Compliance

The loss of qualifying special-purpose entity status would have a potentially "catastrophic" impact on the commercial mortgage securitization business, according to Rick Jones, a lawyer with Dechert LLP, an international law firm.Moderating a panel session at the Commercial Mortgage Securities Association's annual convention in New York, Mr. Jones said that, if a vehicle is not considered a QSPE, the entities deemed to be primary beneficiaries of the securitization vehicle would have to consolidate the loans on their balance sheets. This could result in, say, $50 billion of assets and liabilities on their balance sheets that were not there before, Mr. Jones said. In this case, "why would they securitize if they didn't make money?" he asked. According to Mr. Jones, the accountants "don't understand these issues" and are on a "steep learning curve." Lee Cotton of ARCap REIT, a "B-piece" player, said an industry group is also working with the "powers that be" in Washington to persuade them that what the industry has been doing fits in with standards set by Statement No. 140 of the Financial Accounting Standards Board. According to Mr. Cotton, if B-piece buyers had to consolidate the loans, it would make their balance sheets "totally unreadable" and not helpful to investors. Dechert can be found online at http://www.dechert.com.

Securities and Exchange Commission Chairman Christopher Cox says the New York Stock Exchange should put a time limit on Fannie Mae's exemption from having its stock delisted because he doesn't want the GSE's exemption to become permanent."I am not trying to force a delisting," but there should be a penalty for not completing a restatement in a timely manner, Chairman Cox told the Senate Banking Committee. The chairman said the NYSE should reconsider Fannie's special exemption in light of the report by the Office of Federal Housing Enterprise Oversight documenting massive financial fraud at the government-sponsored enterprise. "I want to inform the committee that we have encouraged the New York Stock Exchange to amend its rule to put an expiration date on this exception, so that Fannie Mae -- and its investors -- understand that we expect Fannie Mae, like any other listed company, to remain in full compliance with the NYSE's listing standards," he said. Mr. Cox also called on Congress to mandate that Fannie Mae and Freddie Mac become SEC registrants and be forced to comply with all commission reporting requirements. According to testimony by Fannie Mae president and chief executive Daniel Mudd, Fannie Mae will complete its restatement by the end of this year.

LandAmerica Financial Group Inc., Richmond, Va., has announced the acquisition of MSTD Inc., a Baltimore-based provider of Web-based technology to the mortgage servicing industry.MSTD is an application service provider whose flagship product, BackInTheBlack, combines rules-based decision engines with embedded workflows and integration of all third-party providers and services used by lenders managing delinquent loans. "Our default management clients are increasingly challenged with delinquencies and foreclosures, as well as with an increased focus on regulatory compliance and loss litigation," said Albert V. Will, executive vice president of lender services for LandAmerica. "Blending the capabilities of LandAmerica Default Services with the technology expertise and products of MSTD enables LandAmerica to offer the mortgage industry the best and most integrated servicing solution in the marketplace." LandAmerica can be found online at http://www.landam.com.

The Treasury Department has served notice that its automatic approvals of Fannie Mae's and Freddie Mac's debt issuance is now under review in light of the accounting scandals at the two GSEs and continued weaknesses in their accounting systems, risk management practices, and internal controls."[T]he time is right for Treasury to review its debt approval process to ensure that we continue to act as appropriate custodians of the power that Congress gave us when the charters of Fannie Mae and Freddie Mac were created," Treasury Under Secretary Randal Quarles told a Women in Housing and Finance meeting in Washington. The government-sponsored enterprises issue corporate debt mainly to finance their giant mortgage portfolios, which combined have $1.45 trillion in assets. Limiting GSE debt issuance could effectively reduce or cap the growth of their portfolios. "Since we have not seen any specific proposal to change that process, it would be speculative to comment," a Freddie Mac spokeswoman said. Fannie Mae declined to comment. Mr. Quarles reaffirmed the Bush administration's support for GSE regulatory reform legislation that would require Fannie and Freddie to shrink their portfolios. He pointed out that Fannie has reduced the size of its portfolio by nearly $200 billion with no discernible impact on the housing market.

The National Community Reinvestment Coalition is "extremely troubled" about the mortgage originations market and "problematic brokers," NCRC executive vice president David Berenbaum testified at the Fed hearing in Philadelphia.Mr. Berenbaum said that in 90% of the cases where the group found a problematic situation, there was a problematic broker involved. The NCRC conducted a "mystery shopping" campaign, sending out qualified minority testers and less-qualified white testers. Among the results he shared at the hearing was that 74% of whites were given details regarding fees, while only 31% of minorities were. Whites were offered, on average, 2.6 products, while brokers discussed only 1.3 products with minorities, he reported. Brokers met for an average of 38.6 minutes with the white testers, and just 27.4 minutes with minority testers.

"The structure of today's mortgage market does not serve Latinos well," a housing policy analyst for the National Council of La Raza told a Federal Reserve Board hearing June 9.Speaking at the Fed hearing in Philadelphia, Janice Bowdler said Latino consumers are more likely to choose a provider by relationship than by price. The most popular products in the Latino community are payment-option mortgages, 100% financing, and stated-income loans from subprime lenders, she said, adding that even when prime lenders advertise to Latinos, they are marketing those products and not the conventional products available from Fannie Mae and Freddie Mac. There are products available, but there is no incentive for originators to use them, she said. Ms. Bowdler concluded her remarks by noting that market intermediaries such as mortgage brokers do play an important role, but she said improved accountability standards are needed to protect consumers.

Washington Mutual Inc., Seattle, is being sued in U.S. District Court in Brooklyn, N.Y., by three former employees alleging that the mortgage banker violated the federal Fair Labor Standards Act by not paying them the minimum wage and overtime.The three plaintiffs, Dewone Westerfield of Grand Rapids, Mich., Charlotte Machado of Trussville, Ala., and Patricia Kemesies of East Islip, N.Y., worked at different locations, but all maintain that they worked in excess of 40 hours a week with no overtime. The plaintiffs allege that, if the loans they handled were not approved, they received no pay for the long hours they worked, and that this practice violates the minimum wage law, according to the attorneys that filed the suit, Nichols Kaster & Anderson PLLP of Minneapolis and Outten & Golden LLP of New York. Alan Gulick, a spokesman for WaMu, said the company has not yet seen the lawsuit. "However, we believe our compensation practices are fair and ethical, and we will vigorously defend our company against the allegations made," he said. Nichols Kaster & Anderson has a website, http://www.overtimecases.com, that lists 10 other active cases against nine mortgage lenders.

The patchwork of state anti-predatory-lending laws often prevents consumers, especially those traditionally underserved by financial institutions, from obtaining affordable home equity loans, according to the Washington counsel for the National Home Equity Mortgage Association.In written testimony submitted to a Federal Reserve Board hearing in Chicago on the home equity market, Wright H. Andrews said policymakers "must take great care to ensure that legislative and regulatory changes do not result in unnecessary or unintended adverse impacts on this critically important nonprime segment of the mortgage market." Mr. Andrews said some state laws have had positive effects but have hurt consumers in other ways, such as "limiting loan affordability and access to credit for many high-risk borrowers." He argued that most of the "tougher" state predatory-lending laws have caused lenders to stop offering flexible financing that makes loans more affordable. They have also caused lenders to stop making "high-cost" loans due to the "increased perception of legal and reputational risks" on the part of major nonprime lenders, he said. Mr. Andrews also called for uniform federal mortgage lending standards, arguing that they would "greatly reduce compliance costs, allowing lenders to pass on savings to borrowers by offering lower rates." NHEMA can be found at http://www.nhema.org.

It could be "several years" before the scandal-wracked government-chartered housing enterprises are out of the woods, their safety-and-soundness regulator has told Congress.Even Freddie Mac, which had been thought to have turned the corner on its accounting problems, is still in the doghouse with the Office of Federal Housing Enterprise Oversight, said acting Director James Lockhart, who has been on the job just over a month. "Both companies are several years away from having adequate internal controls" in place, he told the House Financial Services subcommittee on capital markets, insurance, and government-sponsored enterprises on June 6. Mr. Lockhart said the sanctions in place on Fannie Mae in its $400 million settlement with OFHEO, including the freeze placed on the company's portfolio mortgage assets, can be lifted at the sole discretion of the director. But he added that it's "hard to see their total removal for several years." And he cautioned lawmakers that a similar limit on Freddie Mac is not out of the question. That company is "at least two years away from having acceptable accounting and risk management" in place, he told the panel. Subcommittee Chairman Richard Baker, R-La., agreed, saying "we have a long road" to travel before the two GSEs are shipshape. But the ranking minority member, Rep. Barney Frank, D-Mass., reminded the panel that while Fannie and Freddie may be wounded, they are still fulfilling their housing mission.

The chairman of the House Financial Services subcommittee with oversight of government-sponsored enterprises has accused former Fannie Mae chief executive Franklin Raines of perjuring himself before Congress.Holding a hearing on a new federal report that officially accuses the mortgage giant of accounting fraud, Rep. Richard Baker, R-La., said Tuesday that, "There seems to be clear evidence to my mind that Mr. Raines perjured himself." In the fall of 2004, a then-embattled Mr. Raines testified before Rep. Baker's GSE subcommittee, categorically dismissing charges that the company manipulated accounting rules back in 1998 so it could meet (to the penny) an earnings-per-share goal that triggered $27 million in bonuses paid to its top executives. At times defiant, Mr. Raines told members of the subcommittee then that, "This is a serious allegation, and we strongly disagree with it." Mr. Raines and his attorney did not return telephone calls by MortgageWire.'s deadline. Mr. Raines was forced out by Fannie Mae's board in December 2004.

Higher-priced home purchase loans rose 172% last year among the 10 leading national mortgage lenders, according to a study of federal Home Mortgage Disclosure Act data by Traiger & Hinckley LLP, a New York-based law firm.The firm said diminishing home equity and rising loan-to-income ratios were important factors in the increase. The study also showed that minority and white borrowers paid approximately the same average rate spread on higher-priced loans. "We interpret the growth in rate-spread loans as an attempt by lenders to manager increased credit risk without dashing the American dream of homeownership," said Warren Traiger, a partner in the law firm. "This strategy has not adversely impacted minority groups. On the contrary, lending to minority homebuyers has increased significantly and, despite the greater volume of higher-cost loans, the average price of those loans was consistent across different racial and ethnic groups." The law firm can be found online at http://www.traigerlaw.com.

Legislation awaiting the president's signature would give the secretary of the Department of Veterans Affairs the authority to change the VA's hybrid ARM program so that it conforms to the industry norm.But the secretary is ready to act as soon as President Bush does, according to Keith Pedigo, director of the VA's Loan Guaranty Service. The bill allows the agency to insure five-year or longer hybrids with 2% annual rate caps and 6% life-of-loan rate caps "at the secretary's discretion," but "the plan is to fix the hybrid ARM problem right away" by making the switch from 1% annual caps, Mr. Pedigo said at the Mortgage Bankers Association's Government Housing Finance Conference. The VA official also said his office will soon begin testing a program that will allow veterans to determine their eligibility for VA-insured mortgages online and on their own. He told the meeting he's "not too" concerned with the recent dropoff in the agency's loan volume. "I think it will come back," he said. The VA backed 165,854 mortgages in fiscal 2005, down from the most recent high of nearly 500,000 in fiscal 2003 and an all-time high of some 600,000 in 1994.

Even though the first major overhaul of the Federal Housing Administration's mortgage insurance program in a decade has a long way to go in a short time, the agency is already thinking about how to implement the proposed changes, officials said Tuesday.If Congress should allow the FHA to switch to risk-based pricing, the agency would like to create a "little premium calculator" as a simple means of determining what the FHA would charge to insure a particular loan, according to Meg Burns, director of the FHA's Office of Single-Family Program Development. The agency also plans to move condominiums into the standard 203(b) program to eliminate the "long, drawn-out" approval process, and to either completely revamp the Title I home improvement loan program or drop it altogether, Ms. Burns told the Mortgage Bankers Association's Government Housing Finance Conference in Washington. She said the plan is to remove condos from a "very onerous, time-consuming" clearance process by allowing lenders to certify condo loans directly based on a streamlined checklist. The envisioned premium calculator would compute the cost of the insurance premium based on the borrower's credit score, the term of the mortgage, whether it has a fixed or adjustable rate, the loan-to-value ratio, and whether it is a purchase-money mortgage or a refi, the FHA official said.

FHA Commissioner Brian Montgomery maintains that a recent IRS revenue ruling that downpayment assistance providers are not nonprofit corporations will give a shot in the arm to efforts to revamp the government's oldest housing program.Noting that 25%-30% of the FHA's volume is from loans in which the seller "donates" all or part of the downpayment through a third-party entity, Mr. Montgomery said he's "not sure what will fill the void" if Congress fails to give the FHA permission to back 100% mortgages. While the ruling is "not a complete death knell" for downpayment assistance, "it highlights the need" for lawmakers to act, he told the Mortgage Bankers Association's Government Housing Finance Conference. The FHA commissioner said he thinks "we have a real shot at modernization," adding that he was "encouraged" and "truly surprised" by bipartisan support in the House, where 61 members have signed on to a bill that has been cleared by the House Financial Services Committee. And he said he is "seeing growing enthusiasm in the Senate." Conventional and subprime lenders have been eating away at the FHA's bread-and-butter market of low- and moderate-income borrowers, and the agency's market share has dropped from 13% in 1990 to just 3.5% last year, said Martha Simmons of SunTrust Mortgage, vice chair of the MBA's Residential Loan Committee.