working together toward this goal," Sen. Reid said. There are rumors that the Senate might vote Wednesday on the emergency bill, which would put pressure on the House to pass the bill on Thursday. But the House could make changes to the Senate-passed bill, which would require another vote on passage in the Senate. Sen. Reid wants only "one vote," a source said.

The U.S. attorney in New York has subpoenaed Fannie Mae and Freddie Mac as part of an investigation into whether fraud contributed to the demise of these now government-owned mortgage investing giants. According to public filings, Fannie and Freddie said they face ongoing investigations from both the U.S. attorney and the Securities and Exchange Commission. The two agencies are seeking information about their accounting, financial disclosures, and corporate governance. Freddie said the subpoena it received involved matters for the period Jan. 1, 2007, to the present. Both companies -- which are operating under federal conservatorships -- said they will cooperate with the investigations. Besides the Fannie and Freddie probes, the FBI has launched preliminary investigations into the downfall of Lehman Brothers and American International Group. In addition, more than 20 subprime firms are the subject of criminal investigations by the government. The government seized control of Fannie and Freddie on Sept. 7.

The $700 billon emergency bailout bill Congress is trying to pass this week includes several fixes for a special Federal Housing Administration refinancing program to make it more attractive for lenders to help troubled homeowners and easier to pay off second lienholders who may be blocking a restructuring. Under the Hope for Homeowners program, lenders refinancing borrowers are expected to write down the mortgage to a 90% loan-to-value ratio based on a recent appraisal. The bailout bill gives the program oversight board the discretion to raise the maximum LTV to a higher percentage, possibly to 95%. "This is definitely a positive step that will make the program more attractive to lenders," said mortgage banking consultant Brian Chappelle. The bill also allows the oversight board to use the proceeds from Hope bonds to pay off second lienholders who are blocking a restructuring of the first mortgage. Currently, the lender can only offer second lienholders a share of future appreciation in the property. The Department of Housing and Urban Development is expected to issue guidelines for the Hope program Oct. 1, as required by the housing bill Congress passed their summer.

Congress is calling on the Securities and Exchange Commission to suspend fair-value accounting on distressed assets as part of a $700 billion bill to restore financial stability. The Securities and Exchange Commission and the Financial Accounting Standards Board appear to be having second thoughts about Financial Accounting Standard 157, which governs writedowns on hard-to-value assets. And many in the financial services industry blame FAS 157 for the precipitous drop in the value of subprime mortgage securities that has crippled so many companies. The bill reminds the SEC that it has the authority to suspend FAS 157 if "it is in the public interest and protects investors." In addition, the bill directs the SEC, in consultation with the Federal Reserve Board and the Treasury Department, to conduct a study of FAS 157 and report back to Congress within 90 days.

The Treasury Department must disclose within two days the price it pays for any mortgage asset, according to the pending $700 billion bailout bill. The Emergency Economic Stabilization Act mandates that the Treasury must provide to the public (in an electronic form) the dollar amount of the assets sold, the price, and a description of the collateral being purchased. The Treasury also wants any firm that gives the government warrants to guarantee that its holdings will not be diluted by stock splits.

Beazer Homes USA Inc., Atlanta, has announced a settlement with the Securities and Exchange Commission under which it agrees, without admitting wrongdoing, to comply with certain securities laws and regulations. Beazer said it consented to a cease-and-desist order in connection with matters that were the subject of a previous investigation by the company's audit committee. The settlement, which does not impose a monetary penalty, concludes the SEC's probe of the matters and was accepted by the agency in view of remediation efforts and cooperation by the company, Beazer said. Beazer and its subsidiary Beazer Mortgage Corp. are still under investigation by state and federal agencies regarding matters that were the subject of the audit committee probe, the company said.

The 7th Circuit Court of Appeals has struck down the class certification in a closely watched lawsuit by a Wisconsin couple who maintained that they didn't understand the initial 1.95% teaser rate was only for one month when they took out a payment-option adjustable-rate mortgage from Chevy Chase Bank. A U.S. district court judge ruled in favor of Bryan and Susan Andrews in their request to rescind the loan under the Truth in Lending Act and certified a class action lawsuit. But circuit judges reversed the class certification and said the right of rescission is an individual remedy and that Congress did not intend to leave lenders exposed to class actions costing hundreds of millions of dollars. "Using a class action to resolve a multitude of individual, varied rescission claims is neither 'economical' nor 'efficient' in any sense of those terms," the opinion says.

The Bush administration is willing to accept some limits on executive compensation paid by firms that sell troubled mortgage assets to the government, according to Treasury Secretary Henry Paulson. In trying to sell his $700 billion troubled-asset purchase program, the Treasury secretary has run into criticism from Democratic and Republican lawmakers about bailing out firms that have rewarded their executives for taking excessive risks with bonuses and severance packages. The secretary told the House Financial Services Committee that he is willing to consider compensation limits if they are fashioned in a way that does not discourage participation in the program. He noted that community banks and credit unions, not just Wall Street firms, will be encouraged to participate. The latest House Democratic legislative draft calls for a prohibition on "golden parachutes" for two years. The Democratic draft also allows distressed homebuyers to seek relief in the bankruptcy courts -- despite strong opposition from the financial services industry.

House and Senate Democrats have agreed on most details of a $700 billion bailout plan for the credit and mortgage industries, including a provision that will allow bankruptcy judges to reduce ("cram down") the outstanding balance on troubled mortgages. The cramdown proposal is vehemently opposed by the mortgage banking industry. As of MortgageWire's deadline, Democrats were meeting with Republicans on the legislation. Among other things, the Democratic version of the bill would allow the Treasury to spend an unspecified portion of the money prior to going before an oversight board for further spending allowances. The money will be used to buy troubled mortgage-backed securities from financial service companies (including depositories) of all sizes. Republicans and the White House support Democratic language that would limit compensation for executives whose firms sell into the program.

Interthinx, a provider of risk mitigation and regulatory compliance tools based in Agoura Hills, Calif., is touting the loan-level identity component of its FraudGuard tool to help mortgage lenders comply with so-called red-flag rules that take effect Nov. 1. The Fair and Accurate Credit Transactions Act requires banks to develop policies (consistent with Customer Information Program rules) to identify potential identity theft. FraudGuard uses public and proprietary data to generate more than 45 alerts that help lenders comply with the red-flag rules, the company said. "Creditors and financial institutions are obligated to implement a written program that would satisfy the requirements to detect, prevent, and mitigate identity theft," said Kevin Coop, president of Interthinx. "FraudGuard provides a multitude of critical alerts to support compliance in areas such as Social Security numbers issued prior to date of birth of borrower, invalid phone numbers, and inconsistent personal identification information." The company can be found online at http://www.interthinx.com.

In a battle that has national implications, a Miami Beach city commissioner is taking on condominium lenders in Florida who don't pay what he says is their fair share of condo assessments. Jerry Libbin has formed a coalition of unit owners to lobby state legislators to force banks to pay the full assessment on units that have been taken back from borrowers. Under current law, lenders need pay only 1% of the normal fee once they foreclose on a unit. But Mr. Libbin says some banks don't even do that, and many associations have to sue lenders to recover their unpaid assessments and late fees. Worse, the Miami Beach commissioner maintains, other owners are forced to pay more than they otherwise would so they can maintain their buildings. "Banks are taking unfair advantage of condo owners who have done absolutely nothing wrong," he said. "We must stop this vicious cycle." With 23,631 associations governing a total of 1.4 million units, according to the state's business department, Florida has perhaps the greatest concentration of condos in the country. In Miami-Dade County alone, there are 4,045 buildings with 242,352 units.

Despite Bush administration objections, congressional Democratic leaders are planning to require financial services firms that sell distressed mortgage assets to the Treasury Department to restrict executive compensation. House Financial Services Committee Chairman Barney Frank, D-Mass., also said Democrats feel "strongly" about a provision that would allow bankruptcy judges to restructure mortgages. He said the bankruptcy provision would provide relief for distressed homeowners whose mortgages are not purchased by the Treasury. Mr. Frank said House and Senate leaders are "very close" to agreeing on a bill that would allow Treasury to purchase up to $700 billion in illiquid mortgages. Once congressional leaders agree on a bill, they will begin negotiations with the administration, the chairman said. Separately, 35 consumer, labor, and civil rights groups said they "strongly" back the bankruptcy provision. "We cannot support legislation that fails to help millions of families in danger of losing their homes, while spending hundreds of billions of dollars of taxpayer money to bail out those who caused the problem," the groups said in a letter to Congress.

The nation's largest mortgage trade group says it is against a pending legislative provision that would allow judges to reduce or "cram down" outstanding residential loan amounts, arguing that it could set a judicial precedent that is not needed. In a statement released late Monday afternoon, Mortgage Bankers Association chief operating officer John Courson said the new government fund that will buy up to $700 billion in illiquid mortgage assets does not need judicial approval to reduce or rewrite the loan balance. Mr. Courson said the fund can do cramdowns without a judge's approval. He added that the cramdown is "really irrelevant to the current discussion. Once the fund purchases the distressed mortgages, it doesn't need a bankruptcy judge to rewrite the loan balance without Congress giving bankruptcy judges that authority."

Before the Senate Banking Committee approves a $700 billion bailout of the credit and mortgage markets, some of its members want assurances that the government will not overpay for subprime MBS -- plus promises that taxpayers will get warrants in companies that sell to the government. At a hearing Tuesday -- attended by every senator on the committee as well as a noisy faction from ACORN that was silenced by committee Chairman Christopher J. Dodd, D-Conn. -- several elected officials wanted to know at what price the government would purchase mortgage-backed securities. "How will the assets be priced?" asked Sen. Robert Menendez, D-N.J. "If the seller doesn't like the price, will the taxpayer be asked to pay a premium?" The question was aimed at Treasury Secretary Henry Paulson, who has been putting together the bailout plan over the past few weeks. Committee members expressed dismay at having to spend so much of the taxpayers' money to help bail out Wall Street. "It's financial socialism," said Sen. Jim Bunning, R-Ky. "And it's un-American."

The Securities and Exchange Commission revealed Tuesday that it has 50 pending subprime-related investigations involving residential lenders, investment banking firms, credit rating agencies, and other players involved in the securitization process. Speaking before the Senate Banking Committee, SEC Chairman Christopher Cox said commercial banks and broker-dealers who sold subprime mortgage-backed securities are also being looked at. "We are investigating whether mortgage lenders properly accounted for the loans in their portfolios, and whether they established appropriate loan loss reserves," he told the committee. The agency, which is responsible for overseeing bond disclosures on publicly registered securities, said it is investigating whether lenders adequately disclosed the risk profiles of the mortgages they were securitizing. In late 2006 Lewis S. Ranieri, the co-inventor of the MBS, criticized the SEC in a speech at the National Press Club, saying the agency needs to play a central role in forcing issuers to increase disclosures on bonds collateralized by nontraditional residential loans. At the time, Mr. Ranieri told National Mortgage News that "this isn't an indictment of the SEC," but added that "the transparencies are not what they should be."

Bradford Bank, Baltimore, has reported being notified by the Office of Thrift Supervision that it and its holding company, Bradford Bank MHC, will be receiving a cease-and-desist order. Bradford said it expected that the order would require it to get prior regulatory approval to originate acquisition, development, nonresidential real estate, commercial, construction, or land loans. It will have to prepare a capital plan to maintain a Tier One risk-based capital ratio of 8.0% and a total risk-based capital ratio of 12.0%. To address the need for capital, Bradford Bank has filed a registration statement with the Securities and Exchange Commission for an initial public offering of between 2.125 million and 2.875 million shares of common stock at $10 per share. "Due in part to the deterioration in our loan quality, and resulting provisions for loans losses, coupled with our inability to raise capital through a stock offering to support the asset growth resulting from our previously completed acquisitions, our regulatory capital ratios were negatively impacted," Bradford said in the filing. "Our regulatory capital ratios were reduced below the 'well capitalized' status and at June 30, 2008, we were classified 'adequately capitalized'."

BankUnited Financial Corp., Coral Gables, Fla., has announced layoffs of approximately 160 workers and an agreement on regulatory consent orders that, among other things, bar the bank from originating payment-option adjustable-rate mortgages. The company said the layoffs will come primarily from BankUnited FSB's residential lending operations and will reduce the bank's work force by about 12%. The consent orders with the Office of Thrift Supervision require the company and the bank to take various actions and impose restrictions designed to improve their financial strength, BankUnited said. The orders bar the origination of any loans that may result in negative amortization (including option ARMs) and require the bank, by Dec. 31, to maintain a minimum Tier One core capital ratio of 7% and a minimum total risk-based capital ratio of 14%. The company can be found online at http://www.bankunited.com.

Under legislation now being debated on Capitol Hill, any financial institution headquartered in the United States can be a seller of mortgage-related assets to the Treasury, which will be the "market maker" and sole determiner of price. On Monday, Treasury and Bush administration officials continued their talks on an estimated $700 billion bailout of the capital and mortgage markets. Meanwhile, financial service executives were trying to figure out the most important part (for them) of the historic bailout plan: at what price will Treasury buy their troubled assets? "The biggest outstanding question is how the price of purchased assets will be determined," said Merrill Lynch analyst Akiva J. Dickstein in a new research report. "While the government will not purchase assets at par, the scope of the program plus the fact that the government is unlikely to demand the same yields as private sector purchases means that spreads are likely to tighten." As negotiations on the bill continue, there is talk that the Treasury might liberalize its guidelines and eventually become a purchaser of assets backed by credit cards, automobiles, and commercial real estate. Meanwhile, over the weekend, Goldman Sachs and Morgan Stanley -- the last two of the remaining independent investment banking giants -- said they would transform themselves into bank holding companies, a move that will allow them to accept more bank deposits but will subject them to greater regulatory scrutiny. Goldman owns Litton Loan Servicing, one of the largest "scratch-and-dent" servicers in the United States. Morgan owns Saxon Mortgage, which services $50 billion in subprime loans.

The state's top mortgage regulator told attendees at the New York Association of Mortgage Brokers annual convention Thursday what kinds of things the New York Banking Department is looking for as it moves its examination process toward "safety and soundness." Rholda Ricketts, deputy superintendent of the mortgage banking division, used the acronym FILM to describe what the regulator wants to see: financial, internal controls, legal, and management systems. In the financial area, the department wants mortgage brokers to have real net worth. She said regulators are not looking for a specific number at this point and are addressing each broker on an individual basis. If a business has more monthly expenses than revenues, it needs to work on establishing financial reserves, she said. "If you are in this business to be in this business ... you realistically have to have some cushion" to cover the bad times, Ms. Ricketts said. The department is "trying to encourage people to build a strong industry," she continued. The image of the mortgage broker is "here today, gone tomorrow," and the industry "can't leave that impression on the table any longer," Ms. Ricketts warned. The NYAMB convention was held in Melville, N.Y.

Efforts by House and Senate banking committee leaders to reach a deal on a flood insurance reform bill have reached an impasse, and they may settle for a simple seven-month extension of the National Flood Insurance Program. "I am disappointed that a permanent solution is not before us, but we can and should extend the program while we work on that final bill," said House Financial Services Committee Chairman Barney Frank, D-Mass. Rep. Frank has introduced a bill that provides for a seven-month extension. The current authority to run the NFIP expires Sept. 30. The House and the Senate have passed separate flood insurance reform bills. The House bill provides new coverage for wind damage, which has complicated negotiations.