Compliance & Regulation

The Goldman Sachs official at the center of an SEC civil fraud case against the company regarding a subprime CDO declared his innocence to a Senate subcommittee on Tuesday. The Goldman executive, Fabrice Tourre, was accused-along with Goldman-of selling a subprime CDO to investors in early 2007 without telling those investors that one of the firms helping pick the collateral was also shorting parts of the bond. Tourre told the Senate Permanent Committee on Investigations that all charges against him are false and that he will defend himself in court. He said the bond in question, which caused an estimated $1 billion in losses, "was not designed to fail."

Mortgage industry and consumer groups are urging members of the House Financial Services Committee to vote against an amendment that would raise the minimum downpayment on Federal Housing Administration loans to 5%, from the current 3.5%. "Increasing FHA's downpayment could disenfranchise more than 300,000 responsible homeowners," eight groups say in a letter to the committee, warning such a hike could derail the fragile recovery in housing. Rep. Scott Garrett, R-N.J., claims FHA is making too many risky loans and the downpayment increase is needed to protect taxpayers. The Financial Services Committee is expected to vote this week on Garrett's 5% downpayment amendment as it marks up an FHA reform bill. The bill (H.R. 5072) includes several proposals to adjust FHA annual and upfront mortgage insurance premiums to replenish the agency's mortgage insurance fund. The Garrett amendment would "do little to strengthen FHA's capital reserve ratio," the eight believe. The organizations that put their name on the letter include the Mortgage Bankers of America, National Association of Realtors, National Association of Home Builders, Center for Responsible Lending, Consumer Federation of America, National Fair Housing Alliance, National Consumer Law Center and National Council of La Raza.

The Federal Bureau of Investigation is currently juggling 3,000 open mortgage fraud cases, but is facing challenges managing its resources. Speakers at an industry trade show on mortgage fraud told attendees that rather than spend more money to prosecute fraud, government agencies must utilize their available resources to be as smart and as effective as possible. Ninety-three U.S. attorneys across the nation are working to determine enforcement efforts to fit the needs of individual cases in local communities, said John D. Arterberry, executive deputy and fraud chief of the Justice Department's criminal division. "Each U.S. attorney has the opportunity to tailor his or her enforcement," he said. "The needs in the Northern District of Illinois are going to be different than Fargo, N.D., compared to what is happening in Phoenix or Washington, D.C.," said Arterberry. Speaking at the same show, which was put together by the Mortgage Bankers Association, FHA officials said they are spending an increasing amount of their time focusing on risk while carefully reviewing early payment defaults for signs of fraud. Vicki Bott, deputy assistant secretary for single-family housing at FHA, said the agency is stepping up enforcement through its Mortgagee Review Board. "We are not afraid to take action on lenders who are doing fraudulent activity," she said. "We are looking at how principles of lenders jump around. We are really beefing up our process around loan-level review. We are bringing delinquencies into our cycle of reviewing."

FHA single-family originations stabilized in March at the $22.7 billion level with the "seriously delinquent" ratio falling below 9% for the first time since November. The Federal Housing Administration reported that lenders originated $22.7 billion of FHA-insured loans in March, up slightly from the $22.3 billion funded in February. FHA monthly originations averaged $23.7 billion in the first quarter, compared to $28.8 billion in the fourth quarter. The government-backed product accounts for about 25% of all new fundings nationwide. Meanwhile, FHA reported that 8.8% of its insured single-family loans are 90 days or more past due, down from 9.17% in February and 9.4% in January. The drop in serious delinquencies may be signaling that FHA's $807 billion single-family portfolio has turned the corner, allowing its insurance fund to rebuild its depleted capital reserves. The positive news also might give Democratic members of the House Financial Services Committee more ammunition to shoot down GOP amendments to tighten FHA underwriting, including a hike in downpayments to 5% from the current 3.5% requirement. The committee is expected to vote on the amendments and approve a FHA reform bill late Tuesday afternoon.

Top executives at two credit rating agencies defended themselves Friday against charges that, to retain market share, they knowingly issued inflated ratings on mortgage-backed securities before the financial crisis and put off making needed changes in their standards. Officials from Moody's Investors Service and Standard & Poor's tried to rebut a congressional report regarding their actions, arguing that they had been public about flaws in the mortgage market and had made changes to better adjust to risk. "Moody's did see the escalating housing prices and the loosening of standards in subprime lending practices, we published on these observations, and we incorporated our more unfavorable views into the way we assigned ratings," said Raymond McDaniel, chairman and CEO of Moody's, in a hearing by the Senate Permanent Subcommittee on Investigations. But former employees of S&P and Moody's painted a much different picture, telling lawmakers that executives pressured analysts to maintain market share. They were discouraged, they said, from raising questions about the credit quality of some loans backed by mortgages. Eric Kolchinsky, a former director of Moody's derivatives group, testified that in October 2007, days after the firm downgraded $33 billion in subprime bonds, he was reprimanded by e-mail because quarterly market share fell to 94%, from 98%.

Federal Deposit Insurance Corp. chairman Sheila Bair said the agency has reduced its projection of the number of bank failures this year. In a cable news interview Friday, Bair said that though closures are still expected to exceed last year's total of 140, the pace is slowing. "We do think things are improving," she said. "We think it will be more than 140" this year "but less than what we were projecting, for instance, three months ago." Bair reiterated a projection that failures would peak "toward the end of this year." She added that it will continue to be predominantly smaller banks that are closed and said some institutions that had been nearing insolvency-and were placed on the agency's "problem" list-have since recovered. "Some of the banks that we thought were going to fail have actually raised capital, and they've come off of our list," she said.

The Federal Reserve Board will hold four public hearings this summer to see if its Home Mortgage Disclosure Act regulations need to be updated. The hearings will start July 15 in Atlanta. The other hearings will be held Aug. 5 in San Francisco, Sept. 16 in Chicago and Sept. 24 in Washington. Most mortgage lenders are required to file HMDA reports that include information on one-to-four family loans they originate or purchase. About 8,400 lenders file annual HMDA reports that include information on approvals and rejections of mortgage applicants and their race, gender and income. Banking regulators use the information to detect discriminatory lending practices. The last major HMDA revisions came in 2002 with the government requiring mortgage bankers to disclose pricing data on subprime loans for the first time. One of the objectives of the hearing is to evaluate whether the pricing data "helped provide useful and accurate information about the mortgage market," the Fed said.

A senator from New York where several credit unions were victims of the $140 million U.S. Mortgage/CU National Mortgage fraud is calling on Fannie Mae's regulator to engineer a settlement on the disputed claims. In a letter to Edward DeMarco, director of the Federal Housing Finance Agency, Democrat Charles Schumer urges the agency and Fannie Mae to "work with the affected credit unions to come to a fair resolution of this dispute that does not threaten the viability of the credit unions." Schumer noted, "Ultimately, I am concerned about the fiscal well-being of thousands of my constituents who may suffer adverse financial impacts" because of U.S. Mortgage Corp. "The magnitude of this potential loss will have a significant adverse impact on these credit unions and their members, some of whom are employees of the U.S. government, as well as state and local governments." Schumer declined requests for further comment. The congressional intervention comes as Fannie Mae has begun mediation with several of the credit unions aimed at settling the dispute. Several New York credit unions, including Suffolk FCU, Sperry Associates FCU and TCT FCU, were among 28 credit unions that had their mortgages fraudulently sold to Fannie Mae by CU National president Michael McGrath. McGrath has pleaded guilty to the fraud and is scheduled to be sentenced next month.

Sen. Richard Shelby, R-Ala., is confident his fellow Republicans will vote "en block" Monday evening, preventing the Senate from starting debate on the financial services reform bill. "I believe the 41 Republicans, for right now, will stand together," Sen. Shelby told a meeting of the Independent Community Bankers of America Monday morning. If the GOP can hang together, Shelby said, it will give him a stronger hand in negotiating with Senate Banking Committee chairman Christopher Dodd, D-Conn., on a compromise bill. To prevent bailouts, Shelby wants tighter limits on Treasury and Federal Reserve lending to failing financial institutions. He also wants prudential banking regulators to have more "say" over the activities of a new independent consumer protection agency, which likely will be given sweeping powers over mortgage lenders. Dodd is now working with Shelby but wants the bill to reach the floor soon, so the amendment process can begin. Negotiations with Republicans have been ongoing for months. Dodd estimates there are only 40 to 50 legislative days left this year to pass a bill. The Republicans are wary of the amendment process, however, and want a compromise hammered out in advance of floor debates. If the reform bill passes the Senate, Shelby warned the bill could be in "peril" if changes are made in a conference with the House. The House passed its reform bill in December. Differences in the two bills are usually worked out in a House-Senate conference.

A Supreme Court decision could make it easier for consumers to sue collectors for sending erroneous collection notices. The high court, in a 7-2 opinion Wednesday, ruled that collectors cannot protect themselves from such lawsuits simply by stating they made a legal error when sending a notice. At issue were the actions of an Ohio law firm, Carlisle, McNellie, Rini, Kramer & Ulrich Co., that mistakenly started foreclosure proceedings on behalf of Countrywide Home Loans Inc. A homeowner later sued the law firm, arguing that it violated the Fair Debt Collection Practices Act by contending in the foreclosure suit that her alleged debt would be assumed to be valid unless she contested it in writing. The case will return to a lower court.