Compliance & Regulation

The Federal Reserve officials continue to take a wait-and-see approach to ending their $1.25 trillion MBS purchase program by the end of this quarter, according to a statement issued by the Federal Open Market Committee. The Fed is gradually slowing the pace of agency mortgage-backed securities buys and it had already purchased $1.15 trillion in MBS as of Jan. 20. The FOMC "anticipates" that it will complete the MBS purchases at the end of the first quarter. "The committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets," Wednesday's statement said. The FOMC had the same language in its Dec. 16 statement. Experts seem to be somewhat divided on what will happen to MBS prices once the Fed stops purchasing Fannie Mae, Freddie Mac and Ginnie Mae MBS. Some believe the Fed's exit is well known and the transition will be orderly, resulting in a gradual climb in rates. But others are concerned MBS prices could fall more steeply and push mortgage rates up in a way that could shock the market.

The Department of Justice is forming a special Fair Lending Unit which is expected to aggressively pursue residential lenders and brokers that engage in what the government calls "toxic and discriminatory" loans. The new FLU "will pursue cases of reverse redlining — where predatory lenders have targeted toxic products to minority communities, resulting in unprecedented numbers of foreclosures and the resulting disinvestment and blight," DOJ assistant secretary Thomas Perez said recently. The new unit also will review Home Affordable Modification Program data to see if servicers are treating minorities fairly and providing them with access to modifications and appropriate reductions in monthly payments. The Senate confirmed Mr. Perez several months ago to run the Civil Rights Division. "It is really ramping up now that he is there," said Paul Hancock, a partner at K&L Gates. The former Civil Rights Division attorney said it is important for lenders to be prepared and develop their own defenses to the type of claims that might be coming. "We expect this is going to be a very aggressive administration and push the envelope as much as they can to challenge lenders," Mr. Hancock said.

Security Atlantic Mortgage of New Jersey, one of 15 lenders subpoenaed by the government two weeks ago, is telling mortgage brokers that it has stopped taking new applications while transferring unclosed loan files to Real Estate Mortgage Network, a nearby lender. The 17-year old company said it made the decision to shut its pipeline in "the wake of unfavorable publicity created by the recent unorthodox HUD press conference and the concerns this press conference has raised with our lenders and investors." As National Mortgage News Online went on deadline, company officials had not returned telephone calls about the matter. SAM said REMN is "actively recruiting" its existing operational staff, including underwriters and closers to fill positions in a new operations center." In an announcement on its website, SAM said it funded more than 17,000 loans, many of them in "government-designated disadvantaged neighborhoods, representing nearly 60% of our production." It added that "it has always been our mission to serve those qualified families most in need of the FHA program." In mid-January HUD subpoenaed 15 mortgage companies, seeking out possible fraud in an effort to stem losses on FHA loans. While publicizing the subpoenas, the agency noted that they had not yet found any evidence of wrongdoing at the firms, and were singling out those with the highest default rates, including SAM.

New home sales fell 23% in 2009 from the previous year and sales ended the year on a down note with a 7.6% decline in December. Despite the first-time homebuyer tax credit, sales of newly constructed homes totaled only 374,000 in 2009, compared to 485,000 in 2008, according to the U.S. Census Bureau. This year, economists at the National Association of Home Builders expect an improving economy and new homebuyer tax credit will push new home sales up 39% to 517,000. The tax credit, which includes repeat buyers this time, expires April 30. Buyers that sign a sales contract by April 30 have until June 30 to close. NAHB economist Bernard Markstein expects the new tax credit will generate 180,000 additional sales and 40,000 of the sales will involve new homes. Meanwhile, the Census Bureau reported that sales of new single-family homes fell to a 342,000 seasonally adjusted annual rate in December from 370,000 in November. November sales were revised upward. Last month, the bureau reported that sales plunged 11.3% in November to a 355,000 seasonally adjusted annual rate.

The Obama Administration is finally making headway in its effort to get Bank of America and other large servicers to modify second liens when they modify first mortgages. Bank of America said it is the first to sign an agreement with the Treasury Department to participate in a second lien modification program (2MP), which will become a component of the government's Home Affordable Modification Program. Treasury is expected to issue guidelines for 2MP shortly. "For many homeowners facing severe financial difficulty, decreasing the payment on the first mortgage without a reduction in the payment of the second lien may not produce an affordable combined mortgage payment," said Barbara Desoer, president of Bank of America Home Loans. The 2MP program is designed to address cases where the bank services the first mortgage and owns the second lien. Since last summer Treasury has been working with BoA and several large banks on a second lien modification initiative. Four banks with $441 billion in second liens also service 55% of all first mortgages, according to some estimates.

Some vendors are making it easier for lenders to complete the new good faith estimate disclosure by providing price guarantees, according to a Real Estate Settlement Procedures Act attorney. "We are seeing a lot of vendors guaranteeing the [settlement] charges. And I expect to see more of that," said Phillip Schulman, a partner at K&L Gates in Washington. Lenders also want third-party vendors that they recommend to homebuyers not to raise prices without providing 60-day advance notice, Mr. Schulman told clients during a webinar. Under the new RESPA rule, charges for lender-required or lender-recommended services should not exceed the initial estimate given to mortgage applicants by more than 10% at closing. If the settlement costs are higher than the good faith estimate, the lender ends up paying the difference at the closing table. In guaranteeing prices, vendors are expected to pay the overage, Mr. Schulman said.

Orange County prosecutors arrested two Ladera Ranch men - and issued a warrant for a third - accusing them of defrauding more than 400 homeowners in an alleged $1.25 million loan modification scam, according to a report in The Orange County Register. Christopher Lee Diener, 42, Terrence Green Sr. 43, and Stefano Joseph Marrero, 40, are each charged with a felony count of conspiracy and 97 felony grand theft counts, according to the Orange County District Attorney's office. Messrs. Diener and Green were taken into custody and are each being held on $1.5 million bail. They will be arraigned by midweek, at the latest. The business partners are accused of getting upfront fees from homeowners, and falsely promising they can get them loans with cheaper payments in less than 90 days and offering a 100 percent money-back guarantee, prosecutors said.

The Department of Housing and Urban Development on Monday stopped three lenders from originating Federal Housing Administration loans and suspended another as part of a continuing effort to weed out firms that do not follow its underwriting rules. The HUD Mortgagee Review Board permanently withdrew FHA approval from Strategic Mortgage Corp., Oklahoma City, ProMortgage Inc., Claremore, Okla., and Americare Investment Group Inc., Arlington, Texas. FHA also suspended Home Mortgage Inc., of Burr Ridge, Ill., for six months. Strategic Mortgage had a 14.7% early default and claim rate and FHA said it charged borrowers impermissible or excessive fees and submitted a false certification to HUD. The MRB also levied a $71,000 civil money penalty against the Oklahoma City company. ProMortgage had a 7.3% early default and claim rate and HUD said it failed to comply with numerous FHA requirements such as reviews of early defaulted loans, verifying borrower income and reporting employee compensation on appropriate forms. The MRB levied a $124,000 CMP against the firm. HUD terminated Americare for failing to make monthly payments on a settlement involving a $124,000 civil money penalty.

On average, it takes more than six months to complete a loan modification, which is "unacceptable," according to the State Foreclosure Prevention Working Group. The group, which includes state attorney generals and banking lawyers, notes in its fourth-quarter report that servicers have steadily increased the number of employees dedicated to loss mitigation. The report says that, on average, one full-time employee is handling 133 modification cases, down from 246 cases back in June. "However, the increase in loss mitigation staff has not prevented an increase in the backlog of loss mitigation resolutions," the January report says. State officials point out that the ratio of modifications "in process" to completed modifications has "ballooned" from 3-to-1 in October 2008 to 7-to-1 in October 2009. The working group is concerned that 72% of completed modifications result in an increase in the principal amount of the mortgage. "Servicers routinely capitalize delinquent interest, corporate advances, escrow advances and attorney fees and other foreclosure-related fees and expenses into the loan balance when completing a loan modification," the report says. With so many underwater mortgages, increasing the loan balance "only adds to the likelihood of ultimate default."

As the Obama Administration wrestles with ways to help unemployed and underwater homeowners, the Federal Housing Administration is going back to see what it can do to kick start the Hope for Homeowners program. "The Hope for Homeowners could help underwater borrowers," FHA commissioner recently told reporters. The H4H program has gone through several makeovers since Congress first created the special refinancing program in 2008, but it has never lived up to its promise. FHA lenders made only 22 H4H loans in fiscal year 2009, which ended September 30. In the fourth quarter of this calendar year, 23 H4H loans have been approved. The H4H program depends on mortgage investors writing down the principal amount of the loan to a 96.5% loan-to-value ratio and taking a hit. The only benefit for investors is the existing loan is refinanced into a new FHA-insured loan and they are protected from further losses. FHA made some changes to the H4H program last year. "We are now assessing how well that is going to work and what we need to do differently," Mr. Stevens said.