Compliance & Regulation

The Federal Home Loan Banks have priced their $3 billion, three-year Global security, which they said was oversold within hours of its announcement. The security (CUSIP 3133XXF8) was priced at 99.818% to yield 1.686% at a spread of 26+ over a comparable Treasury yield. Preliminary distribution information indicates investors were 66% concentrated in the United States. In addition, 22% of the remaining investors were said to have come from "other" miscellaneous regions, a category that can include South American, Canada, Africa, Australia and others. Data shows 7% of the investors were categorized as Asian and the remaining 5% were described as European. Investment advisors/fund managers look to have made up 47% of buyers, 27% appear to be central banks, 10% were categorized as pension funds, 8% were described as financial institutions, 5% were categorized as other, and the remaining 3% were said to be state/local government entities.

California now has the highest risk of mortgage fraud with an index value of 222, according to a report from Interthinx. Nevada, which had the highest index for the previous five quarters, drops to second place with an index of 220, and is closely followed by Arizona with an index of 211, according to the Mortgage Fraud Risk Report for the fourth quarter of 2009. Florida remains in fourth place at 179, while Colorado is fifth at 153. The occupancy fraud risk index rose 16% since last quarter, the first significant increase in the index since the fourth quarter of 2006. The magnitude of the quarter-on-quarter increase suggests that occupancy fraud risk will be a serious issue going forward, as continuing price declines and get-rich-quick schemes lure investors back into the market and as builders face continuing difficulty in moving unsold inventory. Despite a 4% quarter-on-quarter decrease, the property valuation fraud risk index is up 40% over last year and up more than 100% from two years ago. Schemes involving short sales, real estate owned inventories, wholesale flipping, and refinancing by borrowers whose equity has been impaired by falling real estate values continue to drive this index. Interthinx analysts expect lenders to focus more closely on fraud risk mitigation as they work to emerge from the downturn. This will help guard against the potential for fraud as a large number of adjustable rate mortgage loans, especially option adjustable rate mortgages with negative amortization features which reset between now and the first quarter of 2012.

As the Federal Reserve ends its purchases of mortgage-backed securities, Fannie Mae and Freddie Mac could become buyers if private investors don't return to the market, a Freddie executive said. "There is room for Fannie and Freddie to buy some of these securities and hold them in their portfolios for the near term," said Freddie economist Amy Crews Cutts. The Fed is currently tapering off its MBS purchases so the market can adjust as it exits at the end of the quarter. "The idea is to attract private capital back into the market place," Ms. Cutts told a HomeFree-USA homeownership conference. Freddie Mac economists expect the Fed's exit will have modest impact on mortgage rates. The Freddie deputy chief economist said she would not be concerned if mortgage rates rise to 5.5% or 6% — as long as it happens in an orderly fashion. "A little bit each week," she said. Ms. Cutts also noted that lenders might relax their underwriting standards to compensate for the rise in rates. But she would be worried if rates rise "violently and sharply." In that case, she expects the Fed will move back into the market and start buying MBS again. Minutes from the Fed's last Federal Open Market Committee meeting reinforce this view. "The committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets," according to the minutes of the Jan. 27 FOMC meeting. The minutes also indicate the FOMC members considered, but rejected, changing that language to reflect "the possibility that the committee might decide either to sell securities or to purchase additional securities" in the future.

Educational Systems Federal Credit Union became the first victim of the massive fraud at CU National Corp. to settle claims with Fannie Mae, setting the stage for other CUs hurt by the $140 million scandal to come to terms with the government-sponsored enterprise. "We've been negotiating with them [Fannie Mae] since July and August of last year," said Chris Conway, president of the Greenbelt, Md.-based ESFCU. Mr. Conway has now turned his eye toward a settlement with CUMIS Insurance Society, which holds a bond with the $340 million Greenbelt, Md., credit union. Mr. Conway said he is prevented from discussing the terms of the settlement under the agreement, but said ESFCU has received all payments and the return of the 32 mortgages Fannie Mae had bought from CU National under false pretenses. He also expressed optimism that the combination of the Fannie Mae payment and an insurance payout will help his credit union recover most, if not all of the $5 million exposure they have in the case. Representatives of nearly two dozens CUs are expected to meet with Fannie in mediation over the next few months to hammer out a settlement of claims. Michael McGrath, who founded U.S. Mortgage — the parent of CU National — pleaded guilty last year to selling $140 million worth of mortgages issued by 28 credit unions to Fannie Me without the CU's authorization and pocketing the money. He will be sentenced next month.

Sen. Bob Corker, R-Tenn., has clarified that he is dead set against the creation of a Consumer Financial Protection Agency as a stand-alone agency and will not support financial regulatory reforms that include a CFPA. Late last week Sen. Corker volunteered to work with Senate Banking Committee chairman Christopher Dodd, D-Conn., in crafting a bipartisan reform bill. However, the Republican committee member is more interested in finding a consensus on ways to resolve failures of large financial institutions and deal with systemic risks. "Like most Republicans, I believe a stand-alone agency for consumer protection or separating those protections from safety and soundness are nonstarters. I will work to see if we can find a way to enhance consumer protection without negatively impacting the safety and soundness of our financial system, and if we cannot, this will not be a bill I can support," Sen. Corker said.

Almost two months after National Mortgage News first reported that Lend America of Long Island was refinancing consumers but then not paying off their prior first liens, federal officials are investigating those allegations. Existence of the probe was first reported by Newsday. Lend America's top executive, Michael Ashley, could not be reached for comment. The Federal Housing Administration banned the Melville-based Lend America, a privately held nondepository, from its insurance program in November, citing numerous underwriting violations. FHA loans accounted for most of its production. In early December the company stopped originating new loans and laid off most of its workforce. NMN quoted consumers who had loans with the company as well as an attorney who represented vendors that did business with the nonbank.

A former Ameriquest Mortgage employee has pleaded guilty to stealing the personal identification information of nearly 100 victims and using that information to obtain money and other items. In his plea agreement, Jason Alan Tauer of Robbinsdale, Minn., admitted stealing the files of 93 people who had made mortgage applications to Ameriquest Mortgage where he worked as a mortgage assistant from March 15 through April 29, 2005. Tauer was indicted late last year and charged with two counts of bank fraud, one count of access device fraud and three counts of aggravated identity theft. The now-defunct Ameriquest was based in Orange, Calif.

The slumping new home business is a large factor in California's monetary woes, according to a preliminary report that shows the downturn has resulted in the loss of hundreds or thousands of jobs and tens of billions of dollars in economic output to the state's economy. The study found that new housing construction contributed just $14.3 billion to California's economy in 2009 and generated 80,000 jobs. That's only a fraction of the $67.7 billion and 487,000 jobs the industry added in 2005. The report also found that every dollar spent on new housing construction in the state generates additional 80 cents in total economic activity and that each job created through residential construction supports an additional 1.2 jobs. The "Economic Benefits of Housing" report details the role the housing industry plays in the economic health of California and was conducted as the fourth update to a report first commissioned in 2003. The Center for Strategic Research analyzed construction and market data from around the state and quantified the impact of California's construction sector to the state's economy. "It has never been more evident that we must revive the housing industry in order to revive California's economy," said Liz Snow, president of the California Building Industry Association.

Creditors of Taylor Bean & Whitaker are seeking permission from a bankruptcy judge for authority to sue former company insiders, including president Lee Farkas, who founded the company and made it into a top 10 ranked lender. According to a report on Dow Jones, the committee representing Taylor Bean's unsecured creditors in the bankruptcy case wants to sue Farkas and other insiders for money the company loaned them that allegedly hasn't been paid back. The creditors committee said in court filings this week that TBW's lawyers have "conflicts or other concerns that make it unable or unwilling" to pursue the suits, but the committee said the company is backing its efforts. The committee is also planning to go after Bank of America for money the bank allegedly held back after selling securities backed by TBW mortgages. Pursuit of claims against the bank's insiders could well represent the unsecured creditors' best shot at seeing a significant recovery in the bankruptcy case. Judge Jerry Funk of the Bankruptcy Court in Jacksonville, Fla., has scheduled a Feb. 19 hearing to consider the committee's request. TBW filed for bankruptcy protection last summer after trying to buy a controlling stake in its chief warehouse provider, Colonial Bank. Colonial failed shortly thereafter.

A lone Republican on the Senate Banking Committee has stepped forward to work with committee chairman Christopher Dodd, D-Conn., on crafting a financial regulatory reform bill, but the two have decided to postpone talks on consumer protection, an issue closely being watched by mortgage bankers. Sen. Bob Corker, R-Tenn., said creation of a Consumer Financial Protection Agency is "probably the hot button issue." As a result, the two senators have agreed to set that topic aside for now. The Tennessee senator moved fairly quickly after discussions between chairman Dodd and the ranking Republican senator on the committee, Richard Shelby of Alabama, broke down. "I hope to make it clear that I am stepping forward purely as one Republican senator who believes this is a piece of legislation that needs to be passed and is willing to see if it is possible in a bipartisan way," Sen. Corker said. However, Sen. Corker has serious concerns about the creation of a CPFA, which brought Senators Dodd and Shelby to an impasse. This new independent agency would set uniform standards for mortgage lenders and credit card issuers with an eye toward preventing abusive and deceptive practices. Washington observers say that unless language creating a CFPA is in a final bill the White House will oppose it.