Compliance & Regulation

Even though the White House is trying to use Fannie Mae and Freddie Mac to prop up the residential mortgage market — including massive loan modifications — their regulator issued a new "Five Year Plan" on July 9 that leaves in place the targeted goal of shrinking each of their portfolios to $250 billion. At the end of May the two, together, boasted $1.6 trillion in on-balance sheet assets. The Federal Housing Finance Agency's five-year plan offers no new major revelations about their future. FHFA notes that Fannie and Freddie "have not met and may continue to be unable to meet many regulatory standards." The two were taken over by the government and placed into separate conservatorships in September.

Key Democrats on the House Energy and Commerce Committee are skeptical of the Obama administration's proposal to create a new Consumer Financial Protection Agency that would take over most of the Federal Trade Commission's authority to prevent abusive mortgage lending practices. "I have significant concerns about these plans," Rep. John Dingell, D-Mich., said at a hearing. "FTC has done superb work in protecting consumers and this country will not benefit from a diminished mandate to that agency." Committee chairman Henry Waxman, D-Calif., said a new approach to consumer protection is "clearly warranted." But the chairman said the FTC's ability to perform its consumer protection function should be strengthened, "not weakened." Republican members strongly oppose claims the CFPA would "strip" the FTC of its authority over consumer financial products and create a "new tax" on all consumer credit providers. It appears that House Financial Services Committee chairman Barney Frank, D- Mass., will have to address Rep. Waxman's concerns in drafting a CFPA bill. Some industry groups also oppose the creation of a new consumer protection agency. The American Financial Services Association is recommending that Congress leave enforcement authority with the federal banking agencies and give FTC back-up enforcement authority. "The FTC should be granted authority to step in if the prudential regulator fails, or is unable, to address consumer protections in a timely manner," AFSA president and chief executive Chris Stinebert testified.

Mortgage fraud-related Suspicious Activity Reports referred to law enforcement increased 36% to 63,713 during 2008, compared to 46,717 reports in 2007, according to the Federal Bureau of Investigation's 2008 Mortgage Fraud Report. While the total dollar loss attributed to mortgage fraud is unknown, financial institutions reported losses of at least $1.4 billion, an increase of 83.4% from 2007. The report showed that more than 3.1 million foreclosure filings were reported on approximately 2.3 million properties nationally during 2008, up 81% from 2007 and 225% from 2006. As of 2008, the Western region of the U.S. had the most pending FBI mortgage fraud-related investigations. According to the FBI's report, the top 10 mortgage fraud states for 2008 were California, Illinois, Texas, Georgia, Ohio, Colorado, Maryland, Florida, Missouri and New York. Rhode Island, Massachusetts, Pennsylvania and the District of Columbia were newly identified as having significant mortgage fraud problems.

Jonathan Boxman, an owner and operator of New York-based real estate title insurance companies, was charged in federal court in Brooklyn with defrauding his companies' clients of more than $1.7 million. According to Benton J. Campbell, U.S. attorney for the Eastern District of New York, Mr. Boxman — who was unavailable for comment — controlled a real estate title insurance company in New York and other title abstract companies. Through his companies and bank accounts, Mr. Boxman received fees for recording mortgages and deeds, which, in turn, he was supposed to remit to the county where the deed or mortgage was recorded. However, instead of paying the fees to the counties, he allegedly transferred the money to accounts he controlled and used it to pay his companies' operating expenses and to cover thefts from prior victims of his scheme. As a result of his alleged scheme, several mortgages and deeds were never recorded.

Though the banking industry has a strong chance of defeating the Obama administration's call to eliminate the thrift charter, its arguments for defending it appear weaker than ever. According to a report in American Banker, two of the primary reasons for preserving the charter — stronger preemption powers and broader interstate branching rights — appear headed for the chopping block, and the third — a focus on mortgage lending — is now increasingly suspect. Many observers doubt the wisdom of keeping a charter that focuses primarily on real estate lending, arguing that thrifts caused the savings and loan crisis and helped fuel the current crisis. "Why do you need it?" said Chuck Muckenfuss, a partner at Gibson, Dunn & Crutcher LLP. "It has certain restrictions in it, and so why not just make it one better charter in which you can do whatever you want to do? That's pretty compelling."

Dyck-O'Neal of Arlington, Texas, a national debt collection agency, has been slapped with a cease and desist order by regulators in Georgia for engaging in loan brokering/lending activities without a license or obtaining the proper exemption. At press time the company had not returned a telephone call about the matter. Among its many services, Dyck-O'Neal purchases and serves as a collection agent on first and second mortgage liens.

After being convicted of 51 counts of conspiracy, fraud and money laundering in connection with a mortgage fraud scheme, Harold Stafford of Sumner County, Tenn., has been sentenced to eight years in prison, followed by three years of supervised release. His co-defendants, Miles Jackson Black and Jeffrey Dunn Hathcock, also from Sumner County, were each sentenced to a year and a day in prison, followed by five years of supervised release. All three defendants were ordered to jointly pay $1 million in restitution and a special assessment of $5,100. According to the U.S. attorney's office for the Middle District of Tennessee, Stafford engaged in a scheme that involved the purchase of 22 luxury homes in Hendersonville, Gallatin and Goodlettsville through unqualified straw buyers. Stafford, Black and Hathcock caused the submission of false mortgage loan applications to lenders that overstated the straw buyers' income, falsely stated that the homes would be the straw buyers' primary residences and failed to disclose other recent home purchases by the same straw buyers. All of these mortgage loans ended in default and foreclosure, resulting in losses to mortgage lenders, after foreclosure, totaling $2,214,700.

Beazer Homes USA Inc., Atlanta, has agreed to pay the United States $5 million, plus contingent payments of up to $48 million to be shared with victimized private homeowners, to resolve allegations that it and Beazer Mortgage Corp. were involved in fraudulent mortgage origination activities in connection with federally insured mortgages. The settlement resolves the following allegations: that, when Beazer Mortgage Corp. made Federal Housing Administration-insured mortgage loans for homes built by Beazer Homes, the companies fraudulently and improperly required purchasers to pay interest discount points at closing but then kept the cash and failed to reduce interest rates; that it provided cash gifts to home purchasers through certain charities so purchasers could come up with minimum required down payments, with assurances the gifts would not have to be repaid, and then increased home purchase prices to offset the amount of the gifts; that it obscured which of its branches made defaulting loans to avoid FHA detection of excessive default rates; and that it ignored stated income requirements in making loans to unqualified purchasers. Beazer Homes operates in at least 21 states.

The Title/Appraisal Vendor Management Association has sent a three-page letter to the National Association of Mortgage Brokers stating its attacks on appraisal management companies in the fight over the Home Valuation Code of Conduct are baseless. "Everyone in the industry knows there were serious problems with the collateral valuation part of the business," said Jeff Schurman, TAVMA executive director. "Maintaining an arms-length relationship between the loan originator and appraiser is the centerpiece of the HVCC. To characterize AMCs as the centerpiece of the Code is simply false." He added that there is no tangible data to suggest that AMCs are the problem. Instead, the real issue is that New York Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac felt that loan originators whose compensation depended upon the loan closing were trying to improperly influence appraisers, Mr. Schurman said.

The Department of Housing and Urban Development is revising its appraisal policies on Federal Housing Administration-insured loans with respect to appraisal management companies, according to an agency spokesman. Appraisal groups have been complaining that HUD's restrictions on appraisal fees and the lenders' increasing reliance on AMCs is driving many experienced appraisers away from taking assignments that involve Federal Housing Administration-insured loans. "The loss of these seasoned professionals is adding unnecessary and substantial risk to the FHA program," according to four appraisal trade groups which sent a letter to HUD secretary Shaun Donovan. "We already have a mortgagee letter in the clearance process addressing this issue," the HUD spokesman said. FHA borrowers are expected to pay no more than the "customary fee" for an appraisal, according to a 1997 HUD mortgagee letter on appraisal management companies. To cover their management fees, AMC hires appraisers that will accept a reduced fee, according to the appraisal coalition. As a result, "the consumer is receiving a much lower level of service - often from appraisers who do not know the local market - in many cases," the coalition says in its letter to HUD. The Appraisal Institute, American Society of Appraisers, American Society of Farm and Rural Appraisers and National Association of Independent Fee Appraisers signed the letter.