Compliance & Regulation

Two-thirds of the AAA-rated private-label MBS purchased by Fannie Mae and Freddie Mae have been downgraded to "junk," the GSEs' regulator told a congressional panel, and only a small portion is still rated AAA. Federal Housing Finance Agency director James Lockhart told a House Financial Services subcommittee the two government sponsored enterprises have $171.3 billion in PLS backed by Alt-A, subprime and other mortgages in their investment portfolios. Only 3% remain AAA and not on downward watch, Mr. Lockhart said. Another 11% remain AAA-rated but are on downgrade watch as of May 28. Meanwhile, 68% of the private label-MBS has been downgraded below investment grade, which is sometimes referred to as "junk" bonds. An additional 17% has been downgraded but remain investment grade, according to FHFA. "There is no doubt [the credit rating agencies] failed" in rating these securities," Mr. Lockhart said at the June 4 hearing. "We need to reform the rating agencies and we need to get them back to rating and not consulting and getting fees for structuring bonds," he said. Impairments on the MBS resulted in Fannie recognizing $6 billion in losses in the first quarter and Freddie recognizing $7 billion in losses.

Former real estate broker Kathy Chen, her ex-boyfriend Richard Salgado Gonzalez and his brother Daniel Gonzalez have been charged with running a $17.5 million mortgage fraud scheme by the Orange County District Attorney's Office. The trio allegedly recruited and paid straw buyers to obtain mortgage loans for the purchase of multiple properties. Between 2005 and 2007, the defendants allegedly obtained 47 fraudulent loans in excess of $17.5 million on 35 California properties, including 13 in Orange County, 16 in San Bernardino County and six in Kern County. The defendants, none of whom were available for comment, allegedly acquired licenses for nonexistent businesses under the pretense that straw buyers owned the businesses to make them eligible for higher income loans. They are accused of fabricating loan applications to reflect higher incomes for the straw buyers, forging the names and signatures of straw buyers on various deeds and loan documents and forging the seal and notary stamp on notarized documents and deeds, which were filed with the Orange County Clerk-Recorder's Department. The defendants used the straw buyers' credit information on several occasions without their knowledge or consent, prosecutors say. After initially making monthly payments on the loans, they defaulted and kept the excess money, according to investigators. Ms. Chen was arrested on June 1 on a $3 million warrant. A warrant has been issued for the Gonzalez brothers, who may be living in Puerto Vallarta, Mexico.

Mortgage companies are scrambling to implement an over-looked Truth-in-Lending Act rule that goes into effect July 30 requiring timely delivery of the good faith estimate on home purchases, refinancings, and home equity loans. On applications taken after July 29, lenders must deliver the GFE to the borrower within three business days and they cannot collect any fees before delivery — except for the credit report. The TILA rule also requires lenders to "wait seven business days after they provide the early disclosures before closing the loan," according to the Federal Reserve Board. If the financing charges or annual percentage rate changes, the lender must provide a new disclosure with the revised APR "and wait another three business days before closing the loan," the Fed says. Consumers can waive this three-day waiting period in emergency situations such as a foreclosure. The Fed approved the rule on May 8. The FDIC recently reminded lenders about banks about the rule.

A Republican Congressman from New Jersey is working on legislation to facilitate the issuance of covered bonds in this country and create a market for these bonds that are collateralized by mortgages which remain in the issuing bank's portfolio. "This type of securitization is widely used in Europe to provide liquidity to their mortgage markets and I believe they could be very effective in increasing mortgage funding in the U.S.," Rep. Scott Garrett said at a House Financial Services Committee hearing. He noted that committee chairman Barney Frank, D-Mass., is planning to hold a hearing on covered bonds. The hearing has not been scheduled yet. The Treasury Department has issued guidance on covered bonds and the Federal Deposit Insurance Corp. issued a policy statement on covered bonds in August 2008. But Rep. Garrett contends that investors need more assurance that FDIC will not repudiate a covered bond if an issuing bank fails. A spokeswoman for Rep. Garrett noted that a covered bonds statute would provide more certainty than any regulatory change. "And the certainty could lower transaction costs because the investors and issuers aren't going to be pricing for the uncertainty," spokeswoman Erica Elliott said.

Rising interest rates have already impacted mortgage refinancings and could undermine the housing recovery, according to a senior economist at Wells Fargo & Co. "Just as we are hitting bottom in the housing market, there is a lot of uncertainty about how strong the recovery will be," said Scott Anderson, senior economist at Wells Fargo. The May jobs report shows that job losses slowed to 345,000 a month, compared to 700,000 during the winter. "It's a good sign and it bolsters the argument the housing market should bottom in terms of sales and perhaps in starts" possibly in June or July, he said. However, the Federal Reserve is struggling to keep mortgage rates low, he said. Refinancing activity has dropped off. "Home purchase activity could wallow at moribund levels," Mr. Anderson said.

Angelo Mozilo, the founder and former chairman/CEO of Countrywide Financial Corp. — and an icon in the industry for many years — was slapped with a massive civil fraud complaint by the Securities and Exchange Commission on Thursday afternoon, accused of deliberately misleading investors in the company's stock and engaging in insider trading. David Siegal, Mr. Mozilo's attorney released a statement calling the SEC charges "baseless," adding that the lender's risks "were well disclosed to and understood by the marketplace." The SEC also sued former CFC executives David Sambol and Eric Sieracki, accusing them and Mr. Mozilo of "falsely assuring investors" that Countrywide was funding "primarily" prime quality loans and had avoided the excesses of its competitors. The two men could not be reached for comment. Last summer Bank of America bought CFC for a few dollars a share compared to a one-time high of $40. The agency released a memo that Mr. Mozilo wrote in April 2006 where he refers to Countrywide's subprime business as "the poison of ours." According to figures compiled by National Mortgage News Countrywide was the nation's largest subprime lender and servicer during its final years of operation, but had not made a serious run at A- to D lending until the early 2000s. The agency accuses him of selling $140 million of stock from November 2006 until August 2007 while "he was aware of material, non-public information concerning Countrywide's increasing credit risk." In past interviews with NMN Mr. Mozilo maintained that his stock sales were legal and followed the rule of law. In March 2007 he told this newspaper that he was selling the stock in question, noting, "I have almost all my personal net worth tied up in the company." He defended the sales, saying "I have created $25 billion in value for the shareholders. It's been one of the best performing stocks on the New York Stock Exchange. I gave them 98% of the value and took 2%. And they [the shareholders] didn't have to do the work. I did it for them."

In charging former Countrywide CEO Angelo Mozilo with fraud, the Securities and Exchange Commission is zeroing in on the lender's payment option ARM business, a controversial product that Mr. Mozilo initially embraced and then later cursed. According to figures collected by National Mortgage News Countrywide Financial Corp. was the nation's largest POA lender in 2006, a year in which Mr. Mozilo wrote several memos cited by the SEC in its complaint. (CFC was also the largest POA funder in 2007, originating a record $86 billion in these notes which eventually can become negatively amortizing.) In one memo Mr. Mozilo laments that CFC has "no way, with reasonable certainty, to assess the real risk of holding" POAs on its balance sheet. He adds that by putting so many loans on CFC's books "we are flying blind on how these loans will perform in a stressed environment." One loan broker who funded POAs for CFC told this newspaper that the loans were hugely profitable for the company because of all the points it charged on them. When CFC was eventually sold to Bank of America last year it had $80 billion in loans on its balance sheet -- including POAs and second liens. The SEC accuses Mr. Mozilo of knowing how risky these products were but without sharing his opinions with investors. "Concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk," said SEC director of enforcement Robert Khuzami. During CFC's last year of operations, the lender began sending out warning letters to borrowers who were choosing the 'neg am' option on POAs, telling them of the risks.

A Republican Congressman from New Jersey is working on legislation to facilitate the issuance of covered bonds in this country and create a market for these bonds that are collateralized by mortgages which remain in the issuing bank's portfolio. "This type of securitization is widely used in Europe to provide liquidity to their mortgage markets and I believe they could be very effective in increasing mortgage funding in the U.S.," Rep. Scott Garrett said at a House Financial Services Committee hearing. He noted that committee chairman Barney Frank, D-Mass., is planning to hold a hearing on covered bonds. The hearing has not been scheduled yet. The Treasury Department has issued guidance on covered bonds and the Federal Deposit Insurance Corp. issued a policy statement on covered bonds in August 2008. But Rep. Garrett contends that investors need more assurance that FDIC will not repudiate a covered bond if an issuing bank fails. A spokeswoman for Rep. Garrett noted that a covered bonds statute would provide more certainty than any regulatory change. "And the certainty could lower transaction costs because the investors and issuers aren't going to be pricing for the uncertainty," spokeswoman Erica Elliott said.

After pleading guilty to facilitating the fraudulent sale of seven residential properties through straw buyers, U.S. District Court Judge Marcia Cooke has sentenced Jose G. Martin to 65 months in federal prison, followed by three years of supervised release. Judge Cooke also ordered a restitution hearing to determine the identity of the victims to be paid by Martin in connection with the $3.2 million in losses that resulted from his participation in the scheme. According to R. Alexander Acosta, U.S. attorney for the Southern District of Florida, Martin was arrested in January 2009 for his involvement in a mortgage fraud scheme that resulted in more than $6.6 million in fraudulent loans and pleaded guilty in April. At closings, Martin submitted fraudulent invoices for construction work on these properties and received hundreds of thousands of dollars as payment for construction work that was never performed. Martin then distributed these proceeds to himself, the straw buyers and other co-conspirators. After closings, Martin and the straw buyers failed to make payments on the mortgages to the victim lenders and the properties went into foreclosure. In one instance, Martin flipped a property in Coral Gables, Fla., three times in two years, more than doubling the price of the property to $1.2 million from $550,000. In the course of the Coral Gables property flips, Martin diverted to himself $450,000 for construction work purportedly performed on this property. In addition, Martin paid off three straw buyers of this property, none of whom ever intended to live in the property or pay the mortgages. Ultimately, the Coral Gables property went into foreclosure, resulting in significant losses to the lender.

GMAC Financial Services said it has priced $4.5 billion of debt guaranteed by the Federal Deposit Insurance Corp. through the agency's Temporary Liquidity Guarantee Program. GMAC, the parent of Residential Capital Corp., the nation's fifth largest mortgage servicer, said the offering will further improve its liquidity position. The securities offering included $3.5 billion of senior fixed-rate notes and $1 billion of senior floating rate notes. The debt comes due in December 2012. In May 2009, GMAC received regulatory approval to participate in the TLGP for up to $7.4 billion. Earlier this year the company received a $5 billion infusion through the Treasury Department's TARP program.