Compliance

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.

Key senators and consumer groups are urging Congress to wait for a Government Accountability Office study before taking legislative action on Federal Housing Administration reforms -- but don't expect the study to be completed anytime soon."We haven't received the formal request, and we haven't initiated anything," a GAO official said. A spokesman for the Senate Banking Committee said a letter requesting the report would be sent to the GAO by the end of the week. At a June 20 hearing, Sen. Wayne Allard, R-Colo., said he is asking the GAO to conduct a study on the Bush administration's FHA single-family reform proposals and wants the GAO to recommend the "most viable options FHA can pursue to serve additional low-income and first-time homebuyers." Senate Banking Committee Chairman Richard Shelby, R-Ala., recently urged Senate appropriators not to include the FHA reforms in a Department of Housing and Urban Development appropriations bill, and FHA reform was kept out of the bill. "We have commissioned a study by GAO to examine the implications of the reform proposal," Sen. Shelby said in a July 17 letter. "We believe that it would be premature to legislate without this additional information."

The Securities and Exchange Commission has launched an inquiry of a senior executive of Bayview Financial, Miami, who is accused of altering loan credit data that affected his sales commissions.A top official at Bayview told MortgageWire that the event "is not material" from a financial standpoint and said the company is cooperating fully with the SEC. The official said the executive in question -- who is described in SEC documents as a "senior salesperson, managing director and limited partner of the firm" -- has been fired. The official said the executive "had been manipulating data for years." Bayview says the salesman's actions -- which entailed altering FICO scores -- have caused the privately held firm to repurchase or substitute $66 million in residential loans, or about 3% of its book of business. Bayview Financial pools mortgages and then packages the loans into mortgage-backed securities. On July 14 Bayview received a letter from the SEC indicating that its staff had launched an inquiry into the matter.

Treasury Secretary Henry Paulson wants his team to develop a debt approval process that would allow his department to stop Fannie Mae and Freddie Mac from financing the growth of their portfolios, according to a Treasury official.The secretary has "instructed us to ensure that the mechanics of our debt approval process are robust enough to give Treasury the practical option of limiting the GSEs' debt issuance in accordance with our statutory authority, should that become necessary," Treasury Under Secretary Randal Quarles told a Reuters panel on government-sponsored enterprise reform on July 19. Mr. Quarles told reporters that the Treasury is still reviewing its approval process for GSE debt issuance and just had its first meeting with Fannie and Freddie executives. "There are a lot of issues that need to be thought through" before there is a "decision as to whether or not this is something we want to do," the Treasury official said. He stressed that Secretary Paulson would prefer a legislative solution to reducing Fannie's and Freddie's giant portfolios. It appears that the new Treasury secretary will wait to see whether Congress can pass a GSE regulatory reform bill before deciding whether he wants to take the next step.

Senate appropriators have put off a decision on FHA single-family reforms advocated by the Bush administration until they go to conference with the House on a Department of Housing and Urban Development appropriations bill."We will look at it in conference," a Senate staffer said. The senators don't want to go into conference with the Federal Housing Administration reforms "when there are significant issues that still need to be discussed," he said. Sen. Christopher Bond, R-Mo., the chairman of a Senate Appropriations subcommittee, and Senate Banking Committee Chairman Richard Shelby, R-Ala., harbor serious concerns about the FHA reforms, which would raise FHA loan limits and allow the FHA to charge risk-based insurance premiums and offer zero-downpayment loans. The House has already passed a HUD appropriations bill with the FHA reforms. But Sen. Bond's subcommittee approved a HUD appropriations bill July 18 that eliminates a loan cap on FHA reverse mortgages but does not include the FHA single-family reforms.

HUD General Counsel Keith Gottfried is working on a compliance assistance process that would allow lenders and settlement service providers to seek legal guidance on Real Estate Settlement Procedures Act issues."We want the industry to be innovative, and they can't be innovative if they have to worry about an enforcement action," Mr. Gottfried said in an interview. The general counsel is drafting a proposed rule that will allow the Department of Housing and Urban Development to issue no-action letters -- signaling that the department will not take enforcement actions against a company that is trying to make the homebuying process more transparent and less burdensome. "I have already drafted about 24 pages of this regulation," he said, and it is being circulated within the department. HUD has to start acting more like a regulatory agency, he said, by putting out guidance, staff bulletins, and interpretations on a timely basis. Besides RESPA, compliance assistance would be provided on fair housing, public housing, and other issues under HUD's jurisdiction.

A proposed rule by the Federal Housing Finance Board would not improve the current regulatory capital framework, and it would make Federal Home Loan Bank membership less attractive, according to Standard & Poor's.The capital proposal to restrict excess stock would "pose a severe limitation" on the FHLBanks' ability to deliver low-cost advances to their members and to provide them with an attractive dividend on their stock, S&P says in a research paper. The Finance Board's proposal would end the practice of paying dividends in the form of excess stock and would mandate a high level of retained earnings. "Should this proposed regulation be adopted as it is currently written, Standard & Poor's will have to monitor any negative impacts to the liquidity profile of the individual banks, core business dynamics, and membership trends," S&P says. The rating agency can be found online at http://www.standardandpoors.com.

Freddie Mac has announced that it is now in compliance with the Federal Reserve Board's revised Payments System Risk policy, ahead of the July 20 implementation deadline.In September 2004, the Fed revised its daylight credit policies for payments into the Fedwire system, effective July 20, 2006. (Fedwire handles all the interest and redemption payments on securities guaranteed by Freddie and Fannie Mae.) The revised policy requires Freddie Mac to fully fund its accounts in the system to the extent necessary to cover payments on its debt-and mortgage-related securities each day. Freddie said it began testing its new business practices in April 2006, and has implemented a strategy that aims to fully fund the company's daily payment obligations by 11 a.m. ET.

The Office of Federal Housing Enterprise Oversight has placed the expansion of Fannie Mae's acquisition, development, and construction lending program on hold, the company's chief executive has told MortgageWire.Fannie president and CEO Daniel Mudd said OFHEO raised concerns about the adequacy of the ADC program's controls and processes, and he agreed to make improvements. Once OFHEO is satisfied that Fannie Mae has "the right routines and controls in place, we will expand the ADC program," Mr. Mudd said in an interview. At a homebuilders' conference in January, Mr. Mudd announced plans to expand the ADC pilot program and purchase $10 billion in ADC loans over 10 years. Mr. Mudd characterized his company's relationship with OFHEO as "positive" and "challenging" during the interview. "I would put them in the tough-but-fair category," he said.

Treasury officials are starting direct talks with Fannie Mae, Freddie Mac, and the Federal Home Loan Banks regarding the Treasury Department's process for approving the issuance of debt by the three government-sponsored enterprises.Senior level meetings are scheduled for the weeks of July 10 and July 17 with executives of Fannie, Freddie, and the Office of Finance, which issues consolidated debt obligations for the 12 FHLBanks. The meetings were first reported by the Wall Street Journal. Treasury Under Secretary Randal Quarles served notice four weeks ago that the automatic approval of GSE debt issuance is under review in light of the accounting scandals at Fannie Mae and Freddie Mac and problems with their accounting systems, risk management, and internal controls. Fannie and Freddie issue corporate debt mainly to finance their giant mortgage portfolios, which have $1.45 trillion in assets combined. The Bush administration supports legislation to reduce those portfolios. Limiting their debt issuance could effectively reduce or cap the portfolios. The FHLBanks issue debt mainly to finance loans to their member banks and thrifts.

In a big win for lenders, the Louisiana Recovery Authority has decided that assistance grants going to homeowners with hurricane-damaged properties should be placed in escrow accounts."Compensation to the homeowners with mortgages will be disbursed at closing directly to an escrow account with the homeowner's lender," LRA spokeswoman Catherine Heitman told MortgageWire. Mortgage lenders and servicers have urged Louisiana and Mississippi to require escrow accounts as a way to ensure that the Community Development Block Grant funds appropriated by Congress are used for repairs and rebuilding. Mississippi decided to disburse the grant assistance directly to homeowners. Louisiana is going with escrow accounts. "We want the money to be used to rebuild and repair homes," Ms. Heitman said. LRA officials are still discussing whether homeowners who own their homes outright and don't have a mortgage should be required to have escrow accounts. About 120,000 Louisiana residents are expected to receive assistance grants.