Fannie Mae and Freddie Mac may find themselves subject to new requirements in ensuring compliance for the soon-to-be reformed National Flood Insurance Program, if the Senate has its way.
Although the two secondary market giants grumble that more regulations are redundant, Congress doesn't appear to be listening.
The government-sponsored enterprises may be looking at costly procedures that could require them to scour every loan file for compliance. a task that could also have an expensive, time-consuming effect on mortgage lenders and servicers. The bill also calls for the mandatory escrowing of flood insurance premiums. (See story, Page 3.)
The bill before the Senate Banking Subcommittee on Housing and Urban Affairs will require the new GSE regulatory agency, the Office of Federal Housing Enterprise Oversight, to require both to establish procedures to assure flood insurance coverage of all loans they purchase that are located in special flood hazard areas when the loan is originated.
The legislation, S. 1405, introduced Aug. 6 by Sen. John Kerry, D-Mass., is intended to rescue the National Flood Insurance Program at a time when many lawmakers fear it may become insolvent. The bill is scheduled for markup Sept. 28 and could reach the Senate floor this session, according to one mortgage banking lobbyist.
During a subcommittee hearing Sept. 14-15, Kerry explained that the massive summer flooding of the Mississippi and Missouri rivers left the flood insurance fund with a $35 million deficit.
Of 11 million structures in the flood hazard areas, only 2.4 million were covered by flood insurance--a slim compliance rate for what he said should be a mandatory requirement for all federally insured and guaranteed mortgages.
"While everyone from banks to mortgage brokers to Fannie and Freddie say they have secured full compliance," Kerry said, "it's clear that millions of the 8.6 million uninsured properties have mortgages and are required to have insurance and just don't."
Armed with that knowledge, the Banking Committee proposed placing OFHEO in a position to require the GSEs to set regulations "force-placing," or mandating flood insurance as a condition for securitizing mortgage loans.
Fannie and Freddie already require this and say their current compliance assurance methods are accurate. Each cited extenuating factors, such as mortgages originated before statutes required flood insurance, loans originated by nonfederally regulated institutions and properties recently remapped as flood hazard areas, as some reasons for borrower noncompliance. Under those circumstances, they said, a borrower wouldn't be breaking the law.
Fannie Mae said it cannot support the provision. Adding regulatory requirements is how Congress traditionally reacts when it identifies a problem, said Robert J. Englestad, senior vice president for mortgage lender standards. However, it goes against new government initiatives calling for streamlining the federal bureaucracy.
"This is not a situation where a regulator needs new authority to compel us to take an action we may prefer not to take," Englestad said. "Our current procedures, conveyed through our contracts with lenders, are more extensive in specifying the need for insurance than ... the bill."
Freddie Mac agreed. "The legislation would . . . not expand the scope of flood insurance coverage but merely add a layer or regulation to existing statutory requirements," Michael Stamper, executive vice president of risk management, told the panel.
The GSEs also cried foul over a Savings & Community Bankers of America recommendation that they supplant lenders as the entity responsible for notifying borrowers of the "force-place" requirement.
"Servicing fees paid to lenders by secondary market agencies do not cover the costs associated with notification," said Alfred Pollard, SCBA director of government relations in a letter to Senate Banking Committee Chairman Donald Riegle, D-Mich. "Therefore, this notification requirement and any subsequent costs should be placed with the entity with ultimate exposure in case of a flood disaster."
Both GSEs responded by saying the notification costs are, indeed, covered by servicing fees and that, because secondary market agencies have no direct contact with borrowers, they should not be included in that portion of the regulation.