Compliance & Regulation

Peter Affatati of Coral Springs, Fla., has been sentenced to 156 months in prison in federal court in West Palm Beach for his role in a multi-million dollar mortgage fraud scheme. Affatati was also ordered to pay restitution in the amount of $8.8 million. Affatati was charged with and pled guilty to orchestrating a $40 million mortgage fraud scheme that involved more than 50 residential mortgages, most of them in South Florida. Affatati used straw buyers to purchase the residential properties. Affatati used his title company to falsify the staw buyers' employment, income and asset information to qualify them for large mortgages from institutional lenders. Upon the funding of the mortgage, he diverted a large portion of the proceeds for his personal benefit. Affatati was also charged with defrauding a victim in North Carolina by selling to the victim fictitious securities in the amount of $390,000. The mortgage lenders suffered actual losses after the properties were foreclosed upon of more than $8 million.

Despite the pleas of mortgage bankers, the government sponsored agencies have no intention of lowering their guarantee fees, their representatives said at the Mortgage Bankers Association's National Secondary Market Conference in Chicago. "No," said Donald Bisenius, Freddie Mac's senior vice of single-family credit guarantee business, when asked by MBA chairman-elect Rob Story whether the GSEs are considering such a move. Thomas Lund, executive vice president of single-family mortgage business at Fannie Mae, said the current fee structure strikes a balance between providing liquidity to the mortgage market and protecting taxpayers from footing the bill for loans that go sour. Mr. Lund also pointed out that the guarantee fees charged by the GSEs are "still far below" those charged in the jumbo market by non-agency investors. Even though the overall credit profile of borrowers has improved, Mr. Bisenius told the meeting, the fees need to remain at their current levels because "the housing market is very, very fragile. Prices at best are flat, and still falling in many places. We need to balance against that risk." On a more positive note, the two GSE spokesmen also said that once their companies, which are in federal receivership, get up to speed on their purchase of conforming jumbo mortgages, the current 150 basis point spread in pricing "should shrink dramatically."

Mortgage brokers are staging a last-ditch lobbying effort to get Congress to block the implementation of a new appraisal code that applies to all loans sold to Fannie Mae and Freddie Mac. The new code, which goes into effect May 1, prohibits the government sponsored enterprises from purchasing mortgages if loan officers or mortgage brokers are involved in selecting appraisers or influencing the appraisal process. The National Association of Mortgage Brokers claims the GSE code will marginalize brokers and independent appraisers by encouraging major lenders to rely on "unregulated" appraisal management companies. "Please contact your Senators and Representatives today to urge them to stop or delay (for at least 12 months) the implementation of the Home Valuation Code of Conduct, which is de facto regulation, forced on Freddie Mac and Fannie Mae by New York Attorney General Andrew Cuomo," NAMB says in a "Call to Action" emailed to its members on April 16. "Please contact your legislators today at their in-district offices, as Congress currently is in recess." The appraisal management company model is "flawed," NAMB says, and it will produce "poor quality" appraisals at an increased cost to consumers.

Five Florida residents have been arrested for their alleged involvement in a criminal mortgage fraud operation that defrauded several financial institutions of $4.5 million. Emerio Lima, Inocencia Soto, Pedro Fornos and Josefa Herrera, all from Miami, and Stephen Zalka of Parkland, Fla., are facing charges of organized fraud, mortgage fraud and grand theft. They allegedly recruited straw buyers who lent their names and credit to purchase numerous properties. They were told that they wouldn't have to make any mortgage payments, since the properties would be flipped in a few months. The scheme also included a certified public accountant who allegedly provided falsified employment verification letters for the straw buyers. With the straw buyers lined up, HUD-1 statements with inflated sales prices were submitted to lenders for funding. The title agent, acting on behalf of the other co-conspirators, allegedly transferred the funds into a bank account of either a third party or a shell company controlled by one of the co-conspirators. The arrest affidavit identifies nine properties located in Miami-Dade, Broward, Lee and Charlotte counties, which were allegedly used by the defendants to facilitate their scheme. Most of the properties are now in foreclosure. The five defendants were unavailable for comment. According to the Attorney General's Office of Statewide Prosecution, the investigation is ongoing and additional arrests are expected.

The House Financial Services Committee is holding a hearing April 23 on a regulatory reform bill that would restrict nonprime mortgage lending and lender compensation. Committee chairman Barney Frank, D- Mass., originally wanted the committee to mark up and approve the bill (H.R. 1728) before Congress left April 6 for its two-week break. But the chairman agreed to postpone the markup due to objections by committee Republicans and industry groups. Now it appears the committee markup will be April 28 or April 29. The mortgage reform bill (H.R. 1728) requires lenders to retain 5% of the credit risk when they sell single-family loans that are not prime fixed-rate mortgages to investors. Lenders say the 5% is too high and they are looking for some middle on the risk retention issue. H.R. 1728 also restricts yield spread premiums and mortgage bankers are concerned the language is ambiguous and could restrict servicing release premiums.

GMAC Mortgage said it is hiring new staffers at its nationwide lending and servicing centers.On April 13, the company joined the Home Affordable Modification Program and the hires are needed to accommodate the increase in loan modifications, as well as the recent surge in refinance activity. Even before becoming formally part of the program, the Fort Washington, Pa., based company sent out more than 100,000 financial packages to homeowners who are potentially eligible for modifications under the new program. While the press release issued by GMAC Mortgage did not give a number for the new hires, other published reports say the company is adding 1,000 people. A call to GMAC Mortgage for confirmation was not returned by deadline.

Citigroup reported $1.9 billion in net credit losses on its residential mortgage portfolio in the first quarter, up from $887 million a year ago, due to a "continued rise" in delinquencies, the company said. The New York-based banking giant said the percentage of first mortgages 90 days or more past due jumped to 7.15%, up from 3% in first quarter of 2008. The single-family loans that Citi owns with FICO scores below 620 have a 13.7% serious delinquency rate. Meanwhile, Citigroup has a 3.25% serious delinquency rate on its home equity loans as of March 31, up from 1.45% a year ago. Citigroup said it originated $22.4 billion in residential mortgages in the first quarter, up from $16.6 billion in the previous quarter, but down 40% from the first quarter of 2008. Overall, Citigroup's North American consumer and mortgage banking units reported a $178 million loss for the first quarter. The company does not break out losses due to its residential mortgage business.

Residential mortgage originations at Wells Fargo and other banks receiving TARP assistance rose at a "healthy" clip in February from January, according to a monthly lending survey compiled by the Treasury Department.Single-family originations at Wells Fargo, for instance, totaled $34.8 billion in February, a 45% increase from the previous month. The bank ended the month with $75 billion of mortgages in its pipeline, according to the Treasury survey. Led by refinancings, the median increase in residential mortgage originations across the 21 TARP banks rose at a "healthy" rate, the lending survey says. Bank of America originated $28.7 billion in single-family loans in February, up 25% from January. Refinancings totaled $22.3 billion. Refinancings at Wells Fargo totaled $28.5 billion. Due to the large pipeline, the San Francisco-based bank said "strong funding levels are expected in March."

Homebuyer traffic is beginning to pick up in certain parts of the country, a sign that lower interest rates and tax credits are working, according to the Federal Reserve's new 'Beige Book.'Still, the government reports that residential prices, overall, are weak with home values and construction "still falling in most areas." The Fed reported this one positive note: "better-than-expected" buyer traffic led to a scattered pickup in sales in a number of its 12 regional districts. Districts seeing an increase in homebuyers include Atlanta, Kansas City, Minneapolis, Richmond and San Francisco. In the commercial real estate sector the outlook is negative: "Nonresidential real estate conditions to deteriorate," the Fed says. "Difficulty obtaining commercial real estate financing was constraining construction and investment activity." The government notes, however, that "Nonresidential construction is expected to decline through year-end, although there were some hopeful reports that the stimulus package may lead to some improvement."

Fannie Mae and Freddie Mac experienced a stunning 152% increase in loan delinquencies in the 90-days or more past due category, according to a new report by their regulator, the Federal Housing Finance Board. The late payment rate rose to 2.14% from 0.85%. Meanwhile, the agency's 'Foreclosure Prevention Report' shows the GSEs increased their assistance for troubled borrowers and suspended most foreclosures from November 26 into the first quarter of this year. The foreclosure suspensions caused 12,600 troubled loans to remain on the government sponsored enterprises' balance sheets in December — "increasing the 90-day plus delinquency rates," the GSE regulator said. Nevertheless, the two had 655,900 seriously delinquent loans on their books as of December 30, compared to 511,166 on October 31, a sequential increase of 28%. Fannie and Freddie completed 3,400 foreclosures in December, down substantially from 14,400 in November. Overall, they foreclosed on 34,845 properties in the fourth quarter, compared to 47,500 in the third quarter. Their real estate owned (REO) inventory declined 3% in the fourth quarter to 92,800.