Compliance & Regulation

Some nonbank mortgage lenders that pass the state LO tests required under the SAFE Act plan to market their expertise and use it as a competitive advantage against commercial banks. "It's definitely a plus in our favor," said Marc Savitt, a former past president of the National Association of Mortgage Brokers. "We can wave that piece of paper around and say, 'Hey, we're certified.'" Bodhi Kraus, for one, said his company, Priority Lending Mortgage Corp. in Santa Rosa, Calif., plans to highlight the fact that its loan officers are licensed on its business cards and mailings, and may even tout the licensing in its radio advertisements. "We advertise and make the phones ring," said Kraus, Priority's vice president. "We just don't have the employees to take" the calls. Under the Secure and Fair Enforcement Licensing Act, part of the Housing and Economic Recovery Act of 2008, loan officers working for state-supervised mortgage firms must now meet minimum standards for licensing and registration, including several hours of education and passing a test. Nonbanks say the requirements can be costly and time consuming, which puts them at a disadvantage to depositories, which are exempt from the SAFE Act. But Glen Corso, managing director of the Community Mortgage Banking Project, a trade group for independent lenders, said a number of companies he works with plan to use the licensing as a competitive tool, as a way to tell consumers that their loan officers are well qualified.

It appears that House/Senate conferees are leaning toward adopting risk retention language requiring issuers of residential MBS to hold a "vertical" slice of securitized assets, which means mortgage bankers will be affected by losses on all tranches, not just one. According to interviews with lobbyists working the issue, the details will not be hammered out until next Tuesday, at the earliest. "We think we're going to be okay on the issue but you never know," one MBS investor told National Mortgage News. It appears that language stipulating 5% risk retention for "qualified" mortgage assets (Fannie Mae, Freddie Mac, FHA and other government products) will survive, though there was even talk of cutting that down to 3% for certain loans. If issuers are required to take on vertical risk they suffer losses on all MBS tranches that are created. Under a "horizontal" model only the most subordinated bond is first in line to absorb credit losses. None of the executives interviewed wanted to be identified because of the sensitive nature of the talks. The House and Senate are trying to shape a compromise bill on overhauling regulation of financial services, including many facets of mortgage banking.

The Senate has approved a plan to give those already in contract to purchase a home an extra three months to be able to use federal homebuyer tax credits. The language, pushed through the chamber by Senate Majority Leader Harry Reid gives homebuyers until Sept. 30 to complete their purchases and qualify for tax credits of up to $8,000. Under the current terms, buyers had until April 30 to get a signed sales contract and until June 30 to complete the sale. The proposal was approved by a 60-37 vote but only applies to consumers who already have signed contracts to finish at the later date. About 180,000 homebuyers who already signed purchase agreements would otherwise miss the deadline.

In the wake of a criminal indictment against the owner of Taylor Bean & Whitaker, the inspector general for the Department of Housing Urban Development is projecting at least $3 billion in losses for the government, perhaps more. In a brief interview with National Mortgage News, HUD IG Michael Zerega said the nonbank lender "cooked their books," adding "they called loans performing when they weren't." The IG's office has been investigating Ocala, Fla.-based TBW since 2008. The nonbank was a top-ranked FHA lender, and GNMA issuer. It pledged MBS and other assets as collateral for warehouse lines of credit made by commercial banks. On Wednesday, just after the Securities and Exchange Commission announced that it had filed a civil suit against TBW CEO and owner Lee Bentley Farkas, the Justice Department filed a 16-count indictment against him. The criminal allegations echo charges in the civil complaint, namely that TBW, under Farkas, created $400 million of "fake mortgages," and then sold them to its chief warehouse lender, Colonial Bank. (Last spring TBW tried to buy a controlling stake in Colonial using borrowed money and TARP funds. The deal eventually fell apart with both companies failing.) The indictment says Farkas "and others" carried out a "massive fraud," saying at least $1.9 billion in losses have already occurred. An attorney for Farkas said his client would plead not guilty.

The Justice Department is now investigating 3,000 cases of reported mortgage fraud nationwide, more than double its caseload of two years ago. At a press conference Thursday, Attorney General Eric Holder gave a tally of "Operation Stolen Dreams," a 100-day-old task force whose work has resulted in 1,215 criminal indictments and 191 civil enforcement actions. "The breadth of the fraud is truly astonishing, which is why we launched an unmatched effort to fight it," said Holder. "The staggering totals from this sweep highlight the mortgage fraud trends we are seeing around the country. We have seen mortgage fraud take on all shapes and sizes-from schemes that ensnared the elderly to fraudsters who targeted immigrant communities. We have seen cases that have resulted in dozens of foreclosures and millions in losses, as well as fraudsters who have bankrupted entire companies and national lenders who were not playing by the rules." DOJ has requested $178 million in its fiscal-year 2011 budget to fight mortgage fraud, an increase of more than $18.4 million.

Even though residential servicers are posting stronger loan modification numbers, a sizable amount of these mortgages could default again within a year, according to a new report from Fitch Ratings. Dow Jones reported that the rating agency's findings reinforce criticism that the government's Home Affordable Modification Program will only result in delaying the inevitable foreclosure filing for mortgagors who cannot afford to remain in homes due to a number of factors—including loss of income, a high level of household debt and reduced property values. HAMP pays mortgage-servicing firms to modify mortgages and find other ways to keep people in their homes. Since HAMP was launched early last year, servicers have been making slow but steady progress with modifications under the program. By balance, about 15% of all residential mortgage-backed securities loans have received some sort of modification through May, up from 10% last September.

The Securities and Exchange Commission Wednesday accused the former owner of Taylor Bean & Whitaker with orchestrating a massive equity and MBS fraud tied to his firm's warehouse borrowings from Colonial Bank, a depository it tried to take control of last summer using TARP money. In a civil complaint, the SEC says TBW owner and CEO Lee Farkas created $1.5 billion worth of "fictitious" whole loans and impaired MBS which were pledged to the bank's balance sheet and served as collateral for warehouse lines of credit. The government says the nonbank ran into "liquidity problems" and began over-withdrawing on its warehouse lines which led to the equivalent of a check "kiting" scheme at the bank. The agency says the scam predated TBW's attempted takeover of Colonial, a troubled bank, by about 18 months. In the spring of last year TBW tried to buy a controlling stake in the Alabama-based warehouse lender, using $200 million of its own money (most of it borrowed using servicing rights as collateral) and $100 million from private investors. These investors included several nonbanks that also were warehouse clients of Colonial. The bank, which failed last summer, was at one point the nation's largest warehouse provider. Using TBW's $300 million investment, Colonial had applied for $550 million of Troubled Asset Relief Program funds to stabilize its capital position. Farkas could not be reached for comment. TBW filed for bankruptcy protection last fall.

The regulator of Fannie Mae and Freddie Mac is directing the troubled GSEs to move the trading of their stocks to the Over-the-Counter Bulletin Board market while declining to answer questions about a reverse stock split. "We're not getting into that," said a Federal Housing Finance Agency spokeswoman when asked why the regulator didn't direct the two mortgage giants to declare a reverse stock split. Sources say the GSEs were informed of the move last week and were caught off guard. In trading Wednesday, their stocks plunged in value by 40%. The OTC Bulletin Board is operated independently of the 'Pink Sheets' market which is for private firms. OTCBB requires regular SEC filings while the Pink Sheets does not, said a Freddie Mac spokesman. Last Friday Fannie was in violation of a New York Stock Exchange requirement mandating a publicly traded firm to maintain a minimum average closing price of $1 for 30 days. Agency chief Edward DeMarco cautioned that FHFA's "determination to direct each company to delist does not constitute any reflection on either enterprise's current performance or future direction, nor does delisting imply any other findings or determination on the part of FHFA as regulator or conservator." Since being taken over by the government in September 2008, Fannie and Freddie continue to lose money. To date, the two have required $140 billion of assistance from the Treasury to maintain their net worth positions above zero. Over the past 52-weeks Fannie's share price has ranged from a low of 51 cents to a high of $2.13. Freddie's 52-week low is 53 cents, its high $2.50.

Although one of the first steps the conference committee took last week was to preserve the existence of the thrift charter in the final regulatory reform bill, the charter's days are likely numbered anyway. The merger of the Office of Thrift Supervision into the Office of the Comptroller of the Currency will eliminate some of the key benefits of choosing the charter, and leave a single agency trying to enforce two different sets of rules, observers said. Ultimately, many said they expect the thrift charter to fade away. "It's a little complicated with two different charters in one agency," said James Barth, a finance professor at Auburn University and a senior fellow at the Milken Institute. "It seems it's not a real complete merger. I would think down the road one would want to eliminate that distinction." The future of the charter is just one of the difficulties stemming from the pending OTS-OCC merger, observers said, including how best to integrate the agencies' personnel, cultures and different supervisory approaches. "It's not a question of the OTS," said Dough Faucette, a partner at Locke Lord Bissell & Liddell LLP. "That's a foregone conclusion; that's gone. The real question is then what will the attitudes and culture of the new agency be like?" Although the bill has yet to pass—conferees were slated to address some of the remaining issues surrounding the merger during their session today—implementation of the agencies' combination has already begun.

Even though mortgage rates continue to flirt with all-time lows, homebuilding executives feel awful. A new report from the National Association of Home Builders says executives in the sector are losing confidence in housing now that two federal tax credits have expired. NAHB said its housing market index fell to 17 in June, sinking five points after two straight months of increases. It was the lowest reading since March. "The homebuyer tax credit did its job in stoking spring sales and we expected a temporary pullback in the builders' outlook after the credit expired at the end of April," said NAHB chairman Bob Jones, a homebuilder from Bloomfield Hills, Mich. "However, the reduction in consumer activity may have been more dramatic than some builders had anticipated, which resulted in their lower confidence levels." Builders were more optimistic earlier in the year when consumers could take advantage of tax credits of up to $8,000. The incentives expired April 30 but buyers with signed contracts have until June 30 to close. Legislation has been introduced in the Senate to extend the closing deadline into September.