Compliance

A new GSE regulator could establish annual limits on the size and growth of Fannie Mae's and Freddie Mac's giant portfolios through a rulemaking process, according to James Lockhart, director of the Office of Federal Housing Enterprise Oversight.The OFHEO director told the National Economists Club that the $700 billion mortgage portfolios are too large and should be reduced gradually to a level the regulator determines is appropriate after weighing safety-and-soundness and systemic risk concerns. "If done properly, the reduction of the portfolios would be through a transparent rulemaking process," he said. And after a gradual reduction, the government-sponsored enterprises could "grow with the market," he added. The process Mr. Lockhart outlined reflects a proposal floated by Treasury Department officials to break a deadlock in the Senate over the issue of portfolio limits. No agreement on a GSE regulatory reform bill has been reached yet. "I believe the two sides are not very far apart at all," the OFHEO director said.

Members of minority groups constituted the fastest-growing segment of homebuyers obtaining new home-purchase mortgages in 2005, according to Genworth Mortgage Insurance and Compliance Technologies.In a report released at the Second Annual Mortgage Lending Industry Diversity and Emerging Markets Conference & Career Fair in Washington, conference co-sponsors Genworth and ComplianceTech said the percentage increase for minority loans in high-volume areas was three times greater than for white households in the top 20 metropolitan areas for mortgage growth. Using newly released Home Mortgage Disclosure Act data for 2005, the report ("The 2005 Minority Home Buying Surge") analyzes the change in minority home-purchase loans from 2004 to 2005 in 388 metro areas. "We are now witnessing the positive effects of the growth in immigrant households who want to own a piece of the American Dream," said Michael Taliefero, managing director of ComplianceTech, which prepared the report. "While immigration is part of the story, the lower homeownership rates among African-Americans and Hispanics represent pent-up mortgage demand that is starting to be filled." Genworth can be found online at http://www.genworth.com.

Interest-only and payment-option ARM lenders will have to qualify borrowers at the fully indexed rate with potential negative amortization added to the loan amount under final federal regulatory guidance issued Friday.Banking regulators rejected industry complaints that the new underwriting guidelines will be too restrictive. Under the mandate, payment-option adjustable-rate mortgage servicers must include in the monthly mortgage statement an "explanation" that if borrowers chooses the minimum monthly payment -- which many do -- it would increase their loan balance. "The regulators stuck to their guns," said Howard Glaser, a former Department of Housing and Urban Development attorney who runs a consulting practice. ".... It is rare for federal regulators to step in and regulate a specific product. They are doing so here out of concern that they need to protect both the borrower and the bank." According to the Alternative Products Quarterly Data Report, the largest option ARM lenders include Countrywide Home Loans, Washington Mutual, and Golden West, among others. The regulators also issued model consumer disclosures for IO and option ARM products for public comment.

Kirkpatrick & Lockhart Nicholson Graham LLP, which has a large mortgage banking and financial services practice, is in merger talks with a Seattle-based law firm that is focused on the technology industry.Preston Gates & Ellis and K&LNG are in "discussions aimed at a possible combination of their firms by year-end," the two companies said in a statement. Kirkpatrick & Lockhart merged with the London-based Nicholson Graham in January 2005.

The Office of Thrift Supervision Director John Reich has decided to bring the agency's Community Reinvestment Act requirements back in line with those of the other federal banking regulators, and the OTS will start a rulemaking process soon.Under former Director James Gilleran, the OTS expanded the small-bank CRA exemption to $1 billion and relaxed the community investment and services tests for larger institutions. The other banking regulators responded by creating a community development test to reduce the CRA burden on institutions with $250 million to $1 billion in assets. But they did not weaken the investment and services tests for larger banks. "Since joining OTS, I have come to appreciate that, in addition to effective community lending, thrifts continue to make investments and services that promote community development in all markets, particularly low- and moderate-income areas," Mr. Reich said. "Regardless of the rules, thrifts will continue to be leaders in key CRA activities."

Mortgage fraud resulted in losses of $545.9 million during the first half, and the losses are on track to outpace last year's total, according to newly released government figures.According to the Federal Bureau of Investigation, mortgage fraud losses totaled $1 billion in fiscal 2005, more than double that of the year before. Financial institutions engaged in mortgage activity filed close to 17,000 suspicious activity reports with the FBI during the first half. In 2005, 21,994 SARs were filed. (For more details, see the Oct. 2 issue of National Mortgage News.)

SouthStar Funding LLC has agreed to pay $500,000 to settle a complaint that its restrictive policies on funding row house loans discriminated against blacks and Hispanics.The Atlanta-based wholesaler has agreed, as part of the settlement worked out by HUD, to drop its policy of not funding loans on row houses in Baltimore and not funding row house loans in other areas when the property value is under $100,000. "SouthStar is pleased that it has reached a settlement with NCRC regarding the complaint [and] looks forward to working with NCRC to promote fair housing policies nationwide," said Toni Ward, SouthStar's vice president for compliance. The Department of Housing and Urban Development, which investigated the complaint filed by the National Community Reinvestment Coalition in March, is urging leaders to review their row house policies. "Our hope is that other mortgage companies will take note and examine their policies that impose similar restrictions," said HUD's assistant secretary for fair housing, Kim Kendrick. The NCRC has filed similar complaints against three other lenders with restrictive row house policies. SouthStar will pay $500,000 over four years to fund the NCRC's efforts to combat discrimination and educate housing counselors.

Rep. Spencer Bachus, R-Ala., plans to circulate a draft of a predatory lending bill soon, but he has clarified that the draft is not the product of a bipartisan agreement, although he hopes to reach such an agreement next year."The bill Congressman Bachus is drafting is simply his attempt at the next step in an ongoing process of reaching consensus on subprime lending legislation," a statement issued by Rep. Bachus' office says. The chairman of the financial institutions subcommittee held discussions with key Democratic members of the House Financial Services Committee earlier this year. However, Rep. Bachus issued the clarification after Democrats pointed out that they have not participated in the drafting and don't know what is in his bill. "Rep. Bachus has worked with us in good faith, and I look forward to continuing to do that next year," Rep. Brad Miller, D-N.C., said in an interview with MortgageWire. "But it is not the consensus or compromise bill at this point."

House Financial Services Committee members have come very close to reaching a bipartisan agreement on predatory lending legislation, and they plan to circulate a draft of the bill soon for discussion purposes and to set the stage for committee action next year."I think we are awfully close [to an agreement]," Rep. Spencer Bachus, R-Ala, told reporters. The chairman of the financial institutions subcommittee acknowledged that the bill would impose a suitability standard on lenders making mortgage loans, but declined to provide other details. Rep. Barney Frank, D-Mass., noted that some conservative Republicans have problems with the bill. But he said mainstream Republicans on the committee are "ready to make the deal." In separate interviews, Reps. Bachus and Frank said that no matter which political party controls the House after the November elections, a predatory lending bill will be on the committee's agenda next year.

Federal regulators on Wednesday criticized the residential finance industry for aggressively marketing "exotic" mortgages without making full disclosures on the payment shock associated with some of the loans.At a jam-packed hearing before the Senate Banking subcommittee on housing, Sandra Thompson of the Federal Deposit Insurance Corp. told elected officials that in the monthly mortgage statements they send out, some lenders encourage borrowers "to make the minimum payment," adding that payment-option adjustable-rate mortgage customers "are not getting enough information" early in the application process. Also on Wednesday, the Government Accountability Office issued a report on "alternative mortgage products" (exotics), saying that some recent borrowers now lack sufficient equity in their homes to refinance out of the loans. The report notes that in their advertisements, "some lenders and brokers emphasize the benefits of AMPs without explaining the risks associated." According to exclusive survey figures compiled by National Mortgage News and Alternative Products Quarterly Data Report, mortgage bankers funded $264 billion in option ARMs and interest-only loans in the second quarter, or 31% of all mortgages funded.

The risk that mortgage fraud will have an economic impact in vulnerable markets continues to rise at "an unprecedented rate," according to CoreLogic, a Sacramento, Calif.-based provider of mortgage risk assessment and fraud prevention systems.CoreLogic said its recently developed Core Mortgage Risk Monitor, which forecasts the most likely locations of fraud "hot spots" over the next 12 to 18 months, rose by 5% in the second quarter. The five U.S. markets currently most at risk are Detroit-Livonia-Dearborn, Mich.; Memphis; Dayton, Ohio; Akron, Ohio; and Gary, Ind. CoreLogic can be found on the Web at http://www.corelogic.com.

Differences between the House and the Senate on GSE portfolios and creating an affordable housing fund are not "unbridgeable," and an agreement on GSE regulatory reform is possible, according to House Financial Services Committee Chairman Michael Oxley."It would be shame after all our hard work … if we couldn't get the bill to the president's desk," the Ohio Republican told a National Association of Federal Credit Union legislative conference. It is "encouraging" that the Treasury Department and the White House have moved off their insistence on strict portfolio limits, Rep. Oxley told reporters after his NAFCU speech. And he indicated that negotiations between House and Senate banking committee leaders are continuing. Rep. Paul Kanjorski, D-Pa., also expressed optimism that an agreement on a government-sponsored enterprise bill could be worked out by the end of September so that Congress could come back in November and pass it. "It would be almost sinful not to get a new regulatory regime put together," Rep. Kanjorski said.

Office of Thrift Supervision Director John Reich broke ranks with his fellow regulators Sept. 14 over proposed guidance on commercial real estate lending and warned at a congressional hearing that banks and thrifts might view the concentration thresholds as caps and limit their CRE lending.The OTS director testified that he supports issuing guidance to raise awareness that high concentrations of CRE loans need to be effectively managed, but not with the threshold numbers. "I do have a concern that they will view them as limits and caps," Mr. Reich said. Multifamily and commercial property loans (plus land, development, and construction loans) that exceed 300% of equity capital would be considered a high concentration under the proposed guidance. Residential and commercial ADC loans that exceed 100% of equity capital would also be considered a high concentration. The OTS director told the panel that it is "inappropriate" to lump multifamily loans with shopping mall and office building loans in determining high concentrations of CRE loans. FDIC Chairman Sheila Bair testified that the guidance will emphasize that the "stated thresholds are not limits" and will recognize that different property types have different risk characteristics.

Federal banking regulators and mortgage banking professionals will have their say on "exotic" mortgages on Sept. 20 when two Senate Banking subcommittees host a joint hearing on the hot new products.The subcommittees on housing and on economic policy have invited five federal banking regulators to testify, as well as representatives from lending, mortgage insurance, and consumers groups. The hearing comes just as banking regulators are trying to finalize guidance that would strengthen underwriting and improve consumer disclosures on interest-only loans and payment-option adjustable-rate mortgages. Federal regulators are close to agreeing on IO and option ARM guidance, but are hung up on how to treat negative amortization and whether it should be added to the principal amount of an option ARM for purposes of qualifying a borrower. Mortgage lenders originated $83.3 billion in option ARMs in the second quarter, which accounted for almost one in 10 of residential loans funded, according to survey figures compiled by National Mortgage News and the Alternative Products Quarterly Data Report.

Roughly 18% of the mortgage bankers and mortgage brokers in New York state have not yet paid their general assessment and are in immediate suspension, according to a New York Banking Department official who addressed the New York Association of Mortgage Brokers convention in Melville, N.Y.If the bill, plus a $100 late fee, is not paid by Oct. 10, the registration is considered to be expired, and if it is not paid by Dec. 10, the expiration is considered permanent, said Robert A. Mengani, assistant deputy superintendent of banks in the department's mortgage banking division. The department is seeing an increasing number of violations of advertising regulations, which Mr. Mengani attributed to the shrinking mortgage origination market. A particular problem involves materials using the words "United States of America" or having a picture of the Statue of Liberty, which are protected words and images. Violators open themselves up to a $15,000 fine and must send out retraction letters, he said.

After a 20-year wait, a mortgage originator education bill is awaiting the signature of New York Gov. George Pataki, the outgoing president of the New York Association of Mortgage Brokers announced Thursday at the group's annual convention in Melville, N.Y.The NYAMB executive, Don Romano, said the bill also requires that originators who work for any state-regulated entity, including mortgage bankers and state-chartered banks and thrifts, be registered and that the background check be performed by the New York Banking Department. As for specifics, Mr. Romano said there are no rules established for the law, which would go into effect on Jan. 1, 2007, although implementation would be one year later. But among the people who would have to be registered is "anyone with direct contact with the consumer," he said. The law establishes an even playing field among state-regulated entities, and "it is going to be a plus for us" in competing with federally chartered entities, Mr. Romano said. The NYAMB is going to push the idea that, by dealing with a mortgage broker, a consumer is dealing with someone who is regulated by a local authority, he said.

Originations of Federal Housing Administration reverse mortgages are on a tear this year, but lenders are worried that election politics could lead to a shutdown in the first quarter and disrupt the program designed to help seniors tap the equity in their homes.Lenders are expected to bump up against a cap on FHA home equity conversion mortgages by February or March, according to the National Reverse Mortgage Lenders Association. "We are very nervous," said NRMLA president Peter Bell. "Lifting the cap is a do-or-die issue for the HECM business." The House has passed a bill, sponsored by Rep. Michael Fitzpatrick, R-Pa., that eliminates a 250,000-loan cap on the number of HECM loans the FHA can insure. But the Senate has not acted on the Fitzpatrick bill (H.R. 2892) or a similar bill introduced by Sen. Rick Santorum, R-Pa. "We are anxious to see the Senate move before they adjourn before the election," Mr. Bell said. With political control of the House and the Senate up for grabs, "who knows what will happen after the election?" he added.

One week after facing withering congressional criticism, Federal Housing Finance Board Chairman Ronald Rosenfeld dropped several hints at a board meeting that he plans to move ahead and finalize a controversial capital rule that would require the Federal Home Loan Banks to increase their retained earnings.Republican and Democratic members of the House Financial Services Committee urged Mr. Rosenfeld to withdraw the capital rule at a Sept. 7 hearing. But the Finance Board chairman seemed unfazed at the board's meeting this week and commented that a meeting to finalize the capital rule would probably be a very long session due to the number of comment letters the proposal generated. In acknowledging former director Franz Leichter's contributions to the agency and the capital rule, Mr. Rosenfeld said the final rule "will have your fingerprints on it." At the Sept. 13 meeting, the Finance Board approved a final rule to streamline the affordable housing program and establish new rules for FHLBanks to approve and fund out-of-district housing projects. The board also agreed to issue a proposed rule for a 30-day comment period that creates an examiner rating system for FHLBanks. The Finance Board can be found online at http://www.fhfb.gov.

The risk that mortgage fraud will have a harmful economic impact in vulnerable markets is rising at an "unprecedented" rate, according to CoreLogic, a Sacramento, Calif.-based provider of fraud prevention technology and services to the mortgage industry.CoreLogic reported that its Core Mortgage Risk Monitor rose 5% in the second quarter after increasing 6.4% in the first quarter. The five major metropolitan statistical areas most at risk, according to the index, are Detroit-Livonia-Dearborn, Mich.; Memphis, Tenn.-Miss.-Ark.; Dayton, Ohio; Akron, Ohio; and Gary, Ind. The index measures collateral risk, which is "the risk associated with the accuracy of a residential property valuation and the sustainability of that valuation over the life of the mortgage due to the unique characteristics of the property, market, and mortgage contract participants," CoreLogic said. The company can be found on the Web at http://www.corelogic.com.

The first enforcement actions relating to investigations into the pricing of 2004 subprime loans could be announced in the next three to six months, according to industry attorney Andrew Sandler."I would expect over the course of the next three to six months there will be at least several consent decrees or lawsuits by federal enforcement agencies and/or state attorneys general involving mortgage loan pricing that reflect the conclusion of investigations related to 2004 HMDA data," Mr. Sandler told MortgageWire. The release of 2004 Home Mortgage Disclosure Act loan pricing data last year initiated investigations and special exams of nearly 200 banks and mortgage companies for possible discriminatory pricing practices. Investigations by the Department of Justice, the Federal Trade Commission, the Department of Housing and Urban Development, federal banking regulators, and state AGs can take up to two years. Mr. Sandler, a partner in the Washington office of Skadden Arps, indicated that additional enforcement actions are possible. Based on the newly released 2005 HMDA data, the Federal Reserve Board referred 270 lenders to their primary regulators for further fair-lending reviews. A Fed spokeswoman said there is a lot of overlap between lenders on the 2004 list and the 270 lenders on the 2005 list.