Housing Industry Reacts to State of the Union

Housing featured prominently in
President Obama’s State of the Union speech on Tuesday night.  The President made two specific proposals,
one to deal with the ghosts of housing past, the other to provide expanded
credit to homeowners.

In contrast to the settlement with banks
that Obama was widely rumored to announce
at the State of the Union, he instead directed Attorney General Eric Holder to
create a new office on Mortgage Origination and Securitization Abuses.  The President said, “The American people
deserve a robust and comprehensive investigation into the global financial meltdown
to ensure nothing like it ever happens again.”

According to the Huffington Post, the new
office will take a three-pronged approach to the issue, holding financial
institutions accountable for abuses, compensating victims, and providing relief
for homeowners, and will operate as part of the existing Financial Fraud
Enforcement Task Force.  On Wednesday several
news outlets were reporting that the unit will be chaired by State Attorney
General Eric Schneiderman, who has been regarded as among the toughest of state
law enforcement officers with Lanny Breuer, an assistant attorney general in
the Criminal Division of the Department of Justice (DOJ) as co-chair.  Others reported to be in the group are Robert
Khuzami, director of enforcement at the Securities and Exchange Commission,
U.S. Attorney for Colorado John Walsh and Tony West, assistant AG, DOJ. 

The President’s second and more
broad-reaching proposal was for a massive refinancing of mortgage loans that
would reach beyond the current government initiates such as the Home Affordable
Refinance Program (HARP).  While few
details are available, the President said that his proposed initiative would
cut red tape and could save homeowners about $3,000 a year on their mortgage
payments because of the current historically low rates.  Unlike HARP, the program would apply to all
borrowers whether or not their current mortgages are government-backed and
would be paid for by a small fee on the largest financial institutions. Obama
did not mention principal reduction in his proposal.

Bloomberg is reporting that the program is
Obama’s response to a call by Fed Chairman Ben Bernanke in a paper sent to Congress
earlier this month for the administration to offer more aid for housing.   While largely dealing with the need to
convert excess housing inventory to rental property, the paper also touched on
the benefits of easing refinancing beyond the HARP program.

Bloomberg also outlined some of the
tradeoffs of a super-refinancing program saying it may damage investors in
government-backed securities by more quickly paying off those with high coupons
and limited default risk while aiding holders of other home-loan securities and
banks.  Word that such a proposal might be
forthcoming in the President’s speech, Bloomberg said, “Roiled the market for
Fannie Mae and Freddie Mac securities according to a note to clients by Bank of
America Corp.”

The Associated Press quoted Stan
Humphries, chief economist at Zillow as saying the refinancing could allow 10
million more homeowners to refinance and, by preventing foreclosures and
freeing up money for Americans to spend, could give the economy a $40 to $75
billion jolt.  The Federal Reserve, the
AP said, was more cautious, estimating that 2.5 million additional homeowners
might be able to refinance.

The refinancing initiative would require
approval by Congress, however the day after the speech the focus was on other issues
such as tax reform and we could not find any reaction from members of Congress
specific to the refinancing issue.  Even the
Mortgage Bankers Association (MBA) issued a statement from its president David
H. Stevens which did not mention the refinancing program, obliquely addressing
instead the creation of the mortgage fraud office.    

“Like the
President, we believe it is time to move forward with rebuilding this nation’s
housing market and that lenders and borrowers alike contributed to the housing
crisis we are currently in.  Let there also be no mistake, those who
committed illegal acts ought to face the consequences, if they haven’t already.”

Stevens
then called for a clear national housing policy “that establishes certainty for
lenders and borrowers alike.”  This,
according to MBA, requires finalizing the Risk Retention/Qualified Residential
Mortgage (QRM) rule “in a way that ensures access to credit for all qualified
borrowers,” establishing working national servicing standards, developing a
legal safe-harbor for Dodd-Frank QRM/Ability to Repay requirements, and “Move(ing)
quickly to determine the proper role of the federal government in the mortgage market
in order to ensure sufficient mortgage liquidity through all markets, good and
bad.

Creation
of the fraud office generated substantial comment, much of which was
unfavorable.  A lot of the criticism
focused on the lack of prosecutions that have emerged from the existing fraud
task force and there was a strong suspicion voiced by the liberal blogosphere
that the new office was merely a cover for pushing the DOJ/50-state attorneys
general settlement with major banks.  However,
one analysis, written by Shahien Nasiripour in U.S. Politics and Policies pointed out the wider powers of
enforcement available to attorneys general in some states such as New York’s
Martin Act and how the states and federal government might use the new office
to pool their powers and responsibilities to the benefit of each.  

The new
office will not lure California Attorney General Kamala Harris back into the
fold.  Harris and Schneiderman both
withdrew from the national foreclosure settlement last year, feeling that it
did not represent the interest of their respective states.  Despite the appointment of Schneiderman to
head the new office, Harris announced on Wednesday that she would not be
rejoining her fellow AGs
in their negotiations saying that the latest
settlement proposal was inadequate for California.  A spokesman for her office said, “Our
state has been clear about what any multistate settlement must contain:
transparency, relief going to the most distressed homeowners, and meaningful
enforcement that ensures accountability. At this point, this deal does not
suffice for California.”

Here’s the video of the speech beginning at the point discussing housing related issues…

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SENIOR ADMINISTRATION OFFICIALS LEAD WHITE HOUSE FORUM ON SUSTAINABLE COMMUNITIES

WASHINGTON – The Obama Administration today convened a meeting with more than 50 local government and business leaders to discuss the role of sustainability in economic development and job creation. The gathering coincided with the third anniversary of the creation of the Partnership for Sustainable Communities, a landmark collaboration between the U.S. Department of Housing and Urban Development (HUD), the U.S. Department of Transportation (DOT) and the U.S. Environmental Protection Agency (EPA).

Congress Hears Different Views on Appraisal Regulation

Among those testifying at a hearing of the House Committee on Financial Oversight’s subcommittee on
Insurance, Housing, and Community Opportunity were William B.
Shear
, director, Financial Markets and Community Investment, Government
Accountability Office (GAO) and Sara
W. Stephens, president of the Appraisal Institute.  Shear restated GAO’s earlier recommendations
that federal regulators set minimum standards for registering Appraisal
Management Companies (AMC)
before a hearing on
Thursday while Stephens countered
that non-congressionally mandated regulations are threatening to hamstring and jeopardize the real estate appraisal
profession altogether.

Shear presented results of a GAO
study on appraisal oversight which confirmed that appraisals remain the most
popular form of property valuation used by Freddie Mac, Fannie Mae (the GSEs) and
major lenders.  While other valuation
methods such as broker opinions and automatic valuation models (AVM) are
quicker and less expensive, they are also considered less reliable and are not
generally used for loan originations.   While GAO did not capture data on the
prevalence of approaches used to perform appraisals, the sales comparison
approach is required by the GSEs and FHA and is reportedly used in nearly all
appraisals.

Charges of conflict of interest have
changed the ways in which appraisers are selected and raised concerns about the
oversight of AMCs which often manage appraisals for lenders, GAO said.  The Dodd-Frank Act reinforced earlier
requirements and guidance about selecting appraisers and prohibiting coercion
and this has encouraged more lenders to turn to AMCs.  This in turn has raised questions about the
oversight of these firms and their impact on appraisal quality.

Federal regulators and the
enterprises said they hold lenders responsible for ensuring that AMCs’ policies
and practices meet their requirements but that they generally do not directly
examine AMCs’ operations.  Some industry
participants voiced concerns that some AMCs may prioritize low costs and speed
over quality and competence. The Dodd-Frank Act requires state appraiser
licensing boards to supervise AMCs and requires other federal regulators to
establish minimum standards for states to apply in registering them. Setting
minimum standards that address key functions AMCs perform on behalf of lenders
could provide greater assurance of the quality of the appraisals those AMCs
provide GAO said, but as of June 2012, federal regulators had not completed
rulemaking for such standards.

The Appraisal Subcommittee (ASC)
established in 1989 by the Title XI of the Financial Institutions Reform,
Recover, and Enforcement Act (FIRREA) has been monitoring the appraisal function
but its effectiveness has been limited by several weaknesses which include failing
to both define the criteria it uses to assess state compliance with Title XI and
the scope of its role in monitoring the appraisal requirements of federal
banking regulators.

ASC also lacks specific policies for
determining whether activities of the Appraisal Foundation (a private nonprofit
organization that sets criteria for appraisals and appraisers) that are funded
by ASC grants are Title XI-related. Not having appropriate policies and
procedures is inconsistent with federal internal control standards that are
designed to promote the effectiveness and efficiency of federal activities.

Appraisals and other types of real
estate valuations have come under increased scrutiny following the mortgage
crisis
and Dodd-Frank codified several requirements for the independence of
appraisers and expanded the role of ASC. 
It also directed GAO to conduct two studies which were the source of Shear’s
testimony before the committee.

GAO recommends that federal
regulators consider key AMC functions in rulemaking to set minimum standards
for registering AMCs, that ASC clarify the criteria it uses to assess states’
compliance with Title XI of FIRREA and develop specific policies and procedures
for monitoring the federal banking regulators and the Appraisal Foundation.  ASC and regulators are either taking steps to
implement these recommendations or considering doing so.

Although she was not speaking directly
to the GAO report, Stephens in a written statement told committee members that,
although appraising is the most heavily regulated activity within the mortgage
and real estate sectors
, regulatory agencies are planning to enact further
changes that would threaten to tie the hands of appraisers, curtail innovation
and increase regulatory burdens on appraisers and financial institutions.

Stephens was testifying directly
against The Appraisal Foundation’s creation of a new Appraisal Practices Board
delving into appraisal practice matters without Congressional authorization.
The Foundation does not have authority to codify appraisal methods and
techniques, she said, and called it a dangerous and unjustified move.  “The regulatory burden for appraisers is on
the cusp of being expanded exponentially.”

“Appraisal methods and techniques
require judgment by the appraiser. It is assumed that the appraiser has
been thoroughly trained to judge appropriate situations. The choice of methods
and techniques are the responsibility of the appraiser in the development of
his/her scope of work” she said. For instance, whether to use reproduction cost
or replacement cost or when and how to adjust for sales concessions are
dependent on the actions of the marketplace and should not be mandated by a
body such as the Appraisal Practices Board. Hard “rules of thumb” do not work
within valuation because there always is an exception to the rule, she said.

The Appraisal Institute offered a
long list of recommendations
to Congress including that they:

  • realign the appraisal regulatory
    structure with those of other industries in the real estate and mortgage
    sectors
  • Protect the independence of the
    appraisal standards-setting process and require that standards for federally
    related transactions be issued by an entity that does not develop or offer
    education for appraisers.
  • Establish limitations around the
    Appraisal Practices Board specifying that no tax dollars be used to fund the
    venture, voluntary guidance be truly voluntary, and meaningful oversight over
    the de facto regulatory action of the Foundation be established.
  • Reiterate that the Foundation does
    not have legislative authorization in the area of “methods and techniques” and
    “appraiser education.”
  • Authorize the GSEs and other agencies
    to halt purchase or guarantees of loans in states that maintain deficient
    appraiser regulatory regimes and ensure that ongoing federal support for the
    GSEs or any replacement maintains consistent appraisal rules.

The Institute said states should be restricted from
codifying voluntary guidance into state law or regulation and the Appraisal
Standards Board prohibited from specifically
referencing its works within the Uniform Standards of Professional Appraisal
Practice and laws should be established to empower state boards to investigate
and prosecute complaints involving appraisers.

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Community Lenders want Smaller GSEs Retained in Secondary Market Role

The Community Mortgage Lenders of
America
(CMLA) is urging policy makers to consider retaining the positive aspects
of Fannie Mae and Freddie Mac
in any future secondary market design.  CMLA is asking that a smaller Fannie and
Freddie be configured to serve 30-35 percent of the overall secondary mortgage
market while being barred from securitizing or investing in anything but plain “vanilla”
mortgages.

The trade association stated its
preferences in a letter to the secretaries of Housing and Urban Development
(HUD), Treasury, and the Acting Director of the Federal Housing Finance Agency
(FHFA) as well as the chairs and ranking members of two congressional
committees which will be involved in the future definition of the market.    

CML said
the two government sponsored enterprises (GSEs) have benefited from the strong
oversight and leadership they have received from FHFA and that has been
reflected in the housing market where credit has remained available primarily
because of their presence.  While the
housing industry, Congress, Treasury, HUD, and the FHFA are seeking clarity on
how the GSEs should perform going forward, CMLA “believes that the housing
industry and the public at large are best served through a sensible and calculated
reformation of the GSEs that reduces their footprint in the industry while at
the same time allowing them to serve their historically critical functions.”

The CMLA endorses a future whereby Fannie and
Freddie shrink to serve 30-35 percent of the overall secondary mortgage market,
and are barred from securitizing or investing in anything but plain
“vanilla” mortgages.

While the FHFA’s October 2011 projections shows
that the balance sheets of the GSE’s are improving, FHFA has also expressed
doubt that they will ever be able to repay the government its investment during
the crisis.  CMLA believes that the
taxpayer can be repaid through creative and thoughtful planning and through
tailoring an increase in guarantee fees to more accurately price risk. 

There are a number of principles that should
inform creation of a fair and effective secondary mortgage market according to
CMLA:

1.  
Standardization reduces
costs

2.  
Liquidity is needed

3.  
Conventional lending
should be protected

4.  
Loss mitigation
procedures should be retained and further enhanced

5.  
Risk must be made
explicit

6.  
Market concentration
should be reduced

7.  
Portfolio flexibility
should be increased

8.  
Proper use of
Guarantee Fees must be required

9.  
Reform must include
standards for the non-GSE Secondary Market.

The letter states that a sensible and calculated
reformation of the GSEs will result in continued liquidity and stability
without an unnecessary disruption
to the secondary market, “or worse, a
concentration of the secondary market within a limited number of large
banks/servicers.”  CMLA sets out the
following steps for the GSEs to complete within a transition time and
recognizing market realities.

  • Pay an explicit
    backstop fee to the federal government;
  • Be prevented by
    statute from securitizing or investing risky mortgages as defined by the
    Qualified Residential Mortgage Rule;
  • Be shrunk and
    normalized to sustain roughly 30 to 35 percent of the secondary market
  • Continue to be required
    to serve lenders of all sizes and to nurture smaller markets in areas of market
    concentration;
  • Continue to provide
    standardization of origination documentation, servicing practices,
    securitization terms and modification/foreclosure strategies as a policy of
    consumer protection;
  • Reduce and maintain
    portfolios over time, but only as transitional market pricing reduces the
    portfolios. Given that the portfolios
    provide a stabilizing influence of mortgage pricing and that the FHFA has said
    the portfolios will only cause 9 percent of overall losses “any forced downsizing
    seems politically motivated to benefit large banks and Wall Street.”
  • Establish a governing
    board to maintain and set a competitive guarantee fee following the public
    utility model with funds generated to be retained in the housing industry for
    the benefit of taxpayers;
  • Regulate
    post-conservatorship executive compensation through a governing board to
    prevent excessive risk-taking.

CMLA says it is the first trade group to call for
the GSEs to remain intact.  Mark
McDougald, Chairman of the organization said, “Our plan is forward-looking
and will result in distinct changes in the secondary market. However, we call
on Washington to move expeditiously and to avoid
drastic, politically-driven changes that will harm small lenders and the small
communities in which they serve,”

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RMBS Investigators Announce Website, Coordination Team

The Residential Mortgage-Backed Securities (RMBS) Working Group unveiled a new website on Thursday to enable “whistleblowers” to report mortgage-backed securities (MBS) related misconduct.  The group also announced the creation of a new team to coordinate various securities-related investigations around the country.

The Working Group is part of the Financial Fraud Enforcement Task Force (FFETF) created in January to address fraud leading to the financial crisis.  The group is led by five co-chairs representing the civil and criminal divisions of the Department of Justice, the Securities and Exchange Commission, and two attorneys general from New York and Colorado.  According to a press release, the working group and its members are focused on investigating potential false or misleading statements, deception or other misconduct by market participants in the creation, packaging and sale of mortgage-backed securities. 

The new website, www.stopfraud.gov/rmbs.html is designed as a “call to those insiders who know about fraud that occurred in the RMBS market, who know it’s time to expose that fraud, and who want to help us hold accountable those individuals and institutions who broke the law in pursuit of bigger paydays, according to Acting Associate Attorney General Tony West.  He said that while the working group has done a tremendous amount of investigative work already and has issued more than 24 civil subpoenas, it is particularly valuable to hear from insiders. “There are scores of people who worked in the RMBS market who acted responsibly but who also may have witnessed greed and misconduct that crossed the legal line and created havoc for investors, homeowners and our economy.  We want to hear from them.”

He stressed that whistleblowers enjoy special legal protection and said that if they summon the courage to report to the group “we will do everything we can to maintain their confidence and trust.”

Each of the Working Group co-chairs has access to different investigative resources and each has brought existing investigations to the table so the new team announced Thursday will attempt to facilitate communication and coordination among the various agencies conducting investigations nationwide.  The new team will consist of criminal prosecutors, civil attorneys and FBI investigators who are coordinating federal and state investigations nationwide.  The team will be chaired by Matthew Stegman, a career white-collar prosecutor.

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