FHA tightens rules, penalties for mortgage lenders
Via HousingWire
Original Article: http://www.housingwire.com/2012/01/20/fha-toughens-rules-penalties-for-mortgage-lenders
The Federal Housing Administration will toughen its standards for approving lenders that insure mortgages on its behalf and force more of them to buyback defaulted loans.
FHA Commissioner Carol Galante said the upcoming rule changes will help the agency protect its Mutual Mortgage Insurance Fund, which, according to some, is in danger of needing a bailout. The fund slipped to a 0.24% capital ratio in the fiscal year 2011, down from 0.5% the year before.
The rule was initially proposed in October 2010 and finalized Friday.
The rule changes apply to lenders authorized to insure mortgages for the FHA without first submitting documents to the agency. Roughly 80% of all FHA-insured mortgages are done this way.
The FHA will make it tougher to get approval for the coveted status. According to the new rule, a lender must hold a serious delinquency rate at or below 150% of the program’s average for the two years prior to its application. This rate will apply to all states in which the lender does business.
Also, the final rule forces lenders to indemnify – or reimburse FHA for an insurance claim – if the lender “knew or should have known” of any fraud or misrepresentation involved. Lenders would be on the hook for indemnification if the loan defaults within five years of origination.
Some commentary from the industry asked it to be shorted to a two or three year window, because problems that occur after then are due to job loss or divorce rather than decisions made at origination. FHA wouldn’t budge and said adopting the shorter timeframe “would be inconsistent with proper risk management practices.”
Others wanted clarification on whether or not the FHA would judge nationwide lenders with others operating within a smaller geographic area when determining approval or renewal of the status. They recommended larger lenders be held to a claim rate up to 150% of the national average, rather than just the states in does business in.
FHA didn’t amend the rule based on these comments either.
In a separate proposal, the FHA is changing the maximum allowable amount of seller concessions, or how much the seller contributes to the down payment or closing costs. The FHA said it will be reduced because the current level creates incentives to inflate the appraised value of the home.
Galante said the FHA will “continue to strike a balance” between managing its risk and continuing to provide support to a still struggling housing market.
“Taken together, the changes announced today will protect FHA’s insurance fund from unnecessary and inappropriate risks while offering clear guidance to lenders regarding HUD’s underwriting expectations,” Galante said.
Loan Originator Compensation: The Regulatory Examination
Via National Mortgage Professional
Original Article: http://nationalmortgageprofessional.com/news28068/loan-originator-compensation-regulatory-examination
Since April 6, 2011, the mortgage industry has been required to implement the new loan originator (LO) compensation rules (Rule). The Rule applies to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 6, 2011.1 The Rule placed restrictions on residential mortgage loan transactions in order to protect consumers against the unfairness, deception, and abuse that can arise with certain loan origination compensation practices, generally prohibits payments to loan originators based on loan terms and conditions, eliminates dual compensation to originators by consumers and any other person and prohibits “steering” consumers to loans to receive greater compensation.
I have extensively explored the features of this Rule, unraveling its complexity in articles, newsletters, presentations, and panels.2 Indeed, I have even published a compendium of analysis, called the FAQs Outline–Loan Originator Compensation, which, as of this writing, consists of more than 400 Frequently Asked Questions and reaches in excess of 130 pages.3 These are deep and narrow waters, and considerable caution is needed in order to navigate their many demanding twists and turns.
The development of these rules, from a regulatory perspective, stretches back to August 26, 2009, when the Federal Reserve Board (FRB) published a Proposed Rule in the Federal Register pertaining to closed-end credit; to July 21, 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)4 enacted Title XIV into law, which amended the Truth-in-Lending Act (TILA) to establish certain mortgage loan origination standards; then to Aug. 16, 2010, when the FRB published its Final Rules amending Regulation Z (TILA’s implementing regulation); on through Sept. 24, 2010, as the FRB issued final rulemaking and official staff commentary with respect to the loan originator compensation rules and anti-steering provisions (Rule); and finally coming to a virtual full stop on Jan. 26, 2011, when the FRB issued its “Compliance Guide for Small Entities on Loan Originator Compensation and Steering.”5 After that, the FRB offered some conference calls, a Webinar—which cleared up some confusion, while causing still other confusion—and occasional updates of the oral, rather than the written, official variety.6
When April 6, 2011 arrived, the mortgage industry was still scrambling to understand the Rule, how to implement it across various origination channels, and, most importantly, how to integrate it into operational, logistical, and financial components. Vendors provided considerable updates and integration features. Nevertheless, for months afterward the Rule continued to perplex and frustrate, particularly with respect to properly implementing disclosures and compensation plans. It still causes considerable consternation.
As we all know, generally there is no regulation issued—whether the statutes are at the federal or state level—that does not have a corresponding regulatory examination to assure enforcement. And so it goes: on Oct. 6, 2011—exactly six months to the day when the Rule became effective—the first examination guidelines for loan originator compensation were promulgated.7
In the “State Non-Depository Examiner Guidelines for Regulation Z—Loan Originator Compensation Rule,” hereinafter “Examiner Guidelines,” issued by the Multi-State Mortgage Committee (MMC), we now have a pretty good idea of the direction that federal and state regulators will be taking in their regulatory examinations for loan originator compensation. The MMC is a 10-state representative body created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR).8
Are these examination guidelines perfectly worked through? Not really. Not yet. After some field testing, we should expect revisions. But as a first stab at a complex issue, they are helpful in giving a sense of the kind of information and documentation that examiners will be reviewing. These are revised procedures and they supersede the Regulation Z Interagency examination procedures. The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC) has approved interagency examination procedures for Regulation Z—Truth-in-Lending, including the Rule. The Examiner Guidelines supplement the Interagency procedures and are intended to assist state regulators of non-depository mortgage loan originators and creditors in standardized and uniform reviews of the Rule.
When the aforementioned Examiner Guidelines were issued, my firm re-set our audit and due diligence reviews for the Rule to accord with them, even in the midst of actual reviews of loan originator compensation compliance that we were then conducting for our clients.
Expect the unexpected
As I have said many times, preparation is protection. Don’t wait for the regulator’s Document Request letter to implement any regulatory requirement. If you wait, by then it’s often too late. Remember, most examinations are look-backs, reaching to the previous examination, or a stated timeframe previous to the current examination. Most examiners have a “No Tolerance” view of firms that cannot provide supporting documents and information in a timely manner. The “record speaks for itself” is the inflexible standard! Our audit and due diligence reviews are the property of our client, and as fully confidential as if the client conducted its own review, with its internal resources—which, of course, is certainly a viable option. So, there really is no excuse for not being prepared for a regulatory examination for loan originator compensation or any other examination.
In my view, undertaking preparedness action for a loan originator compensation examination should consist of the following basics.9 My remarks include some of my firm’s audit and due diligence practices as well as certain features of the recently issued Examiner Guidelines.
Preparation is protection
Review construct
►It is critical to set forth the bounds of the review. Indicate a research range that utilizes an audit sequence which, in part, incorporates federal Interagency procedures and guidelines implemented prior to the effective date of the Rule, as well as federal Interagency procedures and guidelines effective after the date of the Rule, as promulgated by the MMC examiner guidelines, any federal agency, and, when issued, state government agencies.
►A significant portion of the review should be devoted to (1) completing the Institution Information Request and Institution Questionnaire provided in the Examiner Guidelines, (2) assembling items required in a Document Request, (3) providing information asked for in an Audit Checklist (whether specifically designed or Interagency), and (4) including independent review criteria through documentation review, on-site transaction testing (if required), off-site sampling of transaction documents, and interviews of institution staff or other parties.
Review components
►Report of findings
►Review of policy and procedures
►Institution information request
►Institution questionnaire
►Document request
►Auditing of sampling indicia
Methodology
There are several ways to go about preparing for a regulatory examination of loan originator compensation.
Prior to determining the most suitable procedures to follow, three Modules should be outlined, as follows:
Module 1: Examiner checklist
This consists of certain kinds of questions that would be expected to guide the examiner throughout the course of the examination. It is important to be familiar with the criteria that will be applied.
Module 2: Institution information request
The information that we would seek does not apply to dates prior to April 6, 2011. However, this module does take into consideration a very comprehensive review of all information and documentation that affect loan originator compensation.
Module 3: Institution questionnaire
This module is meant to save time and resources. We usually incorporate this in every Document Request, and, unless we direct otherwise, we expect this questionnaire to be completed and returned to us prior to our audit and due diligence review. Most clients know to support their answers with documentation. Certain questions, though, may be answered with a Yes or No response, but most questions require comprehensive, fully documentable responses.
Scope
There are, essentially, three options in fulfilling the scope of exam preparedness, each of which consists of one or more of the aforementioned modules.
Full scope
The Full Scope requires the completion of Modules 2 and Module 3, followed by completion of Module 1 through a documentation review, on-site transaction testing, and interviews of institution staff or other parties.
Limited scope
A Limited Scope only requires completion of Module 1, and it excludes transaction testing and interviews, based on the institution’s responses to Modules 2 and 3.
Limited scope with off-site testing
This review combines the Limited Scope with off-site sampling of transaction documents and/or telephone interviews of institution staff or other parties.
Caveat: Before moving on to the next section, I want to mention that the appropriate risk management approach vis-à-vis the selection of the scope depends on a financial institution’s type, size, complexity, and risk profile. Conferring with a risk management professional would be helpful to determining which scope is most suited to providing the level of exam preparedness needed.
Information questionnaire
Please give earnest consideration to the following questions, as these will come up in one form or another during an examination of loan origination compensation. The financial institution may or may not know the answers to all the questions, but that very fact demonstrates weakness in policies, procedures, and compliance enforcement. When my firm issues a Document Request, the Information Questionnaire is now always included. Prior to the examination, it is unlikely that the examiner will provide information about appropriate answers to these kinds of questions. While some of the questions may seem relatively simple on the surface, they are not really simple at all. The answers are either clearly stated or they are not, and if they are not stated or incorrectly stated, this in itself alerts the examiner to the financial institution’s level of preparedness, its management competence, its implementation awareness, and the additional information and documentation that may be need to be requested for the examination.
1. How are loan originators compensated? Provide details of all compensation procedures and calculations.
2. What incentive plans are offered to loan originators? Provide details.
3. Are loan originators ever compensated based on:
a. The interest rate or Annual Percentage Rate obtained on a loan?
b. The loan to value obtained on a loan?
c. Originating a loan with a prepayment penalty?
d. The amount of loan fees paid to the institution or creditor?
4. Are credit scores a determining factor in the amount of compensation earned by a loan originator? Explain.
5. Is debt to income a determining factor in the amount of compensation earned by a loan originator? Explain.
6. Are loan originators allowed to receive reimbursement for third party costs (i.e., appraisal, credit report, et cetera)?
7. Are loan originators allowed to charge more for third party costs than the actual cost of the service and retain such costs as compensation? Explain.
8. Are loan originators allowed to charge for services other than loan origination services that are performed by the originator? For example: loan processing, document preparation, inspection fees, and so forth.
9. Is the loan originator compensated any differently when price is increased by the creditor or employer to offset loan costs?
10. Is loan originator compensation ever reduced in order for the institution to compete on loan terms? (For example: the institution reduces its rate by 50 basis points to induce a shopping consumer to stay with the institution, and the loan originator’s compensation is reduced accordingly.)
11. Are loan originators able to deliver loans to more than one affiliate or subsidiary of the institution’s parent company? If so, are loan originators compensated differently based on which affiliate the loans are delivered to?
12. Are loan originators allowed to receive compensation (including yield spread premium or similar compensation) from both the consumer and any other person on the same transaction?
Brokered loans: Questions 13 through 18 must be answered by both mortgage broker loan originators originating loans and creditor institutions receiving brokered loans.
13. Does the institution allow loan originators to “steer” consumers to transactions where the loan originator receives more compensation and the loan is not in the consumer’s interest? Explain.
14. Does the institution require or use the steering Safe Harbor provision under the Rule?10
15. During the examination period or the last three years, in how many transactions has the institution required or used the steering Safe Harbor provision under the Rule? Institution may answer with a number or the percentage of total loans originated.
16. Does the institution require third party originators to use the steering Safe Harbor provision?
17. If a creditor, what action does the institution take to monitor third party compliance with the steering Safe Harbor provision?
18. If the institution does not require or use the steering Safe Harbor provision what methods does it use to determine that steering has not and will not occur?
19. How long does the institution retain compensation agreements?
20. How long does the institution retain records of actual compensation?
21. How long does the institution retain records that support the options offered under the steering Safe Harbor provision?
Documents and information
I would like to end this article with a brief overview of the kinds of documents that should be involved in a thorough review involving loan originator compensation. The list I am providing is not meant to be complete, since each financial institution differs in many ways. This is a general list that we would require in a Document Request. A financial institution should be prepared to provide the documentation and information virtually immediately. If a lot of time is needed to get the documents together, the financial institution is, unfortunately, simply not prepared for the examination and should expect the examiner to notice the lack of preparedness.
In addition to the Institution Information Request and Institution Questionnaire that I have described, expect to provide Employment Agreements for Loan Officers, Sales Managers, Producing Branch Managers, and Non-Producing Branch Managers. If the Compensation Plans are not part of the Employment Agreements, but separately attested to, then expect to provide them for these same individuals. A list of affiliates will be required (i.e., title companies), if applicable.11
Wholesale channels must be able to deliver the Wholesale Broker Agreement, Compensation Plan, and any Announcements. Indeed, any origination channel must be ready to provide Presentations and all relevant Announcements.
Examiners will audit certain areas of interest that directly impact actual loan originations. In this regard, expect to provide the loan application register for all applications taken from April 6, 2011 to the date stipulated in the examiner’s Document Request letter. For that same period, also expect to provide Monthly Production Reports, and Rate Sheets.
Finally, the examiner will test the data provided against a complete analysis of loan originator specific data, such as the loan number, loan originator’s name, and borrower’s name, as well as the subject property state, each MLO’s compensation payments, and each MLO’s date of employment or affiliation.
Final words of advice
Most of our clients know that I tend to be a Mother Hen when it comes to taking care of their mortgage compliance needs. I admit it wholeheartedly. In my opinion, each institution should appoint its own version of a Mother Hen in order to assure that examination preparation for loan originator compensation is properly vetted and readied.
The penalties for violations are steep and could be catastrophic, not only with respect to the so-called “traditional” penalties, such as actual damages, statutory damages (up to $4,000 for each individual action and potential class action), and attorneys’ fees and costs, but also there is “enhanced” liability for creditors, such as refunding all finance charges and fees paid by the consumer (unless the creditor demonstrates that the failure to comply is not material). Loan originators are exposed to penalties of the greater of actual damages or three times the compensation or gain on the loan (i.e., liability even if there are no damages); a longer “statute of limitations” for loan originator compensation and certain other violations so that actions may be brought until the end of a three year (i.e., not a one year) period from the date of the violation; and, state Attorneys General are authorized to enforce violations of loan originator compensation and certain other requirements.
Given the penalties for violations of the loan originator compensation guidelines, now is the time to prepare, in advance, and be continually ready for the inevitable notice of the forthcoming regulatory examination.
A Housing Bottom? What Are They Thinking?
Via Business Insider
Original Article: http://www.businessinsider.com/robert-shiller-housing-2012-1
I spoke with Yale professor Robert Shiller in Davos earlier this week.
Shiller has correctly identified two major price bubbles in recent decades–the stock market bubble of the late 1990s and the housing bubble of the late 2000s.
One of the key attributes of most bubbles is that, when they finally burst, prices tend to “overshoot” on the downside, crashing well below fair value until all the exuberance is wrung out of the system.
So is that what’s going to happen to house prices this time? Or, as many people think, are house prices finally “bottoming” and getting reader to blast higher again?
BLODGET: A lot of people have just called the bottom in the housing market in the United States, and there’s been some ok data recently. Is that your take? That finally housing prices are bottoming?
SHILLER: When people phrase is that way, they say ‘we’ve reached the bottom.’ That suggests that we have the expectation of a major turning point right now. But I don’t see that. I don’t see any reason to think that prices are going to start heading up dramatically now. We do have some good news. Permits are up. Notably, the National Association of Homebuilders Housing Market Index is up and that’s a forward looking index. But it’s not up very much. If you look at the rate of change it looks dramatic but it’s still at a low level.
BLODGET: One thing that people are saying is that we have finally absorbed the excess inventory, and with just the general growth of the population and families in the United States, we’re getting close to where we are meeting supply and demand. Is that true?
SHILLER: Well, one simple model of home prices is the construction-cost model. Traditionally, home value was about 15% land and 85% construction costs. The land component has gotten bigger with the bubble. That might be kind of a long run equilibrium. If you believe that, that’s an oversimplified model, then it probably suggests we’ll just stay where we are.
BLODGET: And where are house prices relative to long-term historical trends? I’ve tracked at a lot of measures and it looks to me like we’re finally starting to close in on fair value. But it’s not as though we’ve crashed way below fair value.
SHILLER: It depends what you mean by fair value. If you take account of the very low interest rates, you might think that housing prices should be higher than historically. But then on the other hand, that model hasn’t worked very well historically. That would be like the Fed model applied to housing. But it doesn’t seem to fit. But I think the construction costs model says that housing should track the costs of construction. It doesn’t depend on interest rates, doesn’t depend on the economy. That’s a model, I’m not saying it’s the only model.
BLODGET: And what about price-to-income and price-to-rent?
SHILLER: Those things have come down a lot. I don’t know exactly where the middle is but it’s not like we’re overpriced anymore. Now the question is whether we’ll overshoot, which is a common thing that happens after bubble burst.
BLODGET: And you’re an expert in bubbles and I’ve looked at some on your work going back several hundreds of years on housing. Have you ever seen a bubble where there wasn’t a major overshoot?
SHILLER: Well, the problem is we’ve never had, in the United States, a bubble like this, of this magnitude before. That’s the problem. That’s the fundamental problem of economics. We’d like to be statisticians but in fact the world is always changing on us. So we end up having to use judgment. We’re not very good at that.
BLODGET: Going back to the point about interest rates… People make a huge to-do about the affordability of houses. In your research on house prices, do interest rates actually matter? Or is mortgage finance such a new concept in the history of home ownership that you just don’t have enough data?
SHILLER: I think historically, if you look at it, interest rates don’t seem to matter very much in determining home prices. In terms of forecasting, which you’re asking me to do, to forecast the change, the big thing in forecasting home prices is momentum. It’s different than the stock market. So if it’s been going up it will continue going up and if it’s been going down it will continue going down. By that model, which is the most successful forecasting model for home prices, prices will keep going down.
BLODGET: That’s encouraging! And what about stocks? You pioneered or at least have really popularized the “cyclically adjusted price-earnings ratio,” which looks at prices relative to smoothed earnings over ten years. Recently, over the last few years, a lot of people have come back and said, oh no, it should be sixteen years or it should be five years. Your friend Jeremy Siegel says no, you shouldn’t normalize them at all and so forth. Are you still comfortable with the CAPE as a good measure of base value?
SHILLER: It’s a powerful predictor of the market. John Campbell and I, my former student who is now the chair of the econ department at Harvard…
BLODGET: Congratulations, you taught him well!
SHILLER: That’s why I am proud of my former students! We found that price divided by ten year average earnings predicts price changes. It really does. Over a long time. It may not say what will happen next year. Right now that ratio is kind of high in the United States and that is a suggestion that its not the greatest, but it’s not super high. So if you look at what our model predicts, it would still predicts positive, good substantial returns, better than the 2% on ten-year Treasuries.
BLODGET: A lot of people argue to me that the CAPE includes 2009 which was a terrible year and includes other aberrational years and that’s skewing the average somehow. Is that not the case?
SHILLER: The analysis Campbell and I didn’t include that year because we did it in 1996. But you have to look at the anomalous years. They have to be part of the analysis. Sometimes you have very big movements in one year.
BLODGET: And that’s the whole point of the analysis–to smooth it out.
SHILLER: Right. I don’t know why people keep using one year earnings. That is the time it takes the earth to go around the sun. I don’t see any other significance.
BLODGET: Part of your argument there is that profit margins tend to regress to means and right now we’re at an all-time high profit margin or very close. Do you think that profit margins can continue going up for U.S. companies?
SHILLER: Profits have been very volatile over the last ten years. They look much more strongly mean-reverting than in the past. So that suggests that the current strong profits might turn out to be misleading.
BLODGET: When you think about smoothed earnings as a way of predicting prices, do you think about it as a predictor of what the price is going to do or is it better to think about it as the likely ten year return for the market is ‘x’ at this particular price?
SHILLER: You could go either way… I think that the returns that we could see going forward are not lousy, they’re low…
New FHA Program Seeks to Speed Approval Process of Low-Income Housing Tax Credits
Via National Mortgage Professional
Original Article: http://nationalmortgageprofessional.com/news28346/new-fha-program-seeks-speed-approval-process-low-income-housing-tax-credits
The Federal Housing Administration (FHA) has unveiled a new pilot program to test an accelerated approval process for the purchase or refinancing of multi-family rental properties assisted through the Low-Income Housing Tax Credit (LIHTC) Program. In launching this pilot program in Chicago, Detroit, Boston and Los Angeles, FHA’s Office of Multifamily Housing Programs believes it can cut the time needed to review and approve financing applications for LIHTC-assisted transactions from approximately one year to just 90-120 days. The Hubs will process LIHTC loans for all of their related program centers.
Reducing the time required to review and approve applications under FHA’s Section 223(f) Program helps align FHA-insured financing with the LIHTC Program standards including the need to meet strict time deadlines. Expediting FHA review and approval is needed since failure to meet bond closing or other LIHTC performance deadlines may result in forfeit of the credit allocation or bond reservation and may impair the borrower’s ability to secure tax credits for future transactions. Read FHA’s Housing Notice for details of this pilot program.
“It has become clear that we need to rethink our process at FHA if we hope to leverage LIHTC to the maximum degree possible,” said FHA’s Acting Commissioner Carol Galante. “This pilot program will test our ability to significantly cut our review process so we can put people in affordable homes and provide unique financing options for developers.”
The Housing and Economic Recovery Act of 2008 (HERA) required FHA to streamline mortgage insurance applications for projects with equity from the Low Income Housing Tax Credit (LIHTC) program. Last year, FHA endorsed approximately $561 million in firm commitments for LIHTC projects, a 35 percent increase over Fiscal Year 2010. This new pilot should help to increase those numbers even more.
“If we can successfully cut the time it takes to approve these lower risk LIHTC projects in these four cities, we have the potential to dramatically increase the production of affordable rental projects nationwide,” said Marie Head, HUD’s Deputy Assistant Secretary for Multi-family Housing.
Nonbank mortgage lenders required to file fraud reports
Via HousingWire
Original Article: http://www.housingwire.com/article/nonbank-mortgage-lenders-required-file-fraud-reports
Nonbank mortgage lenders will be required to establish anti-money laundering programs and file suspicious activity reports beginning later this year, according to rules finalized by the Financial Crimes Enforcement Network.
These firms, which also came under Consumer Financial Protection Bureau supervision this year, will now be forced to assist law enforcement agencies with fraud detection just as larger financial institutions are required to do.
“Suspicious activity reports are a critical source of information to law enforcement and regulatory agencies in their investigation and prosecution of mortgage fraud and a wide range of other financial crimes,” said FinCEN Director James Freis.
In November, FinCEN also issued a proposal requiring Fannie Mae, Freddie Mac and the Federal Home Loan Banks to develop the anti-money laundering programs and file fraud reports with the network.
FinCEN found false statements, the use of straw buyers, evidence of fraudulent flipping real estate, flopped short sales and identity theft from these reports.
The rule will give law enforcement and regulators more data on specific crimes, FinCEN said, and provide “a more complete perspective on mortgage related crime trends nationwide.”
According to law firm Ballard Spahr, the impact to nonbank lenders will be extensive. “This means that non-bank mortgage lenders and originators will have to establish AML programs, designate a compliance officer, develop training programs, etc,” said the firm in an email.
“Compliance is looking to be both complex and costly,” the note added.
Fed Unveils Slew of Key Dodd-Frank Rules
Via American Banker
Original Article: http://www.americanbanker.com/issues/176_245/dodd-frank-section-165-systemically-important-too-big-to-fail-1045034-1.html/
Federal regulators unveiled a highly-anticipated proposal Tuesday that details how they plan to regulate the largest domestic financial firms, including new capital and liquidity requirements.
The Federal Reserve Board’s 173-page proposal — considered by industry analysts to be the core of new rules required by the Dodd-Frank Act — would apply to all bank holding companies with more than $50 billion of assets as well as nonbank financial firms designated as systemically important by the Financial Stability Oversight Council.
The plan touched on several critical areas governing bank regulation, including risk-based capital and leverage requirements, resolution planning and concentration limits.
Regulators opted to roll out risk-based capital and leverage requirements in two phases. First, firms will be required to follow the Fed’s November guidelines to capital planning, which require companies to conduct stress tests and maintain adequate capital, including a Tier 1 risk-based ratio of greater than 5%, both under expected and stress conditions.
As part of the second phase, the Fed will issue a proposal to implement a risk-based capital surcharge for systemically important firms based on principles already agreed upon by the Basel Committee on Banking Supervision.
It is not clear exactly which institutions will face a surcharge. The largest 8 U.S. banks have already been targeted by international regulators for a surcharge of between 1% to 2.5%.
But Fed Gov. Dan Tarullo has previously suggested that all firms with greater than $50 billion of assets could face at least a “modest” surcharge. Fed officials did not provide any further information Tuesday on what kind of surcharge such firms would pay.
The Fed also opted to provide multiple phases for firms to fulfill new liquidity requirements. Firms will initially conduct internal liquidity stress tests and set internal quantitative limits to manage liquidity risk based on guidance issued in March 2010. In the second phase, banks will comply with Basel III liquidity rules, which have not been finalized yet by global regulators.
Stress testing will be conducted each year using three economic and financial market scenarios as previously announced by the central bank. The results of that testing will be made public. Holding companies will have to meet those requirements shortly after the rule is completed.
Under the proposal, firms must also limit credit exposure to a single counterparty as a percentage of the firm’s regulatory capital. Credit exposure between the biggest banks will be subject to a tighter limit, according to the Fed.
Separately, the central bank proposed early remediation requirements in order to address any financial weakness at an early stage. Regulators listed a number of triggers for remediation including capital levels, results of stress tests and risk-management weakness.
Savings and loan holding companies, generally, will not be subject to the requirements in the proposal, except to adhere to the Fed’s stress test requirement. The Fed will issue a separate proposal later to address issues if enhanced standards should be applied to those firms.
The proposal would apply to more than 30 U.S. banks, which have total assets of more than $50 billion and are already supervised by the Fed. Nonbank financial firms will be subject to the same set of rules once they are designated by the Financial Stability Oversight Council.
Fed officials said they would show some flexibility on how the rules would apply to nonbank financial firms once they are designated.
The Fed opted to postpone its proposal governing regulation of foreign banks, which will also be subject to additional capital rules, until later, given the number of outstanding issues that still need to be resolved. Roughly 100 foreign banks could potentially be subject to the rule, according to Fed officials.
Given the complexity and the breadth of the rule, Fed officials offered to give industry more than 90 days to comment on the proposal. The comment period is set to close on March 31, 2012.
New FHA standards will increase Ginnie Mae prepayment risk
Via HousingWire
Original Article: http://www.housingwire.com/article/new-fha-standards-will-increase-ginnie-mae-prepayment-risk
The Federal Housing Administration’s recently announced plans to tighten its standards for approving lenders will increase prepayment risks for investors who own Ginnie Mae-backed securities, say analysts at Barclays Capital ($24.47 0.04%).
The agency’s plans to eliminate the consderation of a lender’s compare ratio when deciding whether to streamline-refinance its loans will accelerate refinancing activity, they say, causing higher prepayment speeds, and, in turn, reduce investor profits.
The compare ratio is the serious delinquency rate of all loans originated by a lender during a two-year period relative to the average of all lenders operating in the same region. Higher coupon and seasoned loans have a weaker credit and greater default risks, therefore, streamline-refinancing them could lift ratio passed 150%. And if it does, the lender could lose the ability to originate FHA-backed loans.
The change is part of a larger attempt by the FHA to protect its Mutual Mortgage Insurance Fund, which many say is in danger of requiring a multibillion dollar government bailout.
Disregarding a lender’s compare ratio calculation creates an incentive for streamline-refinancing higher-risk borrowers, analysts say. This will speed up Ginnie Mae prepayments, particularly on higher coupons and pre-2009 originations since these have the worst credit quality.
“That said, we expect the effect on speeds to be modest,” they say. “We believe that this plan will be implemented and has the potential to raise GNMA speeds by a few CPR.”
The effect should be even less for pre-2010 vintages because their much better credit quality suggests they have not been constrained by the compare ratios.
Data from the Department of Housing and Urban Development suggest that the compare ratios of most national lenders are now significantly below the 150% threshold.
In December, HUD Secretary Shaun Donovan, said as a result of an October analysis by an independent actuary of FHA’s insurance fund, HUD plans to announce how it will address premium prices in its fiscal year 2013 budget proposal.
Since then, Congress has enacted a 10 basis-point increase to the FHA annual mortgage-insurance-premium, and President Barack Obama has called on the FHA to shoulder a larger role in helping responsible home owners and the housing market.
“Given the circumstances, we think more changes to the FHA program could be in the works, and since the budgetary proposal should be released over the next few weeks, the timing is peculiar,” they said. “Therefore, Ginnie Mae faces heightened risks in the near term.”
Here Are The 17 Radical Ideas From Google’s Top Genius Conference That Could Change The World
Via BusinessInsider
Original Article: http://www.businessinsider.com/here-are-the-17-radical-ideas-from-googles-top-genius-conference-that-could-change-the-world-2012-2
Google just hosted a series of super high-level talks and invited about 50 entrepreneurs, innovators, and scientists to the deluxe CordeValle resort in the mountains south of San Jose.
They were going through some pretty radical ideas. The kind of stuff that could change the world.
It was called Google’s “Solve For X” conference, a series of talks where some of the smartest people in the world tried to tackle some of the world’s biggest problems.
Google invited them to introduce radical ideas for solving the world’s most complicated problems, like water scarcity and recycling electronics without creating hazardous waste.
So what were they talking about?
“Imaging the mind’s eye”
Mary Lou Epson, founder of Pixel Qi Corporation
“Synthetic Life Tool kits”
Omri Amirav-Drory, Ph.D. is the founder & CEO of Genome Compiler Corp
“Building microsystems on the eye”
Babak Parviz, McMorrow Associate Professor of Innovation at the University of Washington.
“Collaborative science”
Adrien Treuille, assistant professor of computer science and robotics at Carnegie Mellon
“Learning by themselves”
Nicholas Negroponte, founder of MIT Media Lab, Wired Magazine, and One Laptop per Child.
“Stretchable electronics”
Kevin Dowling, VP of R&D at MC10
“Global water scarcity”
Rob McGinnis is Co-Founder and Chief Technical Officer of Oasys
“Efficient nutrition production”
David Berry is a Partner at Flagship Ventures and CEO of Essentient
“Carbon negative liquid fuels”
Mike Cheiky is the President and Founder of CoolPlanet Energy Systems
“Drug delivery”
Mir Imran, CEO and Chairman of InCube Labs, a life sciences research lab
“Physical transport”
Andreas Raptopoulos, founder and CEO of Matternet
“Low power wireless everywhere”
Anthony Sutera, entrepreneur in communications, specializing in radio, satellite and wireless communications systems
“Getting big stuff done”
Neal Stephenson, author
“Resource reclamation”
Privahini Bradoo is the Co-Founder and CEO of BioMine
“Harnessing synthetic genetics”
Juan Enriquez, Managing Director of Excel Venture Management
“Agriculture productivity”
Daphne Preuss, founder of Chromatin
“Higher education impact”
Michael Crow, president of Arizona State University
View all the talks Here
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Synergy Partners / Synergy Capital Announces Factoring Facility for Financial Institutions
