Compliance & Regulation

The Treasury Department is threatening to deny or even claw back incentive payments to mortgage servicers that are not modifying loans, according to the administration's guidelines. The department would not say how many servicers have broken the rules, let alone which ones. But consumer advocates say noncompliance is rampant in the Home Affordable Modification Program. They have documented cases in which servicers wrongly denied modifications or foreclosed before reviewing a borrower for HAMP. The program is voluntary, so withholding or taking back the incentive payments is the biggest club the Treasury holds over servicers. It pays $1,000 for each completed permanent modification for a delinquent borrower and $500 for each mod given to a current borrower. So far, servicer payments have totaled $68.4 million. (A total of 109 servicers are participating in the program.) At a meeting two weeks ago with consumer advocates and Freddie Mac, the department's compliance agent for HAMP, a Treasury official said the government had privately rebuked "four to six" servicers for "systemic noncompliance" with HAMP guidelines, according to three people who were in the room. "Everyone asked, 'How come we haven't heard about this?' " said Andrew Jakabovics, an associate director for housing and economics at the Center for American Progress. The Treasury has "been doing compliance checks, and they've found systemic problems," he said, "but we don't know what actions have been taken to fix the problems or even if they are working on it."

The Senate is moving closer to voting on a financial services regulatory reform bill and industry groups are pressing hard on the risk retention issue to get a qualified mortgage exemption. The current version of the bill requires securitizers to retain up to 5% of the credit risk with some of that risk shared with lenders. Industry groups are urging Senate Banking Committee leaders to give regulators more flexibility in determining risk retention requirements on different mortgage types. But they also want certain loans to be totally exempt from risk retention. "To ensure a liquid and efficient market for core mortgages, we think it is imperative that a mandatory 'zero' risk category be created for 'qualified mortgages' -- those that meet minimum standards for safely underwritten residential mortgages," says a letter penned by five trade groups: The Financial Services Roundtable, Mortgage Bankers Association, National Association of Home Builders, Community Mortgage Lenders of America and Community Mortgage Banking Project. In a separate letter, the MBA warned that the future of small independent mortgage bankers would be threatened if they are forced to retain a percentage of the loan amount on their books. Without a qualified mortgage exemption, these small local lenders might have to shut their doors and between 45,000 to 50,000 jobs could be at risk, MBA senior vice president Steve O'Connor told National Mortgage News. Final changes to the bill are expected to be worked out this weekend as the Senate prepares for a test vote on Monday evening.

The Department of Housing and Urban Development is urging Congress to appropriate $250 million to the Federal Housing Administration for its reverse mortgage program to prevent further cuts in the cash seniors receive from a Home Equity Conversion Mortgage. Congress rejected HUD's request for a $100 million appropriation last year and FHA cut HECM loan proceeds by 10%. This year HUD is proposing to increase the annual insurance premium to 1.25% from 0.5% and cut the loan proceeds by 1% to 5%. Without a $250 million increase, FHA commissioner David Stevens told appropriators loan proceeds would be reduced $23,000 to $27,000 on average. This cut would result in a "serious decline" in loan volume "as HECMs would no longer be viable to many seniors who need to access their home equity while staying in their homes," Stevens testified.

The House Financial Services Committee Thursday morning approved a bill that could make the Rural Housing Service single-family program self-funding by imposing higher loan guarantees fees and prevent a shutdown of the program in the next few weeks. The House is expected to pass the RHS bill (H.R. 5017) next week, sending it over to the Senate. The committee approved the bill by a voice vote. The measure, sponsored by Rep. Paul Kanjorski, D-Pa., doubles the upfront guarantee fee to 4% from 2% and allows the Agricultural Department to assess a 0.5% annual fee on the loan balance. Rep. Kanjorski said the Agriculture secretary plans to impose a 3.44% upfront fee, which can be rolled into the loan amount. (The program is administered by the U.S. Department of Agriculture.) It is estimated the increase would require borrowers to pay an extra $11 a month on a $120,000 loan. As of April 15, the RHS loan guarantee program had used $11.6 billion of its $13.1 billion in loan commitment authority for fiscal year 2010, which ends Sept. 30. The Kanjorski bill increases RHS' commitment authority to $30 billion.

First American CoreLogic, a provider of advanced property and ownership information, analytics and services, is partnering with The Prieston Group to offer a comprehensive fraud prevention and insurance solution to mortgage lenders. The solution combines First American CoreLogic's pattern-recognition fraud tool with TPG's risk management services, indemnity programs and training. Through this partnership, TPG will help lenders establish business rules and guidelines and employ the First American CoreLogic LoanSafe Fraud Manager tool to enforce those policies in the lender's daily operations. Lenders who use this joint solution will be insured against fraud losses by Lloyd's of London, which has a special relationship with TPG. The anti-fraud tool integrates patented pattern-recognition technology with a national property and fraud database. Tim Grace, senior vice president of fraud solutions at First American CoreLogic, said fraud is a $13 billion problem for the lending and investor communities. "This partnership will help lenders focus on best practices, products and processes and provide enterprise- and loan-level metrics to measure results. Our new joint effort will improve loan quality and rebuild confidence levels among lenders and investors," added Arthur Prieston, TPG's chairman.

Pennsylvania is cracking down on misleading marketing tactics from residential lenders that are hunting for refinancing opportunities. The Department of Banking's Office of Consumer Services said that some homeowners are receiving letters that look like they come from their lender or the federal government. In some cases, the company that sent the letter only has its name mentioned in fine print. Consumers call the number on the solicitation thinking they are talking with their lender or the federal government, but discover they are actually speaking with a competing lender. "These communications are brazenly misleading and intended to frighten and confuse consumers," said secretary of banking Steve Kaplan. "We are contacting the offending institutions as well as their marketing companies and ordering them to put an end to this practice."

Freddie Mac's full menu of relief policies for borrowers affected by disasters is being extended to families whose homes were damaged or destroyed by the recent floods in Rhode Island, Massachusetts, New Jersey and West Virginia and are located in federally declared major disaster areas. "We are instructing our servicers to work with borrowers with Freddie Mac-owned mortgages to receive forbearance on their mortgage payments for up to one year," said Ingrid Beckles, senior vice president of default asset management at Freddie Mac. The GSE gives servicers the discretion to reduce or suspend mortgage payments for up to 12 months for borrowers. Each case must be individually assessed to determine, however, Freddie Mac also strongly encourages servicers to help affected borrowers by waiving assessments of penalties or late fees against borrowers with disaster-damaged homes; not reporting forbearance or delinquencies caused by the disaster to the nation's credit bureaus; and suspending foreclosure and eviction proceedings for up to 12 months. The U.S. Department of Housing and Urban Development is also stepping up to help borrowers. HUD said it will speed federal disaster assistance to six counties in New York State, including Nassau, Orange, Richmond, Rockland, Suffolk and Westchester, and provide support to homeowners and low-income renters forced from their homes. HUD has granted a 90-day moratorium on foreclosures and forbearance on foreclosures of Federal Housing Administration-insured home mortgages. HUD's Section 203(h) program provides FHA insurance to disaster victims who have lost their homes and are facing the daunting task of rebuilding or buying another home. Borrowers from participating FHA-approved lenders are eligible for 100% financing, including closing costs. HUD's Section 203(k) loan program enables those who have lost their homes to finance the purchase or refinance of a house along with its repair through a single mortgage.

The Justice Department is seeking a permanent injunction against Lend America and a top executive who controlled the company, Michael Ashley-but no monetary penalties-for defrauding the Federal Housing Administration. A privately held nonbank based in Melville, N.Y., Lend America closed its doors in December, though it has not filed for bankruptcy protection, an event expected by many vendors and third parties that once did business with the company. "Rather than seeking monetary relief, the United States seeks equitable relief barring Lend America from engaging in conduct to defraud the United States," said assistant U.S. attorney John Vagelatos of the Eastern District of New York in a new "notice of motion for default judgment." In a civil suit filed last October, Vagelatos' office won a preliminary injunction to stop Lend America from originating FHA-insured loans. The U.S. Attorney's office is now seeking a default judgment because Lend America and its principals have not appeared for hearings or hired attorneys to represent them. If Lend America does not contest the default judgment by April 30, Vagelatos will ask the judge to impose a permanent injunction on Lend America, its agents and employees from originating, underwriting or endorsing FHA-insured loans. (However, for all intents and purposes, Lend America has no employees left and is out of business.) The AUSA also will ask the court to permanently enjoin those individuals from "advertising, marketing to the public or otherwise soliciting business to originate or otherwise make federally related loans or federally-insured home loans, including but not limited to, those loans defined in the Real Estate Settlement Procedures Act." Vagelatos filed the motion for default judgment on April 19 with the U.S. District Court for the Eastern District of New York.

Lenders would be exempt from risk retention ratios on MBS issuance if they originate low-risk, fully documented mortgages under an amendment Senator Johnny Isakson, R-Ga., plans to offer when the Senate takes up the regulatory reform bill. Under the amendment, "qualified mortgages" would be exempt from a 5% risk retention requirement when a lender sells loans in the secondary market. Qualified mortgages could not have interest-only payments, balloon payments or negative amortization. In addition, any mortgages with loan-to-value ratios exceeding 80% must have private mortgage insurance. The subprime mortgage crisis resulted from "shoddy underwriting," Sen. Isakson said. Qualified mortgages would mark a return to the "gold standard" and the "good old days" when mortgages were well underwritten, he added. Mortgage funders and investment bankers would have to retain 5% of the credit risk on riskier mortgages, however. Borrowers that take out safer loans "should not have to pay the higher interest rates that would result from across-the-board risk retention," said Glen Corso, managing director of the Community Mortgage Banking Project. Industry groups are concerned that risk retention will increase the cost, and reduce the availability of credit to homebuyers. For over a year the industry has been seeking support for a qualified mortgage exemption.

The American Bankers Association is warning that passage of a financial services regulatory reform bill by the Senate would overburden community banks and threaten their future. In a letter to members of the Senate, ABA president and chief executive Ed Yingling says the reform bill would impose 27 new or expanded regulations on banks that would have a "dramatic negative impact" on community banks. The Independent Community Banks of America hopes the Senate will start debate on the regulatory reform bill this Thursday. ICBA wants some of the regulatory burden shifted to nonbank lenders, which potentially would include residential funders. "If there is no bill, all of that heavy burden will continue to fall on community banks and not fall on the nonbanks. That's the world we are living in now," said ICBA's top lobbyist Steve Verdier. Senate majority leader Harry Reid, D-Nev., needs 60 votes on Thursday to start the debate and amendment process on the regulatory reform bill but there are only 59 Democratic senators. Sen. Reid must get at least one Republic senator to cross the aisle. So far, Senate minority leader Mitch McConnell, R-Ky., has done a good job of keeping all 41 Republicans in line, one lobbyist said.