Compliance

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.

The Mortgage Bankers Association and the Commercial Mortgage Securities Association have joined with the Real Estate Roundtable and the National Association of Realtors to oppose differentiation between the ratings of structured finance products and those of other asset classes. In a letter to Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., and the panel's ranking member, Sen. Richard C. Shelby, R-Ala., the groups warn that differentiating between ratings, as some are proposing, would further erode investor confidence and threaten a fragile economy. "At a time when we need to restore liquidity and confidence in the market, the last thing we ought to be doing is be making the ratings process more complicated," said Kieran P. Quinn, chairman of the MBA. "We recognize improving the ratings process is a key to getting players back in the market, and we want to work with Congress to find the best way to do that. This just isn't it." The letter recommends educating investors about the risk associated with all securities, as opposed to focusing exclusively on structured securities. The letter was sent in advance of a committee hearing on the role of credit rating agencies in U.S. credit market turmoil.

The Office of Federal Housing Enterprise Oversight wants to ensure that Fannie Mae's and Freddie Mac's application of fair-value accounting promotes transparency and consistency in financial reporting and will take corrective actions if the practice "distorts earnings or capital," according to newly issued examiner guidance. "It is important that Fannie Mae and Freddie Mac apply fair value in a sound and consistent manner," OFHEO Director James Lockhart said. OFHEO says it expects the government-sponsored enterprises to document their decisions for applying fair value to selected financial assets and liabilities and provide the regulator with a full fair-value balance sheet each quarter. "If OFHEO detects patterns of use of the fair value option that impair transparency or distort earnings or capital, OFHEO will evaluate whether such application of the FVO is unsafe and unsound," the examiner guidance says.

One in 33 U.S. homeowners will likely be in foreclosure over the next two years as a result of subprime loans made in 2005 and 2006, according to a report released by The Pew Charitable Trusts. The numbers projected for Nevada and Arizona are much higher -- 1 in 11 and 1 in 18, respectively -- and another 40 million neighboring homeowners may see their property values and their municipalities' tax bases decline by up to $356 billion, says the report, "Defaulting on the Dream: States Respond to America's Foreclosure Crisis." Pew said states are generally in the forefront of developing policies aimed at preventing abusive lending. "Let's make certain federal laws build upon, rather than pre-empt, the strong and smart state efforts already under way and ensure that states retail flexibility to respond to local circumstances," said Shelley A. Hearne, managing director of Pew's Health and Human Services Program. Pew can be found online at http://www.pewtrusts.org.

ValuAmerica, Pittsburgh, a developer of settlement services technology, has announced a new release of its ValuNet xsp software aimed at preventing directed appraisals and ensuring compliance with federal valuation requirements. The system will also help lenders comply with a recent agreement on appraisals between the New York attorney general and Fannie Mae, Freddie Mac, and the Office of Federal Housing Enterprise Oversight, the company said. "It's the industry's worst-kept secret: some lenders apparently would rather face a fine from their regulators than risk alienating their commission-based loan officers by preventing them from meddling in the appraisal selection and review process," said Robert Murphy, chairman and chief executive of ValuAmerica. ".... Now that Fannie and Freddie have developed their new code, lenders should be looking for new ways not only to end appraisal pressure but to document their compliance." ValuNet xsp is designed to prevent loan officers from selecting or contacting appraisers by automatically selecting appraisers based on their licensing, skill levels, location, price, workload, and past performance, ValuAmerica said. The company can be found online at http://www.valuamerica.com.

The comptroller of the currency says he is uncomfortable with the way New York Attorney General Andrew Cuomo is trying to impose an appraisal standard on all institutions through a settlement agreement with Fannie Mae and Freddie Mac. "To have a situation where a one-off agreement with a single state would have a national policy impact raises questions as to whether that is an appropriate way to make these kinds of policies," Comptroller John Dugan said. The supervisor of national banks is planning to submit a comment letter on the settlement agreement by April 30. Mr. Dugan also questioned whether the settlement's "blanket prohibition" on the use of in-house appraisers or affiliated appraisal firms is necessary to assure "real" independence between the lending and appraisal functions. "It's not at all clear to me that means the appraisal function has to be outside the institution," the comptroller told members of the Exchequer Club in Washington.

All the Federal Home Loan Banks could use affordable housing grants to help refinance or restructure nontraditional and subprime mortgages under a proposed rule issued by the Federal Housing Finance Board. The proposal is modeled after a $10 million pilot program initiated by the San Francisco FHLBank to provide matching grants of up to $25,000 to member banks and thrifts that want to refinance troubled mortgages that are "under water" due to negative amortization or declining property values. The Finance Board approved the San Francisco pilot on Jan. 15, and now it is issuing a proposal that would allow the other FHLBanks to develop similar affordable housing programs. "The proposed rule would temporarily add authority for the banks to use the AHP direct set-aside subsidy to refinance or restructure low- and moderate-income households' subprime or nontraditional mortgages held by bank members or their affiliates," the Finance Board said. The proposed rule is being issued for a 60-day comment period.

The American Financial Services Association says it could support the Federal Reserve Board's HOEPA proposal for dealing with yield-spread premiums if lenders are not held responsible for a mortgage broker's actions. The Home Ownership and Equity Protection Act proposal requires brokers to negotiate their fee in a dollar amount with the borrower upfront before an application fee is charged and to provide the lender with a signed document. Lenders are expected to rely on this document in paying the YSP to the broker. However, AFSA points out that the lender would not know when it was signed and could be liable if it is not signed and dated contemporaneously. "AFSA asks that the Board clearly and unambiguously remove liability from the lender for things that the broker controls," AFSA executive vice president Bill Himpler says in a comment letter. The Consumer Federation of America is asking the Fed to prohibit YSPs on subprime mortgages. "Negotiating fees up front is good, but it still leaves opportunities for abuse," CFA housing and credit policy director Allen Fishbein told MortgageWire.

House Financial Services Committee Chairman Barney Frank, D-Mass., is warning mortgage servicers that they could face very restrictive regulation next year if they don't cooperate in modifying loans for distressed borrowers. The chairman said he is picking up anecdotal evidence that servicers, not investors, are the reason so few mortgages are being restructured. "I want to put the servicers on notice," Rep. Frank said. "If we see a widespread refusal on the part of servicers to cooperate, they can expect much tougher regulation in the future." The lawmaker is working on a regulatory restructuring bill that he wants to pass next year. "We can't abrogate [servicing] contracts, but going forward we can be very restrictive," Rep. Frank said.

Zoot, Bozeman, Ariz., has created a set of tools to help consumer credit grantors comply with so-called red-flag regulations. Section 315 and Section 114(B) of the FACT Act mandate that financial institutions manage and reduce the risk of identity theft fraud for customers. Any organizations, including nonlenders such as brokers and auto dealers, that use consumer credit data are required to comply with red-flag regulations by Nov. 1, 2008. To satisfy red-flag requirements, programs must have reasonable policies and procedures for detecting, preventing, and mitigating identity theft; demonstrate the ability to identify relevant patterns of activity considered red flags, including address discrepancies; and undergo periodic updates to reflect changes in risks from identity theft. Zoot's tool automates the process of complying with these regulations. The vendor can be found on the Web at http://www.zootweb.com.

Financial institutions that file "suspicious activity reports" are getting better at detecting mortgage fraud before the loan is funded, according to a Financial Crimes Enforcement Network report. "Suspected fraud was detected prior to loan disbursements in 31% of the mortgage loan fraud SARs filed" in 2006, the FinCEN report says, compared with 21% in previous years. Reporting companies filed 37,313 SARs citing mortgage fraud in 2006 -- a 44% increase from the previous year's level -- and a sample analyzed by FinCEN showed that loans originated by mortgage brokers were reported in over half of those SARs. The SAR update report "demonstrates that in this period of mortgage crisis we also have witnessed a substantial increase in fraudulent activity that targets lenders and borrowers," said Richard Reise, an American Bankers Association executive.