Compliance

With interest rates on millions of adjustable-rate mortgages predicted to reset in Pennsylvania and nationally over the next two years, Pennsylvania Gov. Edward G. Rendell is urging homeowners with these types of loans to prepare for possibly significant increases in their monthly payments."Many working families are facing tough situations as their monthly payments increase," Mr. Rendell said. "Homeowners with adjustable-rate mortgages should contact their lenders to confirm when, and by how much, their payments will increase." The Pennsylvania Banking Department wants to change the regulations to require mortgage originators to qualify borrowers under the fully indexed rate and amortized repayment schedule. "This would help to protect consumers from being put into loans they can't afford to pay back," he said. "There also needs to be clearer disclosures to help borrowers better understand their loans." Consumers can learn more about Pennsylvania's Homeowner's Emergency Mortgage Assistance Program by calling a toll-free help line, 800-PA-BANKS, or visiting the banking department's website at http://www.banking.state.pa.us.

In finalizing the subprime mortgage guidance, federal banking regulators rejected industry requests for flexibility in helping subprime borrowers by refinancing them into another adjustable-rate 2/28 mortgage.The guidance, issued June 29, suggests that workout arrangements should provide permanent affordability, and that lender/servicers might consider converting ARMs into fixed-rate mortgages to provide "financially stressed borrowers with predictable payment requirements." Comptroller John Dugan said the emphasis is on putting borrowers into loans they can afford. "It doesn't do any good to keep putting people into loans that they can't repay," he said. In underwriting subprime 2/28 ARMs, regulators expect lenders to qualify borrowers at the fully indexed rate, "regardless of any interest rate caps that limit how quickly the fully indexed rate may be reached." The payment schedule should be fully amortizing over 30 years, unless it is a balloon loan.

Federal financial regulators have issued final subprime guidance cautioning against the use of stated-income and reduced-documentation mortgage loans unless there are "documented mitigating factors that clearly minimize the need for verification of a borrower's repayment capacity."The Statement on Subprime Mortgage Lending calls for "a fully indexed, fully amortized qualification for borrowers" and "prudent" consumer protection standards. The standards should include "clear and balanced product disclosures to customers and limits on prepayment penalties that allow for a reasonable period of time, typically at least 60 days, for customers to refinance prior to the expiration of the initial fixed interest rate period without penalty," the statement says. The Mortgage Bankers Association characterized the guidance as "a strong statement that will help curb abuses" but that will likely "constrain consumer credit choices." The association urged Congress to do two things. "First, quickly pass FHA modernization in order to restore affordable credit options for worthy borrowers, and second, refrain from passing legislation that will further constrain credit by forcing lenders to deal with rigid underwriting standards and litigation risk," the MBA said. "Instead, Congress should focus on legislation to improve transparency and accountability throughout the mortgage transaction."

In response to growing demand for reverse mortgages, Wolters Kluwer Financial Services, Minneapolis, is equipping lenders with a new line of electronic documents they can use to help comply with regulatory requirements tied to Home Equity Conversion Mortgages.A HECM, the most common form of reverse mortgage in the United States, allows borrowers aged 62 or older to convert the equity in their homes into income through a lump sum, monthly payments, or a line of credit offered by lenders. The WKFS line of electronic upfront disclosures and closing documents for HECMs allows lenders doing business in the top 10 states underwriting HECMs to create compliant document packages. The top 10 states are: California, Florida, Texas, New York, Michigan, New Jersey, Colorado, Illinois, Massachusetts, and Pennsylvania. The company plans to expand its HECM document line to other states based upon lender demand. WKFS can be found on the Web at http://www.wolterskluwerfs.com.

The Pew Charitable Trusts has announced a $1 million investment with the Center for Responsible Lending aimed at curbing abusive subprime home loans by strengthening underwriting standards.Pew noted that federal financial regulators are poised to issue guidance on subprime lending, but that more than half of subprime mortgages are issued by lenders not subject to such guidance. "With Pew's support, the Center for Responsible Lending will work to protect all subprime borrowers by urging other federal and state policymakers with jurisdiction and industry leaders to adopt basic, much-needed standards," the organization said. Pew said its two-year investment in CRL is intended to strengthen underwriting standards by pushing lenders to verify a borrower's income and ensure that borrowers can repay the loan after scheduled interest rate increases. The organization can be found on the Web at http://www.pewtrusts.org.

Sen. Charles E. Schumer, D-N.Y., wants to impose a fiduciary duty on mortgage brokers and the initial lender that funds a subprime loan under a bill he is trying to get through the Senate Banking Committee."We need a fiduciary duty" that applies to nonbank lenders that are not federally regulated, Sen. Schumer told reporters. "If we did that, the vast majority of abuses would be cleaned up without affecting the functioning of the subprime market." The National Association of Mortgage Brokers contends that there are many problems with this approach -- since relationships between businesses and consumers are usually addressed at the state level. "The idea that imposing a fiduciary/agency relationship is going to fix everything is a fallacy, and it is not well thought out," said NAMB executive vice president Roy DeLoach. The Schumer bill (S. 1299) also requires lenders to underwrite loans at the fully indexed rate and requires escrow accounts on all subprime loans. Sen. Schumer told reporters that he plans to talk to banking committee Chairman Christopher J. Dodd D-Conn., about holding a mark-up of the bill. "The sooner the better," he said.

Fidelity National Title Group, Jacksonville, Fla., has announced the introduction of a new product offering (in partnership with Experian Consumer Direct) aimed at helping its customers protect themselves against mortgage fraud.Under the partnership, Experian will offer Fidelity customers one year of credit monitoring, fraud resolution assistance, and a credit report at no cost. "We recognize that mortgage fraud and identity theft are a growing concern not only for our industry, but for our customers as well," said Randy Quirk, co-president of Fidelity National Financial, the parent company of Fidelity National Title. ".... Now, when our customers purchase title insurance from participating locations of our companies -- Fidelity National Title, Chicago Title, Ticor Title, Security Union Title, or Alamo Title -- they will receive a one-year membership to Experian Consumer Direct's CreditCheck Basic at no cost." The companies can be found online at http://www.fnf.com and http://www.experian.com.

New York Attorney General Andrew Cuomo has initiated several investigations focused on lender relationships with mortgage brokers and appraisers, according to an attorney who specializes in fair-lending litigation."As expected, Attorney General Cuomo has commenced a number of active investigations related to various aspects of mortgage lending," Andrew Sandler told MortgageWire. "Specifically, he has a number of active investigations pending involving pricing and underwriting issues, as well as inquiries focused on predatory lending." The partner at Skadden Arps described the level of scrutiny the New York AG is applying to the mortgage industry as unprecedented. "There are currently more inquiries out of the New York AG than I have ever seen from any individual enforcement agency at any single point in time," Mr. Sandler said. The NY AG's office has not responded to inquiries about its mortgage industry initiatives.

Unlike in past downturns, mortgage lenders are trying to hold mortgage brokers responsible for buybacks, but there are ways that brokers can protect themselves, according to Douglas Lowell Davies, an attorney with Lane Powell Attorneys and Counselors.Speaking at the National Association of Mortgage Brokers annual conference in Seattle, Mr. Davies said he has successfully represented several mortgage brokers that have been sued by lenders to pay for buybacks that investors have pushed back to the lender. He predicted that this is a trend that is likely to escalate and force brokers out of business if they are held liable in some cases. Mr. Davies advised brokers to come up with a short, one-page disclosure detailing all of the pertinent loan terms in plain English for each of their borrowers to sign. For stated-income loans, Mr. Davies added that brokers should have borrowers sign a document swearing, under penalty of law, that the income provided in the application is accurate.

A proposal by the Department of Housing and Urban Development to eliminate seller-financed downpayment assistance on FHA-insured loans has run into bipartisan opposition in the House.During a House Financial Services subcommittee hearing, Republicans and Democrats urged HUD to drop the proposed rule and improve its regulation and monitoring of downpayment assistance programs run by nonprofit organizations. Subcommittee Chairman Maxine Waters, D-Calif., suggested adding language to a Federal Housing Administration reform bill that would override HUD's proposed DPA rule. Rep. Waters also suggested that HUD extend the July 10 comment period deadline on the proposal for another 30 days. Rep. Gary Miller, R-Calif., urged the FHA to improve its underwriting standards on loans with DPA to improve their performance. The foreclosure rate on FHA loans with downpayment assistance provided by nonprofits is 16%.

The Bear Stearns hedge fund "debacle" strengthens the argument that issuers of subprime mortgage securities should have some liability for the underwriting of loans they securitize, according to House Financial Services Committee Chairman Barney Frank, D-Mass.This past week, Merrill Lynch liquidated roughly $850 million in subprime-related assets it had seized from at least one Bear hedge fund after the fund failed to meet its margin calls. Bear Stearns -- after being pressured by other creditors -- is moving to shore up the hedge fund (and a second fund) to prevent a liquidation. Industry groups contend that assignee liability would "kill" the subprime securitization market. In an interview on public television's Nightly Business Report, Rep. Frank said, "But that market is dying of its own right now." He added that including a reasonable assignee liability provision in a predatory-lending bill would provide purchasers of subprime securities a "degree of confidence" that the issuer has vetted the loans. The congressman said he hopes to complete a draft of his predatory-lending bill before the August recess and hold hearings on it in the fall.

Industry lobbyists are trying to tone down a nonbinding resolution sponsored by Rep. Elijah Cummings, D-Md., that would put the House on record in support of tough predatory-lending legislation.The resolution points out that the subprime market has created opportunities for predatory lending and that irresponsible subprime lending has contributed to rising foreclosures rates. "It is the sense of the Congress that legislation should be enacted that protects buyers who have been victims of unscrupulous mortgage brokers and lenders," the resolution says, adding that such legislation should include "an anti-predatory lending provision that bans unfair and deceptive practices." Lobbyists expect the House Financial Services Committee to vote on the Cummings resolution during a June 26 mark-up session -- but the committee has not placed it on the agenda yet. Wright Andrews, executive director of the Coalition for Fair and Affordable Lending, said he expects the resolution to be refined before a mark-up. "The congressman's resolution is well-intentioned, but it could lead to unintended consequences for, not only industry, but the people he is interested in protecting," Mr. Andrews said.

First-time homebuyers should be required to have escrow accounts on subprime loans, a top mortgage executive at Chase told a June 14 Federal Reserve Board hearing on abusive lending practices."Mandating it for first-time homebuyers is very important, because they generally don't understand how this stuff works," said Pablo Sanchez, national mortgage production executive at J.P. Morgan Chase. Otherwise, Mr. Sanchez and other lenders represented at the hearing urged the Fed to rely on guidance in encouraging escrows or to allow consumers to opt out. Consumer advocates, however, are urging the Fed to use its authority under the Home Ownership and Equity Protection Act to mandate escrows on subprime loans. Martin Eakes, chief executive of the Center for Responsible Lending, contends that a HOEPA regulation is needed to ensure that all lenders require escrows. "Guidance will not work," he warned.

The idea of providing borrowers with a simple one-page mortgage disclosure, first developed by American Enterprise Institute resident fellow Alex Pollock, is catching fire with state banking regulators, industry groups, and even members of Congress.Rep. Patrick McHenry, R-N.C., said he is working with Rep. Al Green, D-Texas, to draft legislation that would require mortgage lenders to provide a simple disclosure so that homebuyers understand the terms and even the costs relative to their income. "This will relieve some of the confusion in the process," Rep. McHenry told an AEI seminar. The Conference of State Bank Supervision had developed its own version, and the state regulators want the Federal Reserve Board to mandate a simple disclosure form as part its initiative to curb abusive lending practices. The Mortgage Bankers Association plans to roll out a simplified disclosure in the next few days. Loan officer trainer Christopher Cruise told the AEI seminar that Mr. Pollock's one-page form pulls together 80%-90% of the information a borrower needs to know. "Literally everybody that I have talked to in the industry strongly supports this form," Mr. Cruise said.

A reduction in the origination fee on Federal House Administration-insured reverse mortgages could discourage lenders from offering the product and crimp the program's growth, according to a Congressional Budget Office cost estimate of the FHA reform bill (H.R. 1852).The CBO estimates that the FHA would endorse about 110,000 home equity conversion mortgages in fiscal year 2008 if the reform bill is enacted, and HECM originations would grow at about 2%-4% annually. Last year, the CBO estimated that the FHA could see HECM originations jump to 160,000 loans in a few years. But that was before an amendment to reduce origination fees was attached to H.R. 1852 during a committee mark-up. "A lower origination fee could increase the program's attractiveness to some borrowers, assuming lenders do not increase interest rates significantly to compensate for lower origination fees," the CBO says.

Mortgage disclosures currently required by federal regulators fail to convey key mortgage costs and terms to consumers, leaving them susceptible to deceptive lending practices, according to a Federal Trade Commission study that tested 819 recent mortgage customers.The FTC study found that prime and subprime mortgage customers were confused by the standard good-faith estimate and would benefit from enhanced disclosures. The consumer protection agency tested a prototype GFE with enhanced disclosures that produced better results. "Eighty percent of the respondents viewing the prototype form were able to answer 70% or more of the questions correctly, compared to 29% of the respondents viewing the current form," the FTC said. The study also suggests that subprime borrowers "may benefit the most from improved disclosures," FTC Chairman Deborah Platt Majoras said.

Fannie Mae is hoping its regulator -- the Office of Federal House Enterprise Oversight -- will complete a review of its residential construction loan program soon, enabling the company to get back into the market again.OFHEO suspended Fannie's purchases of acquisition, development, and construction loans last summer, citing concerns about the program's controls and procedures. MortgageWire has learned that Fannie Mae has delivered all information that OFHEO requested on May 8, and now the government-sponsored enterprise is waiting for the regulator's decision. Fannie operated an ADC pilot program under the oversight of the Department of Housing and Urban Development for 12 years. But when Fannie wanted to expand the ADC program last year, OFHEO intervened. Fannie Mae can be found online at http://www.fanniemae.com.

Lender Technologies Corp., a subsidiary of the Mortgage Bankers Association, has issued a Request for Information regarding the creation of a national database to help prevent fraud against lenders.LTC said it is requesting information to determine the availability of contractors that have the experience, expertise, and staffing to develop and operate such a database. "MBA believes that further innovation is required in order to adequately protect the industry, as well as consumers, taxpayers, and communities, from the costs of mortgage fraud, and that is why we are lending our support to efforts to develop a national fraud prevention database," said MBA chairman John M. Robbins. LTC said the primary focus of the project is to develop a database and a process to facilitate the sharing of data that would improve the ability of mortgage lenders to identify and stop fraud at the point of origination. LTC can be found online at http://www.lendertechnologies.com.

Federal Deposit Insurance Corp. Chairman Sheila Bair says accounting firms and industry groups have concluded that there is latitude in the accounting rules governing securitizations that allow servicers to actively restructure subprime loans facing foreclosure.She noted that the industry groups are committed to working with borrowers to prevent foreclosures and with community activists to reach borrowers that need to restructure their loans. The Mortgage Bankers Association has asked the Financial Accounting Standards Board for guidance on the FAS 140 servicing issues. "MBA believes restructurings of certain securitized residential mortgage loans that are widely anticipated to go into default will not cause qualified special-purpose entities holding restructured loans to be disqualifying, thereby forcing the transferors to record a repurchase of the loans," the association said. The FDIC chairman also reported that the regulators are near agreement on the subprime lending guidance when it comes to curbing stated-income loans and other issues. She said she expects the guidance to be issued no later than July.

Senior Republicans on the House Financial Services Committee are supporting efforts by Comptroller of the Currency John Dugan to curb "stated-income" loans, for which subprime lenders don't verify the borrower's income."We were interested to see Comptroller Dugan's recent remarks on stated-income loans, or 'liar loans,' and are deeply concerned about the explosion in originations of these mortgages in the subprime market," Reps. Spencer Bachus (Ala.), Paul Gillmor (Ohio), and Judy Biggert (Ill.) say in a letter to federal banking regulators. As previously reported, Comptroller Dugan wants to place curbs on stated-income loans in the subprime guidance that regulators are finalizing. The representatives acknowledge there should be a "small niche" for stated-income loans. But they also contend that "these low-doc or no-doc loans with a high LTV and [prepayment] penalties" increase the risks of default. "Current circumstances in the housing market have exposed these poorly underwritten loans, and we would ask the regulators to closely examine the role the use of liar loans may have played in the subprime market defaults we are experiencing," the committee members said.