Compliance

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."

America's Community Bankers has dropped it long-standing opposition to a key provision in a GSE regulatory reform bill that raises Fannie Mae's and Freddie Mae's loan limit in high-cost areas."We are not endorsing it, we are not opposing it," ACB executive vice president Robert Davis told MortgageWire. ACB adopted this neutral stance over the winter, and it stands in sharp contrast to its previous efforts to protect the jumbo mortgage market from encroachment from the two government-sponsored enterprises. Mr. Davis would not explain the reasoning behind the change in policy. The House GSE bill (H.R. 1427) allows Fannie and Freddie to purchase loans in high-cost areas where the median sales price exceeds the $417,00 conforming-loan limit -- up to 150% of the conforming-loan limit or the median cost in that area, whichever is lower.

Regulators and legislators should not go too far in reining in so-called "toxic loans," the chairman of the Mortgage Bankers Association said at the group's nonprime conference.Some loan products that lawmakers at the state and federal levels are seeking to bridle are "valuable tools" that enable people with affordability problems to achieve homeownership, San Diego mortgage banker John Robbins said. He said the market is already adjusting to the overzealousness of some originators, and today's loans are "significantly more conservative." "The market is efficient," he said. "It has [moved] and always will move at lightning speed" compared with those who oversee it. Rather than curb the use of such loans, or make it all but impossible for borrowers to qualify for them, Mr. Robbins called on lawmakers to work with the industry in repairing a lending process that includes, among other things, 21 federal forms "written in complex legal language which those within the industry cannot explain, much less understand." He said that as part of the fix, the industry's compensation structure must be "realigned" so that commissions to loan officers, account executives, and mortgage brokers do not contain excessive fees or yield-spread premiums. During his keynote address, Mr. Robbins took particular umbrage at what he said are "irresponsible" statistics being used by the Center for Responsible Lending. He said 86% of all subprime borrowers are currently paying their notes on time.

Proposed federal underwriting guidance could create "questionable distinctions" between prime and subprime borrowers that would cut off credit to some subprime borrowers in the name of consumer protection, according to mortgage banking attorneys at K&L Gates."The natural consequence is that prime borrowers are encouraged, or at least permitted, by national housing policy to seek to finance the purchase of a home, but subprime borrowers are subjected to more rigid restrictions," the K&LG attorneys point out in an alert to clients. The proposed guidance would require lenders to underwrite adjustable-rate mortgages for subprime borrowers at the fully indexed rate, while prime borrowers would continue to qualify at the lower teaser rate. "The imposition of differing standards for subprime vs. non-subprime borrowers raises many concerns, not the least of which is that such a practice may result in a disparate impact on borrowers based upon categorizations protected under the fair lending laws," the alert says.

Securitizers of subprime mortgages will likely face some assignee liabilities under a predatory lending bill that House Financial Services Committee Chairman Barney Frank, D-Mass., plans to introduce in May."I do believe there has to be some assignee liability," Rep. Frank told the National Association of Mortgage Brokers Legislative Conference. He said he believes some level of liability is needed to prevent the origination and securitization of bad loans. "It is the best enforcement mechanism we could have," he said. It will also give regulators leverage to get securitizers to exercise forbearance when there are problems in the subprime market. Chairman Frank also said he will steer away from a suitability standard, which is favored by many consumer advocates, and focus on the ability of the borrower to repay the loan.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has invited the chief executives of five major lending companies, including New Century Mortgage Co., to testify at a March 22 hearing on the causes of the "subprime crisis."The CEOs of HSBC Mortgage Corp. USA, Countrywide Home Loans, WMC Mortgage Corp., and First Franklin Mortgage are also invited to explain their subprime lending practices to the committee. Sen. Dodd blames predatory and irresponsible lending practices for rising defaults and foreclosures on subprime loans. "At the very least, homeowners facing foreclosure deserve to know what factors contributed to their dire straits, and what steps are needed to fix this pressing problem," Sen. Dodd said.

New York Attorney General Andrew Cuomo said Thursday that his office is investigating subprime lenders whose customers have fallen behind on their payments at the highest rate in four years, according to a published report.The Washington Post reported that Mr. Cuomo -- a former housing secretary in the Clinton administration -- revealed the investigation during a news conference but did not offer any details. According to the Quarterly Data Report, subprime foreclosures totaled 3% at the end of December. The overall delinquency rate stood at 14.35%. A year ago the foreclosure rate was 2.13%, but delinquencies totaled 15.89%, the QDR found.

LECG Corp., a global expert services and strategic advisory firm based in Emeryville, Calif., has announced that its subsidiary LECG LLC has agreed to acquire the Secura Group LLC, a privately held consulting firm specializing in financial services and regulatory compliance.The terms of the agreement were not disclosed. Headquartered in Vienna, Va., Secura was established in 1986 by William Isaac, former chairman of the Federal Deposit Insurance Corp., LECG reported. Secura works with financial industry clients in numerous areas, such as fair-lending analysis; anti-money-laundering programs; compliance management; Community Reinvestment Act ratings; subprime lending issues; and Home Mortgage Compliance Act reviews.

Congress may have to act quickly to protect subprime borrowers who are in danger of losing their homes over the next 18 months, according to Senate Banking Committee Chairman Christopher J. Dodd, D-Conn."We may need to get some forbearance or something like that to give them a chance to work through their problems," Sen. Dodd told reporters after speaking to the National League of Cities. "Clearly we are looking at what we can do to help out." Before deciding whether predatory lending legislation is needed, the committee chairman told reporters he wants to see how the subprime securities market behaves and what actions federal and state regulators take to correct underwriting standards on subprime loans. If the regulators finally do a "good job" and the market is "working well," that may be enough, Sen. Dodd said.

The best way to "cure" the serious problems in the subprime market is to pass Federal Housing Administration reform legislation that will allow lower-income homebuyers to get safer and affordable loans, HUD Secretary Alfonso Jackson has told a congressional panel."All you have to do is read the news articles to recognize that New Century and others created serious problems in the subprime market," the secretary of the Department of Housing and Urban Development testified. The FHA single-family reform bill would give the agency more flexibility in setting mortgage insurance premiums and downpayment requirements so it can serve more subprime borrowers. "I am convinced that is the best way to save" those homeowners, Secretary Jackson said. The HUD secretary also told the House panel that discussions with industry groups could soon lead to a consensus on reform of the Real Estate Settlement Procedures Act. "I think we are pretty close," he said.

There is a consensus within the National Association of Hispanic Real Estate Professionals that mortgage wholesalers and brokers should be held accountable for the loans they originate, but the trade group is still in discussions on how to formulate a suitability standard."Clearly the lenders need to have more accountability with respect to the types of loans they deliver to consumers," said NAHREP executive committee member Gary Acosta. The San Diego mortgage broker noted that mortgage brokers and other lenders at the point of sale should be more accountable than wholesalers. But wholesalers have the ability to ensure that a loan has some "tangible benefit" for the consumer, Mr. Acosta said. Meanwhile, NAHREP released a survey at its annual legislative conference in Washington showing that 65% of its members are counseling homeowners who can no longer afford their house payments due to an upward adjusting mortgage. Large majorities of the 500 respondents favor capping mortgage broker compensation and eliminating lender incentives for making loans with prepayment penalties. Nearly 50% of the respondents said they are not aware of Fannie Mae's and Freddie Mac's community-based lending programs.