Compliance

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.

The third-quarter Core Mortgage Risk Index, which forecasts the relative risk of residential loan delinquencies, stands 12% higher than it did a year ago, according to First American CoreLogic, Santa Ana, Calif. The risk index has risen for 11 of the late 12 quarters, the company said. "The CMRI is currently 55% above the base period of the first quarter of 2002, a period near the end of the last U.S. economic recession," said Mark Fleming, the company's chief economist. "Although significantly higher now than during this base period, the CMRI is likely to continue rising nationally over the next 18 months." Mr. Fleming said declining home prices are the "primary factor" in the most recent rise in mortgage risk. CoreLogic, a provider of mortgage risk assessment and fraud prevention systems, can be found on the Web at http://www.facorelogic.com.

"Advertising is definitely an issue" for state regulators, attorney Bonnie S. Nachamie told attendees Thursday at the New York Association of Mortgage Brokers annual convention in Melville, N.Y. The New York Banking Department has hired an advertising specialist, and state regulators are not just looking for compliance with state laws in this area, but federal ones as well. Ms. Nachamie said the banking department has "new friends" at the Federal Trade Commission. The FTC, the New York Banking Department, and the Department of Housing and Urban Development are all chatting with each other and making referrals. Another area where the banking department is spilling over into a federal issue involves mortgage brokers who are doing Federal Housing Administration loans without having a "mini-eagle," she said. There is also a crackdown by state regulators on mortgage brokers who take applications at unlicensed locations. Ms. Nachamie also warned the audience that mortgage brokers are not exempt from making a Home Mortgage Disclosure Act filing if they have 100 applications per year. This has not been on the regulators' radar screen in the past, but the issue is starting to come up.

The House Financial Services Committee has approved a bill that would allow nonprofit housing groups to continue to arrange downpayment assistance on Federal Housing Administration loans and give the FHA some latitude in pricing mortgage insurance premiums based on risk. The bill (H.R. 6694) would reverse provisions in a major housing bill Congress passed this summer that bans seller-funded downpayment assistance on FHA loans starting Oct. 1 and bars the FHA from using risk-based pricing for 12 months. The House is expected to pass the bill despite opposition from the Department of Housing and Urban Development. HUD has been trying to shut down the DPA programs for years because of high default and claim rates. When it comes to RBP, the department contends that the bill is too restrictive. "The RBP portion of the bill would make permanent the recently enacted [12-month] moratorium, which HUD strongly opposed, and place very tight restrictions on FHA's pricing structure," the department said. "HUD does not support it." The House is expected to pass H.R. 6694, but it will die in the Senate, according to industry lobbyists.

Housing Secretary Steve Preston vowed Wednesday morning to implement permanent changes to the Real Estate Settlement Procedures Act by year's end even though industry groups are fighting the agency's proposals on consumer disclosures. Speaking at a luncheon in Washington, HUD Secretary Preston said, "Our goal is to get RESPA completed by the end of this year and then provide the industry with a full year to implement the rule." He added, "I firmly believe this will be a big step forward for restoring trust and transparency between the industry and homeowners." Industry trade groups do not like what the Department of Housing and Urban Development has proposed and want the department to work with the Federal Reserve on simplified disclosure forms. HUD's proposal is now under review at the Office of Management and Budget. Fed staffers have urged HUD to take a more coordinated approach in revamping consumer disclosures. HUD has made major modifications to its original proposal based on conversations with the Fed and other government agencies, as well as 12,000 comment letters HUD has received, according to a HUD spokesman. It sent the final RESPA rule to the OMB on Aug. 21.

The Office of Comptroller of the Currency is checking national banks that fund brokered loans to make sure the mortgage brokers are properly disclosing their fees to consumers as outlined in a 2003 advisory letter. "We have been reviewing bank compliance with this particular section of our guidance recently since it has been more than five years since the advisory letter was issued," Michael Bylsma, the OCC's director of consumer law, told a Mortgage Bankers Association compliance conference. The OCC guidance calls for national banks to enter into written agreements with mortgage brokers to ensure they make loans that meet the consumer's "needs, objectives and financial situation," Mr. Bylsma said. These agreements "should limit total broker compensation to prevent inappropriate steering," he added. The 2003 advisory letter also calls for disclosure of broker fees to consumers, including a written agreement between the borrower and the broker. The broker's fees should be conspicuously disclosed in the agreement that is signed and dated by the consumer before the broker starts work. "National banks should have a process in place to review the written agreements," Mr. Bylsma said. The OCC officials declined to comment on the level of compliance with the advisory letter. National banks originated 45% of all home mortgages in 2007, according to the OCC.

The regulator of the housing GSEs says Fannie Mae and Freddie Mac can continue to operate their multifamily businesses as usual, and they will not have to liquidate their holdings of Low Income Housing Tax Credits or mortgage revenue bonds. The support of the government-sponsored enterprises for multifamily housing finance is "central to the enterprises' public purposes," according to a statement issued by the Federal Housing Finance Agency. "FHFA has stated that business will continue as usual at the enterprises during the conservatorship -- this applies to both the single-family and multifamily businesses." Centerline Capital Group, New York, welcomed the FHFA statement. "Our multifamily financing business is still strong," Centerline president Marc Schnitzer said. "We expect to continue doing business with both companies in our multifamily and affordable housing lending practices."

Discussions between the New York attorney general, Fannie Mae, and Freddie Mac on appraisals reforms are continuing and "progress is bring made," according to Alfred Pollard, general counsel of the Federal Housing Finance Agency. The appraisal reforms announced by AG Andrew Cuomo, Fannie, Freddie, and the GSE regulator in March have already gone through a comment period that generated a very hostile response from industry groups and federal banking regulators. "Fannie and Freddie have reviewed the comments," Mr. Pollard told a Mortgage Bankers Association compliance conference. "They have done a very good job of looking at them and making changes that would be merited." Nevertheless, discussions with the New York AG's office are continuing. "The best I can tell you now is that progress is being made," FHFA official said.

Department of Housing and Urban Development officials have refused to testify before a House Financial Services subcommittee and defend its RESPA rule before congressional and industry critics who want to kill the rule. HUD told subcommittee Chairman Mel Watt, D-N.C., that they should not comment about the Real Estate Settlement Procedures Act rule while it is under review at the Office of Management and Budget. Rep. Watt said at the hearing that he was disappointed that HUD Secretary Steve Preston did not show up. "I though it would be fun to see a bipartisan pummeling of a federal government agency and a spirited defense," he said. Federal Reserve Board officials also declined to testify, "citing a reluctance to be critical of another federal agency," Rep. Watt said. Congressional critics have urged HUD to withdraw the RESPA rule and work with Federal Reserve staff in developing more simplified mortgage and real estate settlement cost disclosure forms. Fed staffers have also urged HUD to take a more coordinated approach in revamping the consumer disclosures. But HUD ignored the Fed and sent the final RESPA rule to the OMB on Aug. 21. Meanwhile, Rep. Judy Biggert, R-Ill., said she expects to get over 200 fellow members of Congress to sign a "dear colleague" letter that urges the OMB to postpone final approval of the RESPA rule until HUD holds public hearings on it.

Supporters of the controversial seller-funded downpayment assistance program rallied in Washington on Wednesday, calling on Congress to pass a bill that would save DPA from being eliminated Oct. 1. The Oct. 1 ban -- signed into law July 30 as part of the Housing and Economic Recovery Act of 2008 -- has mobilized community activists who say it will disproportionately affect minorities, especially first-time homebuyers and female-headed households. A recent analysis by Washington-based Matrix Global Advisors of government data on FHA-insured loans found that over 40% of African-Americans who receive FHA loans, and 27% of Hispanics, rely on seller-funded DPA. According to Scott Syphax, president and chief executive of DPA pioneer Nehemiah Corporation of America, 90% of the 300,000 families Nehemiah has directly served have not faced foreclosure. While stressing that roughly 40% of Nehemiah clients have been minorities, he called on the administration to right a wrong "by supporting H.R. 6694 and reinstating DPA indefinitely."

The Senate Banking Committee will hold a hearing Sept. 16 to quiz Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart about their decision to seize control of mortgage giants Fannie Mae and Freddie Mac. According to the committee, Chairman Christopher J. Dodd, D-Conn., will ask about the eventual cost of the takeover, whether the move will stabilize financial markets, and what it means for mortgage affordability. Fannie's and Freddie's regulator, the newly created FHFA, working with the Treasury, placed the two government-sponsored enterprises under a government conservatorship on Sept. 7. About a month before the takeover, Mr. Lockhart said the two GSEs had enough capital to weather the housing crisis. Rep. Barney Frank, D-Mass., plans on holding a related hearing, but has yet to set a date.