Compliance & Regulation

Following months of development a group of Fortune 100 executives have launched Working Equity Inc. and its signature insurance product, which is aimed at providing homeowners with a form of future home value protection. The product, Equity Protection, is tied to the First American CoreLogic Inc. Index. It is priced two ways: as lifelong protection for 1% of the home's value, or as a monthly payment option at $20 for every $100,000. Working Equity Inc. co-founder Craig Schmeizer told MortgageWire the company is in the process of negotiating with five major insurers he would not disclose, who are expected to serve as reinsurers. "Reinsurance is helpful in the event the market has a significant shock, but the nature of the product does not create risk of that to our business for ... years. We do fully manage the primary risk on the product. We actually retain and manage the risk as an insurance company would. We only use reinsurance as a supplement to our ability to support risk." He added, "Our reserves, such as the fees and premiums we collect, are maintained in a reserve managed by Merrill Lynch, so it is managed by a third party." Mr. Schmeizer said the insurance provides homeowners the type of protection available to lenders through mortgage insurance. Anyone can purchase it independent of his or her mortgage, he said. The concept was originally introduced in military housing where it has been successfully used for years, he said.

Kevin Carey, a former Somerville real estate attorney from Middleboro, Mass., pleaded guilty in Middlesex Superior Court to charges related to making false statements on mortgage applications and using the funds secured from the loans for his own purposes, rather than paying off existing loans. According to Massachusetts attorney general Martha Coakley, while practicing as a real estate lawyer in Somerville and Medford, Carey engaged in a scheme called "mortgage stacking" on four residential properties he or his family members owned. The scheme involved serially refinancing the loans on these properties, without paying off the existing loans. Carey was also the agent for a New England title insurance company, which allowed him to issue title insurance policies on mortgage transactions he processed. Sentencing is scheduled for Nov. 6.

House Financial Services Committee will begin voting on a massive regulatory reform package during the week of Oct. 13, chairman Barney Frank, D-Mass., said. The first markup sessions will involve bills to set up a Consumer Financial Protection Agency and regulate derivatives. On the CFPA bill, Rep. Frank said banks would not have to pay extra assessments to the new agency because a substantial portion of the funding will come from the Federal Reserve Board. The CFPA bill drafted by Rep. Frank calls for the transfer of the Fed's regulatory authority over Truth in Lending Act and other consumer protection laws to the CFPA. "The Federal Reserve will be ceding a lot of power - that it has not used very much - and funding will come with it," Rep. Frank said. The committee chairman noted the Fed has increased it consumer protection efforts in the past few years. "In every case," he stressed, the Fed has acted only after a congressional committee initiated action.

Loan modifications and payment restructurings by the nation's residential servicers rose 75% in the second quarter to 439,574 units, with a noticeable increase in principal reductions, according to new figures released by the Office of the Comptroller of the Currency. The loan mods were undertaken by the nation's largest servicers including Bank of America, Wells Fargo & Co. and others. The percentage increase reflects gains from the second quarter of 2008. Compared to the first quarter, loan restructurings rose 21.7%. OCC said 10% of modifications involved reductions in the principal amount owed by consumes compared to 3.1% in 1Q. OCC, however, does not know the dollar volume on principal reductions. "We don't collect that information from servicers," said an agency spokesman. The government said the number of "seriously delinquent" mortgages continued to rise but there was a lull in foreclosures initiated because lenders moved to implement the Obama administration's Making Home Affordable modification program. Servicers reported that they engaged in 114,538 MHA trial modifications in the second quarter. According to the Quarterly Data Report, there are 66.5 million residential loans outstanding in the United States.

FHA is giving its servicers a directive to lower mortgage rates on loan modifications after finding too many borrowers ended up with higher payments. In the past, FHA allowed servicers to increase the interest rate when it was appropriate. But now that interest rates have come down, "FHA is not really happy with what they are seeing," said Bob Lyons, a servicing consultant with Lyons and McCloskey in Fairfax Station, Va. A new mortgagee letter (2009-35) directs FHA servicers to reduce the interest rate on newly modified loans to a rate that is not more than 50 basis points above the Freddie Mac Weekly Primary Mortgage Survey rate. The FHA mortgagee letter also directs servicers to extend the term of the new mortgage so the borrower has 30 years to pay it off. To qualify for incentive payments, "the modified loan must meet the term and interest rate requirements prescribed in this mortgagee letter," according to the letter signed by FHA commissioner David Stevens.

The Federal Reserve Board has agreed to tweak its interpretation of prepayment penalties so the new HOEPA rule that goes into effect this Thursday (Oct. 1) will not disrupt the origination of higher-priced Federal Housing Administration loans. The Department of Housing and Urban Development and industry groups were concerned HOEPA restrictions on prepayment penalties would stop lenders from making higher-priced FHA loans and cut production by an estimated 20%. The potential landmine involves a Ginnie Mae policy of paying its investors a full month's interest when a FHA borrower prepays a loan. Fed attorneys concluded that the borrower's payment of this extra interest for the remaining days of the month is a prepayment penalty under HOEPA and Regulation Z, contrary to HUD's interpretation. Under pressure from industry groups, the Fed agreed to go along with HUD's interpretation. "Lenders that engage in this practice would not be required to treat the interest charged from the date of repayment until the next installment due date as a prepayment penalty for any purpose under Regulation Z," the Fed said in a letter released late Tuesday. The Fed letter hints that HUD is considering changes to its repayment policies and it could lead to the lenders paying the extra interest.

Three individuals, including a New York City police officer, have been arrested in connection with a mortgage fraud scheme. Oneika Carthon of Brooklyn; Joe D. Green of Jamaica, Queens; and Samantha Girard of Roosevelt, N.Y., have each been charged with bank fraud. Ms. Girard has been an NYPD officer since March 2000. She has been on modified duty since February 2007 and was recently suspended. According to Rose Gill Hearn, commissioner of the New York City Department of Investigation, a police probe uncovered a fraudulent deed for a house in Brooklyn, which, together with other false documents, was allegedly used to obtain funds that were distributed to the three defendants, who were unavailable for comment. This supposed deed claimed to have transferred ownership from the original homeowner, who was deceased, to a man unknown to the former homeowner's family. There were irregularities in the deed, including the incorrect spelling of the deceased man's name and a signature that did not match his known signature. The defendants then allegedly obtained two mortgages using false income information totaling $600,000 to supposedly finance the purchase of the Brooklyn home. At closing, Mr. Green allegedly presented a phony stipulation indicating that a civil action contesting the property transfer had been discontinued. At the closing, $511,500 from the two mortgages was allegedly distributed to the three defendants. The complaint alleges that only three payments were ever made on the mortgages. The loans are now in default. The U.S. Attorney's office for the Eastern District of New York is prosecuting the case.

Banks and thrifts will front the Federal Deposit Insurance Corp. $45 billion in advance deposit insurance premiums under a new proposal designed to bolster the beleaguered insurance fund. The public will have 30 days to comment on the proposal which requires FDIC-insured institutions to prepay quarterly insurance assessments for the fourth quarter of 2009, all of 2010, 2011 and 2012. If adopted, FDIC would get an immediate cash infusion but the banks would be able to list the "pre-paid FDIC expenses" as an asset on their balance sheets that would be reduced each quarter as the assessments come due. "At this critical time, when the economy is just beginning its recovery, looking for options that are less pro-cyclical and that spread the cost over time, this is the right policy," said James Chessen, chief economist for the American Bankers Association. After the failure of 95 banks this year, the FDIC's cash reserves have declined so much that the agency will have to tap the Treasury Department for a line of credit or continue to charge special assessments to keep the fund above water. "In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer," said FDIC chairman Sheila Bair.

Jamilah Al-Bari of District Heights, Md., pleaded guilty to mail fraud arising from the fraudulent purchase of properties in Maryland and Virginia. According to Rod J. Rosenstein, U.S. attorney for the District of Maryland. Jamilah Al-Bari participated in a scheme with her brother, Osman Sharrief Al-Bari, and others to pay straw purchasers to purchase houses for them using false loan documents. While employed at M&T Bank, Jamilah Al-Bari created false documents purporting to verify assets for the straw buyers. She also sent false verification letters concerning the buyers' income and assets on M&T Bank letterhead to banks and mortgage lenders. She created a fictitious M&T Bank employee and used the fictitious name to sign some of the verification letters. Jamilah Al-Bari prepared false M&T Bank verification forms for straw buyers who purchased five properties in Baltimore and two properties in Virginia. She admitted her involvement in the scheme to M&T Bank investigators before her termination. The loss amount attributable to Jamilah Al-Bari was between $400,000 and $1 million. Most of the purchased properties have now gone into foreclosure. Sentencing is scheduled for Nov. 13. Osman Sharrief Al-Bari, a leader of the scheme, pleaded guilty in August and is scheduled for sentencing on Oct. 5. Co-defendants Timothy Reed, Terrence White, Sabrina Weinberg and Kara McIntosh have all pleaded guilty and await sentencing.

The National Association of Realtors is urging the Federal Reserve Board to delay implementation of a HOEPA provision that could place higher-priced Federal Housing Administration loans in violation of new restrictions on prepayment penalties. The Home Owners and Equity Protection Act regulation that goes onto effect this Thursday (October 1) "would prevent lenders from making higher-priced FHA loans," NAR says in a letter to the Fed. "We are requesting this delay to give the Board, the Federal Housing Administration and Ginnie Mae an opportunity to correct the unintended consequences of the intersection" between the new HOEPA rule and Ginnie Mae's payoff requirements, NAR president Charles McMillan says in the Sept. 25 letter. Ginnie Mae requires that all interest on a mortgage must be paid for the full month. If an FHA loan is prepaid on October 9, for instance, the borrower has to pay interest for the rest of the month. The Fed views this extra interest as a prepayment penalty. The American Bankers Association, Mortgage Bankers Association and Consumer Mortgage Coalition have asked the Fed to drop its treatment of post-payoff interest as a prepayment penalty.