A pair of reports on the mortgage industry. "A crackdown by regulators of the Federal Home Loan Banks threatens to shrink a subsidy long enjoyed by thousands of lenders, including giants such as Washington Mutual Inc. and Citigroup Inc. The Federal Housing Finance Board proposed rules this month that would require the banks to retain more of their earnings as capital to build up a bigger cushion against potential losses."

"The proposed rule probably will force most of the home-loan banks to slash their dividends, a big source of income for many of the more than 8,100 commercial banks, thrifts, credit unions and insurers that own the banks. The proposal may discourage the home-loan banks from purchasing mortgage loans made by their members."

"In effect, the congressional charter that created the home-loan banks is a federal subsidy for banking, though one that doesn't involve government spending. Because investors assume that Uncle Sam would feel obliged to bail them out in a crisis, at the expense of U.S. taxpayers, they can borrow cheaply in the international bond markets."

"Many bankers are furious. Diane Casey-Landry, CEO of a trade group, calls the proposed rule 'misguided' and says it would damage a system that supports housing. Regulators have been clamping tighter constraints on the home-loan banks for the past several years. 'What is their ultimate goal?' Ms. Casey-Landry asks."

"The home-loan banks' rapid expansion in recent years has been fueled by intense global demand for bonds issued by U.S. government-related entities. The bulk of the home-loan banks' assets are advances to their members. But the banks also invest in mortgage loans made by their members as well as in mortgage-backed securities and money-market instruments. Some critics deride the investments in securities and money-market instruments as mere 'arbitrage' trading activities that have little to do with the banks' housing mission."

And from the LA Times. "A little-known reward for brokers who arrange home loans at high interest rates is drawing scrutiny from law enforcement authorities. Lenders pay the bonuses to independent brokers who sign up borrowers for mortgages at higher interest rates than they qualify for. With these brokers now writing an estimated 60% of home loans in the U.S., regulators are concerned that many people are being steered into higher-rate loans."

"'With the growing role of mortgage brokers, my office and attorneys general around the country have focused increased attention on these lending arrangements,' California Atty. Gen. Bill Lockyer said."

"The bonus, typically worth thousands of dollars, is included in most loans written by independent brokers, some industry experts say, and may be especially prevalent in costlier mortgages that brokers arrange for borrowers with weak credit. The payments to brokers are known in the industry as yield spread premiums. The terms vary by company but generally work the same way."

"Brokers fiercely defend the incentives. The National Assn. of Mortgage Brokers contends that brokers should not have to disclose the payment at all in part because lenders who don't use brokers are not required to do so. Mortgage bankers who make loans without brokers often sell them for a profit in the financial markets, earning larger premiums for loans with higher interest rates. HUD, however, lacks the authority to regulate those transactions."

"'There are people who say, 'I only charged the guy 1 point.' But no you didn't. You're getting 2 points more through the yield spread premium,' said (mortgage broker) Randy Johnson." "Consumer advocates have long challenged the payment as an illegal kickback. 'I never met a consumer who knew what it is,' said Ira Rheingold, general counsel with the National Assn. of Consumer Advocates. 'I never had a client who knew they were paying a higher interest rate because of that charge.'"