Compliance & Regulation

U.S. District Judge Michael M. Baylson sentenced Mahn Huu Doan, a.k.a. "Bruce Doan" of Philadelphia, to 151 months in prison, followed by three years of supervised release, for a mortgage fraud and identity theft scheme. According to Michael L. Levy, U.S. attorney for the Eastern District of Pennsylvania, Doan, a self-described real estate investor, would purchase houses, using false or borrowed identities, and using government insured loans, which he secured using fraudulent information. Doan's scheme also involved fraudulent appraisals that inflated the value of the houses for the purpose of reselling the properties for a higher profit. In addition to the prison term, Judge Baylson also ordered Doan to pay more than $5 million in restitution, a $5,000 fine and a $400 special assessment.

The First Magnus Litigation Trust and StoneWater Mortgage have entered into a settlement that will dismiss with prejudice claims against the mortgage company, its related companies, current officers, directors and employees. Under the terms of the agreement, both sides admitted no fault. No other terms were disclosed. The lead counsel for the First Magnus Litigation Trust, Jamie R. Welton, said in a statement "the settlement reached with StoneWater is a good result for the creditors and increases the assets from which they may be paid." Among those who are involved in the settlement is current StoneWater president Doug Lemke. However former First Magnus and/or StoneWater executives Gurpreet S. Jaggi, Thomas W. Sullivan Sr., Thomas W. Sullivan Jr., Clinton W. Gaylord, Gary K. Malis, Dominick Marchetti and Karl F.W. Young are still active defendants in the lawsuit. The suit alleges the seven men stripped $300 million from First Magnus, prior to its filing for bankruptcy, to start StoneWater, which they deny.

Homeowners and mortgage investors would not be the only ones with "skin in the game" if U.S. Housing Secretary Shaun Donovan's plan for revising the nation's consumer protection laws comes to pass. The secretary of the Department of Housing and Urban Development told the NAREE conference that "fairness" would be a "fundamental principle" that the Consumer Financial Protection Agency proposed by the Obama Administration would follow. Under that heading, he said, mortgage brokers would "owe a duty of best execution" to avoid conflicts of interest between themselves and their borrower clients. In addition, yield spread premiums would be "banned outright" and prepayment penalties would be restricted. And to reward responsible lending, loan originators would be required to retain a vested interest in the mortgages they write. Brokers would be paid "over time" based on the continued performance of the loans they originate rather than at the closing table. At the same time, lenders and mortgage aggregators would be compelled to retain a 5% interest in the loans so they would be rewarded for making good loans and penalized for making bad ones. The HUD secretary said neither he nor President Obama had any desire to prescribe exactly how brokers should be paid. But they "have to have a duty" to provide affordable products. "Putting a borrower in a mortgage (the broker) knew from day one that the borrower could not afford cannot be allowed to continue," he told the conference. "There has to be a chain there to tie some responsibility to the mortgage to ensure that this kind of situation doesn't ever happen again." None of what secretary Donovan proposed is new, but it is the first time the proposals have been adopted by a key government official.

The Obama Administration expects Fannie Mae and Freddie Mac to continue playing a key role in housing finance, the government sponsored enterprises' regulator said. While exactly what structure the GSEs will eventually take is still very much up in the air, James Lockhart, director of the recently minted Federal Housing Finance Agency, said they will be reconstituted with a well-defined mission that does not involve excessive risk taking. That's likely to mean the two companies, which are now in conservatorship and under FHFA's wing, will no longer be required to meet affordable housing goals that were prescribed by their old mission regulator, the Department of Housing and Urban Development. "In retrospect," Mr. Lockhart told attendees at the National Association of Real Estate Editors' annual real estate journalism conference in Washington that the goals "caused (Fannie Mae and Freddie Mac) to do things they shouldn't have done." The federal regulator also said the GSEs should operate under "clear demarcation" of their roles in relation to the private sector, and that any risk they undertake should be explicit, at actuarial cost and in conjunction with sound insurance principles. "Clearly," he said, "it was folly to allow the enterprises to legally leverage their mortgage credit by well over 100 to 1."

Net worth requirements for Federal Housing Administration lenders and brokers need to be raised, Mortgage Bankers Association David Kittle said at a House Financial Services subcommittee hearing. Higher requirements, he said, allow for lenders and brokers to be held accountable for their actions. "Specifically, we recommend that mortgage bankers should have a minimum corporate net worth of the greater of $500,000 or 1% of FHA loan volume up to a maximum of $1.5 million. Mortgage brokers should have a minimum corporate net worth of the greater of $150,000 or half of one percent of FHA loan volume up to the minimum for mortgage bankers. MBA supports mortgage bankers and brokers maintaining a bond sufficient to provide reasonable protection to consumers and taxpayers," Mr. Kittle's prepared testimony said. He added MBA supports a permanent increase in the FHA limit to $625,500, and in high-cost area, it should be raised to $729,750.

Mortgage market players and other securitization market participants say they largely agree with the Obama Administration plan's aims but have some concerns about the way in which it plans to realign incentives and its global context. "While we support policy initiatives to align economic incentives among securitization market participants and to achieve greater risk transparency, we believe that mandated retention of risk by asset originators and securitization sponsors may not be the most effective way to achieve this goal," said American Securitization Forum executive director George Miller in response to the regulatory reform proposal. "To the extent risk retention is required, we believe provisions must be designed carefully to avoid undue restrictions on the ability to fund consumer and business lending via securitization, which could impair broader economic recovery." He also noted that "international consistency on this topic is critically important" given the global nature of the capital markets and the fact that European policymakers also have been working on risk retention policies. "We acknowledge that there were misuses of securitization that need to be corrected," Mr. Miller said. "However securitization is a central means of delivering affordable credit to consumers and businesses that has produced ... benefits over the past 40 years [that] include increased availability and reduced cost of financing for mortgage loans."

The National Association of Mortgage Brokers said the financial reform plan proposed by President Obama is flawed because it attempts to tie mortgage broker compensation to the long-term performance of securitized loans. The proposal shifts the risk of poor underwriting from the mortgage lender to the mortgage broker "without an increase in compensation for that shift," said NAMB president Marc Savitt in a statement. The group said it welcomes transparency and the proposed Consumer Financial Protection Agency would provide that and level the playing field. However, "proposals to standardize mortgage products could have serious consequences for consumers shopping to find the most suitable and cost effective loan," Mr. Savitt said. The Center for Responsible Lending said it supports the creation of CFMA. "The same rules must apply to similar products across all financial institutions. Such consistency is only fair. And we strongly support the position that states must be free to make and enforce laws that are even stronger than those set by the federal agency when they determine that's necessary to protect their own residents," said CRL president Michael Calhoun.

After pleading guilty to defrauding several mortgage lending companies, a couple from Oak Grove, Minn., has recently been sentenced. Michelle M. Niska has been sentenced to 36 months in prison and three years of supervised release. Robert G. Bock has been sentenced to 10 months of confinement in a halfway house and three years of supervised release. According to their respective plea agreements, Bock and Niska borrowed $593,740 and granted the lender a mortgage on their jointly owned home. Niska filed a document with the county recorder's office purporting to be a satisfaction of the mortgage the defendants had granted to the lender, even though the defendants had not paid off the loan. The couple then sold the home to a third party for $675,000 and admitted that they knew the title company that closed the home's sale should have used the third-party buyer's loan proceeds to pay off the loan, but instead allowed the title company to believe that the loan had been repaid. The defendants then pocketed proceeds from the sale, amounting to $510,000.

Spring is in the air in the Houston metro area, where the number of single-family house sales in May was the most of any month so far this year, according to the local Realtors group. While single-family sales for May were still 21.2% below that of the same month last year, the average price climbed to $213,474, the highest it's been since August. Another promising sign, says the Houston Association of Realtors: foreclosure sales continued to shrink in May. Repossessions accounted for just 20% of all sales in the month, compared to 34% in January, 28% in February, 24.5% in March and 23.6% in April. Overall, 5,539 properties of all types, totaling $1.1 billion, changed hands in the metro area in May. "The more I speak with real estate associations around the country, the more I appreciate the strength with which the Houston market has weathered the economic downturn," said HAR Chair Vicki Fullerton, a RE/MAX broker in The Woodlands. "Our current housing climate has been performing at about 2004 levels while other regions of the U.S. are suffering what Houston endured back in the 1980s." However, month-end pending sales — those listings expected to close within the next 30 days — totaled just 3,637, which was 24.7% lower than last year, suggesting a decline in sales when the June numbers are tallied.

The Federal Reserve's purchases of mortgage-backed securities are affecting the supply-demand balance of MBS collateral in the repurchase markets, according to a Barclays Capital report. This has narrowed the one-month term repo MBS spread to Treasury collateral to 2 basis points from 14 bps in March when the Fed began its purchases, according to a June 15 report by Joseph Abate, a U.S. fixed income strategist at Barclays Capital. "At the same time, usage of the Federal Reserve's [Term Securities Lending Facility] for schedule one collateral (essentially MBS) has evaporated, with no bids at any of the collateral swap auctions for several weeks," said Mr. Abate, in his Weekly Collateral Update report.