Compliance & Regulation

The Treasury Department cited mortgage challenges among other concerns that persist despite an improving economy in deciding Wednesday that it would extend the Troubled Asset Relief Program to early October of next year. In a letter to lawmakers, Treasury secretary Tim Geithner said there have been improvements in the economy but said TARP must be extended due to remaining challenges for mortgagors, homeowners and small businesses. "This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats," Mr. Geithner wrote. The secretary said he would limit the use of the program to a few areas: mitigating foreclosures, helping small businesses, providing capital to community banks and increasing the Term Asset Backed Securities Loan Facility, the latter of which now includes commercial mortgages. The Treasury secretary said he would only use TARP for other purposes if other moves were necessary to stabilize the financial industry. He said he would first consult with the president and the chairman of the Federal Reserve as well as submit written notification to Congress before taking other actions. He warned emergency actions might still be necessary.

JPMorgan Chase has 140,000 borrowers in Home Affordable Modification Program payment trials, but only 16% have been approved (or ready to be approved) for a permanent modification, a Chase executive told Congress. Approximately 71% of the homeowners are current on their trial mods, but many have not submitted the required documents for underwriting - pay stubs, proof of employment and tax returns. "We are focused on helping the 51% of borrowers that are paying but need help completing documents," said Chase executive Molly Sheehan. She also told a congressional panel that 29% of the homeowners did not make all their monthly mortgage payments during the three-month trials and are ineligible for a permanent HAMP modification. Chase, the nation's third largest servicer, has other modification alternatives to help these borrowers, she told the House Financial Services Committee. The Obama administration is making a big push this month to get 375,000 HAMP candidates into permanent modifications. Meanwhile, consumer groups and other critics don't expect HAMP to reach its potential because of high unemployment and so many underwater mortgages. Some also question the servicers' commitment to the program. Center for Responsible Lending senior policy counsel Julia Gordon noted that the HAMP program has the "theoretical potential" to help a significant number of struggling borrowers. "The servicing industry is either unable or unwilling to do what it is has been asked to do," she testified.

The Securities and Exchange Commission has charged three former executives of now-defunct subprime mortgage giant New Century Financial with fraud for misleading investors as their business was "collapsing" in 2006. At the time, Irvine, Calif.-based New Century was a top-ranked subprime lender, and management was considering selling the company to Merrill Lynch. SEC director of enforcement Robert Khuzami said investors in the once publicly traded company "took a double-hit: The company's mortgage assets and business performance became increasingly impaired, and management manipulated its numbers and concealed its deteriorating performance." At one time, New Century's shares traded for $50. Former top managers accused of fraud include Brad Morrice (vice chairman/president), Patti Dodge (EVP) and David Kenneally (SVP). New Century filed for bankruptcy protection in April 2007. The complaint, filed in federal court in the Central District of California, seeks civil penalties and from Morrice and Dodge reimbursement of bonuses and other incentive or equity-based compensation. The agency is seeking a severe personal penalty against the three: a bar against ever again serving as officers or directors of a publicly traded company. Josh Epstein, a spokesman for Proskauer, the law firm representing Mr. Morrice, told The Orange County Register that the SEC's charges against the former executive are "flatly false." He said, "Brad did all he could to save the company and to accurately report the company's numerous challenges to its shareholders. While his efforts failed, there was no fraud." Mr. Morrice remained a large shareholder until the end, losing millions of dollars when New Century filed for bankruptcy in April 2007, Mr. Epstein said. John Vandevelde, an attorney for Mr. Kenneally, said the former executive was never a top executive there but a new accountant who lost "every penny he ever invested" in the company he believed in. "Kenneally never signed any financial statements and relied on the outside auditors for accounting treatment now under question by the SEC," his lawyer said. Ms. Dodge could not be reached for comment.

The Department of Housing and Urban Development late Monday suspended Equitable Trust Mortgage Corp. of Baltimore from making Federal Housing Administration-backed loans -- the second such suspension of a lender within a week. ETMC, which has branches in Maryland, Virginia, and South Carolina, told National Mortgage News it will make a statement on the matter later in the day Tuesday. Its specialty is renovation financing. For now, the suspension is for a minimum of six months. HUD alleges that the nonbank lender charged excessive origination fees to minority borrowers and others. In some cases, the company charged borrowers a broker fee and an additional 1% origination fee, HUD said. "ETM received excessive compensation and improperly charged consumers duplicative and unreasonable fees to originate their loans," HUD noted. It originated nearly 2,250 FHA-insured loans over the past two years, 8% of which are in default. It has filed only 8 claims. HUD's Office of Inspector General also is investigating ETMC's lending practices. Last week HUD suspended Lend America of Long Island which a few days later laid off most of its workforce.

House Financial Services Committee chairman Barney Frank, D-Mass., is adding a provision to his massive regulatory reform package that would provide $3 billion in relief for unemployed homeowners. The chairman is tapping the Troubled Asset Relief Program to fund "emergency" loans and advances. Assistance would be capped at $50,000 per homeowner. As expected, House Judiciary Committee Democrats have submitted an amendment that would allow bankruptcy judges to reduce or 'cram down' the principal amount of a homeowner's mortgage. The House Rules Committee decides which amendments will be considered when debate begins on The Wall Street Reform and Consumer Protection Act (H.R. 4173). Meanwhile, a coalition of lender groups has succeeded in getting congressional sponsors to submit a risk retention amendment to the Rules Committee. It requires regulators to create a category of low-risk mortgages that are exempt from risk retention. H.R. 4173 currently gives the regulators the discretion to set risk retention requirements as high as 5% on most mortgages.

CUNA Mutual Group's CUMIS Insurance Society subsidiary is asking a state court to declare that surety bonds held by 26 credit union victims of the $140 million fraud by U.S. Mortgage/CU National Mortgage Corp. do not cover an estimated $125 million of losses suffered by those credit unions. The little-known move came to light in a new civil suit filed last week by Educational Systems FCU, a Greenbelt, Md., credit union that stands to lose $3 million from the fraud and is asking a federal court in Baltimore to order the credit union insurer to cover the losses as part of the bond. Chris Conway, president of Educational Systems FCU, said over the weekend that he was compelled to file the new suit to prevent CUMIS from getting a court order protecting against his credit union's bond claim. "They kind of forced our hand," Conway told The Credit Union Journal on Saturday. "We have a valid claim and it's pretty straightforward. We couldn't just let them sit by and deny our claim." The state suit filed by CUMIS is apparently the second attempt launched by the insurer to get a court to block the claims, which could be the biggest ever against CUNA Mutual. Educational Systems is one of 26 credit unions whose mortgages were being serviced by CU National and were surreptitiously sold by the company's president, Michael McGrath, to Fannie Mae. McGrath pleaded guilty to the massive fraud in June and is scheduled to be sentenced in February.

The creation of a Consumer Financial Protection Agency would ensure that loan brokers have a vested interest in the performance of mortgages they facilitate, according to HUD secretary Shaun Donovan. The CFPA could end "abusive" yield spread premiums and impose a "duty of best execution" on brokers to make sure they put borrowers into affordable mortgages, the Department of Housing and Urban Development secretary told a Consumer Federation of American conference. In addition, the broker's fee could be paid over time, instead of in a lump sum at the closing table, giving brokers "skin in the game" the secretary said. The National Association of Mortgage Brokers top lobbyist Roy DeLoach said NAMB has a long-standing policy against abusive YSPs that act as incentives for brokers to steer borrowers into riskier, higher cost loans. He noted that NAMB supports a provision in a House-passed bill (H.R. 1728) that prohibits incentivized YSPs. As long as the broker's fee can be financed inside the interest rate, "we are supportive," he said. However, NAMB believes brokers should be paid at closing. In terms of best execution, the NAMB lobbyist noted that wholesale lenders, not brokers, underwrite and approve the loans. "The lenders have all the information we have before the loan goes to close," Mr. DeLoach said.

AmTrust Bank of Cleveland, which until recently was the nation's third largest residential wholesaler, was seized by the government late Friday with a majority of its assets sold to New York Community Bank, Westbury, N.Y., a top ranked player in multifamily lending. A source familiar with the matter said the government actually took bids on AmTrust's operations two weeks ago, saying interested investors included BB&T, EverBank, Fifth Third Bancorp, Key Bank and others. Its failure is expected to cost the government roughly $2 billion. The lender's demise is yet another blow for loan brokers in search of wholesalers willing to table fund their customers. At press time, it was unclear whether NYCB would keep AmTrust's wholesale division intact. A thrift, AmTrust had $12 billion in assets and until a few years ago was called Ohio Savings and Loan. The thrift was a national correspondent originator, selling its conventional loans to Fannie Mae and Freddie Mac. NYCB paid no premium to assume all of AmTrust's $8 billion in deposits, and also agreed to take over $9 billion of the failed thrift's assets. New York Community and the FDIC will share losses on $6 billion of those assets. The nation's largest privately owned thrift, AmTrust had been stung by a string of losing quarters and mounting losses from construction and development loans. Last Monday its holding company, AmTrust Financial Corp., filed for Chapter 11 bankruptcy protection.

Lobbyists are hearing that the House Judiciary Committee wants to tack a bankruptcy cramdown amendment onto the massive regulatory reform package that the House of Representatives will debate and vote on this week. The House Rules Committee will decide on Wednesday which amendments will be in order when the House starts debate on the Wall Street Reform and Consumer Protection Act (H.R. 4173). The House passed a cramdown bill (H.R. 1106) in March by a 234-191 vote that would allow bankruptcy judges to reduce or cram down the principal amount of a homeowner's mortgage. It is unclear if Judiciary Committee Democratic leaders want to attach all of H.R. 1106 to the regulatory reform bill or offer a narrower cramdown amendment. Meanwhile, a coalition of lender groups are hoping the Rules Committee will accept an amendment that would create a category of mortgages that are exempt from the risk retention requirements on sales and securitizations of mortgages. H.R. 4173 currently gives the regulators the discretion to set risk retention requirements as high as 5% on most mortgages. The coalition-backed amendment would give the regulators the option to totally exempt Federal Housing Administration, Fannie Mae, and Freddie Mac mortgages from risk retention.

The Federal Deposit Insurance Corp. is considering amending its loss-sharing agreements with acquirers of failed banks, allowing certain homeowners who are "under water" on their mortgages to reduce the principal amount owed. "There would be no requirement that they perform principal forgiveness - though there would be financial incentives under the 'loss share,' particularly for deeply underwater loans," said FDIC spokesman Andrew Gray. Under the current loss sharing agreements, FDIC agrees to absorb 80% of the losses on the failed bank's assets. But the acquirer is required to modify residential loans for struggling homeowners and reduce their payments to an affordable level. These agreements cover $44.7 billion in single-family loans. Now, FDIC is "actively considering" making debt forgiveness a modification option. "It would be based upon the use of tools that would maximize the value of the mortgage and provide long-term sustainable mortgage payments for the borrower," Mr. Gray said.