Compliance & Regulation

The Federal Housing Administration mortgage insurance fund will not need a capital infusion from Congress, the FHA commissioner said in response to concerns that the program is experiencing larger than expected credit losses due to delinquencies and home price declines. "FHA will not need a congressional subsidy even if the congressional capital reserve ratio falls below 2%," FHA commissioner David Stevens said in response to a report in The Wall Street Journal that rising defaults have "eaten through" FHA's capital cushion and that the fund is in danger of falling below the statutory minimum of 2%. FHA's capital reserve is based on an annual actuarial study that is generally completed by October. The FHA commissioner said he would not comment on FHA's reserve ratio until he sees the study. At the end of the second quarter, 6.88% of FHA single-family loans were 90 days or more past due, up 35 basis points from June 2008, according to FHA. FHA foreclosures are up 17%, however. Meanwhile, the new commissioner has been conducting a thorough review of FHA's credit parameters. "It is expected that FHA will be coming out with some new tightening measures in the next several weeks, which the industry will welcome," said Brian Chappelle, a mortgage banking consultant with Potomac Partners in Washington.

A federal jury in Kalamazoo, Mich., found Patricia L. VanderZwaag and Daniel Lee VanderZwaag, both of Holland, guilty of charges related to filing fraudulent mortgage loan applications. According to Donald A. Davis, U.S. attorney for the Western District of Michigan, the defendants, who owned Mad Jac Corporation, also known as B & J Towing, provided false documentation and information to mortgage companies to obtain loan proceeds. Patricia VanderZwaag also used false information and documentation, including the Social Security Number of another person, to obtain a mortgage loan from National City Bank. She then transferred $16,000 of one of the mortgage company loans to another bank to launder the funds. Immediately after the return of the guilty verdicts, Chief U.S. District Court Judge Paul L. Maloney remanded both Vanderzwaags to the custody of the U.S. Marshal until sentencing. A date for the sentencing hearing has not yet been set.

Bond yields that pressured Freddie Mac's average for 30-year primary market mortgage rates slightly lower over the past week appeared to be stabilizing as of late Thursday morning ahead of an influential economic indicator due Friday. Art Frank, director and head of mortgage-backed securities research at Deutsche Bank Securities, New York, compared the secondary market for the agency mortgage-backed securities yields that influence primary market rates as slightly lower and in a calm before a potential storm Friday when some employment-related statistics are set to be released. The average rate for a 30-year fixed-rate mortgage during the week ended Sept. 3 dropped to 5.07% from 5.14% the previous week and 6.35% a year ago, according to Freddie Mac. "Bond yields pushed mortgage rates slightly lower this week," said Frank Nothaft, Freddie Mac vice president and chief economist. The benchmark 10-year Treasury bond yield had slid to 3.3% from near 3.5% since Aug. 28. At deadline, it was holding relatively steady at 3.33%. The average 15-year FRM rate during the week was 4.54%, down from 4.58% the previous week and 5.9% a year ago. The average rate for a five-year Treasury indexed hybrid adjustable-rate mortgage was 4.67%, down from 4.59% the week before and 5.97% a year ago. The average rate for a one-year Treasury ARM was 4.62%, from 4.69% last week and 5.15% a year ago. Average points were 0.7 for 30-year FRMs and 0.6 for 15-year FRMs, five-year Treasury hybrids and one-year ARMs.

Edward J. Safdie of Madison, Conn., was sentenced to 51 months in prison for conducting a fraud scheme in which he received funding from multiple sources to purchase a Chester, Conn.-based inn. According to Nora R. Dannehy, U.S. attorney for the District of Connecticut, Safdie submitted false documents to Acorn Capital overstating his personal wealth to receive a $1 million loan to secure financing to purchase The Inn at Chester. He then told Citizens Bank, also submitting false documents to the lender, that the $1 million loan from Acorn was his own and that he was using the funds for a downpayment on the inn. Operating through 318 Main LLC, Safdie purchased the inn for $2.4 million. On the same day, he caused 318 Main LLC to sell the inn to Quantum 318 LLC, which he also controlled, using $3.5 million in loan proceeds obtained from Citizens Bank. He then used the proceeds from the Citizens Bank loan to pay back the original $1 million Acorn loan. Thereafter, Safdie convinced Acorn to provide him with a $2 million revolving loan facility, of which he drew down $1.1 million. He continued to provide fabricated brokerage account statements to Acorn. Using the inn as security, Safdie refinanced the Inn and, through the refied mortgage, received $4.5 million from Beal Bank. Safdie then used most of the funds to repay the fraudulently obtained Citizens Bank loan. After failing to repay the Beal Bank loan, Beal Bank foreclosed on the inn.

August Federal Open Market Committee minutes show members discussed slowing the Fed's agency mortgage-backed securities and debt purchases before their planned end this year, making it likely there will be a decision on this issue this fall. As the initial August FOMC meeting statement revealed, the Fed has made plans to end its Treasury purchases in October and the minutes showed a similar plan for the agency MBS and debt buys also was discussed. Some analysts think the FOMC might take action on the issue as early as this month. "Minutes of the August FOMC meeting suggest that the Fed could continue at its current pace, but taper off the purchases as we approach the program completion for a smooth transition. The September FOMC meeting would be an optimal time to make the announcement, in our view," Credit Suisse researchers said in a Sept. 3 report. Art Frank, director and head of mortgage-backed securities research at Deutsche Bank Securities, New York, said he believes slowing the purchases before stopping them could help the market avoid a shock that could cause disruptive spread widening. He said the minutes and comments from Fed officials showing they have discussed this are a good sign to that end. The minutes also showed FOMC members talked about possibly including agency MBS backed by adjustable-rate mortgages in the purchase program to address unusually large spreads between ARM rates and comparable Treasury yields. But divided opinions on the topic made the move seem unlikely. The plan to end Fed Treasury purchases in October may have some implications for MBS and potentially could boost mortgage rates. But these are less of a concern for the MBS market than the end of the MBS purchases themselves, Mr. Frank said.

Fannie Mae and Freddie Mac — which are wards of the government — are seeking significant revisions to a regulatory rule that forces them to submit all new products and activities for review, arguing it is too restrictive and goes against congressional intent. In a rare joint comment letter sent this week to the Federal Housing Finance Agency, the two GSEs objected to several parts of the July 2 interim rule, saying it was unnecessarily burdensome and ineffective, and could make it difficult for the GSEs to help during a financial crisis. The letter marked one of the first times the two companies have publicly taken issue with their regulator, which seized them nearly a year ago and continues to manage them in conservatorship. No doubt because the companies are writing to their conservators, the letter is exceedingly polite, but it still makes clear that the GSEs think the current rule needs critical changes. On Wednesday the Mortgage Bankers Association released a working paper on overhauling the secondary mortgage market which assumes that Fannie Mae and Freddie Mac will no longer exist in the future but also calls for the creation of up to five mini-GSEs that would act as loan guarantors but without holding large on-balance sheet portfolios.

Mario Tolisano and Celestino Orta, both of Bronx, N.Y., have been charged with allegedly bilking three people out of more than $1.3 million in a scam involving selling property the defendants neither owned nor were authorized to sell. According to Bronx district attorney Robert T. Johnson, the defendants, who were unavailable for comment, allegedly offered to sell various properties to two real estate investors, which Mr. Orta allegedly falsely claimed he had either bought or was in the process of buying. The investors allegedly examined the real estate and agreed on a purchase price of $710,000, to be paid up front. Later, the victims were allegedly offered additional properties in the Bronx, Brooklyn, and Queens, for which they paid another $502,000. The defendants then allegedly approached a third victim, who made a $70,000 downpayment for a vacant lot. The victims eventually filed complaints against the defendants, alleging multiple attempts to schedule closings on the properties were ignored, since the defendants never had ownership of the properties nor had authorization to sell them. Mr. Tolisano was arraigned before State Supreme Court Justice Margaret Clancy, who set bail at $250,000. Arraignment for Mr. Orta, who is currently in custody on an unrelated matter, is scheduled for Sept. 3.

A former employee at the now defunct Taylor, Bean & Whitaker faces charges he allegedly stole more than $1.6 million from the company by depositing the funds into accounts he controlled at Navy FCU of Virginia. Victor Cedeno, who was a loss mitigation negotiator in the loan resolution management department at the Ocala, Fla.-based company allegedly deposited checks made out to Taylor, Bean & Whitaker into this account from July 17, 2008, until as recently as Aug. 10 of this year, according to a criminal complaint filed by the U.S. Attorney's office. A spokesman for the U.S. Attorney office said Mr. Cedeno is still being sought by authorities. He could not be reached for comment. The scheme allegedly began July 16, 2008, when Mr. Cedeno opened an account at Navy Fed's branch in Winter Park under the name, "Tailor Bean W." The name "Tailor Whitaker" was listed as primary account holder. A total of 58 checks worth $1.6 million were allegedly funneled into the "Tailor Bean W." account.

The Federal Housing Administration is providing a helping hand to some multifamily developers that started construction but had their financing pulled after completing the foundation. FHA generally does not insure multifamily projects where construction has already started. But for the next six months, the federal mortgage insurer is willing to consider applications in cases where construction was halted early and only foundation and site preparation work was completed. The FHA mortgagee letter indicates that the agency is not going to insure multifamily loans for condominium projects that are 90% complete and are trying to convert to rental units. To qualify, developers have to prove that their financing was cancelled and they have been unable to find alternative financing. The Department of Housing and Urban Development said it is taking this step "due to the illiquidity in the financial markets." The mortgagee letter points out some lenders are backing out of commitments and refusing to fund construction draws. The Census Bureau recently reported that multifamily starts fell to an all-time low of 80,000 units in July, down 72% from a year ago.

The Mortgage Bankers Association on Wednesday morning released a working paper on rebuilding the secondary market — a plan that does not include the continued existence of Fannie Mae and Freddie Mac in their present form but instead relies on the creation of a small number of mini-GSEs that could be in co-operative form. Under the plan, the creation of mortgage-backed securities would rely on risk-based premiums paid into a federal insurance fund with loan level guarantees provided by what the trade group calls a "small number of privately-owned government-chartered and regulated mortgage credit-guarantor entities" or MCGEs. MBA wants ownership of at least one of the MCGEs to be in a co-op form with mortgage lenders as shareholders. "A co-op could be attractive to mortgage bankers," said MBA chief executive John Courson. (Ownership of Freddie Mac stock was limited to savings and loan associations under a co-op structure until 1989, when the company first sold shares on the New York Stock Exchange.) Even though Fannie and Freddie would no longer exist under this blueprint for the secondary market their "technology, human capital, standard documents and relationships" could serve as the foundation for the new MCGEs, MBA says. The plan — which played a role in driving down the GSEs' share price on Wednesday morning — was drafted by a special task force of MBA members including top executives in the industry who work for lenders, servicers, mortgage insurance firms, title companies and other players in the business. Fannie and Freddie declined to comment on the proposal. Some members of the task force work for companies that were once part of FM Watch, a lobbying group whose mission was to curtail the powers of Fannie and Freddie.