Regulatory Uncertainty Prevents Meaningful Housing Recovery

By Clifford Rossi JUN 5, 2012 2:00pm ET

Washington just keeps kicking the can down the road.

Last week’s announcement by the Consumer Financial Protection Bureau that it would to delay issuing final Qualified Mortgage rules for the mortgage industry and the Treasury Department’s comments that housing reform requires further study are just the latest in a string of policy deferrals that prolong meaningful recovery in housing.

The premise for this statement is simple: too much regulatory uncertainty persists in the market for credit to flow more freely.

The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices for April 2012, for example, suggests no real movement in banks’ willingness to “open” the credit box much wider than it has been over the last couple of years, although lenders reported a pick-up in demand for residential mortgages overall.

While no single factor explains the industry’s reticence to expand credit availability, regulatory uncertainty over mortgage origination, servicing and financing holds back the return of private capital to mortgage markets.

To their credit, the various agencies tasked with creating rules that will redefine the mortgage industry of the future have taken a deliberative approach, recognizing the complexity and significance of what such changes may usher in. However, these delays point toward a systemic policy malaise threatening to make the housing recovery since the crisis a decade-long process.

Since it defines what type of mortgage products will generally be available going forward, the QM rule has a lot riding on it. For example, the Qualified Residential Mortgage rule, a separate part of the reform introducing risk-retention provisions into the securitization process, is effectively on hold until the CFPB introduces the final QM regulations.

Beyond QM and QRM lie other major policy issues that have yet to be addressed which contribute to market uncertainty. Nearly four years after both enterprises went into conservatorship, a firm transition plan for Fannie Mae and Freddie Mac has yet to be announced or the details on what ultimately replaces these companies. The enterprises’ regulator, the Federal Housing Finance Agency, has been proactive in positioning a strategic plan for handling legacy mortgage issues with the two firms, maintaining stability in securitization activities and working to develop the systems needed to support the future secondary market. However, politics on both sides have stymied efforts to provide any concrete action plan for moving beyond the caretaking activity that has effectively cast mortgage finance adrift in a sea of regulatory uncertainty.

One way to reduce this uncertainty, while strengthening the focus and resources on key strategic issues for FHFA, would be to merge the two enterprises and reorganize the businesses around three functional areas coinciding with the FHFA’s strategic plan: legacy asset management; ongoing securitization; and future data and system infrastructure development. But this plan can only be put in place if a viable replacement to Fannie and Freddie can be put forth.

Clearly the issue is one of great complexity. However, too much time has elapsed now for there not to be a definitive game plan for reforming the secondary mortgage market.

Other areas of mortgage policy also remain unsettled. One of these is the role of the Federal Housing Administration in mortgage markets and the health of its Mutual Mortgage Insurance fund. Just last week, Lender Processing Services reported a sharp increase in foreclosures resulting from the surge in the FHA’s market share during the 2008-2010 period. While this served a vital countercyclical role at the time, the large share of volume taken by FHA and general weakness in the MMI fund pose fundamental risks to taxpayers and further private capital’s reentry into mortgage markets. Changes in FHA loan limits, insurance premiums and fees play a significant role in determining the extent of the federal government’s direct participation in mortgage financing. Yet little movement in this policy area has been made, again reflecting a broader need for policy coordination on multiple fronts.

In addition, Basel III’s revised capital requirements for mortgage servicing rights and the efforts to overhaul servicing compensation add to the confusion for industry participants assessing the strategic value of owning a mortgage business.

A unifying thread between each of these policy deferrals is the lack of a coherent national housing policy and implementation plan and clear ongoing communication of important aspects in the execution of such a plan. There is no single voice for the administration for housing. Given how much time has elapsed since the crisis, it will be difficult not to have history refer to this period as the lost decade in US housing markets.

To have any hope at avoiding this outcome, the administration should announce the establishment of a U.S. Housing Stability Commission comprised of members representing the relevant federal agency representatives chaired by one of these members with a primary mission of creating, coordinating and disseminating housing policy. Further delay in setting the roadmap for mortgage markets threatens healthy recovery from taking place.

Clifford Rossi is an executive-in-residence and Tyser Teaching Fellow at the University of Maryland’s Robert H. Smith School of Business. He has held senior risk management and credit positions at Citigroup, Washington Mutual, Countrywide, Freddie Mac and Fannie Mae.

Settlement Monitor, Looking to Avoid Conflicts, Seeks Out More Consultants

By Kevin Wack JUN 5, 2012 3:56pm ET

WASHINGTON – The job of determining whether the nation’s five largest mortgage servicers are complying with the landmark 49-state settlement will be divided between several private-sector consulting firms, the settlement’s monitor said Tuesday.

Joseph A. Smith Jr., the former North Carolina banking commissioner who is now the settlement’s monitor, said it does not make sense for a single consulting firm to be responsible for assisting him in the oversight of all five banks, in part because of conflicts of interest.

“We didn’t think that any single firm had the capacity and the independence to handle all of them at the same time,” Smith said in an interview.

Those comments came one day after Smith announced that he had selected BDO Consulting, a division of BDO USA, as the primary professional firm that will assist him.

The settlement documents envision only a role for a primary professional firm, but Smith said that he has decided to hire secondary firms as well. Each of those secondary firms (he did not specify how many will be hired) will be responsible for reviewing work plans submitted by the five servicers.

The five companies that are part of the estimated $25 billion settlement are Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and Ally Financial.

Part of BDO Consulting’s role will be to help develop uniform standards for determining whether the five banks are in compliance with the settlement agreement, which requires them to reduce principal on mortgages, among other provisions. The consulting firm will also help Smith as he selects the secondary firms, and later it will help oversee the work of the secondary firms.

Smith, who heads the Office of Mortgage Settlement Oversight, said that BDO Consulting was chosen from a list of dozens of interested firms in part because it has a track record on large public projects.

Most recently, the firm was hired by federal and state officials to conduct an independent analysis of the Gulf Coast Claims Facility, which was established to provide compensation to victims of the BP oil spill.

After being hired as the mortgage settlement’s monitor, Smith said in an April interview that he wanted to keep his own staff small while relying heavily on contractors to help him review the self-monitoring work that will be done by the five banks.

The process of selecting a contractor with sufficient independence from those five institutions was complicated by the fact that many of the large U.S. law firms and accounting firms have long-standing client relationships with the biggest banks.

BDO Consulting does not have anything approaching what would be considered a material conflict of interest, Smith said Tuesday.

“They don’t have much in the way of conflict with any of the servicers now involved in the settlement,” said Smith, who was hired in February by federal and state officials.

Carl Pergola, partner-in-charge of BDO’s consulting services, added in a separate interview, “We’re not aware of any active work that we provide for any of the five servicers.”

In terms of past work the firm has done for the five servicers, Pergola said that BDO did anti-money-laundering work for Washington Mutual, but the relationship ended around the time that JPMorgan bought WaMu in late 2008.

He also said that BDO was previously hired by counsel for Countrywide, but the work ended about three years ago, or roughly one year after Bank of America bought Countrywide.

Pergola said that BDO’s experience in the mortgage industry is one of the chief assets it brings to the monitoring work. The settlement stemmed from widespread allegations of robo-signing and other servicing abuses.

BDO, which provides tax, financial advisory and consulting services to companies, has done work for one of the 14 servicers. That work is part of a separate foreclosure review process being conducted by federal banking regulators, Pergola said.

But he said the servicer is not among the five that are part of the multistate settlement.

Fannie Mae names Timothy Mayopoulos as new CEO

By Marcy Gordon

Fannie Mae, based in Washington, says Mayopoulos, 53, will become president and chief executive on June 18. He replaces Michael J. Williams, who announced in January that he would step down after a successor was found.

The government rescued Fannie and smaller sibling Freddie Mac in September 2008 after the two companies absorbed huge losses on risky mortgages that threatened to topple them. Since then, a federal regulator has controlled the two companies’ financial decisions.

So far, Fannie and Freddie have cost taxpayers about $170 billion – the largest bailout of the financial crisis. It could cost roughly $260 billion more to support the companies through 2014, after subtracting dividend payments, according to the government.

Mayopoulos will be the third CEO of Fannie Mae since the government takeover. Williams oversaw the restructuring of Fannie’s foreclosure-prevention efforts and managed the troubled company’s reorganization.

In his executive roles, Mayopoulos has managed Fannie’s human resources policies, communications and marketing, and government relations, the company said Tuesday.

Pressure has been building for the government to eliminate or transform Fannie and Freddie and reduce taxpayers’ exposure to further losses.

The Obama administration unveiled a plan last year to slowly dissolve Fannie and Freddie, with the goal of shrinking the government’s role in the mortgage system. The proposal would remake decades of federal policy aimed at getting Americans to buy homes and could make home loans more expensive.

Exactly how far the government’s role in mortgages would be reduced was left to Congress to decide. But all the options the administration presented would create a housing finance system that relies far more on private money.

Mayopoulos said Tuesday he will work closely with Freddie and the companies’ regulator, the Federal Housing Finance Administration, to help lay the foundation for a new system “that will be much more effective and reliable, and better for the country.”

At the same time, Fannie will continue to place high priority on helping distressed homeowners and reducing its losses on loans to benefit taxpayers, Mayopoulos said in a telephone interview.

Edward DeMarco, the FHFA’s acting director, said in a statement that Mayopoulos “brings a breadth of knowledge and experience in housing finance and financial services that is vital at this important time for Fannie Mae and the nation’s housing finance system.”

Fannie and McLean, Va.-based Freddie buy loans from lenders, package them into bonds with a guarantee against default and sell the bonds to investors. Together, the companies own or guarantee about half of U.S. home mortgages – about 31 million home loans – and nearly all new mortgages.

Before joining Fannie Mae in April 2009, Mayopoulos was executive vice president and general counsel of Bank of America Corp. He also has served as a senior executive at Deutsche Bank, Credit Suisse First Boston and Donaldson, Lufkin & Jenrette.

Last month, Freddie named Donald Layton, the former chief executive of discount brokerage firm E(asterisk) Trade Financial Corp., as its new CEO. He replaced Charles E. Haldeman Jr.

Under a new government policy, Mayopoulos’s and Layton’s salaries will be capped at $500,000 per year and annual bonuses will be eliminated for all employees. Those changes came after Congress pressured the government to stop big payouts at the bailed-out companies.

In December the Securities and Exchange Commission brought civil fraud charges against six former executives at the two companies, including former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron. They were accused of understating the volume of high-risk subprime mortgages that Fannie and Freddie held just before the housing bubble burst in 2007.

No current Fannie or Freddie employees were charged or implicated.

Q&A, MBA Chief Stevens, Moving to SunTrust, Braces for ‘Over-Regulation’

By Kate Berry

JUN 5, 2012 1:40pm ET

As head of the Mortgage Bankers Association, David H. Stevens spent the last year warning that excessive and ill-considered regulation could drag down the mortgage market.

As the new head of SunTrust Mortgage, he’ll have to face that regulation head-on.

Stevens, the former commissioner of the Federal Housing Administration, last week said that he would leave the MBA after little more than a year. He will take over SunTrust’s (STI) mortgage operations in mid-July, taking on a business that is still struggling with credit quality and repurchase requests – and trying to comply with new government requirements.

The mortgage industry is in “a state of over-regulation, which could ultimately result in the blockage of credit altogether,” Stevens told American Banker in an interview last week.

Though he said it would be “premature” to talk about his plans at the $172.3 billion-asset SunTrust, Stevens said he chose the Atlanta bank primarily because regional banks have made it through the financial crisis with far less damage to their reputations than the biggest banks have suffered.

“Every bank in America has to deal with mortgage issues,” Stevens said. “You can look at the in-foreclosure inventory across the country and there’s still a lot of work there.”

SunTrust has made noticeable improvements in credit quality and noninterest expenses in the last year. But like most banks, it is still struggling to contain mortgage repurchase costs, reduce non-performing loans and increase the volume of home purchase loans.

“From a growth standpoint, the key was to look for a bank platform that was committed to mortgages, and I do like the regional bank profile,” Stevens said, adding that SunTrust has “been able to take a look at both the legacy issues, which every bank is dealing with, and separate that from how they do the business on a go-forward basis.”

Stevens arrived at the MBA last May, after spending two years as commissioner of the FHA, where he increased enforcement actions against mortgage lenders. His decision to jump to the mortgage industry’s trade group last year raised some eyebrows, and a series in American Banker examined emails suggesting Stevens and his deputies had maintained cozy ties with the industry while at the FHA.

“I went to the MBA because I thought there was a lack of cohesive voice for mortgage management in Washington,” Stevens said last week. “I wanted to create a common voice on critical issues. I wanted to make sure we thought about our reputation. And I wanted to have the MBA return to its role of actually caring about responsible home ownership while creating a common voice for the industry.”

He added that he is leaving the MBA much sooner than he had planned to, “but this unique opportunity to return to the private sector would not wait. I leave a stronger MBA and will continue to be an active member and advocate” in the industry, as “an employer running a large substantial mortgage platform.”

In a wide-ranging interview with American Banker last week, Stevens weighed in on a wide array of issues facing the mortgage industry, including the “qualified mortgage” rule, the government’s role in the housing market and the future of the FHA.

What’s the biggest issue that the industry is dealing with right now?

DAVID STEVENS: We have to create protections for consumers going forward and make sure that we have rules the industry can operate under and be willing to lend in – that’s the dynamic tension and risk.

What is your view of the Consumer Financial Protection Bureau pushing back the release date last week of its “qualified mortgage” rule until the end of the year?

It’s a good idea as long as the rule was delayed for the right reasons. The wrong reason would be delaying it because of the timing of the [presidential] election. That would be a reason for concern and an indication of how impactful the final rule can be and how divisive it can be. It’s a really important rule and the greatest victim of the QM rule is the exact consumer we’re trying to protect, the first-time homebuyer without large wealth or one who may have lost their job.

The good news is that the debate has brought out a profound recognition of the downstream impact that this rule could create. The extended time will give [CFPB head] Richard Cordray and his team more time to look at the data and how it could impact responsible well-qualified borrowers.

If you look at the qualified mortgage rule, regardless of the “ability to pay” issue, all types of products from option arms to balloon payments to no doc/stated income loans are entirely eliminated forever. By eliminating these product features we have basically solved 95% of the problems that created the housing bubble. The experimentation of untested credit models and the layering of risk caused the problems in the first place. But the eagerness to stop any risk may have gone too far and may result in the U.S. having the tightest housing finance rules in the world. It’s the ‘ability to pay’ definition and the safe harbor debate that will impact who gets to buy a home and who doesn’t.

You’ve held various roles in private industry and government. Who is to blame for the current dysfunction of the housing market?

There are more entities involved in the mortgage space now than [ever before] in history. I’ve never seen a world where so many regulators, so many state legislators and legal entities, from state attorneys general to the Department of Justice, are all involved in mortgage finance, and that’s creating excessive levels of uncertainty in the market. There’s a role for Washington to play in clearly defining who’s on point for select issues on a national scale, because without that we’re going to have a continuous morass of players that can cause greater confusion.

Unfortunately the person who ultimately pays the price is the consumer, because all the costs of uncertainty get passed to the consumer through higher-cost loans or tighter credit, because lenders become afraid to lend. There are whole companies that have left the market, like MetLife (MET), or that have scaled back, like Bank of America (BAC), which creates less competition.

Where are we now in terms of resolving the legacy mortgage issues?

We’ve gone through stages. When I first joined the administration we were in the position of stopping the bleeding, because home prices were free-falling and it was about creating programs to prevent foreclosure. The Dodd-Frank Act hadn’t been passed yet. Now it’s transitioned to trying to find a pathway for certainty in the market. What concerns me is that now we’re at a point where it’s a state of over-regulation, which could ultimately result in the blockage of credit altogether. So it’s about getting the dynamic tension right between consumer protection and lending.

By the way, [regulators and policy-makers] are all well-intentioned, but it’s just creating confusion. Too many are wearing the hat of trying to come up with a solution for the future of housing finance.

What should the role of government be in the mortgage market?

I’ve always believed there’s a role for a government guarantee, because for people to invest and to bring capital into the U.S they need the government guarantee. Private capital is opportunistic. I believe that the role of government is too big in the mortgage finance system, so creating certainty as the economy recovers is extremely important to ensure that private capital will want to come back in. I still don’t see a clear path for that. We saw today [June 1] that the unemployment rate increased and the market overreacted. The euro is still clearly in crisis. Until we see some broader stability in the U.S. economy, we’re going to have this volatility. We’re in a huge eco-system of the world economy, and until there is a broader theme of stability, we will have a continued need for this large role of the government in the housing finance system.

But we’ve been here before. I started in the early 1980′s, when interest rates were 16% and lenders weren’t lending and FHA was a huge part of the market. It made up 50% of the market in Texas, Oklahoma and Colorado. People said at that time the economy would never recover and it did. This one will recover as well, it’s just going to take a while. This is a much deeper broader and national recession.

You played a role in the settlement early this year between the five largest banks and federal and state regulators. Were you happy with the outcome?

Happy isn’t the right word. I was working on the settlement in the very beginning. It was a very complex negotiation that involved five very sophisticated financial institutions and knowledgeable legal entities in Department of Justice and state attorneys general. It was a large group of highly-skilled people. This has been a terrible housing recession that everybody from the banks to policy makers would go back in time and wish they could change. The real challenge is getting through this to make sure this never happens again but also doesn’t overly constrain home ownership.

What about the dire predictions that the FHA will need a bailout of $50 billion from taxpayers?

The screams from the highest rafters that FHA was going to cost the taxpayers $50 billion have not come about. They haven’t cost taxpayers a penny and FHA is still operating under its own self-sustaining capital. Unlike Fannie Mae, Freddie Mac, or the banks, FHA has had no TARP funds and is fully self-sustaining on its own capital reserves and that’s going through the worst recession. It’s pretty difficult to accuse them of doing something wrong when there were so many failures. Will they make it through the rest of the recession on its own capital? The odds are better than even that they will. Lehman failed, Countrywide failed, Washington Mutual failed and Wachovia failed – and they all had TARP funds.

I didn’t respect FHA as much working there as I do today. Collecting a mortgage insurance premium on every loan is much different from the government-sponsored enterprises getting a guarantee fee. It gives FHA a greater cushion from default risk. My hope is that the current administration and future heads of FHA don’t pull back the credit characteristics and policies we put in place to tighten the portfolio. They need that revenue in to protect the taxpayer.

I also think the loan limits are too high and when they raised them for FHA and not the GSEs it created a disparity that is really not healthy for the long-term. Of course, they do very few loans above $700,000 but there should be considerations around whether there should be a larger down payment for higher loan amounts.

Fees get a high court reprieve

By KENNETH R. HARNEY Jun 1, 2012

In a decision that could have significant impacts on the fees that consumers pay in real estate transactions, the U.S. Supreme Court has ruled that “unearned” fees charged by lenders and other service providers do not violate federal law as long as they are not split with anyone else.

The court’s unanimous decision effectively reopens the door to controversial “administrative” fees levied by real estate brokers, and could encourage the practice of “marking up” of fees by mortgage lenders, settlement agents and others that had been banned by federal regulators for the past decade.

The ruling also represents a stinging defeat for the Obama administration’s Departments of Justice and Housing and Urban Development (HUD) – both of which had argued that charging unearned fees is illegal – and may be a shot across the bow of the new Consumer Financial Protection Bureau, which inherited the task of policing mortgage and settlement abuses from HUD.

The decision, handed down May 24, involved customers of Quicken Loans, the online mortgage company, who alleged that Quicken charged them “discount” fees but did not provide them lower interest rates on their mortgages, as is customary. Each loan discount fee, or “point,” is equal to 1 percent of the mortgage amount. The failure to provide a lower rate, the plaintiffs claimed, meant that Quicken pocketed their fees without providing anything commensurate in return, which is a violation of the federal Real Estate Settlement Procedures Act (RESPA).

Quicken denied the borrowers’ allegations and argued that in any event, the settlement procedures law, first enacted in 1974 to control widespread kickbacks paid by title insurance companies to realty agents and others, does not apply to situations where there is no split of the fees involved. Quicken’s borrowers maintained that the law does apply and cited a policy statement issued by HUD prohibiting imposition of fees where no actual work or service is provided to justify them.

Disputes over real estate and lending fees have led to a lengthy series of court battles in recent years, with some federal district and appellate courts siding with industry interpretations of the law and others siding with federal regulators and consumers. The Supreme Court accepted the Quicken case in part to resolve the differences among the judicial circuits so there would be a uniform legal standard on fees nationwide. The court’s ruling does not, however, affect state laws that prohibit certain fees or practices, including unearned settlement or mortgage charges.

Though the Quicken case centered on a lender’s fees, realty brokerage charges have also come under attack using HUD’s regulatory interpretation of the law. In a major federal case decided in Birmingham, Ala, in 2009, a court ruled that a realty firm’s add-on fees violated the law. In that case, a $149 extra fee was imposed by RealtySouth, a subsidiary of HomeServices of America, one of the largest brokerages in the country. Fees charged by other realty firms have been much higher – $250 or more in some cases.

Critics within the industry, such as Frank Llosa, a lawyer and broker in Northern Virginia, called such fees “bogus,” and “designed to confuse the customer and ultimately charge them more.” Defenders such as Laurie Janik, general counsel of the National Association of Realtors, said brokers “ought to be able to charge what they need to make a profit” in an environment of rising expenses and higher commission payouts to top agents.

After the RealtySouth ruling, Janik urged brokers to disclose the extra fees as integral parts of their compensation schedules – a percentage commission of, say 6 percent, plus a set fee, say $500. Janik also argued that federal law does not prohibit fees that are not split with other parties, and that RESPA was never intended to be a price-control statute – two views that were at the core of the Supreme Court’s decision in the Quicken case.

Where does this leave the issue? Will lenders, settlement agents and realty companies start tacking on extra fees for themselves, emboldened by the high court’s decision? Possibly. But legal experts warn that there could be pitfalls ahead for firms who tack on outrageous charges when no services are rendered. Laurence Platt, a banking attorney with the Washington, D.C., office of K&L Gates, LLP, cautions that the Consumer Financial Protection Bureau “has its own independent ability to declare practices unfair, deceptive or abusive,” and could still come after companies that, in the bureau’s view, are gouging the public.