Compliance & Regulation

Effective October 1, the proceeds on FHA-insured reverse mortgages will be reduced by 10% — a swift policy change that has spurred lenders to beat the deadline so their clients can borrow more. If lenders can get a FHA case number by September 30, they can save their clients $10,000 to $20,000 in loan proceeds. The average FHA-insured home equity conversion mortgage amount is $159,000. To get a case number for a HECM, the lender has to provide FHA with a signed certificate that the borrower has completed the necessary counseling requirements. Counseling agencies are "swamped," according to Peter Bell, president of the National Reverse Mortgage Lenders Association. "The rush is to get anyone thinking of getting a loan into counseling," he said. The federal mortgage insurance agency made the coverage change to reduce its risk exposure and operate the HECM program without a credit subsidy. According to budget estimates, the HECM program faces an estimated $800 million loss due to falling housing prices and congressional appropriators have not come up with the funds to cover this loss. "We are taking prudent steps at this time to protect the viability of the HECM program and the market it serves," FHA commissioner David Stevens said.

The Federal Reserve's recent decisions to enhance consumer protection regulation and crack down on industry compensation practices do not appear to be assuaging critics in Congress. In the past two weeks, the Fed announced it would begin supervising nonbank subsidiaries of bank holding companies for compliance with consumer protection rules. That move was followed by word that the central bank is crafting a proposal designed to restrict inappropriate executive compensation practices at financial institutions. Those steps come as the prospect of the Fed becoming the systemic risk regulator look increasingly bleak. Though the Fed makes no mention of Congress when discussing its latest actions, observers say its proposals are being developed with one place in mind — Capitol Hill. "They're talking to the Hill," said Gil Schwartz, a former Fed lawyer who is now in private practice. "They're saying the Fed is engaged and they should be anointed with the mantel of the systemic regulator."

Efforts by Financial Services Committee chairman Barney Frank, D-Mass., to get community bankers behind his Consumer Financial Protection Agency bill might require giving banking regulators more say over consumer regulations. Chairman Frank recently proposed several changes to the CFPA bill that the Independent Community Bankers Association considers very positive. "It is moving in the right direction," said ICBA's top lobbyist Steve Verdier. But he noted that the trade group still has concerns about rulemaking. In staking out the trade group's position, ICBA has issued a statement that calls for joint rulemaking between the banking regulators and the CFPA when it comes to consumer regulations. "While the bill provides a role for the banking agencies through an advisory oversight board, the board lacks substantive authority over consumer regulations," ICBA says.

U.S. District Judge Alan S. Gold sentenced Adriana Cruz of Miami to 15 months' imprisonment, followed by 36 months of supervised release, for her role in a mortgage fraud scheme that resulted in the granting of two fraudulent home equity loans totaling $1 million. Judge Gold also ordered Cruz pay nearly $800,000 in restitution. According to Jeffrey H. Sloman, acting U.S. attorney for the Southern District of Florida, Cruz admitted that she and others simultaneously submitted two fraudulent loan applications, each at $500,000, to Bank of America and Wachovia Bank. The applications contained stolen identification information belonging to a co-conspirator's mother-in-law. In each application, the co-conspirators represented the mother-in-law as the purported borrower and pledged her house as collateral. The fraudulent applications were submitted to co-conspirators who worked as loan officers at the banks. When each loan application was submitted, neither bank was made aware of the other pending loan. The purported borrower's signatures were forged and Cruz obtained fake notarizations. After the loans were approved, the proceeds were made available to the co-conspirators. Cruz's co-conspirators previously pleaded guilty and have been sentenced in connection with this case.

The nation's housing market might be best served by creating up to 20 housing GSEs, according to a recent report by the Congressional Research Service. The CRS, however, is not promoting one option over another but instead weighs the benefits of several different ideas concerning the future of Fannie Mae and Freddie Mac. CRS notes that 20 housing GSEs could fall under financial stress at the same time but says one way to avoid this is to assign each a specific geographic region or have them "specialize in certain types of housing such as condominiums or multifamily rental housing." Next year the Obama Administration is expected to unveil its proposals on Fannie and Freddie. Since the third quarter of 2007 Fannie has posted net losses of $102 billion, Freddie $63 billion.

New home sales edged up 0.7% in August after a 6.5% jump in construction activity in July, according to the government. The U.S. Census Bureau reported sales of new single-family homes rose to a 429,000 seasonally adjusted annual rate in August, up from a 426,000 rate in July. The July rate was revised downward by 4,000 sales. "August new home sales inched higher, but only because of revisions," said Weiss Research analyst Mike Larson. Nevertheless, home sales continue to stabilize, "but at depressed levels," he said. IHS Global Insight economist Patrick Newport pointed out that the number of unsold new homes has declined over the past 28 months to 262,000 units, which is a 7-month supply, down from an 11- month supply a year ago. Despite this reduction in inventory, "the market for selling new homes is still brutal," Mr. Newport said.

The correspondent and warehouse lending division of Ally Bank, a unit of GMAC Financial Services, has created a correspondent community bank team that will purchase closed residential mortgage loans from banks, thrifts and credit unions. The new unit also will offer a table funding service — which means loan brokers should benefit. An executive with GMAC said the new unit will focus on community financial institutions that outsource some or all of their mortgage origination process. It will customize services to supplement the client's in-house capabilities. The Fort Washington, Pa., based company said it saw an opportunity in this line of business because market conditions have reduced funding alternatives for smaller institutions. Doug Miller is joining GMAC as the director of correspondent community banking. He held a similar position at Taylor Bean Whitaker, which filed for bankruptcy protection in August.

The serious delinquency rate on Freddie Mac guaranteed single-family loans broke the 3% mark in August, the highest reading ever posted by the mortgage giant. In its new monthly summary, the GSE said the percentage of loans 90 days or more past due and in foreclosure hit 3.13% during the month, up 18 basis points from July. In August 2008, the government sponsored enterprise had a 1.11% serious delinquency rate. The huge jump in defaults is driven mainly by Freddie's $172 billion portfolio of guaranteed alt-A loans, which had a 9.44% serious delinquency rate as of June 30. The alt-A portfolio includes $144.8 billion of interest-only loans and $11.6 billion of payment option ARMs. There was good news, though: In August Freddie issued $47.5 billion of MBS, a 7% increase from July. To date, Freddie has issued $411.2 billion of MBS, compared to $356.8 billion during the same period last year. Freddie reported that its purchases of refinanced loans in August totaled $35.6 billion, an increase of 4.3% from July.

U.S. District Judge Deborah K. Chasanow in Maryland sentenced the two final conspirators of the fraud scheme led by Michael K. Lewis that targeted financially vulnerable homeowners facing foreclosure through local television ads. Cheryl Brooke of Upper Marlboro, Md., was sentenced to 46 months in prison, followed by three years of supervised release. Winston Thomas of New Carrollton, Md., was sentenced to 37 months in prison, followed by three years of supervised release. According to Rod J. Rosenstein, U.S. attorney for the District of Maryland, Michael K. Lewis aired TV ads claiming he could help homeowners facing foreclosure improve their credit, save their homes from foreclosure and assist them with bankruptcy. Lewis and Thomas, a loan officer, told the homeowners that the credit of Michael's brother Earnest Lewis would be used to refinance their homes if they temporarily signed their homes over to Earnest. They could remain in their homes by paying inflated "rent" and fees, which were directly debited from their bank accounts to an account Brooke controlled. The Lewis brothers and Thomas lied about the amount of money that the homeowners would receive at settlement, what would be done with any equity in the homes and the need to file for bankruptcy protection and failed to inform the homeowners of the particulars of how the lease/buyback program worked, it is alleged. Thomas also allegedly submitted false financial and employment information to mortgage lenders. After financing was obtained, Brooke filed motions to dismiss the homeowners' bankruptcy cases so that the settlements could take place. Michael K. Lewis and Earnest Lewis were previously sentenced to 78 months and 54 months in prison, respectively.

Mortgage servicers participating in the Obama Administration's loan modification program will soon be ranked on their response times and other indicators of service quality. Treasury assistant secretary Herbert Allison told a Senate panel that servicers have placed homeowners into nearly 400,000 trial modifications. However, Treasury, like members of Congress, continues to receive complaints about servicers. "Homeowners are not receiving responses from banks as fast as they would like," he said. "To provide additional impetus for them to improve their service quality," Mr. Allison said Treasury would publish reports soon on the service quality of each bank. Meanwhile, Treasury and the servicers are working on streamlining the documentation that homeowners have to provide servicers to qualify for a modification. Mr. Allison noted that Treasury and other administration officials would be meeting the servicers in early October to discuss documentation and other efforts to improve the Home Affordable Modification Program. The Treasury official also told the Senate Banking Committee that the first public-private investment partnership transaction would close at the end of this month. Mr. Allison did not provide any specifics, except to say that it involves that sale of non-agency residential and commercial MBS.