Compliance & Regulation

Milton H. Ohlsen III, of St. Louis, pleaded guilty before U.S. District Judge Henry Autrey to bank fraud after overstating his income on his home mortgage application. In 2000, Ohlsen originally financed his North Ballas Road residence with two loans totaling $302,000. In 2002, Olsen refinanced with Merrill Lynch Corp. for $307,000, and in 2006 obtained another loan from Merrill Lynch for $150,000 for the same home. In 2007, Olsen again refinanced the home with two loans, one for $470,000 from Countrywide and $175,000 from Guaranty Bank, which paid off the previous Merrill Lynch loans. On both of the June 2007 loans Ohlsen falsified the loan applications to Countrywide and Guaranty Bank, stating that his monthly income was $15,000, when in fact it was substantially less. In August 2007, Countrywide assumed the total line of credit from Guaranty Bank. Shortly after, Ohlsen became delinquent in his monthly payments on the original Countrywide and Guaranty loans. In May 2008 Ohlsen was in default on these loans, and in June 2008, he filed bankruptcy. Separately, Ohlsen also pleaded guilty to an illegal firearms charge. Sentencing is scheduled for August 11.

A federal jury found Richard N. Garries of Newport News, Va., guilty of all 24 charges against him related to an elaborate mortgage fraud scheme. According Dana J. Boente, U.S. attorney for the Eastern District of Virginia, Garries conspired with others to make money through the flipping of residential properties. He brought in buyers through false promises that the properties had been renovated, renters had been arranged for the properties, buyers would not have to spend their own funds and that buyers would be provided with cash back at closing. To secure mortgage loans for buyers, Garries inflated the buyers' income on applications and provided them with money to make it appear they had more funds available to qualify for a loan. At the time of the offense, Garries was on probation from a previous federal conviction for wire fraud for which he received a 25-month sentence. Following his release, Garries made numerous false statements to his probation officer concealing income and assets while on probation. Sentencing is scheduled for late summer.

A Taylor, Bean & Whitaker-led rescue of Colonial Bancgroup -- the nation's largest warehouse lender -- was set to be finalized by Friday evening, according to TBW chairman Lee Farkas. In an interview with National Mortgage News Mr. Farkas said "it looks like it's going to go through, yes." TBW is waiting on final signed documents from some of its partners. He noted that Colonial was preparing a press release about the deal and that TBW's other investors in the $300 million capital infusion would be revealed. With the cash infusion finalized, Colonial will then be eligible for $550 million in Troubled Asset Relief Funds from the Treasury Department. At the end of March Colonial was the nation's largest warehouse provider with $4 billion in commitments, according to NMN. Mr. Farkas likely will sit on Colonial's board. He noted that the bank will most definitely continue as a warehouse provider. "It's a good business for them," he said. "They made good money on it last year." Colonial also is a warehouse lender to TBW, the nation's eighth largest residential funder, according to the Quarterly Data Report. Over the past few weeks some analysts that follow the bank raised concerns that the deal might not go through. The Alabama-based bank reported a net loss of $168 million for the quarter ended March 31. Late this past week its shares were trading at $1.36 compared to a 52-week high of $10. It has been burned by a severe downturn in the commercial construction lending, especially in the southeast.

The Treasury Inspector General has concluded that the backdating of capital infusions into six federally chartered thrifts was "inappropriate" and allowed misleading financial reporting by the thrifts. The Office of Inspector General's investigation of the backdating incidents has already resulted in the Office of Thrift Supervision placing two high ranking officials on administrative leave. "We consider these matters very serious and find it alarming that such high level OTS officials were not only aware of the backdating at two thrifts, but either directed or authorized the thrifts to backdate these contributions," said OIG audit director Susan Barron in a report. One case involved the failed IndyMac Bank in Pasadena, Calif. Its holding company made an $18 million capital contribution on May 9, 2008 that was included in the thrift's first quarter financial report. IndyMac was closed in July after a run on the bank. OTS spokesman William Ruberry said all six transactions would have been acceptable under the accounting rules if a "valid note receivable" had been recorded. He noted that OTS has taken the "necessary actions" to address the IG's concerns.

Dominick Devito has been sentenced to 51 months in prison and ordered to forfeit $1.4 million for mortgage fraud and other charges. According to the U.S. attorney's office for the Southern District of New York, Devito was the leader of a fraudulent real estate investment scheme that purchased multimillion-dollar residential properties around Westchester County , N.Y., from January 2002 through November 2004 and used false and misleading information to obtain loans from banks and other lenders. Devito identified properties for sale, orchestrated the purchase of the properties, and performed construction work at the properties. Devito's co-defendant John Liscio was sentenced in March to 12 months in prison and three years of supervised release and ordered to pay $50,000 in restitution. Devito's other co-defendant, Robert Didonato, was sentenced in April to 18 months in prison and three years of supervised release and ordered to pay $18,000 in restitution and to forfeit $112,000. The last remaining defendant, Louis Cordasco, Jr., is scheduled for sentencing on May 27.

The Treasury Department has agreed to invest $7.5 billion in GMAC Financial Services, the parent company of the nation's sixth largest residential servicer. Announced late Thursday, the investment is coupled with Federal Deposit Insurance Corp. approval for GMAC to sell newly issued senior unsecured debt with government backing. GMAC has already received $5 billion in TARP funds. Until the new investment was extended, GMAC was on the hook to raise $11.5 billion of capital within six months. Now it needs to raise $5.6 billion, it said. GMAC is a bank holding company. It recently changed the name of its depository to Ally Bank from GM Bank. Ally makes warehouse lines of credit to non-depository mortgage firms. Over the past year GMAC has closed the retail branch arm of its Residential Capital Corp. affiliate and exited the wholesale channel. Over the past year ResCap's owned servicing portfolio has fallen by 20% to $365 billion in housing receivables, according to the Quarterly Data Report. In other TARP-related news, a new report from Morgan Stanley says many banks will repay their government bailout funds by the fourth quarter of 2009.

The Senate confirmed Michael Barr as Treasury assistant secretary for financial institutions where he will play a key role in reforming the nation's mortgage finance system. A former professor of law at Michigan University and senior fellow at the Brookings Institution, Mr. Barr served as a special assistant to former Treasury secretary Robert Rubin in the Clinton administration. He has been working in the White House since January and is now the only confirmed Treasury official working in the agency's Office of Domestic Finance. At a congressional hearing, Treasury secretary Timothy Geithner said ODF will devise a new financial regulatory structure and work on "tough problems" including the future of Fannie Mae and Freddie Mac. Mr. Geithner also noted that Treasury plans to release proposals for regulatory reform in the coming weeks. The administration is considering the creation of a consumer protection agency that might regulate all mortgage lending with enforcement powers of all residential funders regardless of charter. But the secretary stressed that he has not committed to that concept yet.

The yield on the benchmark 10-year Treasury has been creeping up again and at mid-day was at 3.4%, putting upward pressure on mortgage rates. It's the first time in several months that the yield on the 10-year has been that high. On Thursday the 10-year closed at 3.2%. "The Treasury market suffered a severe sell off," Jefferies & Co. said in a Friday morning report. The report said some of the selling was the result of concern over Standard & Poor's decision to put the United Kingdom on negative watch from a ratings perspective, which put pressure on U.K. government bonds. Comments made by influential investment fund executive Bill Gross also hurt the market. Mr. Gross predicted that the U.S. may "eventually" suffer the same fate as the U.K.

A group of private equity investors led by former North Fork Bank chief John Kanas bought ailing payment option ARM investor BankUnited of Florida in a federally assisted transaction where the government could share in losses on up to 84% of its assets. Several different private equity funds are part of the investor group including one headed by Wilbur Ross, who has already bought two large residential servicing companies, both on the cheap. One investment banking source said BU's $4.9 billion in payment option ARMs might eventually be serviced by Mr. Ross' American Home Mortgage in Irving, Texas. Another investor in the consortium is Centerbridge Capital Partners, which owns Green Tree Servicing of Minneapolis. The Kanas group bought the $12.8 billion asset BankUnited FSB of Coral Gables (along with $8.3 billion in non-brokered deposits) Thursday night for $900 million. Other investors in the Kanas group include: Carlyle Investment Management, Blackstone Capital, the LeFrak Organization, The Wellcome Trust, Greenaap Investments, and East Rock Endowment Fund. The Federal Deposit Insurance Corp. had been entertaining bids on BankUnited for several weeks. On Thursday night the Office of Thrift Supervision officially took control of the thrift and handed it over to the FDIC. Its failure will cost the government insurance fund at least $5 billion. Two other investors bidding for the thrift included J.C. Flowers & Co., and Toronto-Dominion Bank of Canada. North Fork Bank was sold to credit card giant Capital One three years ago.

The Department of Housing and Urban Development has kicked 102 lenders out of the Federal Housing Administration single-family program for various violations and the new housing secretary is promising to get tough on lenders that do not meet the highest standards of conduct. "We expect that when they deal with an FHA-approved lender, they're dealing with a lender they can trust," HUD secretary Shaun Donovan said. In one action, HUD's Mortgagee Review Board suspended Hogar Mortgage and Financial Services from making FHA loans for five years and imposed a $151,000 civil money penalty on the Montvale, N.J. lender. The company could not be reached for comment. The Mortgagee Board determined that Hogar committed serious violations of FHA underwriting requirements. Prior to its suspension in late January, the New Jersey lender had originated 680 FHA loans over the previous two years with 19 defaulting or resulting in a claim. The average FHA default and claim rate is 4.43%, according to the FHA's Neighborhood Watch early warning system. The housing bill (S. 896) that President Obama signed on Thursday imposes stricter reviews of lenders seeking to become FHA-approved lenders. It allows HUD to levy CMP against non-approved lenders participating in FHA originations. The new law requires all FHA lenders to use their official names on advertisements as a way to deter and detect deceptive advertising.