Compliance

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.

Mortgage Bankers Association chairman John Robbins has urged Congress and federal regulators to refrain from mandating underwriting standards that could precipitate a credit crunch.Mr. Robbins told the National Press Club that the mortgage industry has the tools and the capacity to help distressed subprime borrowers avoid foreclosure. The subprime market is already correcting itself, the most aggressive lenders have been punished, and the most aggressive lending programs have been eliminated, Mr. Robbins maintained. Mandating tougher underwriting would force lenders to shut the door on homeowners who need to refinance out of adjustable-rate 2/28 mortgages and exacerbate delinquencies and foreclosures, he warned. "We hope the regulators take a realistic view and allow the industry to deal with the issue and not try to regulate or legislate," Mr. Robbins said. The MBA chairman did call for the licensing and regulation of mortgage brokers.

Federal banking regulators could issue subprime mortgage guidance in the next few weeks, and it will look a lot like the original proposal, according to John Reich, director of the Office of Thrift Supervision.In speaking to reporters, Mr. Reich indicated that the final guidance will require lenders to underwrite adjustable-rate 2/28 mortgages at the fully indexed rate and that it should satisfy the demands of Senate Banking Committee Democrats. However, he wants to be sure that lenders have the flexibility to modify or refinance existing subprime ARMs that are due to reset over the next 12 months so the monthly payments remain affordable and the borrowers are not forced into foreclosure. "That is an issue that the regulators need to address," Mr. Reich said, and he indicated that the issue is still being worked on. Separately, Comptroller of the Currency John Dugan said he wants the guidance to curb the practice of making "stated-income" subprime loans and emphasize the importance of verifying a borrower's income.

The House has passed the GSE regulatory reform bill by a 313-104 vote after reaffirming that the new regulator cannot use systemic risk as a reason for scaling back the size of Fannie Mae's and Freddie Mac's mortgage portfolios.The bill (H.R. 14270) tightens supervision of the two government-sponsored enterprises and requires Fannie and Freddie to make annual contributions to an affordable housing fund. Just before voting on final passage, the House approved by a 383-36 vote an amendment introduced by Reps. Randy Neugebauer, R-Texas, and Melissa Bean, D-Ill., that limits the GSE regulator's authority over the portfolios. The amendment was approved by a voice vote on May 17, but Fannie Mae wanted a recorded vote. "We're pleased the Bean/Neugebauer amendment was passed because it clarifies an important aspect of regulatory discretion over the GSE mortgage portfolios," Fannie Mae spokesman Brian Faith said.

The National Community Reinvestment Coalition has filed fair-housing complaints against four lenders alleging that their policies of not providing mortgage financing on group homes for the elderly and people with disabilities are discriminatory.NCRC filed the complaints -- against Franklin Bank Corp., Houston; ComUnity, Morgan Hill, Calif.; Guaranteed Rate, Chicago; and Hyperion Capital, Lake Oswego, Ore. -- with the Department of Housing and Urban Development for investigation. "This type of discrimination should no longer be tolerated in any form or fashion," said NCRC president and chief executive John Taylor. The complaint against Hyperion also alleges that the company's policies against financing housing on Indian reservations are discriminatory. Aegis Mortgage Corp., Houston, recently paid $475,000 in settling an NCRC complaint and agreed to change its lending policies with respect to row houses, properties on Indian reservations, and group homes.

The House has passed a bill that prohibits commercial firms, such as WalMart and Home Depot, from gaining control of state-chartered industrial loan companies and entering the banking business.The bill (H.R. 698), passed by a 371-16 vote, also restricts ILCs currently owned by commercial firms from branching across state lines. "This bill will preserve the distinction between banking and commerce that is necessary to protect the integrity of the banking system," said House Financial Services Committee Chairman Barney Frank, D-Mass. "I hope to work with the Senate to forge a compromise bill that the president can sign." But it does not appear that the Senate Banking Committee will act on an ILC bill soon. The Federal Deposit Insurance Corp. has imposed a moratorium on ILC applications to give Congress time to address the issue.

Ellie Mae, a Dublin, Calif.-based provider of software and services for the mortgage industry, has released Dynamic Loan Screening, which it touts as the industry's first virtual inter-operable platform that matches loan applications with the products and services of lenders, investors, and settlement service providers.The platform automatically identifies matches between borrower data and products, services, and promotions of participating lenders, investors, and service providers as an originator enters data into Encompass, Ellie Mae's mortgage management system. "As the originator inputs loan data into Encompass, that data is continuously monitored, and when a 'match' occurs, an offer is automatically displayed on the originator's loan origination system screen," said Jonathan Corr, Ellie Mae’s chief strategy officer. "For lenders and service providers, it's like having an account executive sitting on the originator's desktop." Dynamic Loan Screening can also screen for compliance and fraud as well as prepayment and early delinquency risks. Ellie Mae can be found online at http://www.elliemae.com.

Addressing pain points currently haunting the mortgage industry, Fort Worth, Texas-based Rapid Reporting has announced major initiatives addressing fraud prevention and buybacks.Rapid Reporting has partnered with collateral valuation and fraud specialist Magellan Lender Services, San Francisco, to give mortgage lenders a complete solution that checks the validity of both borrower and collateral-related data used to evaluate and approve mortgage loan applications. Rapid Reporting will provide borrower-related verifications and Magellan will provide collateral-based verifications to deliver one-stop coverage. Rapid Reporting said it is also offering a Stated Doc Report providing additional IRS-verified information to determine whether information on stated-income loan applications is corroborated by Internal Revenue Service data. No actual numerical data are released in Rapid Reporting's Stated Doc Report, so the integrity of stated-income loans can be maintained.

Originators who made loans knowing that borrowers would not be able to pay were called out by an MBA official in the opening general session of the Mortgage Bankers Association National Secondary Market Convention as among the factors responsible for the subprime sector's woes.Loans that go wrong "after the fact, we can live with," said MBA chairman-elect Kieran Quinn, calling out "people who only care about their commission" and make loans without regard for the borrower's ability to repay. He said the regulatory response to subprime concerns has been "measured" so far, in part due to productive industry dialogue with officials and market participants. But he also noted that while underwriting has tightened, loan performance concerns in general are not over. Early indicators such as statistics in the economically troubled Midwest and California's short-term delinquencies "do not bode well," Mr. Quinn said.

Senate Banking Committee Democrats are prodding the Federal Reserve Board and the other banking regulators to issue subprime guidance on adjustable-rate 2/28 and 3/27 mortgages as quickly as possible.In a May 17 letter, Banking Committee Chairman Christopher J. Dodd, D-Conn., and four other senators urge the regulators to put aside their concerns that tighter underwriting standards will make it difficult for trapped subprime borrowers to refinance. "Frankly, we find this objection as an admission that the original subprime ARM was inappropriate," the letter says. "It stretches credulity to argue that the path out of a poorly underwritten loan is another unaffordable loan underwritten on the same faulty basis." The proposed guidance requires lenders to underwrite subprime ARMs at the fully indexed and fully amortizing rate. The senators note that the Mortgage Bankers Association, along with major lenders and servicers, has adopted principles to pursue loan modifications if borrowers cannot afford their payment after the ARM resets. "These kinds of modifications offer a real alternative to foreclosure for borrowers, and we urge you to encourage servicers to pursue this course of action," the senators say.

Mortgage lenders support the efforts of federal regulators to strengthen underwriting standards on subprime loans and will help troubled borrowers avoid foreclosure, according to a joint statement issued by five industry groups.The trade groups have been very wary of proposed subprime guidance the banking regulators are expected to finalize soon, and they are very concerned about proposed legislation aimed at providing relief for subprime borrowers facing foreclosure. "We believe the efforts of our members, together with the actions of the regulators, will be effective in dealing with current problems in subprime mortgage lending," the joint statement on responsible subprime lending says. "We urge the federal regulators to ensure that the proposed statement on subprime lending strikes a careful balance that provides enhanced consumer protections without unintentionally limiting the availability of home ownership to creditworthy borrowers." The Financial Services Roundtable, the American Bankers Association, the Mortgage Bankers Association, the Consumer Bankers Association, and America's Community Bankers signed the statement.