Compliance & Regulation

Robert Ratkovich of New Castle, Pa., pleaded guilty before Senior U.S. District Judge Gustave Diamond in federal court to fraud and money laundering charges connected to his scheme to defraud a bank and affordable housing entity. The board of directors of Affordable Housing of Lawrence County hired Ratkovich as a consultant to advise the board of which properties that it should purchase and at what price, according to Mary Beth Buchanan, U.S. attorney for the Western District of Pennsylvania. Rather than do a diligent search, Ratkovich advised the board to purchase seven properties that were all owned or associated with an individual known to the U.S. attorney. To purchase the properties, Affordable Housing of Lawrence County received a loan from First Commonwealth bank to finance the purchase. Ratkovich and others allegedly made misrepresentations to First Commonwealth Bank regarding the financial status of Affordable Housing of Lawrence County and submitted fraudulently inflated appraisals. Judge Diamond scheduled sentencing for Oct. 28.

Howard Edwards and John Foster, both formerly of Rancho Cucamonga, Calif., were sentenced to 20 years, four months in prison and 10 years, four months in prison, respectively, for real estate fraud crimes. The two defendants befriended unsuspecting victims on an Internet chat line. Their personal information was used to obtain loans on luxury cars and real estate in Fontana, Calif. The victims were then liable for these loans. The loan proceeds were transferred to a phony escrow company. The defendants falsified several real estate deeds and forged the signatures and stamps of several notary publics. The defendants then sold a house in Gardena, Calif., without the owner's permission and knowledge for an additional $560,000. The victims, who had been living at the residence since 1971, first found out about it when a lending institution attempted to foreclose on the property. The defendants used the personal information of a man living in Massachusetts to obtain the loans. Edwards and Foster were extradited from Georgia and Illinois, respectively, in 2008. The San Bernardino County District Attorney's Real Estate Fraud Unit investigated, prosecuted and provided the information about this case.

Federal regulators are working on providing capital relief for banks that have to bring securitized assets back on their balance sheets due to a change in the accounting rules that goes into effect at yearend. Regulators told a Senate panel that they can't delay the impact of the Financial Accounting Standard 167 on a bank's leverage-capital ratio. When it comes to risk-based capital, "there is some flexibility to phase it in over time," said Comptroller of the Currency John Dugan. The comptroller said he expects the regulators will issue interagency guidance on RBC in a few weeks. Bankers are hoping the guidance will give them one to two years to adjust to FAS 167, which completely changes the securitization business. "The bottom line is this stuff is going back on the balance sheets. Banks are going to have to hold capital against it. It is really a matter of timing and how it is phased in," Mr. Dugan said. Banks and other issuers of securities backed by mortgages, credit cards and auto loans are expected to discuss the impact FAS 167 will have on their companies in their third-quarter securities filings.

The banking industry has to do a "much better" job of preventing foreclosures, according to Sen. Richard Durbin, D-Ill. He wants servicers to stop foreclosure proceedings when homeowners are seeking a loan modification. "I am asking servicers to make a commitment that they avoid scheduling a foreclosure on any homeowner who is actively working in good faith on a loan modification that is fair, responsible and sustainable," Sen. Durbin said in a speech at the Center for American Progress in Washington. In a letter to the 34 servicers participating in the administration's Home Affordable Modification Program, the high-ranking Senate Democrat also is asking servicers 20 questions about their efforts to help homeowners avoid foreclosures. Sen. Durbin made it clear that he is not impressed with servicers' efforts so far and he said the administration's goal of getting 500,000 homeowners into trial HAMP modifications by Nov. 1 is "easily attainable." The Illinois senator put the industry on notice, however, that he is willing to make another try at passing a bankruptcy cramdown bill if they "don't make real progress in reducing the number of avoidable foreclosures." But he indicated such a legislative drive is not imminent. "I am afraid it is going to take a lot more misery to move a lot more votes," Sen. Durbin said.

After pleading guilty to a $1 million scheme involving the approval and disbursement of two fraudulent home equity loans, four individuals, including two bank insiders, were sentenced to prison. U.S. District Judge Alan S. Gold sentenced Ramon Puentes to 57 months in prison and five years of supervised release, Jorge Nobrega to 27 months and five years of supervised release and Jorge Arrieta to 22 months and five years of supervised release. Sebastian Kishinevsky, who cooperated with the government and assisted with the investigation, received a sentence of six months in prison, six months of home confinement and three years of supervised release. Judge Gold also ordered Puentes and Nobrega to each pay $796,700 in restitution, Arrieta $470,000 and Kishinevsky $326,700. According to Jeffrey H. Sloman, U.S attorney for the Southern District of Florida, the defendants obtained two fraudulent loans, one from Bank of America and one from Wachovia, for $500,000 each. They submitted the loan applications using the stolen identification information of one of the defendant's mother-in-law and supported by fraudulent documents. Each application listed the mother-in-law as the borrower and a home owned by the mother-in-law as collateral. The Bank of America application was submitted to Arrieta, a personal banker at Bank of America. The Wachovia application was submitted to Kishinevsky, a financial specialist at Wachovia. After the loans were approved, the defendants disbursed and shared the proceeds.

The Treasury Department said the 38 servicers participating in the Home Affordable Modification Program are conducting more than 235,000 trial modifications and released its first monthly report on each servicer's performance. "Today's report discloses performance on a servicer-by servicer basis in order to increase transparency for participating institutions. The data show that servicer performance is uneven," Treasury said. The report rates servicer performance in terms of trial modifications started in relation to the size of their portfolio of eligible loans that are 60-days or more pass due. Saxon Mortgage Services ranks highest with 25% of its delinquent loans in 90-day trials, while Bank of America is conducting modifications on only 4% of its delinquent loans. Bank of America has 27,600 loans in trials, compared to 21,100 trial modifications at Saxon. JPMorgan Chase Bank has a 20% performance ratio with 79,300 loans in trials. Despite the disparities, Treasury said HAMP is "on track" to meet the Obama administration's three-year goal of modifying 3 to 4 million loans.

Federal regulators are starting to put pressure on banks to recognize losses on second liens in markets where the first mortgage is underwater due to declining house values. "Failure to timely recognize estimated credit losses could delay appropriate loss mitigation activity, such as restructuring junior lien loans to more affordable payments or reducing principal on such loans to facilitate refinancing," the Federal Deposit Insurance Corp. says in a letter to banks. House Financial Services Committee chairman Barney Frank, D-Mass., and Senate Banking Committee chairman Christopher Dodd, D-Conn., recently urged the regulators to stop allowing banks to carry home equity loans at inflated values. "Carrying these loans at potentially inflated values may contribute to resistance on the part of servicers to negotiate the disposition of these second liens," the chairmen say in a July 10 letter. The FDIC Financial Institution Letter reminds banks of 2006 interagency guidance that says delaying recognition of losses on second liens in declining markets is an "inappropriate" accounting practice.

Colonial BancGroup Inc., Montgomery, Ala., has confirmed that federal agents affiliated with the special inspector general for the Trouble Asset Relief Program executed a search warrant at the company's mortgage warehouse lending division in Orlando on Monday. The company's statement said it was cooperating with the investigation and is conducting business as usual. There are press reports that federal agents also executed a search warrant on Colonial's former merger partner, Taylor, Whitaker and Bean, a mortgage wholesaler based in Orlando. A call to TBW was not returned by deadline. The raid on Monday (Aug. 3) came on the same day Colonial disclosed that a $300 million investment in the bank by TBW would not take place. The deal was believed to be necessary for Colonial to receive a $550 million capital infuson in TARP funds.

After allegedly preparing fraudulent notes by forging the signatures of borrowers, William Everett Nichols of Alexandria, Louisiana, has been indicted and arrested on federal fraud charges. According to Donald W. Washington, U.S. attorney for the Western District of Louisiana, the indictment alleges that Mr. Nichols, who is the president and sole shareholder of First Fidelity Mortgage Inc., knowingly and willfully conspired to devise a scheme to defraud Sabine State Bank and obtain money to which Mr. Nichols was not entitled. The defendant and others allegedly prepared fraudulent notes by forging signatures of borrowers and notaries public and delivered them to Sabine State Bank as collateral in order to cause the bank to deposit money into an account of First Fidelity Mortgage, which Mr. Nichols controlled. Mr. Nichols was unavailable for comment.

Fannie Mae issuance of mortgage-backed securities jumped 44% in June from the previous month but the mortgage giant did not report its monthly purchases of refinanced loans. Fannie saw new MBS issuance of $97.7 billion in June, up from $67.7 billion in May. This jump is most likely due to high refinancing volumes, but there are no numbers to support this as the mortgage giant omitted data on its purchases of refinanced loans in its monthly report. Freddie Mac reported earlier that its issuance of MBS in June jumped 40% and its purchases of refinanced loans were up 26% from May. The GSE regulator said on Thursday that Fannie and Freddie have refinanced over 2 million loans since March 31 and 56,000 of those loans were through the Obama administration's Home Affordable Refinancing Program. HARP is designed to help borrowers with underwater mortgages that can't qualify for regular refinancing programs. Meanwhile, delinquencies continue to creep up at the GSE. Single-family loans 90 days or more past due or in foreclosure rose by 26 basis points to 3.68% in June from the month before. A year ago, just 1.3% of single-family loans were severely delinquent or in foreclosure.