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Testifying Sept. 20 before the House Financial Services Committee, Richard Cordray, director of the Consumer Financial Protection Bureau, said that lenders should not be overly concerned about potential legal liabilities from new mortgage servicing rules announced Aug. 9, American Banker reported.
Cordray noted that the rule still is being finalized and that the CFPB is considering two alternative protections for lenders that should minimize potential lawsuits.
Under one plan, lenders would have a complete safe harbor from lawsuits, while under the other plan lenders would be provided a “rebuttable presumption” protection in the event they’re sued for underwriting mistakes if a loan goes into foreclosure.
Responding to an inquiry from Rep. Michael Grimm, R-N.Y., about whether the CFPB had ruled out the safe harbor protection, Cordray testified that “the differences in safe harbor and rebuttable presumption are in some ways overstated and that we are going to try to minimize litigation risk and draw some bright lines,” American Banker reported.
The industry has warned the CFPB that anything less than safe harbor could cause some lenders to further tighten lending standards or exit the mortgage market altogether over litigation fears.
“I think we're trying to write a rule that confers the protections intended under the ability-to-pay provisions, and we're trying not to have the unfortunate side effect of drying up credit in the mortgage market,” Cordray testified, American Banker reported.
When questioned about the CFPB’s definition of abusive lending practices, which, under the Dodd-Frank Act, the bureau has the power to crack down on, as well as “unfair and deceptive” practices, Cordray testified that there are no plans to write a rule elaborating on the word “abusive” because the definition already is part of the financial reform law.
The CFPB will accept public comment on the new rules until Oct. 9, and intends to implement final rules Jan. 21, 2013.
Read and comment on the proposed rules.
The Federal Housing Finance Agency has targeted five states as part of its plan to adjust the guarantee fees that Fannie Mae and Freddie Mac charge for single-family mortgages, HousingWire reported Sept. 20.
The targeted states are Connecticut, Florida, Illinois, New Jersey and New York.
FHFA hopes increased g-fees will help it recover some of the “exceptionally high costs” the government-sponsored enterprises have incurred when mortgages defaulted in those states, HousingWire reported.
Mortgages originated in these five states would carry an upfront fee of between 15 and 30 basis points, which would be charged to lenders as a one-time payment on each loan acquired by the GSEs.
The FHFA reported that these particular states have average total carrying costs that “significantly exceed” the national average, and accordingly, result in the highest costs for the GSEs and taxpayers, HousingWire reported.
Under FHFA’s plan, homeowners in one of the targeted states who secure a 30-year, fixed-rate loan of $200,000 could see an increase of $3.50 to $7 per month in their mortgage payments.
The GSEs charge g-fees to balance out the credit risks they take when they own or guarantee a mortgage. The g-fees charged on single-family loans fluctuate based on the type of loan and on certain consumer attributes that impact credit risk related to the loan, HousingWire reported.
In a letter signed by FHFA Acting Director Edward DeMarco and provided to the Federal Register, the agency referred to a significant variation among states in the costs that the GSEs have incurred from mortgage defaults, HousingWire reported. According to the letter, the variations primarily are due to different requirements that states and territories have for lenders and other investors in order to manage a default, foreclose on and then receive marketable title to a property backing a single-family mortgage.
Foreclosure can take longer in certain states because of regulatory or judicial actions, and in some states an investor is unable to market a property for a specific amount of time following the completion of a foreclosure. The FHFA cited a difference among states in the daily carrying costs that investors incur during the periods when a defaulted loan is nonperforming and in select states when a foreclosed home cannot be marketed, HousingWire reported.
“Those variations in time periods and per-day carrying costs interact to contribute to state-level differences in the average total carrying cost to investors addressing a loan default,” the FHFA said in its letter, HousingWire reported. “Because the enterprises currently set their g-fees nationally, accounting for expected default costs only in the aggregate, borrowers in states with lower default-related carrying costs are effectively subsidizing borrowers in states with higher costs.”
A report issued Sept. 18 by the Office of the Inspector General of the Federal Housing Finance Agency concluded that Fannie Mae was justified in paying pricey premiums to such servicers as Bank of America when buying the rights to administer poorly handled loans, National Mortgage News reported.
Fannie Mae paid Bank of America $512 million to buy the rights to administer 384,000 loans, believing that transferring those loans from a bank to a “high-touch” servicer ultimately would stem Fannie’s losses and help keep borrowers out of foreclosure. Fannie paid an additional $70 million to speed the loan transfers.
Fannie had to pay the premium to get Bank of America to release the loans because, while the bank’s handling of the mortgages was poor, it was not bad enough to allow Fannie to seize them, National Mortgage News reported.
The OIG’s report highlighted a largely overlooked Fannie program to transfer mortgage loans from struggling banks to smaller servicers that specialize in troubled loans. The OIG report indicated that over the course of 13 deals, Fannie paid $1.5 billion to purchase or finance the purchase of 700,000 loans. Once the agency acquired the loans, it transferred them to delinquency-oriented servicers like Nationstar Mortgage and Green Tree Servicing.
Fannie organized the purchase after discovering that 70 percent of its mortgage losses were coming from loan portfolios with a total principal balance of $300 billion to $400 billion. Since big banks were neither equipped nor compensated to offer much in the way of outreach to troubled borrowers, Fannie concluded that “specialty servicers could potentially help avoid substantial anticipated credit losses,” according to the OIG report, National Mortgage News reported.
However, Fannie did not initially advise FHFA of its plans to transfer the high-risk loans, and some staff at FHFA did not think the transfers were in the best interest of the government-sponsored enterprise, National Mortgage News reported. According to the OIG report, “FHFA stated that such transactions not only failed to encourage improved servicer performance but actually encouraged and even rewarded poor performance.”
FHFA eventually required Fannie to obtain a $70 million “clawback” clause from Bank of America if the loan portfolio failed to improve under new management.
The Bank of America deal is the last one Fannie has been permitted to undertake, though the OIG did determine that the program had value and has probably saved the GSE money in the long run.
Fannie Mae and Freddie Mac stopped doing business with 40 seller/servicers since 2007 and have placed more than 300 high-risk counterparties on watch lists since 2011, according to a Sept. 18 report from the Inspector General of the Federal Housing Finance Agency, National Mortgage News reported.
A company can be terminated as a client by one of the government-sponsored enterprises due to business practices or poor financial health.
According to the report, the GSEs “have independently developed systems to identify high-risk counterparties and add them to watch lists to monitor their performance.”
National Mortgage News reported that being terminated as a client by a GSE typically causes the failure of that seller/servicer unless it is able to successfully appeal the order or find another outlet for its loans in the secondary market.
The report also criticized Fannie and Freddie for not developing “contingency plans for the more than 300 counterparties on their high-risk watch lists and for failing to develop contingency plans for their largest seller/servicers,” National Mortgage News reported.
The GSEs’ largest seller/servicers also are the nation’s largest mortgage originators: Wells Fargo, JPMorgan Chase, U.S. Bank, Bank of America and Citigroup.
The report recommended that the FHFA help fortify GSEs’ risk management systems by “establishing standards for developing contingency plans for dealing with high-risk and high-volume counterparties,” National Mortgage News reported.
Analysts at Bank of America Merrill Lynch said a recent decision by the Federal Reserve to initiate a third round of quantitative easing and purchase $40 million in mortgage-backed securities each month could accelerate the wind down of Fannie Mae and Freddie Mac, National Mortgage News reported Sept. 18.
“The implication here is that the (government-sponsored enterprises) could far more aggressively wind down their portfolios over the next couple of years and find a willing buyer in the Fed,” the analysts explained in their “Securitization Weekly” report, National Mortgage News reported.
The GSEs have been under instruction from their regulator to reduce investment portfolios by 15 percent each year.
Analysts explained that the Fed’s decision to pursue QE3 would permit the GSEs to achieve their regulator’s goal of “maximizing returns for taxpayers,” while shrinking their portfolios. The analysts noted that they were unsure whether or not that consequence was intended or unintended.
The Fed reported that it planned to concentrate its purchasing on newly issued agency MBS in the to-be-announced market. It may purchase existing Fannie, Freddie and Ginnie Mae MBS “if market conditions warrant,” a Federal Open Market Committee statement explained, National Mortgage News reported.
Freddie controls $189 billion of its own MBS in its $576.3 billion portfolio, while Fannie holds nearly $200 billion of its own MBS in its $667 billion investment portfolio.
The Office of the Comptroller of the Currency issued new guidance Sept. 18 for federally chartered banks and thrifts that loan money to investors buying real estate-owned property that will be converted into rentals, National Mortgage News reported.
The new guidance advised lenders that they should view credit risk as similar to commercial real estate because the source of repayment will be rental income. Since REO investors likely have multiple sources of financing, OCC warned that this type of lending can be risky.
The OCC advised banks and thrifts to employ additional policies and controls to monitor and mitigate risk of investor-owned, one-to-four-family residential loans, known as IORR loans.
“These could include the use of loan covenants, requirements for periodic financial analysis, and the need for a willing and financially capable guarantor,” the OCC stated, National Mortgage News reported.
Lenders also were advised to institute underwriting standards regarding owner equity, acceptable appraisal methods, insurance conditions and ongoing monitoring of collateral.
In terms of capital treatment, many REO investor loans will continue to be treated the same as single-family home loans provided to owner-occupants.
The OCC explained that REO investor loans will continue to qualify for the 50 percent risk-based capital category if certain regulatory requirements are met. IORR loans that do not meet the criteria will fall into a higher risk category, National Mortgage News reported.
Securities backed by home-rental mortgages may offer another boost to the housing market, The Wall Street Journal reported Sept. 17. Investors have ramped up efforts to purchase foreclosed properties that will be turned into rentals now that the Federal Reserve has expressed support for the strategy.
Oakland, Calif.-based Wayport Real Estate Group LLC, a major investor in foreclosed properties, recently secured a $65 million loan from Citigroup to help build its portfolio of foreclosed homes to be turned into rentals. And Colony American Homes, part of private-equity firm Colony Capital LLC, owns about 3,000 foreclosed homes with plans to have 10,000 by next spring.
The multimillion dollar Wayport deal may be a harbinger of deals to come with banks offering securitized pools of mortgages to investors with rental income as backing, the Journal reported. As with mortgage-backed bonds, banks would pool the rents of thousands of tenants residing in formerly foreclosed homes and then sell the rental-backed bonds to investors with promised returns based on rental income.
The Journal reported that sales of such bonds would allow investors like Wayport to pay back their lenders while at the same time raising funds to buy more homes.
Ratings agencies have just begun looking at how to rate such deals. Fitch Ratings told the Journal that these pools likely would not be rated above the single-A category, mainly because there is no long-term data on whether or not tenants will pay their rents on time.
Wayport, which currently owns more than 2,000 homes in Atlanta, Chicago, Phoenix and throughout California, hopes to have amassed another 9,000 by the end of 2013. The Journal reported that the firm’s home-buying strategy is unusual in that it purchases properties one-by-one.
“We’re sharpshooters,” Wayport’s Managing Director Gary Beasley told the Journal. He said most of his firm’s rental homes have two-year leases, which is part of its effort to minimize vacancies. “Turnover in the residential world is one of the key things to manage.”
Nearly two-thirds of U.S. residential real estate investors said they expect to purchase at least as many homes in the next 12 months as they have in the past year, according to a survey conducted by research firm ORC International, Bloomberg Businessweek reported Sept. 20.
Conducted in August, the telephone survey polled 3,036 real estate investors about their plans to purchase homes in the next year.
Around 39 percent of real estate investors said they plan to buy more homes, while 26 percent expect to purchase the same number of homes in the coming year as they bought the previous year. Close to 30 percent of investors said they plan to reduce their purchases, Bloomberg Businessweek reported.
“Though housing markets are changing across the nation, investors are still seeing great opportunities,” Josh Dorkin, chief executive officer of BiggerPockets.com, a real estate social-networking company that commissioned the survey, said in a news release, Bloomberg Businessweek reported.
Dorkin noted that 28.1 million active residential real estate investors in the U.S. who own property as landlords rather than as occupants have benefitted from the rental demand as people with damaged credit or lack of money for down payments are pushed out of the housing market.
Recent data from the National Association of Realtors indicated that investors purchased 18 percent of houses in the U.S. in August, up from 16 percent in July and down from 22 percent in August 2011, Bloomberg Businessweek reported.
NAR also reported that transactions for distressed properties — those purchased for less than their mortgage balances — made up 22 percent of purchases in August, down from 31 percent a year earlier, as the sales volume increased and fewer foreclosures came to market.
The Basel III banking rules have come under fire from both the Federal Deposit Insurance Corporation and by the ratings agency Fitch Ratings, which said that the new rules likely could hamper the housing market recovery, HousingWire reported Sept. 20.
Thomas Hoenig, FDIC board member, spoke Sept. 14 at the American Banker’s Regulatory Symposium in Arlington, Va., and said that adoption of the new bank-capital standards called for in Basel III would unnecessarily restrict banks and therefore should be replaced by simpler standards. “Basel III does attempt to increase capital, but it does so using highly complex modeling tools that rely on a set of subjective, simplifying assumptions to align a firm’s capital and risk profiles,” he said, American Banker reported.
Hoenig urged U.S. regulators to reject Basel III outright if the new rules can’t be adjusted for greater simplicity. Hoenig told the symposium that Basel rules had done nothing to stem the most recent financial crisis and that Basel III likely would not prevent the next one. He pointed out that while regulators knew well before the mortgage crisis that home loan risk had increased, they did nothing to change the risk weights of those loans, American Banker reported.
According to American Banker, Hoenig told the symposium that new Basel III regulations also would place smaller institutions at a competitive disadvantage because the rules would require banks to hold certain levels of capital against assets like mortgages and construction loans. Hoenig advocated for simpler rules with a minimum capital demand so that banks would have the flexibility to shift allocation of assets depending on market risks and rewards.
While critics have claimed that Hoenig’s proposed simplified rules would restrict market liquidity, Hoenig noted that in the wake of the financial crisis, banks all but ceased lending — something which would not have happened had they had adequate levels of capital to start.
HousingWire reported that Fitch Ratings offered an outlook similar to that of Hoenig. Fitch noted that if the U.S. adopted Basel III, the move likely would drive banks to cease offering all but the most conventional and low-risk types of mortgage loans. Basel III also might increase borrowing costs for even “plain vanilla” mortgage products, according to Fitch.
HousingWire reported that nontraditional products, such as loans with more than 30 years of amortization, negative amortization mortgages or loans failing to verify a borrower’s ability to repay, would be assigned category 2 status, which would require banks to hold two to three times more capital than for lower-risk category 1 loans.
The Fitch report noted that current capital rules put a 50 percent risk weighting on mortgages with a loan-to-value ratio of 85 percent but that under the Basel III rules, the risk weighting would increase to 150 percent. Fitch Ratings concluded that the Dodd-Frank Act and adoption of Basel III would “sharply curtail the ability and willingness of banks to underwrite or purchase loans that regulators view as high risk,” HousingWire reported.
Wells Fargo and Morgan Stanley allegedly failed to service $73 billion in faulty mortgage bonds, which resulted in default, according to law firm Gibbs & Bruns, Bloomberg reported Sept. 19. The Houston law firm had previously won an $8.5 billion settlement from Bank of America over similar allegations.
Bloomberg reported that Gibbs & Bruns cited $15 billion of Wells Fargo’s residential mortgage-backed securities and $5 billion of Morgan Stanley’s RMBS where bondholders hold 25 or 50 percent or more of voting rights. The dispute also includes $23 billion of RMBS issued by Morgan Stanley and $30 billion issued by Wells Fargo, where holders have voting rights but hold less than 25 or 50 percent.
Gibbs & Bruns represents at least 20 bondholders, Bloomberg reported.
The percentage of holders matters because claims must meet specific minimums before parties to mortgage-bond deals can be declared in default, Bloomberg reported. If not corrected, the defaults can give investors the right to sue bond creators and the deal’s trustees or both.
Bloomberg reported that faulty mortgages and foreclosures have cost the nation’s largest home lenders around $84 billion since 2007. Regulators blamed the banks for other lenders’ reluctance to make new loans.
As lending standards tighten, mortgage loans have hit their lowest level in 16 years, the Federal Reserve reported Sept. 18.
The report noted that banks funded about 7.1 million mortgages in 2011, down 10 percent from the previous year and the lowest number of mortgage loans funded since 1995, when banks issued 6.2 million.
The Fed based its findings on data from 7,600 lenders issued under the Home Mortgage Disclosure Act. The Fed’s report only covered loans issued in 2011 and does not reflect the increase in housing and loan demand fueled by dropping interest rates and the increase in investor-owned properties.
The Fed reported that loans funding home purchases fell by five percent in 2011 and were 64 percent lower than the level of mortgage loans in 2006 — the height of the housing bubble.
Refinancings fell by 13 percent in 2011 when compared to the previous year, but started to rebound with decreasing interest rates at the end of the year.
Lending activity fell the most in areas hardest hit by foreclosures and declining home values. Overall, the loans for owner-occupied home mortgages dropped 7.2 percent, but in hard hit neighborhoods that drop was 13.8 percent, the Fed reported.
Loan denial rates remained flat last year, with about 23 percent of prospective borrowers having been denied credit for home purchases. Most of the denials were related to low home appraisals and applicants’ debt-to-income ratio. The Fed reported that denial rates were highest for minority borrowers, with 31 percent of African American borrowers being denied and 22 percent of Hispanics. Meanwhile, the denial rate for non-Hispanic whites was 12 percent.
Another week of declining rates resulted in fixed mortgages hitting new record lows, Freddie Mac reported Sept. 20 in its weekly Primary Mortgage Market Survey.
The 30-year fixed-rate dropped 0.06 percentage points to 3.49 percent (down from 4.09 percent a year ago). The 15-year fixed-rate fell 0.08 percent to 2.77 percent (down from 3.29 percent a year ago).
The one-year adjustable-rate mortgage remained steady at 2.61 percent, the same as last week (down from 2.82 percent a year ago). The five-year Treasury-indexed adjustable-rate dropped 0.04 percentage points to 2.76 percent (down from 3.02 percent a year ago).
“Following the Federal Reserve's announcement of a new bond purchase plan, yields on mortgage-backed securities fell (and brought) average fixed mortgage rates to their all-time record lows, which should aid in the ongoing housing recovery,” Frank Nothaft, Freddie Mac vice president and chief economist, said in a news release. “New construction on single-family homes rebounded in August, rising by 5.5 percent to the fastest pace since April 2010. In addition, existing home sales increased by 7.8 percent in August to its strongest pace since May 2010.”
View Freddie Mac’s weekly Primary Mortgage Market Survey.
Appraisal Institute President-Elect, Richard L. Borges, MAI, SRA, was featured Sept. 24 in a MarketWatch story on home problems that may kill FHA mortgage deals; Borges discussed potential appraisal snags.
“A good real estate agent will alert you to these red flags before the appraiser visits,” Borges said. “That guidance is especially important in markets where foreclosures and short sales make up a large percentage of sales, making deferred maintenance issues more commonplace.”
Also featured in national media coverage this past week was Mark R. Linné, MAI, SRA, in Valuation Review.
These stories are among the recent media coverage included in the “AI in the News” feature on the members-only section of the Appraisal Institute website.
Appraisal Institute members appearing recently in local media include Frank Schmidt, MAI, KTVU-TV (Oakland, Calif.) and KRXI-TV (Reno, Nev.); and Barrie Gaman, MAI, and Rick McCowan, MAI, New England Real Estate Journal.
See the latest media coverage about the real estate valuation profession, the Appraisal Institute and its members. Media coverage at “AI in the News,” found on the member log-in page of the Appraisal Institute’s website, is updated daily and also includes the latest news releases from the Appraisal Institute.