Compliance

The Federal Housing Finance Board is considering changes to its capital proposal that would make it less onerous and difficult for the Federal Home Loan Banks to come into compliance with new retained earnings requirements."Some commentators made valid points [in comment letters]," FHFB Chairman Ronald Rosenfeld told a congressional panel. "There is room for movement on several important issues." Since the 12 FHLBanks are well capitalized, many questioned the need for a 50% dividend payout limit while the FHLBanks raise their retained earnings to meet the proposed minimum requirement of $50 million plus 1% of non-advance assets. "That is a constructive observation, and we should consider a higher dividend payout ratio, which would extend the time for the FHLBanks to reach the retained earnings minimum," Mr. Rosenfeld said. Many members of the House Finance Services Committee urged the FHFB chairman to withdraw the proposed rule, contending that it would harm the FHLBanks and their affordable housing programs. But Mr. Rosenfeld did not give any indication that he would back down.

Federal banking regulators are seeking comment on whether the largest banks in the United States should have the option of adopting a "standardized," or less complex, Basel II risk-based capital standard.During the summer, several banks and their trade groups urged the regulators to give U.S. banks the option of adopting the standardized approach, which is more advanced than the current Basel I standard and includes more risk buckets for mortgages and other assets. The standardized approach also takes into account securitization risks and wholesale lending commitments, and encourages banks to obtain guarantees and derivatives to mitigate credit risk. Comptroller of the Currency John Dugan noted that the largest foreign banks have the option of implementing the standardized approach or the Basel II approach, which is based on internal risk models. "To ensure that all the interested parties have an opportunity to comment on this fundamentally important issue, the agencies added the question to the Basel II preamble," Mr. Dugan told a Federal Deposit Insurance Corp. board meeting. The FDIC board voted 5-0 to issue the Basel II proposal with the standardization question for a 120-day comment period.

The National Association of Realtors is urging the U.S. Supreme Court to stop the Office of the Comptroller of the Currency from blocking the states from regulating the mortgage subsidiaries of national banks.The comptroller's actions are "unlawful" because they pre-empt state authorities from regulating operating subsidiaries that are incorporated under state law, the NAR says in a brief filed with the Supreme Court. The high court is slated to hear arguments this fall in a case (Watters v. Wachovia Bank) in which the Michigan banking commissioner Linda Watters has been blocked by federal courts from regulating and examining Wachovia Mortgage Corp., which operates in Michigan as a subsidiary of Wachovia Bank NA, Charlotte, N.C. The OCC contends that operating subsidiaries can engage in the same activities as the parent national bank and are exempt from state licensing and consumer protection regulations. But the Realtors argue that the OCC has "overstepped its boundaries" to give national banks a competitive advantage over state-licensed lenders. The NAR has been lobbying Congress for several years to keep national banks from entering the real estate brokerage business.

Interthinx, an Agoura Hills, Calif.-based ISO business that provides fraud detection and compliance tools for the mortgage industry, has announced ISO's acquisition of the Domus System, which provides automated compliance services to the affordable housing industry.The terms of the transaction were not disclosed. The Domus System collects, maintains, and reports on resident and property data electronically. "The affordable housing industry has a tremendous need for accurate and timely compliance reporting," said KC West, president of Domus Systems Inc. "Combining the fraud detection capabilities of Interthinx with the electronic data collection services of the Domus System will deliver a more robust automated compliance and reporting tool to our customers." ISO, Jersey City, N.J., is a provider of products and services that help measure, manage, and reduce risk. The companies can be found online at http://www.interthinx.com, http://www.iso.com, and http://www.domussystems.com.

Fannie Mae and Freddie Mac should expect to be the subject of special and targeted exams as the Office of Federal Housing Enterprise Oversight looks for emerging problems and continues to monitor the GSEs' efforts to put their houses in order, according to OFHEO's proposed strategic plan.OFHEO plans to "perform targeted examinations that explore areas of concern in a more-in-depth and focused way, pursuing higher risk issues arising from ongoing examinations," the proposed plan says. The comment period ends Sept. 13. The 24-page strategic plan also puts special emphasis on validating the information OFHEO receives from the two government-sponsored enterprises and developing a meaningful risk-based capital standard -- along with "additional measures of capital adequacy, which may require legislation." OFHEO Director James Lockhart also wants the agency's researchers and analysts to focus on key policy issues, such as the implications of loan-limit changes and GSE market share.

GMAC-RFC has picked LoanIQ from First American Real Estate Solutions as its collateral risk-mitigation tool.LoanIQ deals with collateral fraud, considered the most damaging form because it creates actual dollar losses. Using a predictive model based on actual "bad loan" cases, LoanIQ provides two scores to help GMAC-RFC and other lenders fast-track low-risk loans through the system while flagging high-risk loans for further examination, First American RES said. FBI statistics show that mortgage fraud losses more than doubled in 2005, from $429 million in 2004 to more than $1 billion, the company reported. GMAC-RFC will incorporate LoanIQ into its existing collateral risk-mitigation system. The companies can be found online at http://www.gmacrfc.com and http://www.firstamres.com.

Despite real efforts by servicers of U.S. residential mortgage-backed securities, complying with the minimum servicing requirements of Regulation AB will "remain a challenge" in the first year of the law, according to a report by Fitch Ratings.Each party in the servicing function is required to provide, by March 31, 2007, both an assessment report on its compliance with Reg AB and an attestation report from a public accounting firm to concur with the servicer's assessment. More parties are now subject to reporting on "previously untested" Reg AB servicing criteria, which could cause delays and restatement of noncompliant servicer reports, according to Thomas Crowe, a Fitch director. "Many servicers are still developing the attestation programs for themselves and other relevant parties, and determining additional reporting requirements," Mr. Crowe said, adding that many are still consulting with accounting and law firms on the requirements. Fitch can be found online at website at http://www.fitchratings.com.

House Financial Services Committee Chairman Michael Oxley, R-Ohio, is urging the new Treasury secretary to make a last-ditch effort to secure a compromise that will speed passage of GSE regulatory reform in the Senate.In a letter to Secretary Henry Paulson, the committee chairman stresses that time is quickly running out for legislative action this year and that there has been no news of progress on the Senate side. "I would urge you to continue to seek a strong compromise and Senate action," Rep. Oxley says in the Aug. 30 letter. The House passed a bill to create a new regulatory agency to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks last fall. "It is the strongest reform legislation that will ever pass the House, absent a conference report," Rep. Oxley said, signaling that he is willing to consider changes passed by the Senate. Congress returns Sept. 5 for a short legislative session before the lawmakers adjourn for the mid-term elections.

Tighter underwriting standards on subprime loans could have a greater impact on reducing foreclosures than banning prepayment penalties and balloon loans and other so-called predatory lending practices, according to a study by the Office of the Comptroller of the Currency.OCC researchers discovered a strong correlation between high foreclosures and refinanced loans with no- and low-document features, which they equated with "loose" lending practices. The study of foreclosures in Chicago did not find the same correlation on subprime loans with balloons or prepayment penalties (36 months or longer) or on no- or low-doc purchase loans. The OCC researchers maintain that underwriting practices that ensure borrowers can repay their loan represent a more effective approach to preventing foreclosures than "blanket" prohibitions on certain lending practices. This approach is also consistent with the proposed guidance on interest-only and payment-option mortgages, according to the study. Federal banking regulators are expected to finalize the guidance this fall.

KB Home has been notified by the Los Angeles regional office of the Securities and Exchange Commission that the SEC will conduct an informal inquiry into the Los Angeles-based homebuilder's stock option grants, according to the company.KB Home said it has informed the SEC of the status of an internal review by a committee of its board of directors in conjunction with outside legal counsel. The company said it "intends to cooperate fully" with the inquiry. KB Home also announced that three shareholder derivative suits have been filed in the past two months against the company and certain of its directors and officers. "The suits generally allege breach of fiduciary duty in connection with the company's stock option grants," KB Home reported. The company said it is evaluating the suits and does not intend to comment on them other than through the filing of responses in court. KB Home can be found online at http://www.kbhome.com.

A recent survey found that mortgage lenders believe that the Department of Housing and Urban Development is "too quick" to require indemnification on FHA loans that go bad, but the chief auditor at HUD's Office of Inspector General says the agency has "backed off" and modified its policies."We are doing less and less indemnifications now," Deputy Assistant IG Robert Gwin told MortgageWire. In the past eight months, the HUD IG has reached numerous agreements with Federal Housing Administration officials regarding what underwriting and compliance issues trigger indemnification -- where the lender has to cover any losses on a loan. "Things we were asking for indemnification a year ago, we are not doing now," Mr. Gwin said in an interview. A Mortgage Bankers Association survey found that two-thirds of lenders felt they were more likely to have to indemnify an FHA loan than to repurchase a non-FHA loan.

The Consumer Mortgage Coalition is raising a red flag about a HUD proposal to prevent Fannie Mae and Freddie Mac from getting affordable housing credit for loans with predatory features.The Department of Housing and Urban Development has proposed an expedited process for listing new terms and practices that it considers abusive. But the CMC says it is very concerned that the lack of checks and balances could hurt all affordable housing lending. "Any expansion of the list of unacceptable terms or required practices requires careful consideration," CMC executive director Anne Canfield says in a comment letter. Ms. Canfield noted that federal banking regulators considered but decided against creating a list of loan terms and practices that could lead to the denial of Community Reinvestment Act credit. If HUD moves ahead with its rule, the CMA recommends the creation of a "safe harbor" so Fannie and Freddie are not penalized for purchasing CRA loans.

Fraud "comes in many forms and has been around for some time," National Association of Mortgage Brokers president Harry Dinham told attendees Aug. 3 at the California Association of Mortgage Brokers annual convention.In his speech in San Jose, Mr. Dinham referred to someone at the recent Florida Association of Mortgage Brokers convention who said it is a lot easier to commit mortgage fraud the second time than the first. "I agree. And his words have been replaying in my mind since then," Mr. Dinham said. "So how do we stop fraud from happening the first time? The only way to combat mortgage fraud is to strengthen and enforce existing laws and educate our broker members and consumers on the best ways to avoid this serious problem." The last thing the industry needs is more regulation, he said, given that enforcement of current laws is underfunded.

Despite tremendous growth in the number of real estate licensees in California, the staff for the state Department of Real Estate has dropped dramatically, according to Real Estate Commissioner Jeff Davi.Speaking at the California Association of Mortgage Brokers annual convention in San Jose, Mr. Davi said there are now 510,000 real estate licensees in the state. Under the current regulatory scheme, many mortgage brokers are licensed as real estate agents. With the turn in the real estate market, the department is expecting to deal with an increase in phone calls and complaints, Mr. Davi said. The department does not do random audits -- any audits it conducts are based on complaints from consumers or competitors. Right now the DRE has 303 employees, but the department has persuaded the legislature and the governor to allow it to hire 38 more, he said. All the new employees will be dedicated to enforcement.

Two Louisiana senators are blocking Senate passage of a flood insurance reform bill because they are concerned that proposed increases in flood insurance premiums would be too expensive for their constituents.Sen. Mary Landrieu, a Democrat, and Sen. David Vitter, a Republican, placed the hold on the flood bill that Senate leaders wanted to pass this week by unanimous consent. Adam Sharp, a spokesman for Sen. Landrieu, said, "One of the main goals is to make the program more affordable for our constituents." The flood insurance bill (S. 3589), which was approved by the Senate Banking Committee by a 20-0 vote, could raise premiums by up to 25% a year. Committee spokesman Andrew Gray said efforts are being made to address the senators' concerns. But he noted that time is short. The Senate is expected to adjourn at the end of this week for its August recess. The flood insurance program is "broken," Mr. Gray said. "We need to have strong reforms and put the program on a more actuarially sound basis."

The Federal Housing Finance Board is signaling that it may give the Federal Home Loan Banks more time to build up their retained earnings so they won't have to cut their stock dividends by 50%.Finance Board Chairman Ronald Rosenfeld revealed the possible change in response to a congressional inquiry about proposed capital revisions that have sparked widespread opposition from FHLBank members. "Our regulation should not materially alter the value of membership in an FHLBank," Mr. Rosenfeld says in a July 26 letter. "For example, the time allowed each Bank to reach its required level of retained earnings must reflect the need for each Bank to offer value to its members, including members' expectations of a reasonable dividend yield on their investments in the Bank." The letter is addressed to House Financial Services Committee Chairman Michael Oxley, R-Ohio, and Rep. Barney Frank, D-Mass. As originally proposed, the 12 FHLBanks would have three years to meet the new retained earnings requirement, and during that transition period dividends could be cut by 50%.

President Bush is calling on the Senate to pass a Federal Housing Administration modernization bill that the House passed July 25 by a resounding 415-7 vote."This bill will improve FHA's ability to help lower- and moderate-income families achieve the American Dream," President Bush said. "I encourage the Senate to join the House and pass this critical legislation." The FHA reform bill (H.R. 5121) would give the FHA single-family mortgage insurance program the flexibility to charge risk-based premiums on low and zero-downpayment loans. It also raises FHA loan limits and expands the FHA reverse-mortgage program for seniors. In the Senate, the FHA reforms have gone nowhere. Banking Committee Chairman Richard Shelby, R-Ala, has asked the Government Accountability Office to conduct a study of the administration's FHA reform proposals, which FHA supporters consider a delaying tactic. "We realize that FHA is in need of reform," Senate Banking Committee spokesman Andrew Gray said. But he noted that Chairman Shelby doesn't have a timeline for committee action. When asked about the GAO study, Mr. Gray said completion of the study is not "necessarily a prerequisite" for legislative action. "But we would like that information," he added.

The House has passed a bill by a 412-4 vote that revamps the Federal Housing Administration program for manufactured housing loans and makes this form of affordable housing lending more attractive to lenders.The bill (H.R. 4804) authorizes the FHA to insure individual manufactured housing loans, but the lender is on the hook for 10% of losses. Currently, the FHA provides pool insurance for these house-only loans, which are not secured by real estate. FHA Commissioner Brian Montgomery said the "outdated and problematic" pool insurance forced Ginnie Mae to stop securitizing manufactured housing loans in the early 1990s. Ginnie officials have indicated that they would reconsider MH loans if Congress passes an acceptable bill. The average cost of a manufactured home was $58,000 in 2004. About two-thirds of manufactured homes are placed on a relative's or the owner's property, and the other third are on placed on leased lots. Sen. Wayne Allard, R-Colo., has sponsored a similar FHA manufactured housing bill in the Senate.

By a 415-7 vote, the House has passed a bill to reform the Federal Housing Administration single-family program so that it can be competitive again and serve its traditional borrowers, who are being steered into subprime loans.The House vote is largely symbolic because the real fight over the FHA reforms, which the Bush administration supports, will occur during a House and Senate conference on the HUD appropriations bill, which has already cleared the House. However, the House vote certainly increases pressure on Senate appropriators to include key FHA reforms in the Department of Housing and Urban Development appropriations bill. The vote shows that an overwhelming number of House members understand that the FHA can be a "benefit for their low- and moderate-income constituents," FHA Commissioner Brian Montgomery said. With the flexibility to charge risk-based premiums and offer zero-downpayment loans, the FHA can provide credit-impaired borrowers a safer and lower-cost alternative to conventional subprime loans, the commissioner said. "We think we have a pretty good argument," the commissioner said.

Consumers groups are opposed to allowing the Federal Housing Administration to charge risk-based insurance premiums, and they supported a decision by Senate appropriators to keep FHA reforms out of a HUD budget bill.The Consumer Federation of America, ACORN, the National Community Reinvestment Coalition, and five other consumer groups signed the joint letter complaining that the FHA reforms would force consumers with lower credit scores to pay more for FHA single-family loans. "We are concerned that customers priced out of the FHA market may have no other choice but to turn to subprime loans, and fear that some may fall victim of predatory lenders that operate in this market," the July 17 letter says. The letter is addressed to Sen. Christopher Bond, R-Mo., chairman of the Senate Appropriations subcommittee that oversees the Department of Housing and Urban Development's budget bill. The Senate Appropriations Committee approved a HUD budget bill last week without including FHA reforms requested by the Bush administration and housing industry groups. NCRC vice president Josh Silver noted that subprime lenders use risk-based pricing. "We think FHA should continue its role as offering an alternative to subprime lending and thereby increasing the competitive pressure on subprime lenders to lower their prices," he said.