Compliance & Regulation

Certain Federal Housing Administration loans could run afoul of a new HOEPA rule that prohibits prepayment penalties, and industry groups want the Federal Reserve Board to fix the problem. The problem stems from a Ginnie Mae payoff requirement that all interest on a loan must be paid for the full month. If the loan is paid off on September 5, the interest must be collected for the rest of the month. The Consumer Mortgage Coalition and other groups are concerned this extra interest is considered a prepayment penalty under the Home Owners and Equity Protection Act regulation that goes into effect October 1. HOEPA bans prepayment penalties on higher-priced loans if the interest rate changes during the first four years. On fixed-rate loans, HOEPA limits a prepayment penalty to the first two years. Too many FHA loans fall into the higher-priced category and the industry wants the Fed to clarify that payoff interest is not a prepayment penalty under HOEPA.

Federal Housing Administration chief David Stevens has confirmed that the government's mortgage insurer will see its reserves fall below the 2% minimum level set by Congress but said the agency is tightening its credit standards to bolster the fund. "To be clear, the fund's reserves are sufficient to cover our future losses, so FHA will not require taxpayer assistance or new congressional action," Mr. Stevens said. The commissioner told reporters there is no plan or need to increase FHA mortgage insurance premiums. FHA's auditors see the "capital reserves getting above 2% within a couple of years with absolutely no changes" in FHA policies or underwriting standards, Mr. Stevens said. But the new commissioner wants to accelerate that timetable and he outlined several changes, involving appraisals, refinancings and lender net worth requirements to reduce FHA's risks and defaults going forward. "These are the first steps in what will be an on-going increasing look at risk management within FHA," he said.

The Federal Trade Commission has filed complaints against two loan modification companies for allegedly making false claims that they could obtain a mortgage modification in virtually all cases. One complaint, filed in the U.S. District Court for the District of Columbia, charges Nations Housing Modification Center and its principals, Michael A. Trap, Glenn S. Rosofsky, and Bryan P. Rosenberg, with violating the FTC Act and the FTC's Telemarketing Sales Rule by allegedly misrepresenting themselves as a government agency and falsely claiming to obtain mortgage mods for consumers. The FTC alleges that very few homeowners got mods and the defendants accepted advance fees for their services. The other complaint, filed in the U.S. District Court for the Central District of California's Southern Division, charges Infinity Group Services and its president, Kahram Zamani, with violating the FTC Act by falsely representing that they would obtain a loan modification in all instances and would allegedly obtain loan refinancing for an up-front fee. The FTC alleges that the company often failed to obtain loan mods and either failed to answer or return consumers' telephone calls or update them about their status. The defendants were unavailable for comment.

The country has seen a "drastic increase" in mortgage fraud cases as a result of the upheaval in the housing market, according to FBI director Robert Mueller. FBI agents are investigating 2,600 mortgage fraud cases as of July 31, up from 1,600 for all of 2008. Many of these investigations are focused on fraud perpetrated by industry insiders and most of the pending mortgage fraud cases involve losses of more than $1 million, Mr. Mueller told the Senate Judiciary Committee. "To meet this growing challenge, we have redirected investigative resources and assigned approximately 300 special agents the task of investigating mortgage fraud. In addition, we direct 15 task forces and 59 working groups that target mortgage fraud," he said. Mr. Mueller pointed out that the FBI is using innovative ways to generate new cases, "We employ statistical correlations and other advanced computer technology to identify patterns in the search for companies and persons engaged in activity that is indicative of fraud." FBI agents also analyze data compiled through Suspicious Activity Reports filed by financial institutions and through HUD-OIG reports.

Federal Deposit Insurance Corp. Chairman Sheila Bair said Friday the agency is considering multiple options for stabilizing the Deposit Insurance Fund, including borrowing from the Treasury Department. To date, Ms. Bair has largely shied from using the agency's Treasury credit line as an option — preferring to boost reserves with industry premiums — although she has not ruled it out. In a speech Friday morning, she said the FDIC board will meet later this month, and likely will issue a proposal that asks for comment on numerous approaches to supporting the fund. The agency is considering "all options, including borrowing from Treasury. I never say, 'Never,'" she said at Georgetown University. The agency has faced industry and some congressional pressure to ease off on charging additional premiums. Instead, observers and some officials say the FDIC should utilize the credit line, which under recent legislation was raised to $100 billion. But borrowing from Treasury has typically been viewed as an extreme option.

The Senate has passed an appropriations bill that provides the Federal Housing Administration with authority to insure up to $400 billion of single family loans in fiscal year 2010. Lenders are on track to originate $335 billion of FHA loans in FY 2009, which ends September 30. The Senate also appointed conferees to meet with House appropriators to iron out a final Department of Housing and Urban Development appropriations bill for FY 2010. Like the Senate bill, the House bill provides $400 billion for FHA and $500 billion in commitment authority for Ginnie Mae. The House and Senate differ, however, on how to deal with an $800 million shortfall in the FHA reverse mortgage program. The Senate bill provides $288 million to cover part of the credit subsidy shortfall and instructs FHA to reduce the proceeds on FHA-insured home equity conversion mortgages to cover the rest of the shortfall. The House bill does not provide any funds. The House and Senate appropriators will have to resolve the HECM when they meet in conference. Reserve mortgage lenders are concerned a reduction in loan proceeds will diminish the value of FHA reverse mortgages and cut benefits for seniors.

The Federal Housing Administration is increasing its net worth requirements for approved lenders to $1 million and requiring banks to file audited financial statements for the first time ever. "With so many banks at risk of default, we want to make sure that our counterparty risk is being reviewed at FHA," said commissioner David Stevens. "Just the fact that they are supervised will no longer be enough." The agency released the tighter rules in response to a weakening capital position at the fund. (See story below.) FHA also is hiring its first credit risk officer and it is tightening its appraisal and refinancing requirements to curtail risk and conserve capital. On streamlined refinancings, FHA will require income verification and credit scores for the first time. The lender also will be required to demonstrate that the refinancing provides a "net tangible benefit" for the borrower. In addition, FHA will cap the maximum loan-to-value ratio on a streamlined refinancing at 125% and require an appraisal in all cases where the borrower wants to add closing costs to the loan amount.

The Federal Housing Administration has decided that "direct endorsement" lenders should be fully liable for the mortgages they originate through loan brokers while saying that these third-party salesmen no longer need to register or meet the agency's net worth requirements. The new policy change appears to be a major boost for brokers, whose ranks have been decimated during the housing and mortgage crisis. "Mortgage brokers will continue to originate FHA-insured mortgages through their relations with approved mortgagees," the agency said. "However, they will no longer receive independent FHA approval for origination eligibility." The new policy relieves brokers from filing audited financial statements with FHA and basically mirrors the hands-off approach that Fannie Mae and Freddie Mae follow with respect to brokers. FHA is making this change as part of a risk reduction effort and refocusing of its resources. However, the agency is adopting a policy that prohibits brokers and commission-based lender staff from ordering appraisals. FHA commissioner David Stevens stressed that FHA is adopting appraisals policies that are consistent with the Home Valuation Code of Conduct but not the entire HVCC that Fannie and Freddie have adopted.

Prosecutors in Vermont have secured the fifth conviction in a scheme that cost mortgage lenders over $11 million. Benjamin Osmanson of California and Sarita, Texas, pleaded guilty to charges related to his scheme to defraud mortgage lenders by submitting false loan applications in the names of "investors." According to the U.S. attorney's office for the District of Vermont, from at least as early as January 2006 through at least April 2007, he and co-defendant Jillian Protzman orchestrated the purchase of at least 50 properties in California, Florida, Kentucky and Vermont in the names of at least 10 investors, obtaining more than $26 million in loans to support the purchases. Osmanson recruited friends, family members and acquaintances to "invest" in real estate. He and Protzman then allegedly submitted fraudulent loan applications in the names of the investors to obtain loans. Osmanson, Protzman and others sought loans from multiple lenders and were said to have closed the loans for each investor within a short period of time in order to preserve the appearance of the investor's good credit until the transactions were complete. The defendants enriched themselves with commissions connected to the fraudulent property purchases and continued to recruit investors and submit applications for new loans, the investigation showed. During the plea hearing, Osmanson admitted his scheme caused more than $11 million in losses to the mortgage lenders as the properties went into foreclosure. Protzman pleaded guilty in August. Two mortgage brokers involved in the scheme, Mike Otis and Chris Whitfield, pleaded guilty earlier this year in the Western District of Kentucky. Florida realtor Margaret Giresi recently pleaded guilty in Vermont for her role in the scheme. Sentencing for Osmanson has not yet been scheduled.

Single-family housing starts fell 3% in August as builders took a breather after five straight months of increased construction activity. The U.S. Census Bureau reported that single-family housing starts fell to a seasonally adjusted annual rate of 479,000 in August from a 494,000 rate in July. The July rate was revised upward by 4,000 starts. Since February, single-family starts are up 34%. "So it is no surprise to see builders take a breather," said Mike Larson, real estate analyst for Weiss Research. "There may be some nervousness about the upcoming expiration of the first-time homebuyer tax credit, and we clearly have some lingering reluctance among bankers to fund construction projects," Mr. Larson said. The tax credit has been an important factor in stimulating demand, according to the National Association of Home Builders. "However, the window is now basically closed for being able to start a new home that can be completed in time for buyers to take advantage of the tax credit before it expires at the end of November," NAHB chairman Joe Robson said. NAHB, the National Association of Realtors and other housing groups are urging Congress to extend the tax credit for another year.