Compliance & Regulation

The number of vacant homes for rent jumped to 4.59 million in the third quarter, up 16% from a year ago and up nearly 190,000 units from the second quarter, according to the Census Bureau. The rising number of rentals reflects a slow sales market that forces speculators to rent properties and families moving up to rent their previous homes. It also reflects a glut of condominiums. "Condos keep coming on the market," said Bernard Markstein, director of economic forecasting at the National Association of Home Builders. The Census Bureau reported that the number of vacant homes for sale rose to 1.99 million in the third quarter from 1.92 million in the second quarter. The number of vacant homes on the market had dropped by 14% during the first half of the year. The slight increase occurred during a period of rising sales with homebuilders continuing to reduce their inventories of unsold houses. Mr. Markstein said the increase reflects more foreclosed homes coming on the market, as well as condo units. The Census Bureau also reported that the U.S. homeownership rate edged up to 67.6% in the third quarter, from 67.4% in the previous quarter. The homeownership rate was 67.9% in the third quarter of 2008 and it peaked at 69.2% in the second quarter of 2004. A percentage point decline in the homeownership rate represents 1.1 million owner-occupants that lost their homes.

The struggling GMAC Financial Services sold $2.9 billion in government-backed debt late on Oct. 28, ahead of a regulatory deadline in November that will test the mortgage/auto lender's capital levels and ability to absorb losses. The bonds are senior fixed rate notes guaranteed by the Federal Deposit Insurance Corp. under its Temporary Liquidity Guarantee Program. Thanks to the government guarantee, the notes will be rated AAA by all three major rating agencies. GMAC is a bank holding company that controls Residential Capital Corp., the nation's fifth largest residential lender and servicer. The government has invested $12.5 billion in the company to date and owns 35% of it. Concerns that GMAC could fail the impending capital test had sent the cost of insuring debt at its residential mortgage arm, Residential Capital, spiraling in the past week as investors worried that the unit would need to be spun off.

The Obama Administration said it supports an extension of the current loan limits for Fannie Mae, Freddie Mac and Federal Housing Administration mortgages following an agreement by House and Senate appropriators to extend those limits for another year as part of the continuing funding resolution Congress is expected to pass this week. "The CR [continuing resolution] maintains the limits for FHA, GSE ... single-family mortgages at $729,750 through the end of calendar year 2010," according to a statement issued by the chairmen of the appropriations committees. The maximum $729,750 loan limit is due to expire Dec. 31 and it would drop down to $625,500 if not extended. "This could result in major disruptions in the mortgage origination market for larger loan sizes as early as November," the appropriations chairmen said. Earlier in the week, industry trade groups warned Congress that quick action is needed because it is becoming more difficult for lenders to approve mortgages with balances above $625,500 due to uncertainty about an extension.

Senate leaders have agreed on an extension of the $8,000 first-time homebuyer tax credit along with a new $6,500 tax credit for move-up buyers, but it is unclear when the chamber will vote on the measure. The credit extension would run from Dec. 1, 2009 through April 30, 2010 and give buyers with a binding contract an extra 60 days to close. The tax credit extension raises the income limits to $125,000 for single-filers and $225,000 for joint filers. This applies to first-time and repeat buyers. To qualify for the $6,500 tax credit, repeat buyers must have used a previous home as a principal residence for five of the previous eight years. The Obama administration said it supports an extension of the first-time homebuyer tax credit. "In extending the tax credit, we urge Congress to include strict measures to combat tax fraud and protect responsible homeowners," Treasury secretary Timothy Geithner said. The tax credit extension is expected to be attached to a bill extending unemployment benefits by 20 weeks. Still, it is unclear when the Senate will pass the extension bill (H.R. 3548), despite broad bi-partisan support. The current $8,000 first-time homebuyer tax credit is set to expire Nov. 30.

Karen Axline, a former title agent from Granville, Ohio, was sentenced to four years in prison for her role in a $9 million mortgage fraud scheme involving more than 30 properties in central Ohio. According to Ohio Attorney General Richard Cordray, in the scheme, participants falsified loan applications and documents on behalf of borrowers and made downpayments allowing borrowers to secure loans in which tens of thousands of dollars were laundered through fictitious home contractor companies. Axline operated the now-defunct Granville Title Agency in Granville and colluded with others in structuring many of the transactions to deceive lenders. Axline is one of 13 defendants charged in the scheme. The investigation is still ongoing.

GMAC Financial, which controls the nation's fifth largest mortgage banking franchise, is talking to the Treasury Department about the government investing up to $5 billion in additional capital into the struggling mortgage and auto lender. According to published reports, Treasury officials have confirmed the talks but GMAC, for now, is saying little about the situation. "GMAC continues to work with the Federal Reserve regarding the remaining capital requirements related to the Supervisory Capital Assessment Program," said a company spokeswoman. "We will comply with the Federal Reserve Bank's final assessment for additional capital." Earlier in the year Treasury told GMAC to raise an additional $11.5 billion in capital after undergoing a "stress test" along with other large banks. While other banks deemed undercapitalized have been able to raise money from private investors, GMAC has been forced to go back to the government via the TARP program. At mid-year Residential Capital Corp., the mortgage banking arm of GMAC, ranked fifth nationwide with $383 billion in housing receivables.

Legislation to give regulators new powers to protect the financial system from failures of large institutions also imposes high credit risk retention requirements on mortgage and asset-backed securitizations. The Financial Stability Improvement Act legislation that House Financial Services Committee chairman Barney Frank, D-Mass., worked out with Treasury secretary Timothy Geithner requires creditors to retain 10% or more of the credit risk when they sell or securitize loans. "Regulators can adjust the level of risk retention above or below 10%, but not lower than 5%," according to a summary of the bill. The bill also gives the federal banking regulators and the Securities and Exchange Commission the flexibility to make exemptions or adjustments to the risk retention requirement if it is "consistent with the purpose of ensuring high quality underwriting" and improves consumer access to credit on reasonable terms. The House passed a mortgage reform bill in May that requires securitizers to retain 5% of the credit risk. But the bill (H.R. 1728), specifically exempts government guaranteed mortgages and loans purchased or securitized by Fannie Mae and Freddie Mac from the credit risk retention requirement. The bill Rep. Frank unveiled to deal with "too big to fail" institutions does not appear to include such an exemption.

Timothy Lynn Beliveau of Mound, Minnesota, was charged with allegedly swindling 14 investors and their lenders out of more than $2.5 million through a real estate fraud scheme. According to B. Todd Jones, U.S. attorney for the District of Minnesota, the indictment charges that Mr. Beliveau, while owning U.S. Housing & Financial Services, a company that assisted homeowners who were close to losing their homes to foreclosure, and American Alliance Mortgage Group, a mortgage brokerage company, allegedly orchestrated a scheme to defraud vulnerable homeowners and induce investors to purchase distressed real estate from those homeowners at inflated prices. The alleged scheme created a pool of funds Mr. Beliveau then allegedly used to buy boats, motorcycles, a Florida vacation home and other personal items. Mr. Beliveau could not be reached for comment.

It is becoming more difficult for some lenders to approve mortgages with balances above $625,500, according to industry groups that are urging Congress to move quickly and extend the current higher loan limit. The $729,750 maximum loan limit for Fannie Mae, Freddie Mac and Federal Housing Administration loans is due to expire at yearend. In a letter to House and Senate leaders, three trade groups warn that some lenders are pulling back because they don't want to get caught with loans they can't sell. "The result is that borrowers are being unnecessarily denied financing because of the uncertainty about expiring loan limits," according to a letter by the Mortgage Bankers Association, National Association of Home Builders and National Association of Realtors. "Therefore, we request Congress extend the limits as soon as possible so as not to jeopardize the fragile recovery," the Oct. 26 letter says.

A group of credit unions whose mortgages were fraudulently sold by defunct U.S. Mortgage Corp./CU National Mortgage to Fannie Mae are lobbying Congress for return of their stolen funds, part of a $140 million fraud by the former owner of U.S. Mortgage. The group of 16 credit unions are asking Congress to direct Fannie Mae, which is now owned by the federal government, to return their mortgages, which U.S. Mortgage President Michael McGrath confessed in June to selling to Fannie Mae without their knowledge or consent. So far, Fannie Mae has rejected legal pleas for the return of the mortgages and is fighting a suit brought by one of the credit union victims, Picatinny FCU of New Jersey. "I don't know what the full story is about what McGrath did with the money but we do know that he sold them to Fannie Mae," said Alfred Scipio, president of Treasury Department FCU, who claims Fannie Mae illegally holds $8.8 million of his credit union's mortgages. "We believe that they bought stolen merchandise and they should return it." McGrath confessed to selling more than $138 million of mortgages his company was servicing for about 30 credit unions and lost almost all of the money on stock trading. Fannie Mae did not respond to requests for comment.