Compliance

The Securities and Exchange Commission wants the credit rating agencies to publicly disclose the information they use in rating mortgage-backed securities (including information about the underlying mortgages) to provide more transparency for investors and other rating agencies. "That would permit broad market scrutiny, as well as competitive analysis by other rating agencies that are not paid by the issuer," SEC Chairman Christopher Cox said. The proposal approved by the commissioners for public comment would prohibit credit rating agencies from assisting MBS issuers in structuring their deals to get a certain rating. However, it would be acceptable to tell the issuer how much overcollateralization is needed to achieve a triple-A rating, an SEC staffer said. The rating agencies would also have to maintain a history of their rating actions, including default statistics for the initial rating and defaults that occur after a rating is withdrawn. The wide-ranging proposal addresses conflicts of interest, disclosures, internal practices, and business practices of the rating agencies and is designed to prevent another "subprime mess," Mr. Cox said.

Six attorneys general have stood out for their creative leadership and aggressive response to the nation's foreclosure crisis, according to a new report from ACORN. The organization said these AG's -- Connecticut's Richard Blumenthal, Massachusetts' Martha Coakley, New York's Andrew Cuomo, Illinois' Lisa Madigan, Iowa's Tom Miller, and Minnesota's Lisa Swanson -- earned A-plus grades for actively seeking real data from mortgage servicing companies, pursuing cutting-edge cases against the industry's bad actors, speaking out on matters of state and federal importance, and putting their offices to work for distressed borrowers. ACORN -- the Association of Community Organizations for Reform Now -- says these AGs are cracking down on rescue scams and pushing the industry to perform better. ACORN collected examples of the work done by all 51 attorneys general and has recommended best practices and strategies used by the AGs. The report lists 18 attorneys general who earned A's, six with B's, eight with C's, one with a D, 12 with F's, and six with Incompletes.

To stem losses to the FHA insurance fund, the Department of Housing and Urban Development is reissuing a proposed rule that would ban seller-funded downpayment assistance on Federal Housing Administration-insured mortgages. HUD has been tangling for several years with nonprofit groups that arrange for low-income homebuyers to receive downpayment assistance from home sellers. HUD maintains that foreclosures on these FHA loans are three times higher than for other loans because the seller jacks up the price to recoup the downpayment "gift." In March, a federal district court judge ruled that HUD violated the Administrative Procedures Act in issuing a similar rule to stop seller-funded DPA programs. FHA Commissioner Brian Montgomery said the judge provided HUD with a "roadmap" to modify the proposed rule and reissue it for a new 60-day comment period. The FHA commissioner also told the National Press Club Monday that the FHA has booked $4.6 billion in "unanticipated long-term losses" mostly due to seller-funded DPA loans. He stressed that the FHA is solvent but may need a congressional appropriation if such losses continue. Meanwhile, downpayment assistance providers are ready to block the rule again. "We will not watch Commissioner Montgomery or HUD sever the only lifeline available to the low- to moderate-income families," said Scott Syphax, president and chief executive of Nehemiah Corporation of America.

National City Mortgage has agreed to pay $4.6 million to settle claims by the U.S. Department of Justice that it submitted mortgages to the Federal Housing Administration for mortgage insurance that were already in default. The Miamisburg, Ohio, lender allegedly submitted 58 loans for FHA endorsement where the borrowers had already missed a payment. FHA requires lenders that submit mortgages 60 days after origination to certify that the payments are current. "Lenders must follow the Department of Housing and Urban Development's rules and be held accountable if they knowingly submit loans that are not eligible for insurance," acting assistant attorney general Gregory Katsas said. National City Mortgage is one of the largest FHA lenders and it has "a long history as a responsible lender," a spokesman said. "As stated in the settlement agreement, National City refuted the government's allegations and denied any liability." The HUD Inspector General referred the National City case to the Justice Department. In 2006, IG auditors found that NCM had originated 34,838 FHA mortgages between Feb. 1, 2004 and Aug. 31, 2005 and 1,476 of those loans were in default within the first six payments.

More than 11,000 loan officers have already registered with the five-month-old Nationwide Mortgage Licensing System. Add more than 8,700 principals, owners, and branch managers who also have joined the system, and the tally is nearly 20,000, according to figures released at the Conference of State Bank Supervisors' annual conference in Amelia Island Plantation, Fla. The CSBS operates the licensing system, which went live in January in eight states. Created in conjunction with the American Association of Residential Mortgage Regulators, the system is designed to bring greater accountability and transparency to the mortgage business. The system now contains more than 6,100 company, branch, and individual licensees, and nearly 11,200 more applications are pending. Some 330 licenses have been "terminated" since the NMLS went live Jan. 2, most likely because they were voluntarily surrendered but possibly because some were revoked. A total of 18 states are scheduled to participate in the NMLS by the end of the year, and 42 agencies in 40 states have signed letters of intent to join the system eventually.

The chief economist at Moody's Economy.com says the housing market has a long way to go before it turns the corner. "The housing downturn is now comparable to the Great Depression," Mark Zandi told the Conference of State Bank Supervisors' annual meeting at the Amelia Island Plantation in Florida. "And it is evident across the country." The "most fundamental problem" with housing is excess capacity, "and it's getting worse," Mr. Zandi said. Citing Census Bureau data, the economist said the number of "completely vacant" unsold houses now totals 2.25 million units. That's twice the number of houses that were sitting on the shelves in 2004, and the current situation "won't stabilize soon," he told the state regulators. The economist also said most places are now experiencing price declines. Not so long ago, he was predicting that prices would fall 20% or so from peak to trough. But he told the CSBS that the 20% figure "doesn't cut it anymore." Now, he's looking for a 20%-25% drop in prices by the time the free-fall is over, and perhaps 30% in some places in California, Florida, Nevada, and Arizona.

The Federal Deposit Insurance Corp. will issues guidelines next week on managing third-party risks, FDIC Chairman Sheila Bair has told the Conference of State Bank Supervisors' annual meeting. The guidelines will deal, in part, with compensation of mortgage brokers. Until now, the FDIC has been dealing with the issue on a case-by-case basis, Ms. Bair said at the meeting at Amelia Island Plantation in Florida. But in that loan brokers "could steer" consumers into dangerous loans or mortgages they don't fully understand, how state-chartered banks pay third-party originators "deserves closer scrutiny," she added. Ms. Bair also held out hope for her plan to prevent a million foreclosures by reworking "underwater" mortgages. While expansion of the Federal Housing Administration's loan programs will be "extremely helpful" in the long term, her rescue plan would "give borrowers a breather" in the short term, she said. "It's for people who want to stay in their homes and ride out the housing crisis," she told the state banking regulators. Ms. Bair said it's possible that a floor amendment incorporating her proposal would be added to the Senate housing bill as a "nice complement" to FHA expansion. The FDIC chair also urged lenders and regulators to move back to common-sense underwriting. "If I'm going to point to two culprits" for the mortgage market calamity, she said, it would be the failure to underwrite at the fully indexed rate and the ability of borrowers to repay.

The GSE reform bill passed by the Senate Banking Committee gives the new regulator broad powers to raise Fannie Mae's and Freddie Mac's capital requirements and determine the appropriate size of their investment portfolios, according to a Credit Suisse report. It is likely that the new regulator will determine that the government-sponsored enterprises "should be less leveraged," CS research analyst Moshe Orenbuch says. "Such a determination by the regulator could either limit the growth of the GSEs or require that they raise additional equity." He reiterated an Underperform rating for Fannie and Freddie. Freddie Mac says it supports the legislation. "We would stress, however, that if not applied carefully, the bill could adversely impact the mortgage market," a spokesman said. Fannie Mae also has concerns about "elements in the bill that could inhibit the GSEs' ability to provide the greatest possible support for mortgage markets and housing affordability," a Fannie spokesman said.

The Mortgage Bankers Association has issued a policy paper backing its position that legal/regulatory efforts in the wake of the recent market crisis should make distinctions between mortgage bankers and brokers in four areas. The MBA's position runs counter to the National Association of Mortgage Brokers' longtime assertion that there should be a "level playing field" where legal and regulatory efforts are concerned. David Kittle, the MBA's chairman-elect, indicated during a teleconference Tuesday morning that the association has taken brokers' concerns into account. "Many of our members are brokers," he said. "We just want transparency." The MBA wants brokers to disclose "responsibilities and compensation" and to be "treated legally as agents" if they "claim to be, or act as, borrower agents." The mortgage bankers group also wants a national minimum net worth requirement for brokers, and "appropriate" bonding. The MBA can be found online at http://www.mortgagebankers.org.

A new GSE regulator should require Fannie Mae and Freddie Mac to adjust their investment portfolios in a "countercyclical manner" so they could provide more liquidity for the mortgage market the next time the housing market goes bust, according to the director of the Office of Federal Housing Enterprise Oversight. OFHEO Director James Lockhart told a banking conference that the two government-sponsored enterprises loaded up on risky loans and securities during the recent housing boom, and now they are dealing with credit losses and have been forced to raise capital. In a future downturn, Fannie and Freddie could provide more liquidity for the mortgage market if their regulator requires them to build up capital during the boom and sets standards for the operation of the portfolios so they can provide "liquidity and stability to the secondary mortgage market at all points in the credit cycle," Mr. Lockhart said. Congress is working on a GSE reform bill that would authorize the new regulator to set such standards. "An important issue for supervisory agencies is how to create incentives for institutions to behave in a less pro-cyclical manner without interfering with their ability to earn reasonable returns on capital," the GSE regulator said.

Mortgage servicers of REMIC securitizations no longer have to wait for a borrower to miss a payment before they contact and offer a homeowner a loan modification with a lower interest rate or principal reduction, according to an Internal Revenue Service ruling. Revenue Procedure (2008-28) opens the door for servicers to actively identify borrowers likely to end up in foreclosure without jeopardizing the tax status of a real estate mortgage investment conduit. "This is an important change that will allow more homeowners who may potentially get in trouble to be able to have their loans modified prior to default," said Anne Canfield, executive director of the Consumer Mortgage Coalition. The IRS recognizes that servicers have developed sophisticated programs to identify borrowers likely to default using data such as declining credit scores, falling house prices, or interest rate resets. Once they form a reasonable belief that there is significant risk of foreclosure, "then they can go ahead and contact the borrower before any payment goes late," IRS associate counsel Susan Baker said. Currently, REMIC regulations prohibit a loan modification before the borrower is in default.

Senate Banking Committee leaders were still negotiating late Thursday afternoon on GSE regulatory reform and Federal Housing Administration refinancing bills after furious negotiations Thursday morning had prompted some to predict that an agreement was near. At the request of Sen. Richard C. Shelby, R-Ala., committee Chairman Christopher J. Dodd, D-Conn., postponed a 10 a.m. mark-up session as the two sides tried to come to terms on the foreclosure prevention bill, which uses the FHA to refinance struggling borrowers with "underwater" mortgages. Sen. Dodd said Thursday afternoon that an agreement had not been reached. "We are getting closer, but we aren't there yet," the committee chairman said. Sen. Shelby says he is concerned about using taxpayer funds to refinance speculators and others who made bad decisions. "We shouldn't bail out people who probably shouldn't have bought a home to begin with and probably won't pay if they are refinanced," he said on CNBC-TV.

The second-quarter Core Mortgage Risk Index stands 16% higher than the level of a year ago, reflecting rising delinquency and foreclosure rates, flat or declining price appreciation, and slower job growth, according to First American CoreLogic, Sacramento, Calif. Among the largest 100 markets in the country, CoreLogic reported that the five with the highest risk are: Riverside-San Bernardino-Ontario, Calif.; Los Angeles-Long Beach-Glendale, Calif.; Sacramento-Arden-Arcade-Roseville, Calif.; Stockton, Calif.; and Miami-Miami Beach-Kendall, Fla. "As of March 2008, 33 states were experiencing year-over-year house price declines, up from 28 states in February, demonstrating how quickly home price declines appear to be spreading," the company reported. CoreLogic, a provider of mortgage risk assessment and fraud prevention systems, can be found on the Web at http://www.facorelogic.com.

The Senate has passed a flood insurance reform bill in a 92-6 vote that phases out subsidized premiums for certain commercial properties and vacation/second homes and requires properties protected by dams and levees to have flood insurance for the first time. The bill (S. 2284) also requires lenders to escrow flood insurance premiums and increases penalties on lenders that don't insure homebuyers in flood-prone areas. A House-passed bill expands the National Flood Insurance Program to offer dual coverage for flood and wind damage. The Senate overwhelmingly rejected such an expansion by a 73-19 vote. The Senate bill also forgives $17 billion in debt that the Federal Emergency Management Agency borrowed from the U.S. Treasury to pay flood claims after hurricanes Katrina and Rita in 2005.

Senate Banking Committee Chairman Christopher J. Dodd, D- Conn., says his committee will mark up two bills on May 15 that will address the housing crisis -- an FHA refinancing bill and a GSE regulatory reform bill. The Federal Housing Administration bill is similar to a House-passed measure that authorizes the FHA to refinance "underwater" mortgages if the investor/servicer writes down the principal amount to 85% of the current appraised value. The government-sponsored enterprise bill would strengthen regulation of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Efforts to craft a compromise with Sen. Richard C. Shelby, R-Ala., have failed so far, and Sen. Dodd introduced the two newly drafted measures on his own. The Bush administration says it hopes to get a "strong" and "balanced" GSE bill but is likely to oppose the FHA refinancing bill. President Bush has already threatened to veto the House FHA bill (H.R. 3221). FHA Commissioner Brian Montgomery said H.R. 3221 "forces taxpayers to pay for bad loans" and creates "hundreds of thousands of risky loans." The commissioner told the National Association of Realtors that there is room for compromise if Congress is willing to take a "workable" approach that is fiscally sound.

Stewart Information Services Corp., Houston, has revised its first-quarter 2008 results following the discovery of an agency defalcation. As a result of the fraud, the company took a pretax charge of $4.6 million, which affected its results on an after-tax basis by $3.0 million, or $0.16 per share. Stewart is now reporting a first-quarter loss of $25.2 million ($1.40 per share). On April 30, it reported a loss of $22.3 million ($1.24 per share).

Bowing to congressional pressure, the Department of Housing and Urban Development has extended the comment period on its Real Estate Settlement Procedures Act reform proposal for 30 days. But HUD acting Secretary Roy Bernardi says he is determined to finalize the RESPA rule before the end of this year. "In light of congressional and industry requests to extend the comment period for the rule, and our desire to develop the best possible rule, we are allowing additional time," Mr. Bernardi said. "However, we remain committed to finalizing the rule before the end of the administration." Nearly 150 members of Congress have signed a petition seeking an extension. Industry groups began clamoring for an extension as soon as the proposal was issued because it goes beyond revising the good-faith estimate to provide consumers with a clear and concise disclosure of loan terms and settlement costs. The HUD proposal is more ambitious and opens the door to volume discounts and other issues that have raised concerns among many settlement service providers. The comment period was due to expire May 13.

With Congress in crisis mode, the Mortgage Bankers Association is calling on lawmakers to take care of "unfinished business" by addressing policy issues that have, in some cases, lingered for years. Issuing a 10-point "Agenda to Stabilize the Housing Market," the MBA said at its National Secondary Market Conference in Boston that lawmakers need to step back from their "crisis mentality" and focus on basic policies to steady the mortgage market, help distressed borrowers, and ensure that today's problems don't recur. "We're saying to Congress to be very careful, and don't overreact," MBA senior vice president Steve O'Connor said at a press briefing. The MBA's 10-point plan includes some well-worn items, such as modernizing the Federal Housing Administration and reforming the regulatory structure governing Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. But it also backs away from its previous stance that only mortgage brokers should be licensed. Now, the MBA says that with the exception of those who work directly for federally regulated institutions, all individual single-family loan originators should be licensed. "We support the licensing of all people, including direct lenders," said David Kittle, the MBA's chairman-elect. "We've come off that exception." The MBA can be found online at http://www.mortgagebankers.org.

The Federal Housing Administration "in the next few days" will announce a new proposal to introduce risk-based pricing, saying it is "unfair" to balance the long-term viability of the insurance fund on the backs of its lowest-income borrowers. "It's counterintuitive, but working-class families with FICO scores of 680 and above and which have saved for years for a downpayment have our lowest default rate," FHA Commissioner Brian Montgomery said at the Mortgage Bankers Association's National Secondary Market Conference in Boston. "We want to give those families a little price break." The FHA's first attempt at switching to risk-based pricing was pulled amidst a flurry of negative comments and opposition on Capitol Hill. But Mr. Montgomery said the new rule "will be more benign," including not as much of a discount to the least risky borrowers. "We're no longer going to 75 basis points," the FHA commissioner said. "There was concern from the private mortgage insurers that we were intruding into their realm. That was never our intent, but we will offer a little less of a discount." Mr. Montgomery said risk-based pricing has to be the "price of admission" if the FHA is forced to continue taking loans with seller-funded downpayments, which have a default rate three times the norm but are making up a larger and larger share of its portfolio.

A Federal Housing Administration bill approved by the House Financial Services Committee last week will fall far short of its goal of helping 1 million at-risk borrowers avoid foreclosure, according to budget analysts. The Congressional Budget Office estimates that the FHA refinancing bill (H.R. 5830) would refinance only 500,000 homeowners into FHA loans during the life of the four-year program, when 2.8 million borrowers are expected to face foreclosure proceedings. The budget analysts note that the bill requires holders of first liens to write down loans to about 85% of the current appraised value, and they would have "an incentive to direct their highest-risk loan into the program." Other liens must be extinguished, which leaves little incentive for second lienholders to participate, unless a foreclosure sale is imminent. About 40% of subprime and alternative-A mortgages have second liens. "CBO estimates about 25% of the loans with second liens could be refinanced under this new program," the agency said.