Compliance & Regulation

The Government Accountability Office, in a new report, has entered into the debate over the future of Fannie Mae and Freddie Mac, blistering some of the most widely discussed options for revamping the two. Though the watchdog agency did not take a formal position on what policymakers should do with the GSEs, it essentially declared two ideas unworkable — fully privatizing Fannie and Freddie or turning them into public utilities. Those options could spur inefficiencies, raise mortgage rates and take banks out of the business of offering traditional mortgages, the GAO concluded. The report offered detailed pros and cons of other options including nationalizing Fannie and Freddie, simply restoring the firms to their previous status, breaking them up into multiple entities or turning them into cooperatives. In the year since the federal government seized the GSEs, options for how to deal with them have multiplied, even though the Obama administration has said it will not deal with the issue until 2010. While many Republicans and other conservatives have pushed for years to privatize the GSEs or eliminate them, the GAO found only one benefit to such an approach: enhanced market discipline. But the agency warned that it was not clear if privatized GSEs could support the mortgage market during a crisis.

Introduced earlier this year as part of the president's economic stimulus bill, the $8,000 first-time homebuyer tax credit, to date, has prompted 314,000 additional consumers to get off the fence and purchase a home, according to new figures released by the White House. The National Association of Realtors estimates that the tax credit will boost home sales by an additional 350,000 by the time it expires on December 1. Overall, 1.8 million first-time homebuyers may take advantage of the tax credit, according to NAR economists. Meanwhile, homebuilders, Realtors and other housing groups are trying to get the word out that buyers must go to closing by November 30 to take advantage of the tax credit. In mid-October, housing groups will mount a public campaign to extend and increase the tax credit and possibly expand it to all homebuyers. But for now, the lobbying is low key so potential first-timers won't get the idea they can sit back and wait for an extension. In July, 30% of existing home sales were by first-time buyers.

DebtX is selling $788 million in loan participations held by failed Silverton Bank of Georgia for the Federal Deposit Insurance Corp. The 344 participations are from commercial real estate and commercial and industrial loans and are being offered on an individual basis. It includes both performing and non-performing assets from 27 states, with the largest concentrations in Georgia, Alabama, Florida, Ohio and Washington. The largest loan is a $20.7 million participation in a loan secured by residential lots in Las Vegas. More than 140 of the participations are less than $1 million. Kingsley Grassland, chief executive of DebtX said the sale is getting investor interest, especially from community banks, the traditional buyer of loan participations.

Mario Bernadel, a real estate investor from Phoenix, has been convicted of running a mortgage fraud scheme involving at least 32 residential properties in the greater Phoenix area. According to John J. Tuchi, interim U.S. attorney for the District of Arizona, participants in the scheme recruited unqualified straw borrowers, submitted fraudulent loan applications on their behalf, obtained mortgage loans in excess of the selling price and then took the excess amount of the loans out through escrow. Bernadel recruited and trained mortgage brokers, straw buyers and an escrow officer in the scheme and, following the funding of the loans, received cash back. The homes purchased through the scheme have been foreclosed or sold at a loss. Seven other co-conspirators were also charged and have pleaded guilty and await sentencing. The scheme resulted in $20 million in loans obtained by fraud and a loss of more than $2 million. Bernadel's conviction is part of "Operation Cash Back," in which 40 defendants were indicted and arrested. Bernadel is the 20th defendant to date who has been convicted. U.S. District Judge Stephen M. McNamee set sentencing for Nov. 30.

Ginnie Mae set a record in its issuance of mortgage-backed securities backed by reverse mortgages in August. Overall, the agency saw a 3% decline in total issuance between July and August. More reverse mortgage lenders are turning to Ginnie Mae as their secondary market outlet since Fannie Mae, the biggest investor on Federal Housing Administration-insured Home Equity Conversion Mortgages, hiked its margins in March by 50 to 75 basis points. Issuance of Ginnie Mae securities backed by HECMs hit a record $1.5 billion in August, up from $853 million in July and $580 million in June. Ginnie Mae issued a total of $44.7 billion in mortgage-backed securities in August, down from a record $46.2 billion set in July. Nevertheless, Ginnie Mae issuance has exceeded $43 billion for the past three months.

Sen. Christopher Dodd, D-Conn., said he will continue to serve as the chairman of the Senate Banking Committee, ending weeks of speculation that he might jump to another committee to work full-time on healthcare reform. "The banking committee is of vital importance to Connecticut," said Sen. Dodd who is up from re-election next year. He noted his the committee's efforts to advocate for consumers dealing with "greedy" lenders and that the committee has "more work to do to create an independent consumer financial protection agency." Following the death of Sen. Edward Kennedy, Sen. Dodd could have become the chairman of the Health, Education, Labor and Pension Committee and the Connecticut senator said he will continue to play a leadership role in passing healthcare reform. He said both economic recovery efforts and healthcare reform are critical issues for him and his constituency.

Due to the scarcity of warehouse lending, Fannie Mae is providing faster funding in mortgage-backed securities transactions so lenders can quickly turn around and make more loans. "We're providing faster funding to lenders so that they get cash immediately after closing to continue funding loans," Fannie president and chief executive Michael Williams said. "Previously, they had to wait a month or more for the MBS transaction to settle," he told the financial services executives and lobbyists at an Exchequer Club luncheon in Washington. In response to a question from one executive, the CEO indicated that Fannie is not interested in getting into the warehouse lending business. But Fannie has looked at ways to provide support for warehousing lending at the request of the GSE regulator and Treasury Department. "If asked, we will do it," Mr. Williams said.

David Findel, the president and CEO of Morganville, N.J.-based Worldwide Financial Resources, is facing charges in an alleged $11 million mortgage-reselling fraud scheme. According to the Newark, N.J. office of the FBI, Mr. Findel, from Colts Neck, N.J., surrendered himself to the FBI and made his initial appearance before Judge Mark Falk, who released Mr. Findel on a $1 million secured bond. Originally started as a financial planning company, Mr. Findel expanded Worldwide Financial Resources to include home mortgage origination and banking services. This allowed WFR to both initiate and fund mortgages for its clients by borrowing money from a warehouse lender. To repay the lender, WFR would resell each mortgage it originated in the secondary mortgage market. When WFR experienced a liquidity crisis in January 2008, Mr. Findel allegedly conducted a scheme to defraud mortgage banks by reselling the same mortgages to multiple financial institutions. Once WFR sold a mortgage, Mr. Findel would allegedly create a second set of fraudulent mortgage documents and resell the same mortgage to a different secondary market lender. The complaint alleges that Mr. Findel, who was unavailable for comment, obtained more than $11 million from secondary market lenders through this scheme.

Residential mortgage-backed securities performance is expected to continue to deteriorate into 2010 while commercial MBS woes could persist into 2010 or 2011, according to Moody's Investors Service. "Commercial real estate is usually one of the last sectors both to enter a recession and exit one," Moody's said. Claire Robinson, a Moody's senior managing director, said changes in disclosure and regulation affecting the securitized markets is among other reasons MBS recovery may take this long. Higher investor risk premiums also play a role. The combination of these are likely to mean higher costs of securitization for issuers that also affect the market's rate of recovery, she said.

Starting Oct. 1, Federal Housing Administration direct endorsement lenders can determine whether a condominium project meets HUD eligibility requirements and begin financing unit sales. Currently, HUD field staff must approve condominium projects, which can be a slow process. The National Association of Realtors likes the new streamlined approach. However, the Department of Housing and Urban Development still requires a 50% occupancy rate to be eligible and no more than 30% of the units can be financed through FHA-insured loans, according to mortgagee letter 2009-19. NAR is urging HUD to relax the occupancy and concentration ratios to encourage more condo sales. "Increasing the concentration limit, or temporarily suspending it, will result in a greater number of owner-occupied units because more borrowers will be able to use FHA in more condominium projects," NAR says in a July 31 letter to HUD. FHA's new condominium policy ends "spot-loan" approvals (starting Oct. 1), which allow lenders to make a loan on one unit in a condo that is not FHA approved. The new streamlined and "uncomplicated" approval process eliminates the need for spot loans, HUD said.