Compliance & Regulation

First American CoreLogic, Santa Ana, Calif., is offering current and potential clients a "2X mortgage fraud guarantee." The guarantee claims users will identify twice the level of potential fraud using First American CoreLogic's fraud detection technology than when using technology from any other fraud solutions vendor, or the trial period will be free. The guarantee states lenders will save twice as much in fraud losses and that the savings will be at least twice as much as the cost of the solution. First American CoreLogic will work with clients to develop either a production trial or retrospective testing program for measuring its patented pattern-recognition anti-fraud technology. If the fraud-detection technology doesn't identify a minimum of twice the loss savings over products from its competitors and deliver a 200% return on investment during the measurement time period, the cost of scoring the loans will not be charged.

A regulatory drive to force large, systemically risky banks to issue "contingent capital" — a new type of instrument that allows depositories to quickly convert debt to equity under stressful circumstances — is gaining momentum. Federal Reserve Board chairman Ben Bernanke became the latest policymaker to discuss such a plan at a hearing Thursday. This is a sign the idea, which was considered radical as recently as last year, has become increasingly mainstream. In theory, such a debt instrument would allow a bank to quickly raise capital if a crisis occurs, lowering the risk that the government would have to bail it out. During the hearing, Mr. Bernanke said regulators are still working on capital standards that would be "calibrated to the systemic importance of the firm." He noted, "Options under consideration in this area include requiring systemically important institutions to hold aggregate levels of capital above current regulatory norms or to maintain a greater share of capital in the form of common equity or instruments with similar loss-absorbing attributes, such as 'contingent' capital that converts to common equity when necessary to mitigate systemic risk."

Detecting a change in attitude among both buyers and sellers — not to mention what is now a three-month increase in the benchmark price indices that bear his name — economist Karl Case believes the housing market has hit bottom. Not that housing is ready to bounce back with a vengeance, but at least it is no longer in a free-fall, the co-founder of the S&P Case Shiller indices said at the New England Mortgage Bankers Conference in Providence, R.I. "We're not going to come roaring out of this," said Mr. Case, who has been teaching economics at Wellesley College for more than 30 years. "We'll come out of this slowly. There will be some bad days and good days, but the mood began changing in March." The economics professor cited several signs that a recovery has begun, including a 25% increase in housing starts since April and "the best number of all," a sharp drop in unsold inventory of new homes. The huge number of completed but unsold houses has "been a real drag" on the market, he said. "The building industry has been getting killed like it's never been killed before," he said. But Mr. Case also warned that if he is reading the tealeaves incorrectly, the mortgage market could take another hit. If housing continues to falter, the economist said, "then we are writing bad paper now." To illustrate just how far the housing sector has fallen, the economics professor pointed to housing starts, which nosedived from 2.273 million units at the peak of the cycle in January 2006 to 598,000 units in August. That decline cost the economy roughly $588 billion, or 4.2% of GDP, he said.

Steve Abreu is the new president of GMAC's mortgage operations, working out of the company's Fort Washington, Pa., office. His most recent position was president and chief executive of GreenPoint Mortgage Funding of California. (GreenPoint, a subsidiary of a bank, closed two years ago.) Mr. Abreu is a 20-year veteran of the mortgage banking industry. He will report to Thomas Marano, chairman and CEO of GMAC's mortgage operations. Mr. Marano recently assumed additional responsibilities as GMAC's chief capital markets officer, coordinating the firm's capital commitments, risk analytics and broker/dealers. The hiring of Mr. Abreu will provide ongoing, strategic focus for the firm's mortgage operations, GMAC said. Mr. Abreu will be representing the company at the upcoming Mortgage Bankers Association convention in San Diego.

Mortgage companies cut their payrolls by 6,100 full-time workers in August as employment in the residential finance industry hit a new low. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector fell to 261,200 positions in August from 267,300 in July. Jay Brinkmann, chief economist for the Mortgage Bankers Association, said servicers are hiring workers to deal with rising delinquencies and loan modifications. However, that hiring has been offset by reductions in staff due to bank mergers, back-office consolidation and a reliance on temporary workers and contractors, Mr. Brinkman said. He noted that the bankruptcy of Taylor, Bean & Whitaker, Ocala, Fla., will not show up in the BLS mortgage jobs data until next month's report. (Some of TBW's West Coast AEs were recently hired by CMG Mortgage, San Ramon, Calif.) Meanwhile, Friday's national employment report shows a higher-than-expected 263,000 U.S. workers lost their jobs in September. The unemployment rate edged up to 9.8% from 9.7% in August. (There is a one-month lag in BLS reporting of mortgage industry employment data.)

Prior to initiating any foreclosure actions, lenders and servicers would have to evaluate the borrower for a loan modification and provide relief for qualified homeowners, according to a bill introduced by Sen. Jack Reed, D-R.I. The bill (S. 1731) indicates that a borrower should be offered a modification plan if the net present value of the modification is greater than foreclosure. "My bill provides targeted relief to qualified homeowners so that more families can keep their homes," Sen. Reed said. The bill is aimed at stopping servicers from pursuing foreclosure actions while borrowers are being considered for modifications or in a trial period. S. 1731 "establishes meaningful penalties by making noncompliance a defense to foreclosure," a summary of the bill says. It also places limits on foreclosure fees and prohibit costly mark-ups of fees. Democrat Sens. Dick Durbin (Ill.), Sheldon Whitehouse (R.I.) and Jeff Merkley (Ore.) are co-sponsors of the "Expand and Improve Loan Modification Programs" bill.

Republican congressmen are becoming more concerned about the Federal Housing Administration's financial plight and they want to increase FHA's downpayment requirement to 5%. Rep. Ed Royce, R-Calif., said FHA is operating at the same dangerous leverage ratios that led to the takeover of Fannie Mae and Freddie Mac. Rep. Scott Garrett, R-N.J., said he has drafted a bill that would increase the FHA downpayment requirement to 5% from the current 3.5% level. "There are increasing reports of the likely necessity of a taxpayer bailout for the FHA and this legislation aims to implement reforms to try to prevent such a bailout from occurring," Rep. Garrett said at a House Financial Services Committee hearing. The Garrett bill also calls for a General Accountability Office study to determine the appropriate leverage ratio for FHA. In the early 1990s, Congress mandated that FHA maintain a minimum 2% capital ratio. A recent audit shows that the federal mortgage insurance fund has fallen below the 2% minimum. But FHA officials say the insurance fund should be able to maintain a positive capital position and FHA will not need taxpayer assistance.

Industry insiders who commit fraud are being blacklisted as quick as a Nolan Ryan fastball, panelists at the New England Mortgage Bankers Conference in Providence, R.I., said. Freddie Mac now has nearly 2,000 names on its exclusionary list, while the Department of Housing and Urban Development's Office of the Inspector General suspended or disbarred more than 1,000 people from dealing with the Federal Housing Administration last year alone, they reported. "I'd like to say there are just a few bad apples in our industry," said Kathy Cooke, Freddie Mac's fraud investigation manager. "But there are a lot of bad apples, and they make the entire industry look bad." Michael Motulski, assistant regional inspector for audit in HUD's six-state New England region, said "fraud for housing" constitutes 20% of the cases investigated by the HUD inspector general, while "fraud for profit" accounts for 80%. But in all cases, an industry professional is involved, he added, either by assisting a borrower in the latter or being one of the perpetrators in the former. Mr. Motulski, who works civil cases, said that in addition to the administrative actions taken against appraisers, brokers, realty agents, closing attorneys and other industry insiders, the IG's office made 1,524 arrests in fiscal 2008, gained 1,180 indictments and earned 969 convictions. "We go after folks," he said. "Up to and including monetary penalties, we get people out of our programs." As far as industry insiders are concerned, fraud has changed from a matter or opportunity to one of desperation, added Diane DeChellis, the special agent in charge of the New England region's IG office. "It's not just lifestyle anymore," she said. "It's almost a survival thing right now."

The first two public-private ventures that will invest in toxic mortgage-backed securities have been approved by the Treasury Department. The Invesco Ltd. and TCW Group Inc. have raised a combined $1.13 billion and the two investment management firms are now eligible for matching capital from the Troubled Asset Relief Fund. "Treasury will also provide debt financing up to 100% of the total capital commitments of each Public-Private Investment Fund, representing $4.52 billion of total equity and debt capital commitments," the department said. The PPIP program was originally designed to purchase nonagency residential and commercial MBS from banks to clean up their balance sheets. But the banks made it clear they would not sell their legacy MBS at steep discounts. The new and smaller $30 billion PPIF program can purchase MBS from any seller to provide liquidity and facilitate price discovery. "This program allows Treasury to partner with leading investment management firms to increase the flow of private capital into the market for legacy securities and give taxpayers a chance to share in the profits," Treasury secretary Timothy Geithner said.

The 2008 Home Mortgage Disclosure Act data show that Federal Housing Administration lending surged in the second half of 2008 and by December FHA had a 38% share of the home purchase market and 25% share of the refinancing market. "By the end of 2008, nearly one-half of home-purchase loans and one-quarter of refinanced loans were backed by either FHA or the VA," according the Federal Reserve Board analysis of the HMDA data. Fed researchers noted that Fannie Mae and Freddie Mac were losing ground to FHA and VA because the GSEs raised their underwriting fees in 2008 and the private mortgage insurance companies raised their prices and limited coverage. "Fannie Mae and Freddie increased their market share in 2007 but relinquished much of those gains during 2008," the report says. Overall, FHA, VA and Rural Housing Service combined had a 25.7% share of the mortgage market in 2008, up from 7.5% in 2007.