Compliance

Key congressional supporters of raising the conforming-loan limit are reconsidering a provision in a GSE reform bill that would require Fannie Mae and Freddie Mac to securitize and sell all jumbo mortgages.Reps. Barney Frank, D-Mass., and Gary Miller, R-Calif., commented at a hearing on rising foreclosures that securitization makes it very difficult to restructure the loans when borrowers get into trouble. Rep. Frank, chairman of the House Financial Services Committee, said it might be better for the government-sponsored enterprises to keep those loans in portfolio. On March 28, the committee approved a GSE regulatory reform bill that raises the conforming-loan limit in high-cost areas.

State regulators cannot interfere with the mortgage banking subsidiaries of national banks, according to a U.S. Supreme Court ruling that upholds the comptroller of the currency's exclusive authority over national banks and their subsidiaries.The 5-3 decision in Watters v. Wachovia Bank is a resounding defeat for state attorneys general and banking regulators who wanted to reassert their powers in providing consumer protection and regulating national bank subsidiaries. "The Conference of State Bank Supervisors is deeply disappointed," CSBS president Neil Milner said. "We see it as a setback for financial consumers and state efforts to battle predatory lending, abusive mortgage lending practices, and mortgage fraud." Comptroller John Dugan welcomed the decision, which culminates a long legal battle with the states. "We are pleased that the court's decision supports the ability of national banks to continue to conduct business activities through their operating subsidiaries as they are now doing," he said.

Federal regulators are encouraging banks and thrifts to help distressed subprime borrowers through loan modifications and other workout arrangement by awarding Community Reinvestment Act credit."The agencies want to remind their institutions that existing regulatory guidance and accounting standards do not require immediate foreclosure of homes when borrowers fall behind in the payments," an interagency statement said. The statement also points out that the financial institutions are required to inform delinquent borrowers about the availability of homeownership counseling. And the institutions should work with consumer-based organizations that help financially stressed borrowers avoid foreclosure. "Bank and thrift programs that transition low- and moderate-income homeowners from higher-cost loans to lower-cost loans may also receive favorable consideration under CRA," the agencies said.

A Federal Deposit Insurance Corp. summit may have found a way to restructure adjustable-rate 2/28s mortgages in subprime securitizations and prevent foreclosures, according to FDIC Chairman Sheila Bair.She told a congressional panel that one way to restructure or modify these loans is to continue with the starter rate on the ARM. This approach was discussed at the April 16 summit with lenders, securitizers, and servicers, where it was learned that MBS investors really don't have a realistic expectation of getting the higher reset rate. Investors will have to approve this approach, even though they will incur losses. But Ms. Bair pointed out that foreclosures would cause bigger losses. "I think they are willing to do that," she told reporters. One hurdle is an accounting interpretation that requires a securitized mortgage to be delinquent 30 days before it can be restructured. "I think that is a problem," the FDIC chairman said. She said she plans to discuss it with the Financial Accounting Standards Board.

Countrywide Home Loans Inc., Calabasas, Calif., has entered into a $500,000 settlement with a Connecticut regulator for charging excessive financing fees on 473 borrowers and for failing to register 147 originators with the state banking department.Countrywide paid a $401,750 civil money penalty for the violations and contributed $100,000 to NeighborWorks to provide homeownership assistance for state residents. State examiners found that Countrywide imposed prepaid finance charges that exceeded (in the aggregate) the legal limit, which is 5% of the loan amount or $2,000, whichever is greater. The limit on prepaid finance charges, which includes points and application and administrative costs, was enacted four years ago as part of the state's anti-predatory-lending law. Countrywide has refunded all the 473 overcharged borrowers and has agreed to take corrective actions with respect to prepaid finance charges and registering originators that work directly for the company. Countrywide said the settlement arose from a "misinterpretation and misapplication" of certain Connecticut requirements and that the company undertakes extensive efforts to comply with national and state laws governing its lending operations. The company can be found online at http://www.countrywide.com.

Fannie Mae and Freddie Mac could add only affordable housing loans and securities to their mortgage investment portfolios under a regulatory reform bill introduced by four Republican GSE hardliners on the Senate Banking Committee."This bill would refocus the GSEs' practices and investments on affordable housing, thereby reducing systemic risk," Sen. John Sununu, R-N.H., said. Any mortgages or mortgage-backed securities acquired by the government-sponsored enterprises after enactment of the bill would have to meet the affordable housing goals set by the new GSE regulator or be "promptly securitized and sold to third parties," the bill says. Both GSEs have $700 billion portfolios, and the regulator could make "temporary adjustments" to avoid market disruptions. Sens. Sununu, Chuck Hagel (Nebraska), Elizabeth Dole (North Carolina), and Mel Martinez (Florida) are the Republican co-sponsors of the bill. Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has not circulated a GSE bill yet.

Mitch Heffernan, the former president and chief executive of the defunct Mortgage Lenders Network, recently sought an injunction in bankruptcy court to stop the Connecticut Department of Labor from pursuing criminal charges against him, according to an article published in the Hartford Courant.The office of a Connecticut state's attorney blocked the injunction and defended the department's right to seek the warrant. The department applied for an arrest warrant for Mr. Heffernan that would charge him with 61 counts of failing to pay wages to employees at MLN, which filed for bankruptcy in March. The arrest warrant for Mr. Heffernan is still pending at the state's attorney's office, said Nancy Stefans, a representative of the department. MLN was a top-20-ranked subprime lender.

Consumer advocates are urging Congress to amend the bankruptcy code so that homeowners can restructure high-cost loans and avoid foreclosure.The current code protects mortgage lenders, according to the National Association of Consumer Bankruptcy Attorneys, and does not allow the bankruptcy judges to reduce the interest rate or principal amount so that homeowners can successfully emerge from bankruptcy with affordable payments. As a result, more homeowners with subprime loans are forced to walk away from the homes, according to NACBA president Henry Sommer. "Help is urgently needed for hundreds of thousands of American families at risk of losing their home due to abusive home loans," he said. An NACBA survey shows that bankruptcy attorneys are finding that more of their clients have problems involving subprime loans. Half of the respondents said 50% of their clients with homes have mortgage-related problems, while 20% of the attorneys said 75% of their clients with homes have mortgage-related problems. The Consumer Federation of America and the Center for Responsible Lending joined the NACBA in calling for bankruptcy reforms.

The Neighborhood Assistance Corporation of America is planning to conduct protests and mock foreclosures at the homes of Wall Street and mortgage company executives -- demanding loan modifications for subprime borrowers who are facing foreclosure.Subprime adjustable-rate mortgages were "structured to fail," and "we are going to go into their neighborhoods" if they don't stop the foreclosures, NACA chief Bruce Marks said at a Washington news conference. The Boston-based community advocacy group wants the investment banking firms and subprime lenders to restructure the loans so that troubled borrowers get a fixed-rate mortgage at the initial qualifying rate (e.g., a 2/28 ARM with an initial interest rate of 6% would be restructured as a 6% fixed-rate mortgage). NACA plans to start the protest campaign on April 21 by inviting subprime borrowers to its offices in 33 cities to educate them about subprime "scams" that were used to exploit them with loans they could not afford, Mr. Marks said. The group is also pledging $1 billion to refinance victims of predatory lending into affordable mortgages through a commitment by Bank of America and Citigroup. NACA has run a mortgage lending operation for subprime homebuyers since the mid-1990s that offers no-downpayment fixed-rate mortgages at 1 percentage point below the market rate. Now it is refinancing mortgages to prevent foreclosures.

The top Republican on the House Financial Services Committee supports the concept of making secondary-market investors accountable for the performance of subprime loans through an assignee liability provision that is modeled after a New Jersey anti-predatory-lending law.Rep. Spencer Bachus, R-Ala., said the New Jersey statute has been "shown to be effective, and it could be the starting point for national legislation." Nearly a month ago, Financial Services Committee Chairman Barney Frank, D- Mass., said he wants to include an assignee liability provision in predatory-lending legislation. "It is the best enforcement mechanism we could have," Rep. Frank said. Rep. Bachus clarified, in response to a news story, that he has not reached an agreement with Chairman Frank on an assignee liability provision. The ranking committee Republican also stressed that the New Jersey law allows borrowers a private right of action to press claims rather than a class-action lawsuit. He said he also supports the New Jersey law because investors in subprime securities can protect themselves from liability through due diligence.

Fannie Mae and Freddie Mac have not adopted federal nontraditional mortgage guidance yet, but their regulator is trying to get them on the same page as other financial institutions.James Lockhart, director of the Office of Federal Housing Enterprise Oversight, told reporters that he expects Fannie and Freddie to comply with the nontraditional mortgage guidance that federal banking regulators finalized last September. The guidance requires lenders to underwrite interest-only and payment-option mortgages at the fully indexed rate. The two government-sponsored enterprises have already informed OFHEO about their plans, and Mr. Lockhart said OFHEO will be seeking "some changes." He indicated that those changes would be spelled out in a letter to the GSEs, possibly this week. "So we expect them to be compliant," Mr. Lockhart said. The OFHEO director also noted that there have been discussions with the GSEs about the proposed subprime guidance the banking regulators issued March 2 for public comment. "We are asking for their comments on that," he said.

Federal regulators should have the authority and the responsibility to end abusive lending practices, Sen. Hillary Rodham Clinton says in a letter that urges the Federal Reserve Board to act quickly in finalizing guidance on subprime lending."We should take greater steps to ensure the regulators not only have the authority but the responsibility to end the deceptive and irresponsible lending practices that drew people into adjustable rate mortgages and other hybrids they could not afford when the rates adjusted upwards," the New York senator says in the letter to Fed Chairman Ben Bernanke. The Democratic presidential candidate also argues that lending regulations should cover nonbank lenders and should be effectively enforced. "I fear that regulatory oversight has been lax and too many lenders were irresponsible or unscrupulous," the senator says. "Families and communities are now paying the price." The comment period on the subprime guidance ends May 7.

Problems in the subprime market are "largely contained" and the economy will "weather this storm," Dallas Federal Reserve Bank president Richard Fisher says, but the outlook for the housing market isn't as clear.Last year, 40% of homebuyers were subprime or alternative-A borrowers, Mr. Fisher told the Austin Mortgage Bankers Association. With the contraction in nonprime lending, "housing markets may feel some short-term pain, making it less clear whether housing construction has bottomed and how long the housing downturn may last," he said. The Dallas Fed president also said the regulators are being very careful in setting credit standards because they don't want to compound the problems in the subprime sector or stifle innovation. "I think the recent subprime mortgage statement put out by the Fed and four other regulators gets the notion of sensible risk-taking just about right," Mr. Fisher said.

Lenders are already using a number of tools to help financially stretched borrowers avoid foreclosure, but these cases need to be addressed individually rather than with a blanket moratorium, according to the Mortgage Bankers Association.Lenders and servicers have developed loss mitigation tools to help borrowers who are at risk of losing their homes, MBA chairman John Robbins said in response to calls for an immediate six-month moratorium on foreclosures. Mr. Robbins acknowledged that a credit crunch in the subprime market has left some borrowers "trapped" and unable to refinance into a more affordable loan. "They are trapped, and we are doing everything we can to help them, including looking at new products designed to help troubled borrowers," Mr. Robbins said. Four civil rights groups have called for a moratorium. Allen Fishbein, director for housing policy at the Consumer Federation, said "unprecedented action" is needed. "We certainly think the situation is serious enough that it warrants consideration of all possible solutions, including a moratorium," he said.

Civil rights group are calling for an immediate six-month moratorium on foreclosures so that borrowers with subprime hybrid mortgages can transition to a more affordable loan product."If lenders, servicers, Wall Street, and policymakers allow the flood of subprime foreclosures to continue rising unchecked, years of economic progress in communities of color will be wiped out," NAACP Washington bureau director Hilary Shelton said. The Leadership Conference on Civil Rights, the National Fair Housing Alliance, the National Council of La Raza, and the Center for Responsible Lending joined the NAACP in calling for a moratorium. These groups contend that subprime lenders targeted minority communities with reckless and unaffordable adjustable-rate 2/28 mortgages, and now the borrowers are losing their homes on a massive scale. "Those responsible for these mortgages have a duty to fix the broken product they sold just like everyone else," CRL president Mike Calhoun said. "The industry must work quickly."

The U.S. attorney general has requested documents "generally relating" to builder Beazer Homes' mortgage business, the company said. "At this time, there have been no allegations of wrongdoing," Beazer said. "We are fully cooperating with this request and the U.S. attorney's office," the company added. Beazer said it believes the request "was fueled" by information published in the Charlotte Observer and BusinessWeek indicating that there is a federal investigation of the company in connection with alleged mortgage fraud. However, the company said that, based on its internal investigations to date, it has found "no evidence to support the allegations in these articles."

Beanstalk Networks LLC, the West Palm Beach, Fla.-based developer of OpenClose mortgage automation systems, has announced the release of License Cop, which allows lenders to electronically track the licenses of brokerage companies or loan originators.Beanstalk said administrators can configure License Cop in minutes to create rules that automatically "police" where loans can and can't be originated. License Cop verifies state origination authorization and license dates, then allows or denies origination accordingly. "The problem with some compliance functionality is that licensing isn't verified until after the loan has been originated," said OpenClose president Jason Regalbuto. ".... License Cop allows lenders to stop origination at the registration process. Once it's set up, it's completely automated." The company can be found online at http://www.openclose.com.

The Connecticut Department of Labor has confirmed that it has applied for an arrest warrant for the former president of Mortgage Lenders Network, Mitch Heffernan.The agency would like Mr. Heffernan -- who founded the now-defunct subprime lender -- to be charged with 61 counts of failing to pay wages to employees of MLN, which filed for bankruptcy protection last month. Although the warrant was placed about 10 days ago, the labor department has yet to hear from authorities on whether the warrant was obtained, said Gary Pechie, director of the department's wage and workplace division. "Prosecutors are very sensitive about this stuff," he said. "We don't call them, they call us. We're all just waiting now." The department expects to hear an update within the next few days, he said. Mr. Heffernan could not be reached for comment. MLN closed its wholesale division in late December. Some former MLN account executives have complained that they were not paid commissions owed to them.

Congress should examine the causes of foreclosures before rushing to judgment and prescribing new restrictions on lenders that could "unfairly curtail access to credit," according to the president of the National Association of Mortgage Brokers.The NAMB has been pushing for the Government Accountability Office to conduct a study on foreclosures, and the chairman of the House Financial Services Committee, Rep. Barney Frank, D-Mass., is expected to submit a request to the GAO. "No one questions the personal heartbreak of foreclosure or the serious effect this is having on America's cities," NAMB president Harry Dinham told a House Oversight and Government Reform subcommittee on March 21. However, there are a number of possible factors -- bankruptcy reform, credit card debt, low savings rates, and decreasing home values, as well as illness and other life events -- that could explain recent increases in foreclosures, he said.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., is calling on lenders, investors, and other stakeholders to work together to provide relief for subprime borrowers facing foreclosure."The solution to this problem may not be legislative," Sen. Dodd said at a hearing on the turmoil in the subprime market. "Instead, I intend to ask leaders from all the stakeholders -- regulators, investors, lenders, GSEs, FHA, and consumer advocates -- to come together and try to work out an efficient process for providing relief to homeowners." The subcommittee chairman accused the regulators of being "spectators" as lenders pushed unaffordable subprime loans. He said he plans to introduce a bill that "attacks" predatory lending. "We need to put a stop to abusive and unsustainable lending," he said. Sen. Dodd acknowledged that it will be "tough" to pass a predatory lending bill, but added that "we must try."