Monday Morning Cup of Coffee

A look at the stories on HousingWire’s weekend desk… with more coverage to come on bigger issues.

Senate Banking Committee chairman Chris Dodd, D-Conn., and House Financial Services Committee chairman Barney Frank, D-Mass., sent a letter to the heads of bank regulators, asking them to look into whether banks are inflating the value of second mortgages on their balance sheets, discouraging proactive mortgage modifications and loan restructurings.

Dodd and Frank say banks are unwilling to update their balance sheets to show second mortgages have declined in value, although house prices have plunged across the country, putting borrowers well underwater on their mortgages. At risk now, the chairmen say, is the willingness of second lien holders to participate in the Hope for Homeowners (H4H) program, which adjusts a troubled borrower’s mortgage to 90% of the assessed value of the home.

From their letter:

“We understand that the nation’s largest mortgage servicers carry on their balance sheets significant volumes of these subordinate liens in the form of closed-end second mortgages or home equity lines of credit.  We are concerned that the loss allowances associated with these subordinated liens may be insufficient to realistically and accurately reflect their value, especially in light of the historically poor performance of first lien mortgages and seriously diminished values of the underlying collateral. As you know, the nation has experienced sharp declines in home prices, with further declines expected in many markets. This has resulted in as many as 20 percent of all homeowners having mortgages that exceed the value of the home. These numbers are likely to be much higher in the case of option ARMs and subprime loans.

“Many subordinate liens stand behind these mortgages. Carrying these loans at potentially inflated values may contribute to resistance on the part of servicers to negotiate the disposition of these liens, and thus may stand in the way of increasing participation in the H4H program.  Inadequate reserving would also overstate the capital position of these institutions at a time when an accurate picture of the capital adequacy of the banking system is crucial.”

The State of Florida enacted legislation to set aside $30.1m for the Florida Homebuyer Opportunity Program, which will provide up to $8,000 to qualifying first-time homebuyers as an advance on the federal first-time home buyer tax credit.

The Florida Association of Realtors (FAR) estimated “several thousand” first-time home buyers in the state could advantage from this program, which essentially monetizes the tax credit for use as down payment, closing costs or renovations and repairs on qualifying home purchases.

“We want Floridians to take advantage of this important program, which will help stimulate the state’s economy as well as the real estate market,” said FAR president Cynthia Shelton. “By helping qualified first-time buyers come up with the funds needed to purchase a home, this initiative will play a vital role in overcoming the largest financial barrier to homeownership.”

The funds are available through local county and city housing offices that currently operate the State Housing Initiatives Partnership. The program, which runs through Nov. 30, 2009, allows up to $8,000 to a qualifying buyer, depending upon the value of the home. The funds must be repaid with the tax credit received by the borrower after filing the year’s tax return.

It was a slow Friday of receiverships for the Federal Deposit Insurance Corp., with Wyoming bank regulators shutting down a single bank, Bank of Wyoming, the 53rd failure of 2009. The failure is estimated to cost the FDIC’s deposit insurance fund $27m.

The FDIC entered a purchase and assumption agreement with Central Bank & Trust to assume all but $8m (of brokered deposits) of the bank’s approximately $67m total deposits as well as $55m of the bank’s $70m of assets. The FDIC will pay brokers directly for the amount of their funds and plans to retain any remaining assets for later disposition.

The New York Federal Reserve purchased another $23.25bn of agency mortgage-backed securities (MBS) in the week ending July 8: $3.15bn from Freddie Mac (FRE: 1.14 -1.72%), $16.05bn from Fannie Mae (FNM: 1.02 -0.97%) and $4.05bn from Ginnie Mae. In the same week, it sold $6.2bn of 30-year MBS with 5.5% coupons. A summary of the Fed’s balance sheet shows MBS held outright slipped by $85m in the same week, bringing the total to $462.45bn of MBS currently on the balance sheet.

Write to Diana Golobay.