Mortgage Action Alliance Newsletter

Volume III | Issue 20 | July 21, 2008

Market and political fallout surrounding Fannie Mae and Freddie Mac, as well as the failure of IndyMac, continued to dominate Washington last week. Recently, the Treasury and Federal Reserve produced a backstop plan to help the GSEs weather the current storm. Congress, which was close to completing work on the omnibus housing package, has now paused completion of that bill as it considers the backstop package. We expect the final package to be on the House floor this Wednesday, and to be considered by the Senate before August 1st. But of course, nothing is certain in this business, particularly during a time of such significant market turmoil.

The best news from last week appears to be that the consumer impact of the situation is minimal. Rate locks continue to be honored, closings are occurring and applications are being taken. The dislocation in the market, at least at this point, continues to be felt on Wall Street, not Main Street.


Last week was a significant week for a number of reasons, including the Fed's adoption of the final HOEPA rules. While the rule doesn't go into effect for another year, it will have a significant impact on the future legislative and regulatory landscape.

Treasury Introduces GSE Backstop Proposal - Slows Progress on Housing Legislation

In an attempt to stabilize Fannie Mae and Freddie Mac during extraordinary market volatility, the Treasury Department proposed a plan that would temporarily extend an unspecified line of credit to the government-sponsored enterprises (GSEs) by authorizing the Treasury Department to buy stock and other obligations in Fannie Mae and Freddie Mac. The plan would also provide additional oversight authority of the two companies by the Federal Reserve Board (FRB). The proposal serves to provide a backstop to restore confidence in the GSEs. These backstop measures would support the capital the GSEs are required to hold as protection in dire circumstances, not a taxpayer-funded bailout of the GSEs. &n bsp;

Efforts are being made to combine the GSE backstop plan with the existing omnibus housing package. Treasury Secretary Henry Paulson worked with Congressional leadership to garner support for inclusion of the plan in the final package. Closed-door negotiations over provisions of the housing bill are under consideration between House Financial Services Committee Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Christopher Dodd (D-CT). These discussions aim to resolve existing conflicts to facilitate quick passage. The House will vote on the bill this week and turn it over to Senate for final consideration. MBA remains optimistic that the legislation will reach the President prior to August.

FRB Releases Final HOEPA Rules

On Monday, July 14, the Federal Reserve Board (FRB) adopted final rules under the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA), amending Regulation Z. Under HOEPA, the Board has authority to prohibit acts or practices in connection with mortgage lending that the Board finds unfair, deceptive or designed to evade HOEPA and with respect to mortgage refinancings associated with abusive lending practices or otherwise not in the best interest of the borrower. Generally, the rules: (1) prohibit certain acts or practices for "higher priced" or subprime mortgage loans and loans that meet HOEPA's cost triggers; (2) prohibit other acts or practices for all closed-end credit transactions secured by a consumer's principal dwelling; (3) prohibit certain misleading or deceptive advertising practices in connection with closed-end mortgages; and (4) require earlier consumer disclosures for closed end mortgages secured by a principal dwelling. Notably, the rule changes the definitions for determining what constitutes a "higher priced or subprime loan" receiving greater regulation. First lien mortgages are "higher priced" if they are 1.5 percentage points above the average prime offer rate issued by Freddie Mac. Second lien loans are "higher priced" if they are 3.5 percentage points over the same index. Please find MBA's summary attached.

MBA Reiterates Support over Housing Provisions

On Thursday, July 17, MBA sent a letter to House Financial Services Chairman Barney Frank (D-MA), Ranking Member Spencer Bachus (R-PA), Senate Banking Committee Chairman Christopher Dodd (D-CT), and Ranking Member Richard Shelby (R-AL) reiterating support for key provisions of the House-passed version of the housing bill that will facilitate the use of FHA multifamily insurance with the Low Income Housing Tax Credit (LIHTC) program. As previously expressed in a letter dated on July 2, the changes outlined in the bill will lower costs and expedite processing to allow the development and rehabilitation of affordable rental housing at a time when it is needed most. Please find both letters attached as one document.

Ginnie Mae Releases Memo on FHASecure Expansion

On Friday, July 11, Ginnie Mae released an all participants memorandum (APM) that replaces AMP-07-14 and updates the applicable "M FS" Ginnie Mae II multiple issuer pooling requirements. FHASecure mortgages that have the following characteristics are eligible for inclusion in "M FS" pools only: (1) fixed rate loans originated following FHA Mortgagee Letter 2008-13 to borrowers that refinanced after becoming delinquent and (2) fixed rate refinance loans to borrowers that have taken out new subordinate liens. All other FHASecure mortgages may be placed into other pool types depending on Ginnie Mae's pooling requirements.

MBA Makes Recommendations to President's Council on Financial Literacy

On Tuesday, July 15, MBA President and CEO Jonathan Kempner wrote to the Underserved Committee of the President's Advisory Council on Financial Literacy recommending the report should provide a broad set of guiding principles that emphasize greater transparency and financial literacy. In addition to encouraging these principles, MBA made several recommendations, including: FHA modernization, GSE reform legislation, limiting the use of low-documentation loans, increasing transparency across the board, and requiring greater responsibility and accountability of mortgage lenders and brokers.

FDIC Releases Policy Statement on Covered Bonds Consistent with MBA Recommendations

On Tuesday, July 15, the Federal Deposit Insurance Corporation (FDIC) released its final policy statement regarding the treatment of covered bonds in the event of a bank failure. The statement provides guidance on how FDIC can expedite access to collateral pledged for certain covered bonds to bondholders should FDIC terminate the bond transaction. Covered bonds initially originated in Europe and are non-deposit obligation bonds of the issuing bank secured by a pledge of loans that remain on a bank's balance sheet. The final rule maintains limits on a bank's covered bond transactions to no more than four percent of its total liabilities. Additionally, while the definition of "secured liabilities" includes Federal Home Loan Bank (FHLB) advances, the policy does not impose a cap on FHLB advances and has no effect on a bank's deposit insurance assessments. This specific component of the policy is consistent with MBA's recommendations delivered to FDIC in a comment letter on June 23 (attached). It is important to note that FDIC did hint at revisiting the issue of secured liabilities in the future.

In other news, the FDIC Board also approved final guidance on the supervisory review process (Pillar 2 of 3) for banks implementing Basel II framework, the new advanced capital adequacy framework. The final guidance details how to assess overall capital adequacy for banks using Basel II.

SEC Issues Emergency Order to Enhance Investor Protections Against Naked Short Selling

On Tuesday, July 15, the Securities and Exchange Commission (SEC) issued an emergency order intended to enhance investor protections against "naked" short selling in the securities of Fannie Mae, Freddie Mac, and other primary dealers at commercial and investment banks. The order goes into effect on July 21 for an eight day period, expiring on July 29. Anyone effecting a short sale in the securities referenced during this period is required to borrow the securities and deliver them at settlement. By issuing the order, SEC Chairman Christopher Cox "aims to stop unlawful manipulation" that has threatened the stability of financial institutions.

FHA Commissioner Participates in CampusMBA's Live Online Conference

On Tuesday, July 15, Federal Housing Administration (FHA) Commissioner Brian Montgomery addressed a record number of MBA members and others during a CampusMBA Live Online Conference with FHA staff. The Commissioner's participation came the day after implementation of FHA's risk-based premium structure. In his comments, the Commissioner noted that FHA appreciates the efforts lenders have undertaken to update their systems in order to facilitate the new premium structure. FHA is fully aware of the potential problems that could arise should the housing bill pass into law and implement a one-year moratorium on the risk-based pricing structure. FHA is devising ways to address this issue.

MBA Submits comments to IRS on REMIC Single-Family Changes

On Tuesday, July 15, MBA and the Consumer Mortgage Coalition submitted comments to the Internal Revenue Service (IRS) concerning Revenue Procedure 2008-28, which establishes standards for when modifications to loans in pools would not compromise the real estate mortgage investment conduit (REMIC) tax status of the pool (attached). The letter applauded the IRS's ruling and suggested comments on how to improve the revenue procedure. Of note, MBA suggested the IRS not establish a threshold for the number of loans that can be delinquent in a pool upon their contribution date as IRS's 10 percent threshold is lower than the 50 percent standard established by the SEC's requirement under Regulation AB. MBA also suggested that if a date is selected for measuring delinquency levels, that date should be based on the "cut-off date" rather than the "start-up date" of that security. Finally, the IRS should eliminate the sunset date of 2010.

ASF Launches Project RESTART

On Wednesday, July 16, the American Securitization Forum (ASF) launched Project RESTART (residential securitization transparency and reporting), an industry-developed initiative to help rebuild investor confidence in mortgage and asset-backed securities, restore capital flows to the markets, and increase the availability of affordable credit. Project RESTART is a collaborative effort of behalf of investors, issuers, originators, credit rating agencies, and servicers to restore confidence in the markets by implementing steps that will eventually lead to accepted industry standards. Currently, only a proposal on the ASF RMBS Disclosure Package (phase one) has been released, which standardizes and expands existing disclosure to investors and credit rating agencies. MBA has been discussing the proposal with ASF and Treasury and plans to submit comments on phase one before the August 22 deadline.

Congressional Hearings: Update

On Tuesday, July 15, the Senate Banking Committee held two hearings pertinent to the state of the market. The first hearing, entitled "The Semiannual Monetary Policy Report to the Congress," heard testimony from FRB Chairman Ben Bernanke. While Chairman Bernanke refrained from using the term recession to describe the economy, he reported that the housing market continues to decline, economic growth is slow and the FRB will continue to monitor inflation.

The second hearing, entitled "Recent Market Developments and Regulatory Responses to Them," took place immediately after the first hearing. The Banking Committee once again heard testimony from FRB Chairman Ben Bernanke, in addition to Treasury Secretary Henry Paulson and SEC Chairman Christopher Cox. During this hearing, the Committee heard discussions on Fannie Mae and Freddie Mac, the Treasury's backstop GSE proposal, and the consequences of IndyMac's failure. Secretary Paulson explained the need to implement the Treasury's proposal, which Chairman Bernanke endorsed. He also defended the FRB's decision to open the credit window to the GSEs.

On Thursday, July 17, the House Financial Services Committee held its own hearing on monetary policy, entitled the "Humphrey Hawkins Hearing on Monetary Policy." Chairman Bernanke provided testimony.

This week, the House Financial Services Committee will hold a hearing on mortgage servicing practices, where MBA is expected to provide testimony.