Compliance

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.

The Federal Housing Administration refinancing bill is on a fast-track in the House of Representatives but has hit a bump in the Senate Banking Committee, where a scheduled May 6 mark-up has been postponed. The House Financial Services Committee passed the FHA refinancing bill on May 1, and the full House is expected to vote on it during the week of May 5. The foreclosure prevention bill provides the Federal Housing Administration with $300 billion in loan commitment authority to refinance "underwater" mortgages. House leaders want to attach the FHA refinancing bill to a larger legislative package that includes FHA modernization and GSE reform bills the House passed last year. The bills increase the loan limits for the FHA, Fannie Mae, and Freddie Mac to $729,750. The package also includes a tax bill that provides revenue bonds to refinance subprime loans and a $7,500 tax credit for first-time homebuyers. Meanwhile, it appears that negotiations over a government-sponsored enterprise bill to strengthen regulation of Fannie and Freddie has bogged down, and Senate Banking Committee leaders will reschedule the May 6 mark-up. Committee Chairman Christopher J. Dodd, D-Conn., wants to tackle the GSE reform and FHA refinancing bills in the same mark-up.

Banks are squeezing builders by imposing tougher terms on acquisition, development, and construction loans, and it is going to lead to more defaults, according to the National Association of Home Builders. Lenders are seeking additional equity on outstanding ADC loans and "balking" at loan extensions, the president of the Illinois Home Builders Association, Scott Eckstein, told the House Small Business Committee. "Defaults on ADC loans are rising" and "banks are actively reducing exposure levels to home credit," Mr. Eckstein testified. The NAHB is urging federal banking regulators to take a "balanced" approach in evaluating construction loans. "Overly pessimistic assumptions about future home sales and values will result in an unnecessary extension of the credit crunch and housing recession," the Illinois builder said.

Mortgage lenders are urging the Office of Federal Housing Enterprise Oversight to withdraw its support for appraisal reforms that Fannie Mae and Freddie Mac agreed to implement as part of a settlement with New York Attorney General Andrew Cuomo. The agreement "permits the NYAG to unlawfully exercise authority that resides exclusively with the federal government," according to eight financial services trade groups. And they contend that OFHEO "violated its statutory directive" to be the sole regulator of the two government-sponsored enterprises when it entered into the agreement with the New York attorney general. "We urge OFHEO to withdraw its assent to the agreement, to not permit the GSEs to implement the agreement, and take steps to assure that this type of rulemaking by settlement does not occur in the future," the joint letter says. In comment letters on the appraisal reforms, the same groups strongly oppose the ban on the use of in-house appraisers and subsidiary appraisal firms.

The Federal Trade Commission's multiyear investigation into the servicing practices of a Bear Stearns affiliate could lead to the filing of a complaint, but EMC Mortgage Corp. executives have agreed to resolve the matter through "consent negotiations," according to the FTC. Lydia Parnes, the FTC's director of consumer protection, told a Senate panel that FTC staff "believes EMC and its parent Bear Stearns have violated a number of federal consumer protection statutes in connection with its servicing activities." The FTC director indicated that negotiations have not started yet. "The FTC cannot comment further on this ongoing law enforcement investigation," she testified. Ms. Parnes also revealed that the FTC has launched "several nonpublic investigations of mortgage originators for possible violations of fair lending laws." In addition, the consumer protection agency is investigating more than a dozen mortgage companies for deceptive advertising. The FTC can be found online at http://www.ftc.gov.

The Federal Deposit Insurance Corp. has developed a $50 billion "pay-down" loan program to facilitate the restructuring of "underwater" mortgages and prevent 1 million foreclosures. If approved by Congress, the Treasury Department would make loans to borrowers to pay down the principal of the first mortgage by up to 20%. Mortgage investors participating in the program would pay Treasury's financing costs and interest on the Home Ownership Preservation loan for the first five years. After five years, the borrower would start paying principal and interest. To ensure repayment of the HOP loans, the first lienholders would subordinate their interests to the Treasury. This would ensure that the government is "paid off the top," FDIC Chairman Sheila Bair said, when there is a sale or refinance. She called it a "workable" plan that would make "unaffordable loans affordable." It would also avoid dealing with second lienholders. The loans could stay in the securitized pools and the servicer wouldn't have to get the second lienholder's approval for the restructuring, Ms. Bair told reporters.

House Financial Services Committee Chairman Barney Frank, D-Mass., says it is "entirely possible" that Congress will send President Bush a legislative package by the Fourth of July that is responsive to the current housing crisis, reduces foreclosures, and increases confidence in the secondary-market agencies. The package would include two Federal Housing Administration bills and a GSE bill to strengthen regulation of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, the chairman told a Washington conference sponsored by the Independent Community Bankers of America. On Wednesday, Rep Frank expects to complete a committee mark-up of his FHA bill to refinance struggling homeowners with "underwater" mortgages. (The Senate Banking Committee is scheduled to mark up a government-sponsored enterprise bill on May 6.) The House has already passed a GSE regulatory reform bill. In addition, the House and Senate are close to an agreement on an FHA modernization bill that will make the FHA a safer alternative to subprime loans. "The crisis has generated some pressure" to act, Rep Frank told reporters. "We should have it done in June."

The Department of Housing and Urban Development has determined that market conditions prevented Fannie Mae and Freddie Mac from reaching two affordable housing subgoals in 2007, and it will not require the two government-sponsored enterprises to take corrective action. The two home-purchase subgoals are supposed to measure the GSEs' efforts in financing low-and moderate-income homebuyers. Fannie and Freddie submitted market data to HUD showing that rising home prices reduced the availability of affordable housing. In addition, the subprime meltdown and tighter credit conditions made the barriers to achieving the subgoals "insurmountable," Freddie Mac said. In letters to the chief executives of the two mortgage companies, HUD Assistant Secretary Brian Montgomery reported that information provided by the GSEs is "consistent" with HUD's market research. HUD has determined that the achievement of the two subgoals was "not feasible," Mr. Montgomery says in the April 24 letters. He also notes that HUD also considered the "financial stability" of Fannie and Freddie in evaluating their affordable housing performance.

Rust Consulting Inc., Minneapolis, has announced the formation of a task force to deal with developments related to the subprime mortgage crisis. Rust said the task force is composed of experts from the company's antitrust, consumer finance, labor and employment, and securities practice areas. Jim Parks, a principal consultant with Rust, said the company's clients have been forming internal task groups to deal with the "many nuances" of subprime market litigation. This prompted Rust to form the task force "to work alongside those clients in tracking and monitoring case development in this area," he said. The company, which is part of the class action settlement administration industry, can be found online at http://www.rustconsulting.com.

The House Financial Services Committee has approved by voice vote a bill that would shield mortgage servicers from investor lawsuits so they can modify loans and help more troubled borrowers avoid foreclosure. The bill (H.R. 5579), sponsored by Reps. Michael Castle, R-Del., and Paul Kanjorski, D-Pa., would create a safe harbor for servicers who carefully consider loss mitigation options and decide to modify a mortgage. "Homeowners and investors alike benefit by finding terms and conditions that would allow at-risk homeowners to stay in their homes, while providing investors some rate of return for their investments," Rep. Castle said. Industry groups oppose the bill. But Rep. Castle said his bill would "eliminate some of the payoffs" required under a Federal Housing Administration refinancing bill the committee was scheduled to mark up on April 24. The FHA bill requires investors/servicers to write down the loan amount to refinance an "underwater" mortgage into an FHA-insured mortgage.

MRG Document Technologies, Dallas, has announced an alliance with Lydian Data Services, a Boca Raton, Fla.-based provider of end-to-end outsourcing services for mortgage operations. The alliance enables MRG to extend its Miracle document preparation system to customers of Lydian's origination fulfillment center who use Lydian's outsource capabilities to supplement or replace their own internal processes, MRG said. Through a custom interface created by MRG, Miracle upfront and interim disclosures and closing documentation can be accessed via the Lydian Exchange Network, which unites lenders and industry service providers. "By using MRG's customizable document preparation packages and Lydian Data Services' turnkey fulfillment capabilities, lenders can streamline their origination processes while maintaining full compliance with state and federal regulations," said Terry King, group chairman of MRG. The companies can be found online at http://www.mrgdocs.com and http://www.lydiandata.com.