Compliance & Regulation

The Department of Housing and Urban Development is threatening to stop Financial Mortgage USA, Honolulu, from making Federal Housing Administration reverse mortgages and allegedly taking advantage of seniors. HUD alleges that the mortgage brokerage firm "duped" seniors into using the proceeds of their FHA reverse mortgages to purchase annuities from an affiliated insurance firm. [Reverse mortgages have an annuity feature depending on the payment plan the senior chooses.] The HUD Mortgagee Review Board is "particularly concerned about one case in which the company steered an 88-year-old borrower into purchasing an annuity which did not mature until she reached her 104th birthday," the department said. The MRB has proposed to permanently withdraw Financial Mortgage USA's status as a FHA-approved lender and fine the company $97,500 for violating FHA rules. The Honolulu lender can request an administrative hearing to contest HUD's actions. Company executives could not be reached for comment.

Federal regulators have issued guidance that encourages banks to refinance or restructure commercial real estate loans despite declines in property values and rents. "The financial regulators recognize that prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions," according to a policy statement issued by the Federal Financial Institutions Examination Council. The policy statement provides examples of prudent CRE workouts. It also stresses the importance of the borrower's willingness and capacity to repay the mortgage. The guidance tells examiners not to adversely classify prudent workouts, even in cases where the borrower is associated with an industry that is facing financial difficulties. CRE loans that are "renewed or restructured in accordance with prudent underwriting standards should not be adversely classified or criticized unless well-defined weaknesses exist that jeopardize repayment," the guidance says.

As the bank earnings season starts to wind down, credit rating firm DBRS said the results for the most part show a weak quarter. "Despite the improvement in financial markets and some promising signs in housing markets, DBRS still expects that mounting job losses, the weak economy and the sustained pressure of asset quality deterioration will keep bank earnings weak at least into the middle of 2010. This economic pressure is falling more heavily in some regions of the country, especially where housing markets and real estate activity collapsed and remain depressed," a report from the company said. Nonperforming loans are increasing, but at a slower pace. Like many others, the Chicago firm is projecting commercial real estate as the next hot spot. CRE portfolios have held up well except for construction loans. But higher vacancies, lower rents and depressed valuations will have an impact, as the weakness in the economy feeds through to demand for commercial space. "CRE is likely to be the weak link in a bank earnings recovery," DBRS said. The report also noted that mortgage banking income in general was lower when compared with the second quarter of this year.

Some daylight emerged Thursday between Treasury Secretary Tim Geithner and House Financial Services Committee chairman Barney Frank over whether systemically important financial institutions will be publicly identified. The two men worked closely on legislation to tighten supervision of these large, complex companies and to set up a system for unwinding them if they got into financial trouble. Rep. Frank (D-Mass.) introduced the bill on Tuesday and favors keeping the names of these institutions private. "There will be no identification of a systemically important institution until the hammer falls on it," Rep. Frank said at a hearing Thursday. He said the committee would vote on the bill next week, perhaps as early as Nov. 4. But at the hearing, Mr. Geithner, regulators and other lawmakers said it would be impossible to keep the public from knowing which institutions the government considers too big to fail. "It won't be a secret that they're held to tougher standards," Geithner said.

The incidence of property valuation fraud rose 46% in the third quarter compared to the same period a year ago, according to a new report from risk mitigation firm Interthinx. Interthinx noted that on a sequential basis property valuation fraud jumped 25%. The company, whose software helps lender/servicers track fraud, said it is seeing a continued shift to fraudulent schemes involving short sales, real estate owned inventories and refinancing by borrowers whose equity has been impaired by falling real estate values.

A lawsuit alleging Countrywide Financial Corp. violated the Real Estate Settlement Procedures Act through a mortgage insurance captive reinsurance kickback scheme has been reinstated by a federal appeals court. The suit, Alston v. Countrywide, was originally filed in December 2006. In 2008, a trial court judge dismissed the suit, ruling there was a lack of jurisdiction. But in a new ruling, Judge Maryanne Trump Barry of the U.S. Court of the Appeals for the Third Circuit, said "What is before us for decision turns on a question of statutory interpretation - does or does not the plain language of RESPA Section 8 indicate that Congress created a private right of action without requiring an overcharge allegation? We conclude that it does." The decision also states that the "filed rate doctrine" does not apply because those suing are challenging Countrywide's alleged wrong conduct and not the "reasonableness or propriety of the rate that triggered the conduct." According to the attorneys for the plaintiffs, who are seeking class action status, Countrywide allegedly assigned each loan which lacked a 20% down payment to one of seven private mortgage insurance companies on a rotating referral fee basis. The MI companies allegedly then were required to reinsure the policy with a Countrywide subsidiary, Balboa Reinsurance Co. The plaintiffs claim that between 2000 and 2006, Balboa collected $892 million in reinsurance premiums and paid $0 in claims. Edward W. Ciolko, a partner with Barroway Topaz Kessler Meltzer & Check, the law firm that brought the suit, said "Consumers faced with inherently opaque real estate settlements have the right under RESPA to be compensated if they are subjected to practices such as kickbacks or unearned closing fees. These abusive practices eliminate competition and increase prices over time, and they are what RESPA is specifically intended to address." Barroway Topaz said it has brought similar lawsuits against Washington Mutual, GMAC and Wells Fargo that were on hold pending this ruling. A representative of Bank of America, the current owners of Countrywide said "At this point we evaluating the ruling and will respond in court at the appropriate time."

Senate Democratic leaders have scheduled a vote on Monday evening to break a filibuster on a bill to extend unemployment benefits and the homebuyers tax credit. If they get the 60 votes to end debate, the Senate should be able to pass the extension bill (H.R. 3548) next week — possibly on Monday. Republican senators have halted any action on H.R. 3548 for the past few weeks because the Democrats won't let them offer several unrelated amendments. One amendment calls for a sunset of the $700 billion Troubled Asset Relief Program and another involves the scandal involving the ACORN community group. After Monday's votes, Republican senators can still hold up passage for three more days. The extension bill will have to go back to the House of Representatives for a final vote. Supporters are hoping the House will not make any changes. Meanwhile, Democrats have added more tax items to the tax bill, including changes in the net operating loss carryback rules to make it more generous for businesses. But the bill still extends the $8,000 first-time homebuyer tax credit from December 1 through April 30 and gives buyers with a binding contract an extra 60 days to close. It also creates a new $6,500 tax credit for move-up buyers. The current homebuyers tax credit expires November 30.

The House and Senate moved quickly to pass an extension of the $729,750 GSE loan limit through the end of 2010, hoping to avoid any potential disruption in the mortgage market. Both chambers cleared the loan limit extension late Thursday as part of a continuing funding resolution. President Obama is expected to sign the continuing resolution (CR) shortly. The maximum $729,750 loan limit for Fannie Mae, Freddie Mac and Federal Housing Administration loans in high cost areas will expire at yearend, dropping to $625,500. The CR extends the higher loan limits through December 31, 2010. The CR also extends the nationwide $625,500 loan limit for FHA-insured reverse mortgages through December 2010. "Given the lack of a private secondary mortgage market, FHA, Fannie Mae and Freddie Mac are pretty much the only game in town," said Robert Story, chairman of the Mortgage Bankers Association. "Extending the current loan limits, along with other initiatives will help restore stability to the housing and mortgage markets." VA loans were not included in the extension. The Department of Veterans Affairs already has the authority to guarantee single-family loans with a maximum loan balance of $729,750 through December 31, 2011.

The Small Business Administration is creating a secondary market guarantee program for loans originated in its 504 Certified Development Co. program. A 504 CDC loan can be used to purchase real estate or other fixed assets related to a small business' expansion. It involves a 50% loan-to-value first mortgage provided by a private commercial lender without a government guarantee; a 40% second mortgage loan made by a CDC having the government guarantee; and a 10% borrower equity investment. The new program would encourage sales into the secondary market of the first mortgage portion and is funded through the American Recovery and Reinvestment Act. SBA said the recession has caused a significant decline in secondary market activity for the 504 first mortgage loans. Under the program, portions of eligible 504 first mortgages pooled by originators or broker dealers could be sold with an SBA guarantee to third-party investors in the secondary market. Lenders will retain at least 15% of each individual loan, pool originators will assume 5% of the risk, and the SBA will guarantee the remaining 80%. To be eligible to be included in a pool, the first mortgage must be associated with a 504 loan disbursed on or after Feb. 17, 2009. The program will be in place until Feb. 16, 2011, or until $3 billion in new pools are created, whichever occurs first.

Five people, feeling they were victims of a loan modification scheme, allegedly took matters into their own hands and as a result, they themselves have been charged with a crime. Daniel Weston of La Cañada, Calif., and Gustavo Canez of Los Angeles, were charged with two counts of torture, two counts of false imprisonment by violence and two counts of second-degree robbery in connection with the beating and torture of the two loan modification agents. Three others were arraigned and pleaded not guilty. Mario Soloman Gonzales of Glendale, Marissa Parker of Sylmar, and Mary Ann Parmelee of La Cañada, were each charged with two counts of torture, two counts of false imprisonment by violence and two counts of second-degree robbery. According to Los Angeles County deputy district attorney Norma Serna, Mr. Weston and Ms. Parmelee, who live in a house in foreclosure, allegedly sought loan mod assistance from the victims but believed that nothing was being done and wanted their money back. The defendants, including Mr. Gonzales and Ms. Parker, purportedly set up a meeting with the victims, where Mr. Weston and Mr. Canez allegedly attacked, detained and tortured them in front of the other defendants. Mr. Canez and Mr. Weston allegedly used a handgun. The victims also were allegedly robbed of their loan paperwork and personal belongings. Mr. Gonzales, Ms. Parker and Ms. Parmelee, a Realtor, had a business relationship with the victims and allegedly funneled loan mod referrals to the two agents. Bail was recommended at $2.1 million for Mr. Weston and $2.8 million for Mr. Canez. Mr. Gonzales, Ms. Parker and Ms. Parmelee are due at Burbank Superior Court on Nov. 2 for a preliminary hearing. The defendants could not be reached for comment.