Compliance

House leaders have decided to leave Federal Housing Administration reform provisions out of an economic stimulus bill, but the package will include a temporary increase in the FHA loan limits, according to sources. House and Senate banking committee leaders wanted to include FHA reforms in the $150 billion stimulus package, but Treasury Secretary Henry Paulson raised objections. The Bush administration supports quick passage of an FHA reform bill, but "it should be on a separate track," a Treasury spokeswoman said. It appears that the stimulus bill would raise the loan limits for FHA and Fannie Mae and Freddie Mac in high-cost areas to 125% of median area home prices, with a $729,750 cap. This temporary increase would expire at year's end.

Fannie Mae and Freddie Mac will be able to securitize jumbo mortgages originated between July 1, 2007, and the end of this year under the economic stimulus package that the House of Representatives was expected to pass Tuesday afternoon. The stimulus bill (H.R. 5140) temporarily raises the GSE conforming loan limit to 125% of median area home prices in high-cost areas, with a $729,750 cap. H.R. 5140 also includes "sense of Congress" language that encourages the government-sponsored enterprises to securitize the jumbo mortgages -- but leaves it up to Fannie and Freddie to decide the best execution. Fannie Mae president and chief executive Daniel Mudd told Bloomberg News that his preference is to securitize the loans. "That is a good business for us," he said. "It is not capital-intensive. But there may be instances where it makes sense to put them on the balance sheet." The stimulus bill also temporarily raises the loan limits for Federal Housing Administration loans in high-cost areas.

New York Attorney General Andrew Cuomo has granted Clayton Holdings immunity in exchange for providing information on its due diligence work for Wall Street firms that securitized subprime mortgages. The publicly traded company says it has provided due diligence reports to the New York AG since it was first subpoenaed in June. "Now, at the request of the New York attorney general, we have entered into a cooperative agreement with his office," said Frank Filipps, Clayton's chairman and chief executive. The New York Times first reported the immunity agreement. The New York attorney general's office has not replied to requests for confirmation. Clayton performs due diligence on loans purchased by conduits, and identifies "exceptions" to the issuers' loan guidelines. The Shelton, Conn.-based company also evaluates the performance of loans once they are securitized. A company executive said the percentage of loans securitized in 2006 that had exceptions was about 30%.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has pledged to act on a GSE reform bill this year in an effort to get the White House to accept a temporary increase in the Fannie Mae and Freddie Mac loan limit that is going to be inserted in the economic stimulus package. Sen. Dodd met with Treasury Secretary Henry Paulson Friday morning to discuss strengthening the regulation of the two government-sponsored enterprises. "I wanted the secretary to know I am going to get a GSE bill done," Sen. Dodd told reporters. The Treasury secretary has let it be known that he is unhappy with the one-year increase in the loan limit that House Democratic and Republican leaders insisted on. He has always insisted that an increase should be tied to passage of a comprehensive GSE reform bill. Meanwhile, Republicans claim they agreed to increase the GSE loan limit from $417,000 to $625,000. But in marking up the stimulus bill, Democrats plan to raise the GSE loan limit to 125% of median area home prices in 12 high-cost metropolitan statistical areas, with a $729,750 cap.

Arguing that Congress needs to do something about the "foreclosure crisis," Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., says he wants to attach a Federal Housing Administration reform bill and an increase in the GSE loan limit to the economic stimulus package Congress and the White House are working on. Sen. Dodd said he will be meeting with House Financial Services Committee Chairman Barney Frank, D-Mass., to discuss how the House and Senate FHA bills can be reconciled quickly and attached to the stimulus package. "I want to send a bill to the president as soon as possible," Sen. Dodd told reporters. The Connecticut senator also said he supports a temporary increase in the loan limits for Fannie Mae and Freddie Mac so the two government-sponsored enterprises can bring liquidity to the jumbo market. But he did not sound optimistic that that would be possible. The chairman also served notice that he has "concerns" about the House-passed GSE regulatory reform bill and that some changes are needed to get the bill through his committee. "I want a strong regulator," he said. "But I am not going to gut the GSEs. It is not going to happen on my watch."

The California economy is being strangled by limited access to mortgage credit, according to California Gov. Arnold Schwarzenegger, who wants Congress to raise the Fannie Mae and Freddie Mac lending limit from $417,000 to $625,000 as part of an economic stimulus package. "Raising these limits would do more than anything else to pump badly needed credit back into the housing market and revive our economy," Gov. Schwarzenegger says in a letter to House and Senate leaders. More than 50% of California's housing stock is priced above the current GSE loan limit of $417,000. "When combined with the withdrawal of the jumbo loan market, it's no surprise that current home sales activity in California is half the pace seen in 2006," the governor said. The former movie star also pointed out that raising the loan limit for the government-sponsored enterprises automatically raises the limit on loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. "Nothing will more beneficially improve the United States economy than immediately raising these limits," he said. California Realtors, builders, mortgage bankers, and brokers are also urging Congress to raise the GSE loan limit to $625,000 as part of a stimulus package.

The Federal Home Loan Bank of San Francisco has received a regulatory waiver to start making grants of up to $25,000 to help low- and moderate-income homeowners refinance out of nontraditional and subprime mortgages and into a fixed-rate 30-year mortgage. FHLBank member banks and thrifts have to put up $2 for every $1 in grant money to participate in the new affordable housing pilot program. The $2 match is to ensure that members take a loss when the principal amount of an underwater mortgage is written down to meet a 97% loan-to-value ratio requirement for the new mortgage. In approving the grant program, Federal Housing Finance Board members stressed that they want the pilot program to provide sustainable mortgages for the borrowers who cannot afford the resets on their current adjustable mortgages. And they don't want the program used to "bail out" lenders that made bad loans. Other FHLBanks are expected to seek similar waivers, and the Finance Board plans to issue an interim rule for public comment.

The city of Cleveland has sued 21 lenders and Wall Street firms involved in the subprime mortgage market, seeking monetary damages under a "public nuisance law." The litigation is the latest in a series of municipal actions targeting lenders. The Cleveland lawsuit alleges that the lenders "financed and cultivated" the subprime market, leading to a foreclosure crisis that has proved costly for the city. Bank of America, Citigroup, Deutsche Bank, J.P. Morgan Chase, Merrill Lynch, Bear Stearns, Ameriquest, Washington Mutual, Countrywide Financial Corp., Morgan Stanley, Wells Fargo, Fremont General Corp., GMAC-RFC, Goldman Sachs, Greenwich Capital Markets, HSBC Holdings, IndyMac Bancorp, Lehman Brothers, NovaStar Financial, and Option One Mortgage were all named as defendants in the lawsuit.

The city of Baltimore has filed a fair-lending lawsuit against Wells Fargo Bank NA, contending that the San Francisco-based bank's subprime lending practices have led to high foreclosure rates in minority neighborhoods and cost the city millions of dollars in expenses and lost revenues. The city alleges that Wells Fargo targets African-American neighborhoods with high-cost loans, resulting in an 8.2% foreclosure rate, compared with a 2.1% foreclosure rate in predominantly white neighborhoods. "Wells Fargo has caused these foreclosures by targeting Baltimore's African-American neighborhoods for irresponsible and abusive subprime lending practices designed to maximize short-term profits for the bank," Mayor Sheila Dixon said. A Wells Fargo spokesman said its loan pricing is based on risk. "Race is not a factor in our pricing," he said. City attorneys are asking a U.S. district court to enjoin Wells Fargo from engaging in certain lending practices and to award compensatory and punitive damages. The city has retained Relman & Dane, a civil rights law firm in Washington, to work on the case.

MBIA Inc., Armonk, N.Y., has sought to stave off negative rating pressure related to its mortgage-related asset-backed securities insurance exposure with a $1 billion surplus note offering and by cutting its dividend. Combined news reports also indicate that MBIA is facing inquiries by federal securities and state insurance regulators related to the company's reports to investors about its mortgage-related risks. The company reaffirmed previous estimates for the fourth quarter indicating that it will take a $737 million loss for the period that is "principally related" to "insured securitizations of prime home equity lines of credit and prime closed-end second-lien mortgages."

Ballard Spahr Andrews & Ingersoll LLP, a Philadelphia-based law firm, has announced the formation of a multidisciplinary Subprime Lending Team. The group will provide legal support to clients regarding the litigation, government action, and business problems sparked by the subprime mortgage crisis, the law firm said. "As the subprime crisis grows, it's clear that the effects will be felt across several disciplines and throughout the country," said Henry E. Hockeimer Jr., a partner in Ballard's litigation department and a member of the subprime team. "The specific legal disciplines affected happen to be areas of real strength for Ballard: consumer finance, real estate, securities, commercial litigation, and white collar are all areas where the firm has great depth and experience." The law firm can be found online at http://www.ballardspahr.com.

It's not on the table today, but the chief executive of Fannie Mae says policymakers should consider creating a single national regulatory agency to oversee the entire housing finance system. "I think we need a more unified approach to housing finance policies," Fannie Mae CEO Daniel Mudd told an American Enterprise Institute forum. He also said policymakers should consider a "Mortgage Reinvestment Act" to reward banks for making loans that help keep troubled borrowers in their homes, similar to the way banks receive Community Reinvestment Act credit for making loans in their communities. However, he criticized proposed changes to bankruptcy laws that would allow courts to "cram down" the amount of a secured mortgage, saying that tampering with the home loan contract will inevitably shrink the pool of capital available for housing finance in the future.

Fast-tracking loan modifications and freezing the interest rate on adjustable-rate subprime mortgages will not jeopardize the accounting and tax status of the mortgage-backed securities, according to an opinion by the Securities and Exchange Commission chief accountant. SEC chief accountant's opinion gives the green light for servicers to implement the fast-track loan modification framework endorsed by the Treasury Department, the Hope Now Alliance, and the American Securitization Forum. ASF deputy executive director Tom Deutsch welcomed the SEC's guidance. "It is imperative for subprime mortgage servicers to have confidence that implementing the fast-track loan modification segment of the ASF framework will not alter the accounting treatment of securitization trusts." SEC chief accountant Conrad Hewitt said in a letter that the vast majority of subprime loan modifications are expected to begin in early 2008. "The Office of Chief Accountant believes this is an appropriate interim step at this time to address this issue given the complexity and lack of specific guidance on the accounting and disclosure for these types of modifications." Mr. Hewitt noted, however, that the letter is not an opinion on the legality of modifying subprime mortgages.

The Community Reinvestment Act may have deterred banks from engaging in the kind of risky mortgage lending that has led to the foreclosure crisis, according to a Traiger & Hinckley LLP study of 2006 loan data. The company said the study indicates that banks making loans in their CRA assessment areas were less likely to make high-cost loans, charged less for the ones they did make, and were "substantially more likely" to avoid the secondary market and retain high-cost loans and other loans in their portfolios. "Without the CRA, the foreclosure crisis might have negatively impacted even more borrowers and neighborhoods," said Warren Traiger, a partner in the law firm. The study is available at http://www.traigerlaw.com.

The Mortgage Bankers Association has changed course and is now backing stand-alone legislation that would allow Fannie Mae and Freddie Mae to purchase jumbo loans of up to $625,000 nationwide on a temporary basis.In a letter to the GSEs' regulator, the MBA contends that liquidity problems in the jumbo market have led to higher interest rates on loans above the conforming loans limit ($417,000) and fewer financing options for borrowers. "The increase should be in effect for no less than 12 months, and up to 24 months if market conditions warrant," the MBA says in a letter to James Lockhart, director of the Office of Federal Housing Enterprise Oversight. The MBA previously opposed a temporary hike in the conforming lending limit unless it was part of a comprehensive bill to strengthen the regulation and supervision of the government-sponsored enterprises. The association can be found online at http://www.mortgagebankers.org.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators launched a Web-based mortgage licensing system on Jan. 2, as promised, with the initial participation of seven states.Four years in the making, the Nationwide Mortgage Licensing System is designed to automate and streamline state licensing of mortgage lenders and brokers. It will also help regulators track and identify bad actors, including originators that move from state to state. "NMLS provides the underpinnings of a regulatory framework to address the weaknesses of our current fragmented and complex system of mortgage origination and supervision," said CSBS executive vice president John Ryan. Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, and Rhode Island are participating in the initial start-up. Forty other states have indicated their intent to transition to the system. The House recently passed a predatory-lending bill (H.R. 3915) that requires the creation of a nationwide mortgage licensing system and registry.

Allegations that Washington Mutual's appraisal practices may have led to inflated property values have prompted the Office of Thrift Supervision to start a review of WaMu and the appraisal practices of other thrifts, according to an OTS spokeswoman."I don't know if it would be fair to say we are singling [WaMu] out," said Barbara Shycoff, the OTS's external affairs director. The OTS decided it is a "good time" to look at WaMu and other thrifts to make sure that "we are comfortable with the practices out there," she said. The Seattle-based thrift maintains that the allegations of pressuring appraisers -- first raised by New York Attorney General Andrew Cuomo in November -- are without merit. "After spending a month and a half investigating these allegations, we can say with confidence that there has been no systematic effort by WaMu to inflate home appraisals," the company said in a recent statement. WaMu also disclosed in the Dec. 21 statement that the Securities and Exchange Commission and the OTS are reviewing its appraisal practices.

The National Ethics Bureau, San Diego, has announced that it is now accepting real estate and mortgage professionals as members.Mortgage brokers who apply must pass a comprehensive seven-year background check for criminal, civil, and business violations, hold a valid mortgage broker license, and meet NEB continuing education requirements. In return, they will be authorized to use NEB branding and communication tools, the organization said. "The real estate industry is under stress due to the market downturn, credit crunch, and subprime crisis," said NEB chairman Steven R. McCarty. "Unfortunately, this has increased unethical sales practices and outright fraud, especially in subprime mortgage applications.... By qualifying for NEB membership, real estate professionals can take a bold step to restore public confidence and lay the groundwork for future growth." The organization can be found online at http://www.ethicscheck.com.

The National Association of Mortgages Brokers contends that the Federal Reserve Board's proposal requiring brokers to disclose their fees up front and in dollars simply places mortgage brokers at a competitive disadvantage to banks.The Fed proposal would hurt thousands of small brokerage shops that sell loans to investors just like banks, NAMB executive vice president Roy DeLoach said. He added that the NAMB is trying to determine whether the Fed complied with the Federal Regulatory Flexibility Act in measuring the impact of the proposal on small businesses. The Fed is issuing its Home Ownership and Equity Protection Act proposal for a 90-day comment period. One Washington mortgage banking consultant said the Fed's treatment of broker fees is similar to that of the Real Estate Settlement Procedures Act proposal expected to be issued for public comment by the Department of Housing and Urban Development in six to eight weeks. Like the HUD rule, the Fed's proposal would stop brokers from making money from interest rate movements. "The Fed is effectively implementing RESPA reform when it comes to yield-spread premiums and mortgage broker compensation," Potomac Partners' Brian Chappelle said. The NAMB can be found online at http://www.namb.org.

The Federal Reserve Board is proposing a "robust set" of rules to clean up subprime lending practices and to address unfair and deceptive practices associated with servicing, mortgage broker fees, and appraisals.On subprime and higher-priced alternative-A mortgages, the Home Ownership and Equity Protection Act proposal would create an ability-to-repay standard, require lenders to verify income and assets to curb stated-income lending, mandate escrow accounts for at least 12 months, and require prepayment penalties to expire 60 days before the first monthly increase in payments. Under pressure from Congress, the Fed was expected to address those subprime practices. However, the Fed decided that it needed to go further to provide a robust and "more comprehensive set of protections" that apply to all mortgages, said Randall Kroszner, a Fed governor. The proposal requires brokers to disclose up front the dollar amount of their fees, including yield-spread premiums, in a written agreement with the borrower. "Creditor payments to a mortgage broker could not exceed the total compensation amount stated in the written agreement," according to the proposal, which is being issued for a 90-day comment period. Servicers could be sued under the Truth in Lending Act for failing to post mortgage payments properly and pyramiding late fees. Lenders and brokers also would be liable for coercing appraisers. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated," Fed Chairman Ben Bernanke said.