Compliance & Regulation

President Barack Obama said he intends to nominate Janet Yellen, Peter Diamond and Sarah Bloom Raskin to serve as governors on the Federal Reserve Board. Yellen is president of the San Francisco Federal Reserve Bank, Diamond is an economics professor at the Massachusetts Institute of Technology and Raskin is the Maryland banking commissioner. The seven-member Federal Reserve Board currently has two vacancies. Gov. Donald Kohn recently said he wants to step down when his term on the board expires June 23.

The Federal Open Market Committee said financial markets are functioning well enough that it can finish closing its special liquidity facilities as planned by shutting down its Term Asset Backed Securities Facility for new-issue commercial mortgages June 31, but it is leaving short-term rates unchanged for now. While there has been "improved functioning" in financial markets, the Fed also noted several continuing economic concerns, the fact that "investment in nonresidential structures is declining" among them. The Fed also said "lower housing wealth" persists and noted, "Housing starts have edged up but remain at a depressed level." Among other concerns were "tight credit" conditions and a lack of employment growth. "While bank lending continues to contract, financial market conditions remain supportive of economic growth," the FOMC said. "Although the pace of economic recovery is likely to be moderate for a time, the committee anticipates a gradual return to higher levels of resource utilization in a context of price stability." Only Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, voted against the decision to leave short-term rates where they are. In dissenting, Hoenig continued "to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability."

Fannie Mae during 2008-2009 found the highest amount of fraud was in the Southeast at 32%, followed by the Midwest, California and the Northeast. "The Northeast region has increased dramatically in the last couple of years. We've seen rings with inflated values, undisclosed liabilities or 'shot-gunning,' and fraud involved with closings and settlement companies," Amy Heinz, director, mortgage fraud program, at Fannie Mae told attendees at the Mortgage Bankers Association's National Fraud Issues Conference in Chicago. Florida accounts for more fraud than in any single region, she said. Fannie also is seeing a trend toward back-to-back property flips perpetrated by individuals who buy low and then convince lenders to sell at inflated prices. After these sales, the properties default, Heinz said.

The full Senate is closer to taking up the financial services regulatory reform bill now that Sen. Richard Shelby, R-Ala., has declared an impasse in his negotiations with Sen. Christopher Dodd, D-Conn. Sen. Shelby noted that the Dodd bill goes too far in regulating derivatives and creating a consumer protection agency with "unchecked authority." But he can no longer expect his fellow Republicans to block consideration of the bill by the full Senate. "Now that my negotiations with chairman Dodd have reached an impasse, I thank my Republican colleagues for their support and defer to their individual judgments on whether the Senate begins debate on this bill," Sen. Shelby said. Senate Democrats tried three times this week to bring the Dodd bill to the Senate floor and start the amendment process but the Republicans blocked it. Senate debate on the reform bill is slated to start Thursday afternoon. "It has been obvious for some time that we are going to have a banking bill this year and this moves it one step closer," said lobbyist Jim Butera of Butera & Andrews.

Residential originations rose last year and along with them, the industry experienced an uptick in appraisal and valuation fraud, according to LexisNexis Mortgage Asset Research Institute. The most troubling fraud trends include fake tax returns and income and application misrepresentation, the company said in its annual fraud report. Speaking at a press conference during the Mortgage Bankers Association's fraud show, LNMARI noted that Florida is leading the nation in suspected fraud followed by New York and California. In 2009, 33% of all reported frauds involve appraisal misrepresentation, up from 22% in 2008. States experiencing noticeable gains in fraud include Arizona, New Jersey and Virginia. "Loss mitigation distractions have opened the door for opportunistic fraudsters to take advantage of desperation, confusion and complacency," said Denise James, director of real estate solutions for LNMARI. "As lenders try to stave off mounting losses on nonperforming loans, they are trying to modify loans that have been falling into default," said James. "Fraudsters are taking advantage of desperate and confused consumers." Foreclosure rescue and loan modification scams are increasing, and the company is seeing a significant rise in short sale scams.

The House of Representatives Tuesday afternoon passed a bill that reforms the Rural Housing Service's single-family program, extending it through Sept. 30 to prevent a shutdown. Supporters of the bill (H.R. 5017) hope the Senate acts quickly to approve the measure this week. The chief sponsor of the legislation, Rep. Paul Kanjorski, D-Pa., said RHS could run out of loan guarantee authority by the end of April. The bill makes RHS self-funding by increasing the upfront guarantee fee to 4% from the current 2% requirement. The Agriculture Department, which administers the program, is expected to impose a 3.44% fee on borrowers. The original bill allowed the Agriculture secretary to assess a 0.5% annual fee on the loan balance, but the measure was dropped during a committee markup. Congress originally granted RHS $13.1 billion for loan guarantee authority for fiscal 2010, but thanks to the program's popularity, the allocation is nearly gone. The bill increases that authority to $30 billion, but it expires Sept. 30 when the fiscal year ends. Congress will have to renew RHS's loan guarantee authority as part of the FY 2011 appropriations process. Rep. Shelley Moore Capito, R-W.Va., said the short-term extension is needed to foster a return of private lenders.

Freddie Mac is seeing more REO property-flip fraud cases in which investors recruit people to pool money in an LLC and purchase bank-owned properties for cash, according to Martin Abad, associate director, Freddie Mac. "The logic behind it is that if you submit a cash offer, it's more likely to get approval from the bank, get a better deal and close quickly," Abad said at the Mortgage Bankers Association's National Fraud Issues Conference in Chicago. Property theft is a new type of fraud, he told attendees at the general session on "Mortgage Fraud and the Secondary Market." When a lender or Fannie or Freddie takes a property back at REO, there are people who will record fake rent deeds and transfer title from the banks or GSE to an LLC, he said. "There is an online recording service where you can pay a fee and record any document you want. You don't have to go to the county recorder's office." In an active case he is currently working on, Abad said the fraudster listed the properties for rent on Craigslist and is now attempting to sell some of these properties. Half of the loans involved in Freddie Mac's fraud cases involved non-owner-occupied properties. What had been loan modification fraud is turning into short sale fraud, because scammers can make more money in a shorter period of time with the latter, he said. In 2009, short sale activity at Freddie Mac increased by 250% from the previous year. In the first three months of 2010, it has increased 65%.

The House Financial Services Committee has approved a bill that will give the Federal Housing Administration more flexibility in adjusting its mortgage insurance premiums. The committee passed the bill (H.R. 5072) on a voice vote after amendments by Rep. Scott Garrett, R-N.J., to raise the FHA downpayment requirement, prohibit financing of upfront premiums and limit the FHA guarantee to 95% of the loan amount were voted down. Garrett's amendment to raise the FHA downpayment to 5% from the current 3.5% minimum failed on a 52-12 vote. FHA recently increased its upfront premium 50 basis points to 2.25% of the loan amount to help recapitalize the FHA insurance fund. But the agency would prefer to raise its 55 basis point annual premium instead. If passed by the Senate, H.R. 5072 would allow FHA to reduce the upfront premium to 1% and raise the annual premium to 90 bps on single-family mortgages with loan-to-value ratios above 95%. Raising the annual premium would be "safer for homeowners and better for the health of the FHA fund," according to Housing and Urban Development secretary Shaun Donovan. The FHA reform bill also strengthens FHA enforcement powers to hold lenders accountable for bad loans. "Further, the bill provides that a lender's improper or imprudent activities at the regional level may now yield enforcement actions that restrict their nationwide activities," the HUD secretary said.

A Republican alternative to Sen. Chris Dodd's massive financial services bill gives the mortgage banking industry hope that Congress understands the dire need for an exemption on MBS risk retention. According to an outline prepared by Sen. Richard Shelby's staff, an exemption on the 5% risk retention rule would be granted for loans that "meet minimum underwriting standards" established by bank regulators. However, no details are provided in the outline. All factions of the mortgage industry are lobbying furiously for a risk retention exception for issuers of bonds backed by Fannie Mae, Freddie Mac, and FHA loans. Language in the Shelby outline regarding risk retention is more specific than what is in the Dodd bill. However, lobbyists say Dodd has been open to more specific language on risk retention. Some industry participations believe that if no "carve out" is granted, a new round of consolidation will result in large players having even more control over the industry than they do now.

For failed-bank bidders, the end of the sweetheart deal may be at hand. During the financial crisis, the Federal Deposit Insurance Corp. has routinely guaranteed 80% of the potential losses on assets at scores of failed banks, a bargain for those trying to enter or expand their reach in the banking market. But in one of its most recent deals-TD Bank's purchase of three Florida banks on April 16-the FDIC agreed to cover only half the losses, a significantly less generous arrangement. Though an 80% guarantee is likely to remain the norm in the near term, the FDIC is expected to do more deals like the one with TD Bank. "We would expect that as the market continues to improve the terms of the loss-share transactions will change and that the amount of risk an acquirer will be willing to assume will increase," said James Wigand, deputy director in the FDIC's division of resolutions and receiverships.