Compliance & Regulation

Hours after last week's guilty plea in the $140 million fraud offense at U.S. Mortgage Corp., insurers for the bankrupt mortgage firm moved to cancel the company's surety bond, which would foreclose one potential source of recompense for some 30 credit unions victimized in the biggest fraud ever to hit the industry. In a motion filed with the U.S. Bankruptcy Court, Zurich American Insurance Co. and its Fidelity & Deposit Co. unit asked the court to allow it to cancel the bond it held for U.S. Mortgage and its CU National Mortgage subsidiary because the companies have ceased originating loans. "As such, U.S. Mortgage no longer requires the surety bonds to support or guarantee its business operations," the company said in a filing with the bankruptcy court on Friday. In addition, U.S. Mortgage stopped paying premiums on the bond after it filed for bankruptcy, voiding the policy, the insurer asserted. The filing came the day after Michael McGrath, the 46-year-old owner of U.S. Mortgage, pleaded guilty in federal court to siphoning $140 million from CU customers by selling their loans to Fannie Mae and pocketing the funds. McGrath has agreed to forfeit $13 million, leaving more than $125 million of CU funds unaccounted for. Authorities told The Credit Union Journal last week they believe McGrath gambled away those funds in the stock market over the past year, leaving virtually nothing for credit unions to recover. One stock he invested in was Fannie Mae, which now trades for less than 70 cents a share.

The Federal Housing Administration is implementing a new approval process for condominium projects. Effective as of Oct. 1, the FHA will allow lenders to determine project eligibility, review project documentation and certify that it is in compliance with Section 203(b) of the National Housing Act. Under the new rules, lenders will have two approval options for processing condo projects, either via the old HUD review and approval process or the new direct endorsement lender review and approval process, which is outlined in a 14-page mortgagee letter issued June 12. However, the direct processing option is available only "to lenders who have unconditional direct endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects." To be approved, the property must be created in full compliance with state law. Condo hotels, timeshares, houseboat and commercial projects are not eligible. The Mortgagee Letter gives particular relief to developers in Michigan, the only state in the country where single-family houses are built under a so-called "site condo" development law. Single-family site condos are encumbered by a declaration of condominium covenants or condominium form of ownership. About 90% of the state's houses are built as site condos, but under the Housing and Economic Recovery Act, the FHA could not insure mortgages on such units. Effective immediately, though, condo project approval is no longer required for site condos. "Without being able to offer FHA, we were out of business," says Michigan developer Stuart Michaelson of The Windmill Group.

Ryan Keith Miller of Lee's Summit, Mo., has pleaded guilty to mortgage fraud charges in U.S. District Court in Kansas City. Kansas. . According to Lanny Welch, U.S. attorney for the District of Kansas, Miller admitted to conspiring with others to fraudulently obtain mortgage loans on properties in Kansas and Missouri by submitting fraudulent loan applications and property appraisals to lenders to obtain money and then transferred the proceeds to bank accounts they controlled for their own use. Sentencing is set for Sept. 14.

The National Credit Union Administration has approved 'shared appreciation' loan modifications in which a credit union can share in the appreciation of any property for which it refinances a loan. The ruling — which came in a recently issued legal opinion — comes as millions of CU borrowers are at risk of foreclosure and are seeking to refinance their mortgages. Under a proposal emanating out of the Michigan Credit Union League, a member would agree to share any future increase in the home's appreciation with the credit union, in exchange for a reduction of the principal balance of the troubled borrower's outstanding loan. Shared appreciation would be based on a predetermined calculation and occur upon the sale of the property at a future date.

The Mortgage Bankers Association is losing yet another lobbyist, the second such departure in the past week. The trade group confirmed to NMN that Meghan Sullivan, who specializes in state mortgage-related legislation, will be leaving at the end of June. She holds the title of director of state legislative affairs. Her departure leaves MBA with just one manager to oversee state bills: Chris Oswald. The trade group said it has lobbyist/consultants "on the ground" to represent it in state capitals. "These are not staff people but consultants," she said. Earlier this week it was revealed that Francis Creighton, MBA's liaison on Capital Hill, was leaving to take a job with a Congressman. MBA will hire a replacement for Ms. Sullivan.

The nomination of David Stevens to be the new Federal Housing Administration commissioner appears to be in limbo while HUD investigates a RESPA complaint against his previous employer. The Department of Housing and Urban Development is conducting an investigation of Long & Foster — a mid-Atlantic real estate brokerage firm — for possible Real Estate Settlement Procedures Act violations. At a Senate Banking Committee meeting this past week, Sen. Richard Shelby, R-Ala., noted the HUD investigation is ongoing. "We don't know who is involved or what. We are waiting to see what comes out of the investigations," Sen. Shelby said. Committee chairman Christopher Dodd, D-Conn., said the nominee "comes highly recommended" for the FHA post. During his career Mr. Stevens also worked in executive positions at Freddie Mac and Wells Fargo Home Loans. Sen. Dodd urged caution and indicated he would like a bipartisan vote in moving the nomination along for confirmation by the full Senate. HUD general counsel Helen Kanovsky told Senators Dodd and Shelby in a letter that the RESPA complaints filed against Long & Foster neither "names nor alleges the personal involvement of David Stevens."

The founder and owner of U.S. Mortgage Corp. has pleaded guilty to a massive fraud that siphoned almost $140 million in funds from almost 30 credit union customers of the company's CU National Mortgage unit. Michael McGrath Jr. pleaded guilty late this past week to federal mail and wire fraud charges and money laundering, according to a report in The Credit Union Journal. Some of the money he took was invested in Fannie Mae common stock, the newspaper reported. Under his plea agreement, he faces between 12 to 20 years in prison when he's sentenced later this year. He also must pay restitution. However, authorities say they have only been able to track about $15 million of the missing money. CU National once provided origination and servicing for more than 120 credit unions. The company filed for bankruptcy in February as the fraud scheme unraveled and sold all of its mortgage servicing rights. Roughly 400 employees lost their jobs.

Because of inaccurate information provided by a Fannie Mae spokesman, a June 9 news brief misstated Fannie's plans for the HomeSaver Advance program. It is only taking on certification and custodial duties; collection agency Dyck O'Neal Inc., Arlington, Texas, will continue to service the unsecured loans.

Many Federal Reserve district banks are seeing an increase in home sales, according to the Fed's Beige Book. "A number of districts reported an uptick in home sales, and many said that new home construction appeared to be stabilizing at very low levels," the Beige Book says. The reporting district banks cited seasonal factors, low interest rates and declining house prices as well as the tax credit available for certain first-time homebuyers. They noted that, "much of the sales increase was found in the lower-priced end of the market." The New York and Cleveland Federal Reserve banks said they saw "strong demand" for refinancings. But the Richmond bank indicated there has been "waning" demand due to rising interest rates. Commercial real estate markets continued to "weaken," the Beige Books says, as rising vacancy rates have been putting downward pressure on rents.

The Department of Housing and Urban Development has suspended three lenders from originating Federal Housing Administration single-family loans while the agency completes investigations of their lending practices. HUD's Mortgagee Review Board placed Golden First Mortgage Corp. of Great Neck, N.Y., Great Country Mortgage Bankers, Inc. of Coral Gables, Fla., and Beneficial Mortgage Corporation of San Juan, P.R., on suspension. The board cited Golden First Mortgage and Beneficial Mortgage for failing to notify HUD of investigations of their operations by other regulators. Golden First Mortgage's president David Movtady is the subject of an Office of Thrift Supervision investigation, HUD said. Mr. Motvady, who is also the chairman of Golden First Bank, a $27.4 million-asset thrift, said the OTS allegations are "unfounded" and he continues to contest them. However, Golden First Mortgage has surrendered its FHA license and will suspend lending operations "until further notice," he said. Beneficial Mortgage failed to notify HUD of an investigation and sanctions imposed by the Puerto Rico commissioner of financial institutions, including revocation of license to originate mortgages, HUD said. In an audit of Great Country Mortgage Bankers, HUD said it discovered multiple violations of FHA requirements, including failure to ensure that employees worked exclusively for GCMB; failure to disclose business affiliations between GCMB and real estate and title service providers; and failure to properly verify key credit information in 55 FHA-insured mortgage loans. Executives from Beneficial Mortgage and GCMB did not return phone calls.