Compliance & Regulation

Eight individuals have been charged with conducting an alleged Westchester County, N.Y.-area scheme that defrauded four separate families and two mortgage lenders of $1.4 million. Doreen Swenson and Hubert Hall of Tarrytown, N.Y., Mildred Didio of New York, David Reback of Rye Brook, N.Y., Eileen Potash of Fresh Meadows, N.Y., Frank Corigilano of Newtown, Conn., Amerigo DiPietro of Brewster, N.Y., and Wilma Shkreli of Westwood, N.J., have been charged with grand larceny, fraud and conspiracy. According to Westchester County district attorney Janet DiFiore, from December 2004 to January 2007, the defendants, who were unavailable for comment at press time, allegedly victimized four separate families in Croton-on-Hudson, Yorktown Heights, Cortlandt Manor and Mount Vernon along with two mortgage lenders, wherein they induced desperate property owners fearing the threat of foreclosure to deed their homes to "investors" with the promise that they could repurchase their property in 12 to 24 months. The defendants allegedly colluded to strip the property of its equity by obtaining inflated mortgages based on fictitious purchase prices using "show" checks to deceive the banks as to the actual purchase price. The defendants were arraigned in Westchester County Court and all pleaded not guilty. Their next court appearance will be on Sept. 9.

President Barrack Obama wants Ben Bernanke to remain at his post at the Federal Reserve Board and has re-nominated the Fed chairman to serve for four more years. "Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and out-of-the-box thinking that has helped put the brakes on our economic freefall," the President said during a break from his vacation on Martha's Vineyard. The President said he wants Mr. Bernanke to "continue the work he's doing" to fix the financial system and engineer an economic recovery. And he stressed the need of financial regulatory reform to "ensure we never face another crisis like this again." Senate Banking Committee chairman Christopher Dodd, D-Conn., said re-appointing chairman Bernanke is "probably the right choice." However, Sen. Dodd said he has serious concerns about the Fed's failure to use its regulatory powers to protect consumers from abusive subprime lending practices. "Chairman Bernanke was too slow to act during the early stages of the foreclosure crisis, but he ultimately demonstrated effective leadership and his reappointment sends the right signal to the markets," Sen. Dodd said.

A Treasury Department proposal aimed at reforming the private-label securities market would give federal regulators some flexibility in setting risk retention standards for the banks. The legislative proposal Treasury recently sent to Congress requires securitizers to retain at least 5% of the credit risk, which cannot be sold or hedged. However, regulators can make "exceptions" and "adjustments" for banks provided they retain some risk and it leads to sound underwriting practices. "We felt it was important to give agencies some flexibility on the no hedging requirement to ensure banks were able to do appropriate risk management at the same time they were being required to retain some risk from their lending," a Treasury official said. The regulators could also lower the 5% threshold on credit risk retention for banks that securitize mortgages if some of the credit risk is retained by originators. "That would also be consistent with our aims," the Treasury official said.

Another defendant in the fraud case involving $12.6 million mortgage fraud scheme that involved 25 upscale residential properties in Lee's Summit and Raymore, Mo., has pleaded guilty in federal court. According to Matt J. Whitworth, acting U.S. attorney for the Western District of Missouri, Jerome Shade Howard of Anaheim, Calif., pleaded guilty before U.S. Chief District Judge Fernando J. Gaitan to his role in a scheme to buy new homes built by Jerry R. Emerick at inflated prices, obtaining mortgage loans for more than the actual sale price by providing false information to mortgage lenders, then keeping the extra proceeds. Howard admitted that he received more than $900,000 in illegal kickbacks as part of nearly $8.5 million in fraudulent mortgage loans. Howard is among 12 defendants who have pleaded guilty to the scheme. Sentencing for Howard will be scheduled after the U.S. Probation Office completes a pre-sentence investigation. Emerick pleaded guilty in April to conspiracy to commit mortgage fraud and wire fraud and to transfer funds obtained by fraud across state lines.

The Independent Cities Finance Authority, a Joint Powers Authority representing more than 7 million people in 66 California counties, has started a second-loan program for first-time buyers who are eligible for the $8,000 federal tax credit. ICFA will lend qualified buyers up to $8,000 at closing in the form of a second mortgage. Upon receipt of the credit, buyers can file amended returns for 2008 to receive the credit this year rather than waiting until they file their 2009 returns - the buyer must pay off the second lien. The second can be used to meet the 3.5% minimum downpayment requirement on an FHA loan, essentially eliminating the need for the borrower to come up with a downpayment. The program is available on a first come, first served basis through real estate brokers, residents or builders in any ICFA member city of ICFA. The 66 regions are: Alhambra, Azusa, Baldwin Park, Barstow, Bell, Bellflower, Brea, Carson, Chino, Claremont, Colton, Commerce, Compton, Covina, Downey, Duarte, El Monte, Fairfield, Fontana, Fresno, Gardena, Garden Grove, Glendale, Glendora, Hawaiian Gardens, Hawthorne, Hermosa Beach Huntington Park, Indio, Inglewood, La Habra, La Puente, Lakewood, Lancaster, Lawndale, Long Beach, Los Angeles, Lynwood, Monrovia, Montebello, Monterey Park, Morgan Hill, Norwalk, Palmdale, Paramount, Pico Rivera, Pomona, Rancho Cucamonga, Rialto, Riverside, Rohnert Park, San Bernardino, San Bernardino County, San Diego County, San Fernando, San Mateo County, San Juan Capistrano, Santa Clarita, Santa Rosa, Signal Hill, South Gate, Vernon, Vista, West Covina, Whittier and Yucaipa.

The mortgage banking firm Taylor, Bean and Whitaker, which recently ceased making mortgages, originated an estimated $22 billion in Federal Housing Administration-insured loans over the past 24 months, which represents 4.5% of the FHA's total business during that period. TBW was FHA's third largest direct endorsement lender and it approved 119,800 loans over the past two years. However, 7.1% of those FHA-insured loans are 90 days or more past due or in foreclosure, according to FHA's Neighborhood Watch System. The average default rate for FHA loans is 4.6%. Based on a higher than average claim rate and loss severity rate of 40%, FHA could face possible losses of $800 million to $900 million due to its exposure to TBW, one source said. As previously reported, the Department of Housing and Urban Development on Aug. 4 suspended the Ocala, Fla., mortgage banking firm from making FHA loans. Freddie Mac also terminated TBW on Aug. 4. In a recent securities filing, Freddie said approximately 5.2% of its mortgage purchase volume in 2008 came from TBW and TBW accounted for 2.7% of its mortgage purchases during the first half of this year.

The Federal Housing Administration has no plans to implement the Home Valuation Code of Conduct, Commissioner David Stevens told a delegation from the National Association of Mortgage Brokers. NAMB's FHA chairman John Councilman, who attended the meeting, reported that Mr. Stevens said he was well aware of the problems originators have been having with the code, which only applies to loans sold to Fannie Mae and Freddie Mac. That being said, the commissioner added FHA is looking at alternatives it feels would insulate appraisers from pressure from originators. Mr. Stevens also told NAMB that plans for FHA to start risk-based pricing for mortgage insurance on Oct. 1 will not be implemented anytime soon. The meeting also clarified upcoming changes in the Real Estate Settlement Procedures Act as it applies to FHA. Mortgage brokers will no longer be allowed to charge discount points starting on Jan. 1, 2010. The 1% fee limitation has been removed, and there is no limit as long as the fees are customary to the market. Furthermore, all fees, including those that are charged by the lender, must be lumped into one sum. A yield-spread premium may be charged, but it must be disclosed on a separate line on the good-faith estimate. FHA reserves are higher than they have ever been, Mr. Stevens told NAMB. That being said, he would not rule out that the government would have to bail out FHA because those reserves are projections and those projections could be changed. Still the average credit score for the program has risen from 633 to 693, due to the elimination of what were termed "troublesome programs" such as seller-paid downpayment assistance and cash-out refinancings.

Mark M. Mr. Benun of New York has been charged with fraudulently selling a Bronx building for more than $5 million and not disclosing several liens on the property. According to Preet Bharara, U.S. attorney for the Southern District of New York, Mr. Benun and a real estate company operator purchased a commercial property in the Bronx near Yankee Stadium for $9.5 million. Mr. Benun, purporting to be the sole owner of the property, allegedly sold it for approximately $5.96 million to another buyer, who paid $4 million in cash and gave Mr. Benun a note for the remaining $1.96 million. Shortly after the sale, Mr. Benun is alleged to have sold the note for $1.46 million. To establish his apparent sole ownership of the building, Mr. Benun allegedly created false satisfactions of the three mortgages on the property and transferred ownership of his co-purchaser's majority interest in the property to himself. U.S. District Judge Victor Marrero has been assigned to the case. Mr. Benun was unavailable for comment.

The Federal Reserve accepted $2.3 billion in investor requests for financing to purchase legacy commercial mortgage-backed securities at the second TALF subscription, up from $669 million at the first subscription in July. The Fed's Term Asset-Backed Securities Loan Facility also provides financing for newly issued CMBS but there were no takers at the Thursday (Aug. 24) subscription. It is understood that several real estate investment trusts are gearing up to sell CMBS and may participate in the September TALF subscription. At the urging of commercial real estate interests, the Federal Reserve Board recently extended the CMBS TALF program until March 31 for legacy bonds and June 30 for newly issued bonds. The TALF program was due to expire at yearend.

Fannie Mae Delegated Underwriting and Servicing credit facilities structured and executed as mortgage-backed securities have been scarce, but there have been signs they may be making a comeback. PNC said recently it originated a $420 million Fannie Mae DUS MBS credit facility for Houston-based multifamily real estate investment trust Camden Property Trust. It represents the first Fannie Mae DUS credit facility of this type since 2007. The Pittsburgh-based PNC said the facility was structured using 11 separate Camden multifamily assets with a combined total of nearly 5,000 units located in California, Colorado, Georgia, Maryland and Texas.