OCC Notes Fewer Banks Tightening Underwriting Standards

The Office of Comptroller of the Currency
(OCC) recently completed its 18th annual “Survey of Credit
Underwriting Practices
.” The survey seeks to identify trends in lending
standards
and credit risks for the most common types of commercial and retail
credit offered by National Banks and Federal Savings Associations (FSA).  The latter was included for the first time in
this year’s survey.

The survey covers OCC’s examiner
assessments of underwriting standards at 87 banks with assets of three billion
dollars or more.  Examiners looked at
loan products for each company where loan volume was 2% or more of its
committed loan portfolio.  The survey covers
loans totaling $4.6 trillion as of December 31, 2011, representing 91% of total
loans in the national banking and FSA systems at that time.  The large banks discussed in the report are
the 18 largest by asset size supervised by the OCC’s large bank supervision
department; the other 69 banks are supervised by OCC’s medium size and
community bank supervision department. 
Underwriting standards refer to the terms and conditions under which
banks extend or renew credit such as financial and collateral requirements,
repayment programs, maturities, pricings, and covenants.

The results showed that underwriting
standards remain largely unchanged
from last year.  OCC examiners reported that those banks that changed
standards generally did so in response to shifts in economic outlook, the
competitive environment, or the banks risk appetite including a desire for
growth.  Loan portfolios that experienced
the most easing included indirect consumer, credit cards, large corporate,
asset base lending, and leverage loans. 
Portfolios that experienced the most tightening included high
loan-to-value (HLTV) home equity, international, commercial and residential
construction, affordable housing, and residential real estate loans.

Expectations regarding future health of
the economy
differed by bank and loan products but examiners reported that
economic outlook was one of the main reasons given for easing or tightening
standards.  Others were changes in risk
appetite and product performance. Factors contributing to eased standards were changes
in the competitive environment, increased competition and desire for growth and
increased market liquidity. 

The survey indicates that 77% of
examiner responses reflected that the overall level of credit risk will remain
either unchanged or improve over the next 12 months.  In last year’s survey 64% of the responses
showed an expectation for improvement in the level of credit risk over the
coming year. Because of the significant volume of real estate related loans,
the greatest credit risk in banks was general economic weakness and its results
and impact on real estate values.   

Eighty-four of the surveyed banks (97
percent) originate residential real estate loans.  There is a slow continued trend from
tightening to unchanged standards with 65 percent of the banks reporting
unchanged residential real estate underwriting standards.  Despite the many challenges and uncertainties
presented by the housing market, none of the banks exited the residential real
estate business during the past year however examiners reported that two banks
plan to do so in the coming year.  Additionally,
examiners indicated that quantity of risk inherent in these portfolios remained
unchanged or decreased at 81% of the banks.

Similar results were noted for
conventional home equity loans with 68% of banks keeping underwriting standards
unchanged and 18% easing standards since the 2001 survey.  Of the six banks that originated high
loan-to-value home equity loans, three banks have exited the business and one
plans to do so in the coming year

Commercial real estate (CRE) products
include residential construction, commercial construction, and all other CRE
loans.  Almost all surveyed banks offered
at least one type of CRE product and these remain a primary concern of examiners
given the current economic environment and some banks’ significant
concentrations in this product relative to their capital.  A majority of banks underwriting standards
remain unchanged for CRE; tightening continued in residential construction and
commercial (21 percent and 20 percent respectively).  Examiners site cited the distressed real
estate market, poor product performance, reduced risk appetite and changing
market strategy as the main reasons for the banks net tightening.

Nineteen banks (22 percent) offered
residential construction loan products but recent performance of these loans
has been poor and many banks have either exited the product or significantly
curtailed new originations.

Of the loan products surveyed 17% were originated
to sell, mostly large corporate loans, leveraged loans, international credits,
and asset based loans.  Examiners noted
different standards for loans originated to hold vs. loans originated to sell
in only one or two of the banks offering each product.  There has been continued improvement since
2008 in reducing the differences in hold vs. sell underwriting standards and
OCC continues to monitor and assess any differences.

…(read more)

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First Horizon’s Buybacks; Buyback Legal Chatter; Basel III and Construction Loans; Congress Snubs Small Business?

I have been subtly warning groups during speeches, and writing in this commentary, about the implications of Basel III. Most of the focus is on servicing & the value of it. But did you know that under the new Basel III rules, construction lending would likely go into the “high risk commercial real estate” category and require a 150% risk weighting? “Lenders would seek deals where a developer would contribute a substantial amount of cash equity; while banks would be less likely to let developers rely just on the equity from appraisals” per American Banker. And the government and the Fed are asking why banks aren’t lending? This is just another reason.

Last month we sold the house where my kids grew up, and I had a handyman remove the doorframe where we marked heights on birthdays. I am not mentioning this to turn the daily into a Hallmark card, but because it reminded me of one thing that the press seems to forget: a house is a home and not a share of stock. And when it comes to that, the popular press seems to forget that people need a place to live, that people want a good school district for their kids, a place to get to know the neighbors, a place to create an emotional attachment. I could go on and on, but there are very concrete reasons why people who are underwater on a house still make the payments, why many who supposedly saw the real estate decline didn’t sell their home, and why so many people don’t care about minute fluctuations in the price of housing based on the latest metric.

I’ll get off my soapbox, and get on with business: I think that the last time the S&P/Case-Shiller Home Price Index went up was during the Eisenhower Administration – until now. Seriously, for the first time in eight months the S&P/Case-Shiller Home Price Indices rose over levels of the previous month.  Data through April 2012 showed that on average home prices increased 1.3% during the month for both the 10- and 20-City Composites. Prices are still down 2.2% for the 10-City and 1.9% for the 20-City over figures for one year earlier but this is an improvement over the year-over-year losses of 2.9% 2.6% recorded in March. This report followed Monday’s news that New Home Sales jumped 7.6% in May to 369k and was up 19.8% from a year ago, and last week’s Existing Home Sales, Housing Starts and NAHB HMI which all contained some positive signs.

How’s this to grab one’s attention: “Congressional Subcommittee REFUSES Small Business Brokers and Appraisers a Seat at the Table.” The notice from the NAIHP goes on, “For the second time in a week, the Subcommittee on Insurance, Housing and Community Opportunity, Chaired by Rep. Judy Biggert (R-Illinois), refused small business housing professionals the right to be represented during Congressional testimony.” Here you go: http://www.naihp.org/.

Yes, there are plenty of rumors that the agencies are hotly pursuing buybacks to recoup taxpayer losses, and that the agencies are losing personnel except for QA & auditing. But that reasoning doesn’t help companies like First Horizon National Corp. It “cited new information it recently received from Fannie Mae as the basis for incurring the $272 million charge this second quarter. About $250 million will go to repurchase loans made with “inadequate or incorrect” documentation, and $22 million is being charged to address pending litigation.” I don’t make this stuff up.

Last week I received a legal question about buybacks. “I was asked by a former customer of a major investor’s correspondent lending group about how others are handling repurchase/make-whole requests on older vintage loans.  His experience has been that the investor will ask to be reimbursed for losses associated with loans that have been foreclosed and disposed of without being given an opportunity to refute the alleged rep and warrant deficiency.  He has had to hire a law firm to argue each of these requests and the major investor has backed off each time. Normally, when a correspondent is still active, there is obviously leverage against the correspondent under an implied or actual threat of being terminated as a customer if a make-whole is not made, and when an investor is no longer in the correspondent business, I’ve heard rumors of it being more inclined to back down but sometimes taking a former customer to court or ‘saber rattling’. Needless to say, it is expensive to have a lawyer prepare a rebuttal to a make-whole request, just to have the investor ultimately back-off – what to do?”

I turned this over to attorney Brian Levy, who wrote, “Your question about investor willingness to sue originators over repurchase claims is difficult to answer with specificity.  My clients have been able to settle and/or avoid litigation in every engagement that I have undertaken in this area. That does not mean, however, that the threat of investor repurchase litigation over individual loans is not real or that litigation is not occurring, but it has been my experience that these disputes can be resolved (or dismissed) through extensive and detailed settlement negotiations and information exchange.  Litigation over individual repurchase claims may be fairly unusual now, but so were repurchase claims entirely prior to 2007-2008. Due to the unique nature of each originator’s position and the facts around applicable repurchase claim(s), however, it would be reckless to assume one will not be sued on specific claims based on what is generally occurring in the industry or based on what may have been past investor appetite for litigation (although these are important elements to consider in one’s strategy).”

Brian goes on. “For example, much depends on the facts and circumstances of the loan(s) in question, whether there are any other relationships between the parties that can be leveraged (loans in the pipeline, warehouse lines etc.) the overall quality, stability and reputation of the originator and, significantly, the parties’ tolerance for risk, availability or need for reserves and the desire for finality.  Moreover, investor and originator appetite for lawsuits may change over time as strategies can change in organizations and as the few cases that have been filed begin to yield decisions that are more or less favorable to one side or another. Even the tenor of discussions or lack of attention to the matter can impact a party’s willingness to file a lawsuit. All of these issues should be explored with legal counsel as part of an originator’s comprehensive repurchase management strategy.” (If you’d like to reach Brian Levy with Katten & Temple, LLP, write to him at blevy@kattentemple.com.)

Here are some somewhat recent conference & investor updates, providing a flavor for the environment. They just don’t stop. As always, it is best to read the actual bulletin.

Down in California, it is time again for the CMBA’s Western Secondary conference. (I’ve been wandering around that San Francisco conference since 1986 – if those halls could talk…) The CMBA has presentations on “QM, QRM, the CFPB, Agency Direct Delivery – Reviving the Lost Art of Servicing Retained Execution, Compliance issues Facing State Licensed Mortgage Banks Today and How Regulatory Change will Impact Your Business and the Secondary Market, Manufacturing Quality – Steps to Produce a Quality Loan (Operation Focus),” and several other topics. Check it out.

In light of the increasing number of non-conforming transactions where the departure residence is retained by the borrower and is in a negative equity position, Wells Fargo issued a reminder that underwriters must weigh any and all risk factors evident in the loan file.  Each case should be weighed individually, as there are only so many situations underwriting guidelines can predict.  The Wells Seller Guide now states that, in a case where the departure residence won’t be sold at the time of closing and is in a negative equity position, paying down the lien or using additional reserves to cover the negative equity may be required to reduce overall risk.

Wells has issued another reminder that a signed Borrower Appraisal Acknowledgement is required for all loans.  The Acknowledgment, whether it’s the Wells-issued form or a custom document, must include the property address, complete lender name, borrower name, borrower signature, and borrower signature date.  If the form has checkboxes where the borrower can make a choice, these boxes must be ticked.

Due to changes to FHA Single Family Annual Mortgage Insurance and Up-Front Mortgage Insurance Premiums announced by HUD back in March, one of which requires lenders to determine the endorsement/insured date of the FHA loan as part of a Streamline Refinance transaction, Refinance Authorization results will need to be submitted to Wells with the closed loan package.  These results are necessary to ensure that the accurate MIP was applied.  This applies to all FHA Streamline Refinances with case numbers assigned on or after June 11, 2012, while loans purchased through Pass-Thru Express are excepted.

Wells’ government pricing adjusters are set to change on July 2nd.  For VA loans with scores between 620 and 639, the adjuster will go from -0.750 to -1.500.  The adjuster for loans with scores between 640 and 679, currently at -0.250, will change to -0.500.  This affects Best Effort registrations, Best Effort locks, Mandatory Commitments, Assignments of Trade, and Loan Specified Bulk Commitments.

How sensitive are our markets to European news? Sure, instead of buying our 10-yr yielding 1.65% you could buy a Spanish 10-yr yielding 6.74%. But there is instability, evidenced by this note from an MBS trader yesterday: “News of Merkel stating Europe would not have shared liability for debt ‘as long as she lives’ caused Treasuries to immediately surge higher, only to be met by better real money selling of 7s.  While the selling did help to stall the rally, the true relief didn’t come until Reuters posted a correction to its initial release, re-quoting Merkel as having said Europe would not have ‘total shared’ liability for debt as long as she lives.  The amendment took Treasuries off the highs ahead of the 2yr auction…”

Say all you want about the market, bond prices and yields are not doing a whole heckuva lot. Tuesday the 10-yr closed at 1.63%, very close to where it’s been all week, although there was some intra-day volatility blamed on Europe. (European problems will be with us for years, and paying attention to intra-day swings can become wearisome after years…) For agency mortgage-backed securities, volume has been around “average” all week, with the usual buyers (the Fed, hedge funds, money managers, overseas parties) absorbing it. Up one day, down another – yesterday was down/worse by about .250, which was about the same as the 10-yr T-note. We could have been helped by the Conference Board’s Consumer Confidence index which dropped for a fourth straight month, to 62 from a revised 64.4 in the prior month, but nope.

No one is getting any younger… (Part 1 of 2)
I very quietly confided to my best friend that I was having an affair. She turned to me and asked, “Are you having it catered?” And that, my friend, is the definition of ‘OLD’!

Just before the funeral services, the undertaker came up to the very elderly widow and asked, “How old was your husband?”
“98,” she replied. “Two years older than me.”
“So you’re 96,” the undertaker commented.
She responded, “Hardly worth going home, is it?”

Reporters interviewing a 104-year-old woman:
“And what do you think is the best thing about being 104?” the reporter asked.
She simply replied, “No peer pressure.”

I feel like my body has gotten totally out of shape, so I got my doctor’s permission to join a fitness club and start exercising.  I decided to take an aerobics class for seniors. I bent, twisted, gyrated, jumped up and down, and perspired for an hour. But, by the time I got my leotards on, the class was over.

…(read more)

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Mortgagee Letter 2012-10

Miscellaneous Underwriting
Issues- Rescission of Disputed Accounts and Collection Accounts Guidance
(Mortgagee Letter 2012-3)

Harvard’s State of Housing Report Says Home Construction Now Adding to GDP

Steadier job growth and improving
consumer confidence are now boosting home sales and home prices may finally
find a bottom this year according to the latest State of the Nation’s Housing report released this morning.  The report, produced by the Joint Center for
Housing Studies of Harvard University, says further that stronger home sales
should pave the way for a pick-up in single-family construction over the rest
of 2012.

Conditions, however, will keep this
recovery “subdued.”  The backlog of
nearly 2 million loans in foreclosure means that distressed sales will remain
elevated and will keep a downward pressure on prices and another 11.1 million
homeowners are underwater on their mortgages, dampening both sales of new homes
and investment in existing units.  While
vacancies have been declining the report notes, they still remain well above
normal, holding down demand for new construction in many markets.

What the for-sale market needs most, the
authors say is a sustained increase in employment.  This might in turn bring household formation
back to normal levels.  The depressed
pace of homebuilding has been a major factor in hiring and pulled down growth
in the gross domestic product (GDP) from 2006 to 2010.  Since the beginning of 2011, however, both home
construction and home improvement spending have made a positive contribution to
GDP in four out of five quarters.

Another bright spot is the rental market;
the number of renters surged by 5.1 million over the decade of the 2000s, the
largest decade-long increase in the postwar era.  This reflects not only growth in those
populations which are historically prone to rent – the young, minority, and low
income households, but foreclosures have driven others into the rental market.

Still the rental market has not fully
benefited from the large echo-boom generation because the recession has forced
a lot of young people to put off leaving home which usually means a move into
rental housing.  Once the economy
improves the echo-boomers should give the market a significant lift.

The rising demand for rentals has
sparked rent increases in many parts of the country; 38 of the 64 markets
tracked by MPF research had rent increases that outstripped inflation and all
but one of the remainder (Las Vegas) had at least a nominal increase in
2011.  Even in some cities hard hit by
foreclosures and the economy in general (Detroit, Cleveland) rents are rising.

The increase in rents has, in turn,
helped to stabilize the multifamily property market where prices are were
reported up by 10 percent in the fourth quarter of 2011 from one year earlier
and multifamily construction starts more than doubled from its trough to a
225,000 unit annual rate, providing a welcome boost to construction.

Homeownership continues to slide,
dipping to 66.1 percent in 2011 from 66.8 percent a year earlier and 69 percent
at its peak in 2004, but it is still higher than in the period from 1980 into
the early 1990s.  Rates for older
households continue to climb as the population ages, but the homeownership rate
for younger households will probably continue to decline over the next few
years.

The number of new homes added to the
housing stock in the 2002-2011 period was lower than in any other ten year span
since the early 1970s so it is hard to argue that overbuilding is dragging down
the market.  The excess housing supply is
largely a reflection of the slowdown in housing growth which resulted from the
decline in the rate at which younger people are forming households as noted above
and also because of a sharp drop in immigration.  But over the longer run, the growth and aging
of the current population should support the addition of about 1.0 million new
households per year for the next ten years. 
Immigration remains an unknown in this calculation, but even assuming
net inflows are half what was predicted by the U.S. Census in 2008, household
growth should average 1.18 million per year in 2010-2020.

The recession took a toll on household
income but did little to lessen the burden of housing costs.  Between 2007 and 2010 the number of
households paying more than half of their income for housing rose by 2.3
million to 20.2 million.  While renters
accounted for the vast majority of the increase, the number of severely
cost-burdened owners also rose more than 350,000 as many households took on
expensive mortgages they were later unable to refinance.  In addition, this recent increase is on top
of an increase in cost burdened households of 4.1 million in 2001-2007.

These cost burdened families face a big challenge.  Among families with children in the bottom
expenditure quartile of income and with the most severe housing cost burden,
only about three-fifths of the amount is spent on food, half as much on
clothes, and two-fifth on healthcare as is spent by families living in
affordable housing.

The Joint Center said there are few
prospects for a meaningful reduction in this cost burden
.  Funding for the federal Housing Choice Voucher
Program has increased only modestly since the recession and the only
significant growth in subsidized rental housing is through the Low Income
Housing Tax Credit which continues to add about 100,000 affordable units each
year.  If the current calls for reducing
domestic spending are realized “the nation would move even further away from
its longstanding goal of ensuring decent, affordable housing for all
Americans.”

On the road ahead, with moderate gains
in multifamily and single family construction and improving sales of existing
homes, housing should be a stronger contributor to economic growth than it has been
in years
.  The rental market is back on
track, but the owner occupied market still faces the same pressures it has for
years; distressed properties which hold down prices and owners who are unable
to sell because they are underwater. 

Actions such as changes in the Home
Affordable Modification Program, the servicing settlement, and more rapid
disposition of properties where homeownership cannot be maintained are helping
the market.  However, the greatest
potential for recovery of the for-sale market is its historic
affordability.  The dive in home prices
and record low mortgages rates make homebuying more attractive than it has been
in years but the limited availability of financing that meets the needs of many
borrowers, strict underwriting guidelines, and rising fees are inhibiting
sales. “With key mortgage lending regulations still undefined, it remains to be
seen to what extent and under what terms lenders will make credit available to
lower income and lower-wealth borrowers.”

…(read more)

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FHFA Sends Annual Report to Congress on GSEs, FHLBanks

As required under the Housing and
Economic Recovery Act (HERA), the director of The Federal Housing Finance
Agency (FHFA) submitted the agency’s annual Report to Congress on the two government
sponsored enterprises (GSEs)
for which it is responsible and for the Federal
Home Loan Banking System (FHLBanks.)  In
addition to a lengthy recounting of the performance of the regulated entities
during the course of 2011, FHFA also provided an assessment on their safety and
soundness including information on any material deficiencies in their
operations, their overall operational status, and an evaluation of their
performance in carrying out their respective missions.

FHFA reported that it had conducted an examination
of both GSEs as to their financial safety and soundness and overall risk
management practices on a framework known as GSEER which stands for Governance,
Solvency, Earnings, and Enterprise Risk which comprises credit, market, and
operational risk management.  The agency
assigned rating of critical concern to both Fannie Mae and Freddie Mac in a
number of areas and ratings of substantial concerns in others. 

In the case of Fannie Mae, the report
says that the GSE “exhibits critical financial weaknesses as evidenced by its
poor performance and condition and prospects”. 
Credit risk remains high but is somewhat mitigated by the higher quality
of the single family book of business since 2009.  Business operations are vulnerable to
disruption, especially by human capital risk, and capital is wholly dependent
on the support of the U.S. Treasury.

In the case of Freddie Mac FHFA says its
credit risk remains high, the control structure is weak, human capital risk is
elevated, and their capital is also wholly dependent on the Treasury.

The most significant
risks facing Fannie Mae are credit risk, human capital risk, dependence on a
legacy infrastructure that needs to be updated, and the need to execute the
strategic plan for the conservator ships. 
Fannie Mae’s management and its board were responsive throughout 2011 to
FHFA findings and are taking appropriate steps to resolve issues the report
says.  However Fannie Mae must continue
to identify and proactively reduce the risk and complexity of its business
activities, focus on loss mitigation and foreclosure prevention, and maintain
sound underwriting criteria for single family and multifamily portfolios.

FHFA assigns a limited concerns
rating to Fannie Mae governance, an upgrade from the last examination and is
working with the company to identify a new president and chief executive
officer.  This solvency or capital
classification for ratings remains suspended as it has been since the beginning
of conservatorship, but FHFA assigns earnings a critical concern rating.  Fannie Mae’s net losses increased in 2011 to $16.9
billion from $14 billion in 2010, driven primarily by high provisions for credit
losses.  New delinquencies along with
further declining home prices resulted in a substantial increase in loan loss
reserves.  These reserves increased $10.6
billion to $76.9 billion in 2011.  In
addition a steep decline in long-term interest rates led to mark-to-market
losses on derivatives used for hedging purposes.

Fannie Mae’s credit risk also rates
a critical concern.  Although risk is
high and the quality of risk management is adequate and the level of risk is
decreasing the principal concerns are the credit characteristics of Fannie Mae’s
legacy 2005 to 2008 vintage single-family book of business, opportunity’s to
improve multifamily risk management, and continued weakness of its mortgage
insurer counterparties.

FHFA assigns market risk a
significant concern rating, an upgrade from 2010.  Risk levels are high but the quality of risk
management is adequate.  The concerns are
largely centered around increased balance sheet illiquidity because of the
amount of distressed assets and whole loan portfolios resulting from loss
mitigation activities, the need to strengthen attendant risk management
practices, and the continued negative effects on earnings from the mark-to-market
negative effects from derivative contracts. 
However liquidity and funding risks are low and the related risk
management is adequate.

Operational
risk is a significant concern, another upgrade from 2010.  The level of risk is high and increasing but
the quality of operational risk management is adequate although Fannie Mae needs
to further strengthen project management. 
Its uncertain future, legacy information technology, manual processes that
reduce its flexibility, and the requirement to implement the strategic plan
keep operational and process risks at elevated levels.  However the company improved risk management
in 2011 by installing new operational risk leadership, implementing a risk
management framework, centralizing the reporting structure and other
innovations.

In conducting its examination of
Freddie Mac, FHFA focused on matters previously identified as requiring
attention and the board and management’s response to deficiencies and
weaknesses identified by internal and external audits.

Governance was considered a
significant concern in the examination of Freddie Mac.  The company’s enterprise risk management
structure continues to benefit from a recent redesign however management is
finding it difficult to maintain an adequate control structure because of
increased employee turnover and reliance on manual processes.  The quality of information the Board of
Directors receives has improved and FHFA is working with the board to identify
a new CEO.  The board should continue to
focus on the key risks and issues facing Freddie Mac including the effect
employee turnover has on its ability to manage its information technology.

Freddie Mac received a critical concerns
rating on earnings.  Total revenues
increased slightly in 2011 and credit related expenses and mark-to-market
losses on derivatives also increased.  Derivative
losses were offset partly by interest rate related gains on assets. 

Credit risk was also considered a critical
concern although it is decreasing and its risk management is considered
adequate.  As with Fannie Mae, the
principal concerns center around the GSE’s 2005 to 2008 vintage single family
loans, coupled with underwriting and controls in the multifamily business line,
weak mortgage insurer counterparties, and increased concentration of
counterparty risk.   FHFA said that the
higher quality of Freddie’s more recent single family business and management’s
success in loss mitigation is alleviating some concerns.

Market risk is considered a significant
concern.  The level is high relative to
earnings and capital for the quality of risk management is adequate.  The retained portfolio’s growing proportion
of illiquid assets is increasing risk because of the level of distressed assets
and whole loan portfolios.  These assets
are less liquid, causing prepayment modeling difficulties and less reliable
interest rate risk metrics.  Human
capital risk in the investment and capital markets group and continued negative
effects from the mark-to-market derivative contracts are also a concern. 

Operational risk is a critical concern
as it is high and increasing and the quality of risk management needs
improvement.  Human capital risk and the dependence
on legacy operational and information technology infrastructure are among the
highest risks facing the GSEs. 

Model risk is a significant
concern but while the level is high it is stable.  FHFA’s concerns include the timeliness of
model valuations and the efficacy of models in the current economic
environment.

FHFA
followed up a special review in October of 2011 with a directive requiring
Freddie Mac to phase out its retained attorney network and to work with FHFA
and Fannie Mae through the Servicing Alignment Initiative to develop and
implement consistent requirements, policies, and processes for default and foreclosure-related
legal services.

FHFA
reported that as of the end of 2011, the FHLBanks exceeded the minimum leverage
ratio by having at least 4 percent capital-to-assets.  The weighted average regulatory capital to assets
ratio for the system was 6.9 percent in 2011 compared to 6.5 percent in 2010.  All FHLBanks were profitable for the year and
the system’s advance business continues to operate with no credit losses.  However the quality of the FHLBanks’
investments in private label mortgage backed securities (MBS) remains a
significant concern.  Exposure to such
securities dropped by 20 percent during 2011 as did the credit charges
associated with the securities.

During
2011 two FHLBanks were under consent orders because of their financial
conditions.  The FHLBank of Seattle saw deterioration
in the value of its private label MBS starting in 2010 while Chicago had been
operating under a cease and desist order since October 2007.  Seattle remains under the enforcement action
but Chicago’s order was removed in early 2012.

The
overall all scale of the FHL banks advance operations continued to decline in
2011 reaching $418 billion at year end compared to $479 billion at the end of
2010.  Investments in private label MBS
have adversely affected the overall operation of some banks reducing their
ability to repurchase or redeem stock as the banks shrunk.  FHFA has taken action where needed to address
this problem.

…(read more)

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