Compliance & Regulation

The Treasury Department is relying on Fannie Mae and Freddie Mac to oversee servicers participating in the Home Affordable Modification Program but the two GSEs have completed a very low percentage of those modifications on their own loans. The Obama administration launched HAMP in April and so far 650,000 borrowers have been placed in trial modifications, including 150,000 borrowers in October. Freddie reported that its servicers have enrolled 88,000 delinquent homeowners in the HAMP trials and reduced their mortgage payments. But only 471 borrowers had successfully completed the trial-payment period and received permanent modifications as of Sept. 30. Fannie Mae servicers have placed 189,000 borrowers in HAMP trials. But the government-sponsored enterprise said in its third-quarter financial report that only a "low percentage of our trial modifications had converted into completed loan modifications." In their third-quarter securities filings, the GSEs cite several reasons for the low completion rate, including the time and difficulty servicers face in collecting borrower information to document and finalize the modifications. "Because some borrowers may not make all the required trial period payments, and because of the additional time that has been provided to obtain the required documentation, it is difficult to predict the rate at which our trial modifications will convert into completed modifications," Fannie said. The Treasury Department regularly reports on the number of borrowers in HAMP trials but not the completion rate.

Kawana Latrell Melvin of Atlanta pleaded guilty in Superior Court of Clayton County in Georgia to felony charges that she operated a mortgage banking business without a license. She also admitted to making a false statement with respect to her eligibility to work in the state's residential mortgage industry. The Georgia Department of Banking and Finance referred this matter to the State Attorney General's Office after learning she continued to work a as mortgage loan processor for a residential mortgage licensee in violation of a final cease and desist order. Melvin used a false document purportedly written by the Commissioner of the Department that provided that she was not prohibited from engaging in residential mortgage activities. Melvin has been placed on probation for a period of three years and must pay a fine in the amount of $2,000. While on probation, she is prohibited from obtaining employment in any real estate or mortgage business and cannot apply for or obtain professional licenses in either of these industries.

Fannie Mae has given more than three-dozen credit unions until next week to accept an offer of pennies on the dollar for some $125 million of their mortgages that defunct U.S. Mortgage/CU National Mortgage fraudulently sold to Fannie. So far, only two of the credit unions have accepted the offer, detailed this afternoon in a letter to Fannie Mae's federal regulator from National Credit Union Administration chairman Deborah Matz, who expressed concern at the losses faced by affected credit unions. "I appreciate Fannie Mae is also a victim of this crime," said Mr. Matz in a letter to Edward DeMarco, acting director of the Federal Housing Finance Agency. "However, the financial impact of CU National's fraud on these member-owned cooperatives is significant. Indeed, for some of the credit unions, their losses will be so great as to force our agency to take drastic action under the prompt corrective action rules." Neither Fannie nor the FHFA returned telephone calls. Both the credit unions and Fannie were victims of a massive fraud perpetrated by Michael McGrath, the president of U.S. Mortgage and its CU National subsidiary which sold $140 million of mortgages held on behalf of credit unions to the GSE without authorization and kept the money. McGrath has pleaded guilty to the huge fraud, agreeing to forfeit almost $15 million in assets, leaving a $125 million loss for the CUs. Fannie has given the credit unions until Nov. 16 to accept the offer but so far only two have agreed. Fannie, which has rejected requests to give the mortgages back, has offered to settle with the credit unions for what would amount to less than 20% of the value of the mortgages. If those credit unions realize the 80% of losses it could push several of them into insolvency.

Senate Banking Committee chairman Christopher Dodd, D-Conn., has produced a "discussion draft" of a comprehensive regulatory reform bill that requires sellers of mortgage-backed securities to retain 10% of the credit risk. The House Financial Services Committee is moving toward approving a similar bill to address systemic risk that also requires 10% risk retention — a mandate that the mortgage industry opposes. "To restore confidence in our markets and encourage investment, we will require companies that sell products such as mortgage-backed securities to keep 'skin in the game' so that they won't sell worthless securities to investors," Sen. Dodd said. His bill also creates an independent Consumer Financial Protection Agency to protect consumers from "hidden fees and abusive terms" so they know they are being offered "safe" mortgages and other products, the chairman told reporters. Sen. Dodd said he will seek input on his draft bill and reach out to Republicans in an attempt to mark up and approve a bill by the first week of December. Dodd's CFPA plans focuses on companies that "pose the greatest risk to consumers — mortgage bankers, brokers, finance companies and the largest institutions," according to a legislative summary.

William Everett Nichols of Alexandria, La., president and sole shareholder of First Fidelity Mortgage, pleaded guilty to defrauding Sabine State Bank out of $2.9 million. Sentencing is scheduled for Feb. 4, 2010. According to Donald W. Washington, U.S. attorney for the Western District of Louisiana, Sabine State Bank provided a line of credit to First Fidelity Mortgage, monies that were in turn used by First Fidelity to fund mortgages for its customers. The customer notes pledged by First Fidelity secured this line of credit at Sabine State Bank. Nichols devised a scheme by which he prepared fraudulent notes by forging signatures of borrowers and notaries public, and would then deliver them to Sabine State Bank as collateral in order to cause the bank to deposit more money into First Fidelity Mortgage's account. When the bank would deposit funds into the account to fund these loans, Nichols just kept the money for himself. In total, Nichols defrauded the bank out of $2.9 million. Nichols has been detained without bond since his arrest in July.

Fraud continues to flourish in unstable metro areas in Arizona, Nevada, Southern California and Florida and is popping up in surprise locations like Bend, Ore., according to panelists at the SourceMedia Loan Modification Conference in Dallas. Ann Fulmer, vice president of business relations at Interthinx, said fraud is increasing in these markets among distressed borrowers through foreclosure rescue and loan mod scams. The industry is seeing illegal flipping of REO properties, false appraisals, tarnished broker price opinions and loan reductions in short sales. "There is no training in fraud recognition for servicers. They are pressed for time," she told conference attendees. It is crucial to find ways to train key loss mit staff and to verify a property's listing history, the speakers stressed. Lenders and servicers should create a red flag list within the shop of what to look out for, including a list of other parties and companies they work with on a regular basis, and identify borrowers with multiple loans for properties. In Dallas alone, Chris Day, a special agent in mortgage fraud from the FBI, said there are 75 cases of fraud, each one with at least $1 million in losses, and Dallas "isn't even a fraud hot spot." It is members of the industry who will correct this problem, he said. "Separate each transaction out. Identify things that don't fit. False companies and associations to maybe another case."

After several false starts, the Federal Housing Administration has finally issued new condominium lending policies that go into effect Dec. 7. But the agency is making several temporary exceptions to the new rules due to the "volatility" in the condo market. The new FHA lending policies spelled out in Mortgagee Letter 2009-46 B limit the number of condo units in one complex that can be financed with FHA-insured loans at 30%. And 50% of the units must be owner-occupied before FHA financing can be used. However, Mortgagee Letter 2009-46 A allows exceptions to the FHA concentration and owner-occupancy requirements until Dec. 31, 2010. One exception allows FHA lenders to ignore foreclosed units in calculating the owner-occupancy rate until the end of next year. Meanwhile, the Department of Housing and Urban Development will allow FHA lenders to use a "Spot Loan Approval Process" for condominium units until Feb. 1, 2010. Spot approvals allow FHA lenders to finance one condominium unit in a building that has not been approved by HUD. The new condo lending policies gives FHA direct endorsement lenders the authority to approve condominium projects for the first time ever. The new streamlined lender approval process eliminates the "need" for spot approvals, HUD says.

Fannie Mae and Freddie Mac are becoming increasingly concerned that mortgage servicers will not be able to honor their obligations to repurchase bad loans. Fannie expects repurchase and reimbursement requests will remain high in 2009 and into 2010 and it already has a significant number of requests that have not been paid. "Due to the current housing and economic environment and the adverse impact on our servicers, we may be unable to recover outstanding loan repurchase and reimbursement obligations resulting from breaches of representations and warranties," Fannie says in its third-quarter financial statement. Fannie does not disclose the amount it collects from servicers. But Freddie Mac reported that its servicers have repurchased $2.7 billion in bad loans during the first three quarters of 2009, including $960 million in the third quarter. "Our exposure to seller/servicers could lead to default rates that exceed our current estimates and could cause our losses to be significantly higher than those estimated within our loan loss reserves," Freddie says in its third-quarter financial statement. Lenders that sell loans to Freddie and Fannie are required to make representations and warrantees that the loans comply with the government-sponsored enterprises' underwriting requirements. If the loans don't perform as expected and underwriting deficiencies are flagged, the lender is obligated to buyback the loan.

The Treasury Department has turned down Fannie Mae's request to sell roughly $2.6 billion in low-income housing tax credits to Goldman Sachs. The denial letter came late in the day Friday. The Federal Housing Finance Agency had cleared Fannie to sell the LIHTCs but the ultimate decision rested with Treasury. (Berkshire Hathaway had also expressed an interest in buying the tax credits.) In a filing with the Securities and Exchange Commission, Fannie — without mentioning Goldman — said it had an offer to sell the credits for "a price that exceeds their current carrying value." According to combined press reports, Treasury nixed the sale because it was not in the best interests of taxpayers. Over the past five quarters Fannie has lost $85 billion. Goldman could have used the LIHTCs to reduce its tax burden to the government.

Edward William Farley, a former mortgage broker from Georgia, pleaded guilty in federal district court to charges stemming from a mortgage fraud scheme and a related real estate investment Ponzi scam involving more than 150 victims. According to Sally Quillian Yates, acting U.S. attorney for the Northern District of Georgia, Farley, operating through numerous mortgage firms, defrauded mortgage lenders through same-day property flips throughout the state. He paid an appraiser to fraudulently inflate the value of each property by $50,000 to $100,000 and recruited unqualified borrowers to purchase them from one of his companies. However, Farley did not purchase the properties until the fraudulently obtained loan proceeds on the second purchase had been disbursed. In the real estate investment-Ponzi part of the scheme, Farley then began to operate under the name Alliance Resource Management to conceal his new source of income from prior victims. Real estate investors and lenders were induced through false promises that their investments and loans were fully secured. The same property was used to "fully secure" multiple investors and lenders, causing losses in excess of $20 million. Sentencing is scheduled for Feb. 3, 2010.