Compliance & Regulation

House Financial Services Committee chairman Barney Frank, D-Mass., is threatening to attach a bankruptcy cramdown provision to a regulatory reform bill if servicers don't speed up the loan modification process. Rep. Frank said he is "disappointed" in the servicers' efforts to implement the Obama administration's Home Affordable Modification Program. But he noted there are legal obstacles such as second mortgage and servicing agreements that made modification decisions difficult. If the frustration over voluntary modifications continues to build, the chairman said, it will make it easier to pass a provision that allows bankruptcy judges to modify mortgages on a primary residence. "The best lobbyists we have for getting bankruptcy legislation passed are the servicers that are not doing a very good job of modifying mortgages. If they do not improve their performance then they improve the chances of the legislation," chairman Frank said. Mr. Frank previously has warned that a lack of progress on modifications could lead to more cramdown-related legislative efforts.

The 45 Home Affordable Modification Program servicers are now on track to meet the Obama administration's initial goal of starting 500,000 trial modifications by Nov. 1, according to Treasury assistant secretary Michael Barr. Servicers participating in the administration's Home Affordable Modification Program had over 360,000 homeowners in 90-day trial modifications as of Aug. 31, up from 235,000 in July, according to the latest Treasury report. While performance of individual servicers has been "uneven," Mr. Barr told a congressional panel, "we think all the servicers can do more than they are doing now and we would like to continue to work with them for better results." Bank of America doubled the number of homeowners participating in trial loan modifications and it is on pace to transition 125,000 at-risk loans into HAMP trial modifications by Nov. 1, according to Jack Schakett, a loss mitigation executive. He testified that BoA had 68,000 homeowners in 90-day trials at the end of August, up from 28,000 in July. JPMorgan Chase had 144,050 loans in trial modifications as of August 31, compared to 79,300 in July. Of the 144,500 loans in three-month trials, 113,000 were active as of Aug. 31 and "borrowers are making their trial plan payments," Chase executive Molly Sheehan said. BoA has 7% of its HAMP-eligible borrowers in trial modifications and Chase has 25% of its eligible borrowers in trial modifications.

The major mortgage servicers are preparing for the Treasury Department to roll out a short sale program and they are signing up vendors that specialize in handling these difficult real estate transactions that help troubled homeowners avoid foreclosure. Loan Resolution Corp. chief operating officer Travis Olsen said one of the top 10 servicers has hired his firm to manage the short sale process. "We will take their borrowers who have been denied a home retention plan and hand-hold them during the rest of the process," he said. The COO also noted that his Scottsdale, Ariz.-based pre-foreclosure asset-management company has received requests for bids from several top-five servicers. Treasury is expected to provide incentives for servicers to conduct short sales and share some of the costs of paying off second lien holders. "The final details of the [short sale] program are being finalized, and will be announced as soon as completed," HUD assistant secretary David Stevens told a congressional panel on Wednesday (Sept. 9). In a short sale, the lender agrees to accept a loss on the sale of the property and forgive the remaining balance on the mortgage. If a short sale doesn't work, the next stop is foreclosure. It usually takes LRC a couple of days or weeks to complete a short sale after the buyer makes an offer, while the timeline for servicers can be 60-120 days. "We can sometimes approve short sales the same day the offer is received," Mr. Olsen said.

In its most recent press release listing the banks that received cease-and-desist orders, the Federal Deposit Insurance Corp. included a new section: the dissenters. For the first time in the nearly 20 years that enforcement actions have been made public, the FDIC released a notice of charges against the banks that refused to consent to the proposed orders. This will become routine, but given the graphic nature of the notices — they include exam data and details of alleged wrongdoing — industry insiders and observers say such disclosure could harm banks. Some also contend that the change is meant to dissuade banks from contesting regulatory orders, just as more are starting to do so. "This seems like a ploy to beat bankers into submission," said Joseph D. McKean Jr., the chairman and owner of the $720 million-asset Frontier State Bank in Oklahoma City, which went to court this summer over an FDIC order and is awaiting a decision on the case. "It is not a well-thought-out tactic. Anything the FDIC posts in this regard is likely to hurt a bank." According to the FDIC, the change is not meant to harm or bully the dissenting banks; rather, it is intended to make the enforcement process more visible.

The House Financial Services Committee has set September 23 as a tentative date to mark up legislation to create a new consumer protection agency that would set uniform mortgage lending standards for depositories, non-banks and other players in residential finance. The American Bankers Association strongly opposes the bill (H.R. 3126) because it would limit federal preemption and create the Consumer Financial Protection Agency (CFPA), which would have regulatory and enforcement powers over depositories (on top of what they already face). The Mortgage Bankers Association claims the legislation — proposed by the White House and introduced by committee chairman Barney Frank, D-Mass. — fails to create a federal safety and soundness regulator for non-depository lenders. The CFPA would be responsible for compliance with uniform national lending standards. "The CFPA bill doesn't hit all the marks," said MBA chairman John Courson. Meanwhile, the Independent Community Bankers of America has proposed changes to the CFPA bill that would minimize the burden on community banks. "We are participating in the process," said ICBA's top lobbyist Steve Verdier. ICBA accepts the concept behind a CFPA but wants the agency to focus mainly on enforcement and examinations of non-depository lenders.

Default rates on commercial MBS could hit 6% by yearend as the recession finally takes its toll on the performance of commercial and multifamily properties, the president of the Commercial Mortgage Securities Association said Tuesday. CMSA chief president Patrick Sargent noted that the default rate (loans 60 days or more past due) generally averages 50 basis points. "Now we are starting to see these default rates go up to 3% and 4% and by yearend they could perhaps go up to 5% or 6%," he said on CNBC. The CMBS default rate rose nearly 100 bp to 2.39% in the second quarter from the first quarter, according to Trepp LLC data. CMSA's main focus is to bring liquidity back into the CMBS market, Mr. Sargent said. He noted the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF) has been helpful so far but noted that it will take more time to be effective. The Fed has already extended the TALF program for newly issued CMBS by six months to June 30. "We would like to see TALF extended [again] if it makes sense after next June," Mr. Sargent said.

Eugene Lockhart, Jr., a former player with the Dallas Cowboys, has been charged, along with eight others, with running an alleged mortgage fraud scheme in the Dallas area from 2001 through 2005. In addition to Mr. Lockhart, the following defendants named in the indictment include: Lendell Beacham; William Randolph Tisdale, Jr.; Hubert Jones, III; Patricia Ortega Suarez; Suzette Switzer Hinds; Michael Anthony Caldwell; Donna Lois Kneeland; and Bryan J. Moorman. According to James T. Jacks, U.S. attorney for the Northern District of Texas, the indictment alleges that the defendants, who were involved with several real estate entities, ran a scheme in which they located single-family residences for sale in the Dallas area -- including distressed and pre-foreclosure properties -- and negotiated a sales price with the seller. Prosecutors say they created surplus loan proceeds by inflating the sales price to an arbitrary amount more than the fair market value of the residence. The defendants, who were unavailable for comment, allegedly recruited straw borrowers and caused the loan applications for each straw borrower to include false financial information. The alleged scheme involved 54 fraudulent residential property loan closings resulting in the funding of $20.5 million in fraudulent loans.

Rates moved higher after the market interpreted one closely watched economic indicator as somewhat positive ahead of prepayment reports the market will see when it reopens Tuesday. The benchmark 10-year Treasury yield that generally serves a rough indicator of mortgage rate direction was at 3.43% midday Friday, up from 3.33%, where it was at roughly the same time the day before. Art Frank, director and head of mortgage backed securities research at Deutsche Bank Securities, New York, said after Friday's employment-related numbers, the next anticipated major release expected to be seen in the mortgage bond market that drives rates are prepayment reports that market will likely see on Tuesday.

In the week after the Federal Deposit Insurance Corp. eased its stringent private-equity proposal, firms appear wary but ready to bid on failed banks again. Observers said even though the final guidelines are more palatable, they are restrictive enough that private-equity bidders still face tougher standards than competitors and investors must carefully determine if a bid's reward justifies the regulatory cost. "It's at least encouraged me enough to where we will try" to bid, said Wilbur Ross, the chairman and chief executive of WL Ross & Co. LLC. Ross has also been a bottom fisher of troubled mortgage assets, buying large residential servicing portfolios from such bankrupt non-prime lenders as Option One Mortgage, Irvine, and American Home of Melville, N.Y.

Mortgage companies added 3,600 full-time employees to their payrolls in July while the number of active mortgage brokers fell to a level not seen since September of 2001. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector rose to 267,200 in July from 265,500 in June. The BLS survey counted 70,100 existing mortgage brokers in July, a 1,900 drop from the previous month. After a slight decline in the second quarter, employment at mortgage banking companies is now at first quarter levels. Meanwhile, Friday's employment report contains some encouraging signs that job losses are continuing to slow -- which could mean mortgage delinquencies might subside somewhat. BLS reported that 216,000 U.S. workers lost jobs in August, down from 276,000 in July. The nation's unemployment rate rose to 9.7%, up from 9.4% in July. (There is a one-month lag in BLS's reporting of mortgage industry employment data.)