Compliance & Regulation

The Department of Housing and Urban Development's Mortgagee Review Board is imposing civil money penalties totaling $27,000 on two Federal Housing Administration-approved lenders in Wisconsin and Connecticut for a variety of violations of FHA lending and marketing standards. In the first action, HUD imposed $20,000 in penalties against Green Bay, Wis.-based 1st Rate Mortgage Corp. for allegedly violating HUD/FHA's third-party origination restrictions, making false certifications concerning the compliance with these restrictions and failing to maintain a quality control plan in accordance with HUD/FHA requirements. In the second action, HUD imposed $7,000 in penalties against New Haven, Conn.-based Access Mortgage Corp. for allegedly violating HUD/FHA requirements by improperly using the official FHA logo and failing to notify HUD of a change in its "doing business as" name. Each lender, neither of which responded to requests for comment, will have an opportunity to challenge the imposition of civil money penalties and seek a hearing before an administrative law judge. In addition, HUD reached tentative settlements with four other lenders — Irvine, Calif.-based Nations Direct Mortgage, Grand Rapids, Mich.-based VanDyk Mortgage Corp., Minneapolis-based U.S. Bank NA and Cerritos, Calif.-based Sun West Mortgage Co. — and issued a letter of reprimand to Community Lender Inc. of Boise, Idaho, for allegedly violating HUD regulations.

Tahmeane Elrod of Tyler, Texas, has pleaded guilty to conspiracy to commit wire fraud in connection with a mortgage fraud scheme. According to John Malcolm Bales, U.S. attorney for the Eastern District of Texas, in September 2007 Elrod devised a scheme to defraud mortgage financing companies by submitting false documents in order to qualify for mortgages for the purchase of a residential property. Elrod falsely inflated levels of earned income and forged signatures on a Request for Verification of Employment form as part of a loan application package. Sentencing has not yet been scheduled.

A nine-month investigation done as part of a Florida fraud crackdown has resulted in charges against more than 100 defendants with allegations concerning over $400 million in loans and more than 700 properties. According to A. Brian Albritton, U.S. attorney for the Middle District of Florida, there are currently mortgage fraud-related charges pending against approximately 500 defendants in federal mortgage fraud cases around the nation. The cases concern both mortgage schemes designed to defraud mortgage lenders and "foreclosure rescue schemes" which prey on distressed homeowners. Florida's Mortgage Fraud Surge crackdown was launched in January 2009 in response to the epidemic of mortgage fraud throughout the state, which began during Florida's real estate boom earlier this decade.

A federal judge rejected a request by Angelo Mozilo, the former CEO and founder of Countrywide Financial Corp., to dismiss a Securities and Exchange Commission lawsuit accusing him of securities fraud and insider trading. Mr. Mozilo's lawyer David Siegel called the court's order "disappointing" but added he was confident Mr. Mozilo eventually "will be vindicated." In a court filing, U.S. District Judge John Walter in Los Angeles also rejected requests by David Sambol and Eric Sieracki, respectively Countrywide's former chief operating officer and former chief financial officer, to dismiss related SEC charges. In June the three were slapped with a massive civil fraud suit, accusing them of deliberately misleading investors in the company's stock and engaging in insider trading. They could not be reached for comment. Two years ago CFC's shares were trading in the $40 range. By the time Bank of America bought the firm in the summer of 2008, its stock was trading as low as $3. Investors lost billions on CFC.

Uto Essien, the ringleader of a Colorado based multimillion-dollar mortgage fraud operation, was sentenced to 30 years in the Colorado Department of Corrections. Essien, a Nigerian national, will be deported upon completion of his sentence. An Adams County jury convicted Essien in July after a seven-day trial on four felony charges all related to the use of shell corporations and false invoices to skim money off the top of nearly three-dozen real estate transactions. According to Colorado attorney general John Suthers, Essien and his colleagues fraudulently obtained $10.9 million in mortgages to buy 34 properties in Adams, Arapahoe, Denver and Jefferson counties between April 28, 2004 and Dec. 29, 2006. Essien and his colleagues then skimmed $1.1 million from the transactions to pay for repairs to the properties that the defendants' shell corporations never completed. While acting as a real estate broker, Essien negotiated the property acquisitions and directed the buyers to create the shell corporations. Nine of Essien's co-defendants in the mortgage fraud ring have either pleaded guilty or been convicted.

Treasury Department officials are warning state and local housing finance agencies that the Obama administration's recently unveiled temporary bond purchase program is oversubscribed and that agencies will likely receive less assistance than they requested as a result. The officials issued the warning late last week and asked the HFAs to identify their peak years of issuance from 2004 to 2008 for both single-family and multifamily issues to help determine how much they should receive under the relief program. The agencies had to provide that information to the Treasury by noon on Monday, including CUSIP numbers or other ways to verify the information. The scale-back comes after Michael Barr, Treasury assistant secretary for financial institutions, last month declined to put a dollar amount on the program and instead told reporters it would be sized to meet demand. "We felt it is important to build estimates for the program from the ground up," he said during an Oct. 19 press conference when the temporary New Issue Bond Program was announced. Mr. Barr said at the time that there would be some form of ceiling on the size of the programs, but did not give any specifics. Program participants said yesterday that they do not know the total amount of allocations requested by the HFAs under the program and federal regulators could not be reached for comment.

The Department of Housing and Urban Development late Tuesday unexpectedly delayed the release of a much-anticipated audit of the FHA's capital reserves, raising questions about the accuracy of some of the findings. The delay fueled industry speculation that the government insurance fund is perilously close to reaching the zero mark. In a statement, FHA commissioner David Stevens said the government asked its outside auditor, IFE Group of Rockville, Md., "to run additional economic scenario testing above and beyond what was going to be included in the actuarial study to better understand a broader range of risk scenarios." Based on what it saw of the results, FHA raised questions about the accuracy of IFE's modeling. The auditor then told FHA that it should not treat the report as final. IFE is now running additional tests to ensure that the final report is accurate, FHA said. FHA insures just over $700 billion in mortgages. At midyear its reserves stood at just under $8 billion. But with claims rising that number may have fallen below $5 billion, according to industry sources. Ed Pinto, an industry consultant and FHA critic, said Tuesday that he believes the audit results will be based on "overly optimistic" assumptions relative to the fund's delinquencies, cure rate on defaulted loans and success rate on loan modifications. Mr. Pinto told National Mortgage News that if the FHA's reserves do in fact go negative, "however small that number is, it will be ominous." HUD officials could not be reached for comment.

Michael Chou, a San Francisco mortgage broker, pleaded guilty in federal court to wire fraud conspiracy in connection with a scheme to defraud mortgage lenders. According to Joseph P. Russoniello, U.S. attorney for the Northern District of California, Chou admitted that, in a scheme that began in 2003 and continued through April 2009, he defrauded mortgage lenders and financial institutions by providing false information on loan applications. Working out of an office in San Francisco, Chou and his colleagues assisted individuals who wanted to obtain mortgages for residential properties in Northern California and elsewhere. As a part of this scheme, Chou routinely transmitted fraudulent loan applications to mortgage lenders that inflated the borrowers' creditworthiness. In addition, the loan applications were supported by forged documents that purported to verify the borrowers' employment, income and assets. Chou and others used a network of co-conspirators who posed as the borrowers' employers to falsely verify the employment and income information listed on the loan applications. As a result of Chou's participation in this conspiracy he illegally earned $360,800, which he agreed to forfeit. Eleven other individuals have been charged in connection with the case. Chou, who is currently not in custody, is scheduled for sentencing on March 19, 2010.

Hudson Valley FCU of New York has filed a lawsuit, challenging the state's mortgage tax, arguing that federally chartered credit unions should be exempt from the levy. The credit union claims that federally chartered credit unions, which are defined as instrumentalities of the federal government under the Federal CU Act, should be exempt from all federal and state taxes, according to Paul Quartararo, Hudson Valley's attorney in the case. However, John McDermott, a real estate attorney who has closed loans in New York for 20 years, said he is unsure of the CU's case. "New York does not collect the lender's portion of mortgage tax from credit unions. It does collect the borrower's portion of New York's mortgage tax from credit union mortgagors (loan borrowers) because those borrowers are individuals not credit unions." (Mr. McDermott, who has worked for Citibank, is also a columnist for Origination News, a SourceMedia publication.) The tax varies from county to county, but is $1.30 per $1,000 of a new mortgage when the deed is recorded, and is as high as $2 per $1,000 in New York City, Manhattan County. An exemption from the four-decade-old tax could save credit unions millions of dollars a year. Hudson Valley FCU is a $2.8 billion Poughkeepsie, N.Y., credit union that was one of more than two dozen credit unions chartered in the 1960's to serve employees of IBM Corp. The credit union claims that the tax is unconstitutional as applied to federal credit unions because federally chartered credit unions are instrumentalities of the federal government and the U.S. Constitution bars taxation of those entities without the express consent of the Congress.

U.S. District Judge J. Frederick Motz sentenced Terrence White of Oxon Hill, Maryland, to 42 months in prison, followed by three years of supervised release for mail fraud from fraudulently purchasing 25 properties in Maryland, the District of Columbia and Virginia using false mortgage and settlement documents. Judge Motz also ordered White to pay $4.2 million in restitution. According to Rod J. Rosenstein, U.S. attorney for the District of Maryland, White and others paid straw purchasers to purchase houses for White and others. White created false mortgage and settlement documents, many of which misrepresented the straw purchasers' income and assets. This scheme involved fraudulent loans worth more than $19 million. More than 10 individuals and banks were harmed. The loss amount foreseeable to White is between $2.5 and $7 million. Many of the purchased properties have been foreclosed upon. Co-conspirators Kara McIntosh and Sabrina Weinberg were sentenced to three years and two years in prison, respectively. Osman Sharrieff Al-Bari was sentenced to 78 months in prison. Jamilah Al-Bari and Timothy Reed have pleaded guilty to participating in this scheme and are scheduled for sentencing in the next two months.