Banks and thrifts can earn Community Reinvestment Act credit by placing their troubled subprime borrowers into newly refinanced loans, but not for ordinary workouts and loan modifications, according to regulators.When it comes to their own loans, "I don't think there is any question whether banks will do workouts and accommodate those individuals appropriately," said Robert Mooney, acting deputy director of the Federal Deposit Insurance Corp., at a CRA conference sponsored by the Consumer Bankers Association. The main thrust of the April 17 interagency statement is to encourage banks to work with nonprofit groups in helping subprime borrowers with adjustable-rate 2/28 and 3/27 mortgages that have been securitized. Mr. Mooney noted that a lot of the borrowers are trapped and facing foreclosure. And it isn't easy to "shake" those loans out of the securitizations so responsible banks can do the workouts, he said. Meanwhile, the regulators want to ensure that "you get the credit you deserve" in the CRA lending or service tests "for taking that extra step and going the extra mile," Mr. Mooney said. The CBA can be found on the Web at http://www.cbanet.org.

Democrats on the Senate Banking Committee are turning up the heat on the Federal Reserve Board, demanding that it establish an ability-to-repay standard on subprime mortgages and designate the failure to escrow homeowners' insurance and property taxes as a deceptive lending practice.Under pressure from the committee, Fed Chairman Ben Bernanke had agreed to review the board's power under the Home Ownership and Equity Protection Act. Now the Democrats are demanding at least some minimum action. "The Board should create a presumption that a loan that requires a borrower to pay more than 50% of his or her income to cover the cost of principal, interest, taxes, and insurance is not a sustainable loan" and fails the repayment test, the 10 Democratic senators say in a letter to the Fed. The Democrats also stress that the failure to escrow taxes and insurance puts homeowners at risk. "Subprime lenders and brokers seem to routinely quote monthly payments to prospective borrowers that do not include taxes and insurance as a way of deceiving the borrowers into thinking their monthly obligations will be lower than their true costs," the April 23 letter says. "This is clearly a deceptive practice."

Core Mortgage Risk Monitor's foreclosure index has "increased dramatically" in the second quarter, although the risk index overall is showing signs of stabilization, according to First American CoreLogic, a Sacramento, Calif.-based provider of mortgage risk assessment and fraud prevention systems.The foreclosure index posted a 10.5% quarterly increase that was attributed to rising delinquency rates in the subprime sector. "While house prices are stabilizing, we are transitioning the risks to a period of rising delinquencies and foreclosures that is going to have concentrated and contagious impact on local markets," said Mark Fleming, CoreLogic's chief economist. "Fraud and collateral risk has stabilized at a relatively high level not seen in recent years, and foreclosures are expected to continue to rise despite relatively unchanged employment conditions and stabilization of house prices." CoreLogic said the five U.S. markets currently most at risk are Detroit-Livonia-Dearborn, Mich.; Memphis; Warren-Troy-Farmington Hills, Mich.; Youngstown-Warren-Boardman, Ohio-Pa.; and Dayton, Ohio. CoreLogic can be found on the Web at http://www.corelogic.com.

Fannie Mae and Freddie Mac are some of the biggest investors in subprime securities, and their regulator -- the Office of Federal Housing Enterprise Oversight -- is looking for ways to ensure that their purchases of private-label securities comply with federal subprime underwriting standards."It would make a lot of sense if they can get a representation from the packagers of these securities that they are following reasonable underwriting standards," OFHEO Director James Lockhart told reporters. In a speech to the Independent Community Bankers of America, the OFHEO director said unregulated lenders and mortgage brokers largely contributed to the deterioration of subprime underwriting standards. "OFHEO is now working with the enterprises on guidance that would have the effect of applying -- through the GSEs' market activities -- the strictures of federal guidances on these unregulated firms," Mr. Lockhart said. Fannie chief executive Daniel Mudd told a congressional panel April 17 that his company will comply with the proposed subprime underwriting guidance issued by federal banking regulators in March. The comment period ends May 7.

Citing a need to improve accountability in the mortgage industry and keep families from losing their homes, Pennsylvania Acting Banking Secretary Victoria A. Reider has urged swift action on legislation to stop abusive lending practices blamed for many foreclosures.Legislation was introduced in the state House and the state Senate earlier this year. The six bills are the result of a 2005 Pennsylvania Department of Banking report on foreclosures, which cited abusive lending practices as a significant contributing factor to the state's above-average foreclosure rate. The bills would amend state laws to require individual licenses for mortgage professionals. Currently, the department has the authority to license mortgage companies, but not their employees. "In Pennsylvania, the people who cut your hair are licensed," Ms. Reider said. "The people who sell insurance and stocks are licensed. But the people who guide, for most of us, the largest financial transaction of our lives are not licensed. This legislation would create a new licensing category for individual mortgage loan originators."

The Department of Housing and Urban Development is getting closer to issuing a proposed rule for public comment that restricts downpayment assistance on Federal Housing Administration single-family loans if the funds come from a person or company selling the house.This proposal would prevent nonprofit groups from cycling funds from sellers to FHA homebuyers. It essentially incorporates guidance in the FHA Handbook that downpayment and closing cost assistance cannot come from a donor that has an interest in the sale of the property. HUD data show that defaults on FHA loans with downpayment assistance from nonprofits are twice as high as on other FHA loans and the claim rate is three times as high. The HUD inspector general has been very critical of these downpayment assistance programs. The White House Office of Management and Budget has cleared the proposal, and HUD is expected to send it to Congress for a 15-day review period soon.

Key congressional supporters of raising the conforming-loan limit are reconsidering a provision in a GSE reform bill that would require Fannie Mae and Freddie Mac to securitize and sell all jumbo mortgages.Reps. Barney Frank, D-Mass., and Gary Miller, R-Calif., commented at a hearing on rising foreclosures that securitization makes it very difficult to restructure the loans when borrowers get into trouble. Rep. Frank, chairman of the House Financial Services Committee, said it might be better for the government-sponsored enterprises to keep those loans in portfolio. On March 28, the committee approved a GSE regulatory reform bill that raises the conforming-loan limit in high-cost areas.

State regulators cannot interfere with the mortgage banking subsidiaries of national banks, according to a U.S. Supreme Court ruling that upholds the comptroller of the currency's exclusive authority over national banks and their subsidiaries.The 5-3 decision in Watters v. Wachovia Bank is a resounding defeat for state attorneys general and banking regulators who wanted to reassert their powers in providing consumer protection and regulating national bank subsidiaries. "The Conference of State Bank Supervisors is deeply disappointed," CSBS president Neil Milner said. "We see it as a setback for financial consumers and state efforts to battle predatory lending, abusive mortgage lending practices, and mortgage fraud." Comptroller John Dugan welcomed the decision, which culminates a long legal battle with the states. "We are pleased that the court's decision supports the ability of national banks to continue to conduct business activities through their operating subsidiaries as they are now doing," he said.

Federal regulators are encouraging banks and thrifts to help distressed subprime borrowers through loan modifications and other workout arrangement by awarding Community Reinvestment Act credit."The agencies want to remind their institutions that existing regulatory guidance and accounting standards do not require immediate foreclosure of homes when borrowers fall behind in the payments," an interagency statement said. The statement also points out that the financial institutions are required to inform delinquent borrowers about the availability of homeownership counseling. And the institutions should work with consumer-based organizations that help financially stressed borrowers avoid foreclosure. "Bank and thrift programs that transition low- and moderate-income homeowners from higher-cost loans to lower-cost loans may also receive favorable consideration under CRA," the agencies said.

A Federal Deposit Insurance Corp. summit may have found a way to restructure adjustable-rate 2/28s mortgages in subprime securitizations and prevent foreclosures, according to FDIC Chairman Sheila Bair.She told a congressional panel that one way to restructure or modify these loans is to continue with the starter rate on the ARM. This approach was discussed at the April 16 summit with lenders, securitizers, and servicers, where it was learned that MBS investors really don't have a realistic expectation of getting the higher reset rate. Investors will have to approve this approach, even though they will incur losses. But Ms. Bair pointed out that foreclosures would cause bigger losses. "I think they are willing to do that," she told reporters. One hurdle is an accounting interpretation that requires a securitized mortgage to be delinquent 30 days before it can be restructured. "I think that is a problem," the FDIC chairman said. She said she plans to discuss it with the Financial Accounting Standards Board.

Countrywide Home Loans Inc., Calabasas, Calif., has entered into a $500,000 settlement with a Connecticut regulator for charging excessive financing fees on 473 borrowers and for failing to register 147 originators with the state banking department.Countrywide paid a $401,750 civil money penalty for the violations and contributed $100,000 to NeighborWorks to provide homeownership assistance for state residents. State examiners found that Countrywide imposed prepaid finance charges that exceeded (in the aggregate) the legal limit, which is 5% of the loan amount or $2,000, whichever is greater. The limit on prepaid finance charges, which includes points and application and administrative costs, was enacted four years ago as part of the state's anti-predatory-lending law. Countrywide has refunded all the 473 overcharged borrowers and has agreed to take corrective actions with respect to prepaid finance charges and registering originators that work directly for the company. Countrywide said the settlement arose from a "misinterpretation and misapplication" of certain Connecticut requirements and that the company undertakes extensive efforts to comply with national and state laws governing its lending operations. The company can be found online at http://www.countrywide.com.

Fannie Mae and Freddie Mac could add only affordable housing loans and securities to their mortgage investment portfolios under a regulatory reform bill introduced by four Republican GSE hardliners on the Senate Banking Committee."This bill would refocus the GSEs' practices and investments on affordable housing, thereby reducing systemic risk," Sen. John Sununu, R-N.H., said. Any mortgages or mortgage-backed securities acquired by the government-sponsored enterprises after enactment of the bill would have to meet the affordable housing goals set by the new GSE regulator or be "promptly securitized and sold to third parties," the bill says. Both GSEs have $700 billion portfolios, and the regulator could make "temporary adjustments" to avoid market disruptions. Sens. Sununu, Chuck Hagel (Nebraska), Elizabeth Dole (North Carolina), and Mel Martinez (Florida) are the Republican co-sponsors of the bill. Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has not circulated a GSE bill yet.

Mitch Heffernan, the former president and chief executive of the defunct Mortgage Lenders Network, recently sought an injunction in bankruptcy court to stop the Connecticut Department of Labor from pursuing criminal charges against him, according to an article published in the Hartford Courant.The office of a Connecticut state's attorney blocked the injunction and defended the department's right to seek the warrant. The department applied for an arrest warrant for Mr. Heffernan that would charge him with 61 counts of failing to pay wages to employees at MLN, which filed for bankruptcy in March. The arrest warrant for Mr. Heffernan is still pending at the state's attorney's office, said Nancy Stefans, a representative of the department. MLN was a top-20-ranked subprime lender.

Consumer advocates are urging Congress to amend the bankruptcy code so that homeowners can restructure high-cost loans and avoid foreclosure.The current code protects mortgage lenders, according to the National Association of Consumer Bankruptcy Attorneys, and does not allow the bankruptcy judges to reduce the interest rate or principal amount so that homeowners can successfully emerge from bankruptcy with affordable payments. As a result, more homeowners with subprime loans are forced to walk away from the homes, according to NACBA president Henry Sommer. "Help is urgently needed for hundreds of thousands of American families at risk of losing their home due to abusive home loans," he said. An NACBA survey shows that bankruptcy attorneys are finding that more of their clients have problems involving subprime loans. Half of the respondents said 50% of their clients with homes have mortgage-related problems, while 20% of the attorneys said 75% of their clients with homes have mortgage-related problems. The Consumer Federation of America and the Center for Responsible Lending joined the NACBA in calling for bankruptcy reforms.

The Neighborhood Assistance Corporation of America is planning to conduct protests and mock foreclosures at the homes of Wall Street and mortgage company executives -- demanding loan modifications for subprime borrowers who are facing foreclosure.Subprime adjustable-rate mortgages were "structured to fail," and "we are going to go into their neighborhoods" if they don't stop the foreclosures, NACA chief Bruce Marks said at a Washington news conference. The Boston-based community advocacy group wants the investment banking firms and subprime lenders to restructure the loans so that troubled borrowers get a fixed-rate mortgage at the initial qualifying rate (e.g., a 2/28 ARM with an initial interest rate of 6% would be restructured as a 6% fixed-rate mortgage). NACA plans to start the protest campaign on April 21 by inviting subprime borrowers to its offices in 33 cities to educate them about subprime "scams" that were used to exploit them with loans they could not afford, Mr. Marks said. The group is also pledging $1 billion to refinance victims of predatory lending into affordable mortgages through a commitment by Bank of America and Citigroup. NACA has run a mortgage lending operation for subprime homebuyers since the mid-1990s that offers no-downpayment fixed-rate mortgages at 1 percentage point below the market rate. Now it is refinancing mortgages to prevent foreclosures.

The top Republican on the House Financial Services Committee supports the concept of making secondary-market investors accountable for the performance of subprime loans through an assignee liability provision that is modeled after a New Jersey anti-predatory-lending law.Rep. Spencer Bachus, R-Ala., said the New Jersey statute has been "shown to be effective, and it could be the starting point for national legislation." Nearly a month ago, Financial Services Committee Chairman Barney Frank, D- Mass., said he wants to include an assignee liability provision in predatory-lending legislation. "It is the best enforcement mechanism we could have," Rep. Frank said. Rep. Bachus clarified, in response to a news story, that he has not reached an agreement with Chairman Frank on an assignee liability provision. The ranking committee Republican also stressed that the New Jersey law allows borrowers a private right of action to press claims rather than a class-action lawsuit. He said he also supports the New Jersey law because investors in subprime securities can protect themselves from liability through due diligence.

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.