Compliance & Regulation

The Treasury Department is providing $9.9 billion to six major mortgage servicers for successful loan modification incentives that will be paid not only to them but to borrowers and investors. Administration officials asked Citigroup and JPMorgan Chase and the other companies participating in the Obama administration's loan modification program to estimate how many loans in their portfolios can be modified under the new program to determine the possible cost of the incentive payments. One source familiar with the situation told National Mortgage News that these firms have been lobbying Treasury hard for the incentive payments because they realize the fee income at stake is enormous. According to published reports, Chase Home Finance is receiving a $3.6 billion allotment, Wells Fargo Bank $2.87 billion, CitiMortgage $2.1 billion, GMAC Mortgage $633 million, Saxon Mortgage Services $407 million and Select Portfolio Servicing $376 million. Under the Obama plan, the servicer receives a one-time $1,000 incentive for a loan modification, plus an annual $1,000 incentive if the borrower remains current for three years. The borrower can receive an annual incentive of $1,000 that is applied to principal reduction for up to five years. As an incentive to modify the non-GSE loans, there is a one-time payment of $1,500 payment to the investor.

Kamal J. Gregory of Centerville, Ohio, pleaded guilty in U.S. District Court to charges on an extensive mortgage fraud scheme affecting 210 residential properties, of which 205 are located in Montgomery County, Ohio. The scheme affected 63 investors and led to foreclosure against owners of more than 90% of the properties. Gregory admitted that, while working as a loan officer under between March 2002 and June 2008, he along with 11 other co-conspirators prepared and submitted mortgage loan application packages to lending institutions on behalf of purchasers/investors. The applications made fraudulent claims involving the income of the borrowers and values of the properties involved, most of which were dilapidated. The application packages artificially inflated the properties¹ worth above legitimate fair-market values. Gregory and his co-conspirators created the fraudulent loans as a way of making money for their own benefit. He admitted to participating in 46 separate fraudulent real estate closings. The net fraudulent loan amounts associated with these closings exceeded $4.2 million. Two of Gregory¹s co-conspirators, Julian M. Hickman and Robert Mitchell, have previously pleaded guilty to related charges and await sentencing.

The Senate is expected to vote on a bill next week to expand bank fraud statutes to cover independent mortgage companies and mortgage brokers for the first time.The new definitions for "financial institution" and "mortgage lending business" will ensure that mortgage brokers and mortgage companies are held fully accountable under the federal fraud laws, according to a summary of the bill (S. 386). The Senate Judiciary Committee approved the bill by unanimous vote on March 5. Senate Majority Leader Harry Reid, D-Nev., filed a cloture motion just before Congress left for its two-week spring break to counter any attempt to filibuster or block Senate consideration of the mortgage fraud bill when Congress returns next week. The Fraud Enforcement and Recovery Act also authorizes $165 million in appropriations to fund mortgage fraud investigations by the Justice Department, HUD inspector general and U.S. Secret Service.

After claiming for years that bankers were filing ever more suspicious activity reports in response to regulatory pressure, experts are attributing the latest spike to a dramatic rise in actual financial crime.The number of reports filed by depository institutions last year rose nearly 13% from a year earlier — the largest increase in three years — to 733,529, according to a report to be released next month by the Financial Crimes Enforcement Network. It also was the 12th consecutive year, since FinCen started keeping records in 1996, that SARs hit a new high. "When there are difficult economic times, financial fraud becomes the growth industry," Peter Djinis, a lawyer in Sarasota, Fla., and a former FinCen official told The American Banker. "Financial institutions are clearly paying more attention there. They are now being more liberal in reporting not just active fraud but attempted fraud." Until the financial crisis hit, suspicious activity reports were a top source of complaint from bankers, who called them overly burdensome and of little value to law enforcement officials. After lawmakers criticized regulators in 2004 for failure to enforce anti-laundering laws, the agencies put a new emphasis on SAR reporting. The result was a huge increase in filings.

Missouri Attorney General Chris Koster has filed a lawsuit against US Foreclosure Relief of California for allegedly taking money from consumers to help them modify their loans, but not performing the work."Unfortunately, these tough economic times have brought out opportunists who prey on people at some of their most desperate and vulnerable moments," said AG Koster in a statement. "People facing the loss of a home may feel that they have no other choice but to turn to these fraudulent companies. The Attorney General's Office intends to stop them from doing business in Missouri." According to The Orange County Register, US Foreclosure Relief is a California company with a location in Orange but its telephone does not pick up. AG Koster says US Foreclosure charged homeowners $1,850 for its services, along with a processing fee of $500. "The company demanded payment upfront, in violation of Missouri law. Missouri law is clear that payment may not be charged or collected until the foreclosure consultant service is performed," says the AG's office.

The White House is contemplating naming Fannie Mae CEO Herb Allison to head the government's $700 billion Troubled Asset Relief Program, according to press reports and sources familiar with the situation.At press time government officials weren't commenting on the situation, nor was Fannie Mae, which has been operating under a conservatorship since the fall. If Mr. Allison does depart for Treasury, it would leave both housing GSEs without a permanent CEO. In early March Freddie CEO David Moffet resigned after conflicts arose on how to run the mortgage investing giant, in particular a difference of opinion over profit versus its public mission of helping revive the housing market, the latter of which might force Freddie to forgo certain potential fee income. If Mr. Allison is named to head TARP he would replace Neel Kashkari, a Bush appointee who holds the title of assistant secretary, Office of Financial Stability.

Servicer guidance along with the net present value (NPV) test for the Obama administration's new loan modification program will be issued "very soon," according to Federal Housing Finance Agency director James Lockhart."I'm hopeful we can get this kicked up very fast," Mr. Lockhart said in an interview with National Mortgage News Online. Fannie Mae and Freddie Mae have already issued servicer guidance for modifying loans they own or guarantee. The NPV test will be used to determine which non-agency loans qualify for a loan modification. "That is being finalized," the FHFA director said. Under the new modification program servicers are expected to reduce the homeowner's monthly mortgage payments to a 38% debt-to-income level at their own expense. To achieve a 31% DTI ratio, the government will share in the cost and reimburse the servicer. Fannie and Freddie are using an existing NPV test because they are not being reimbursed by the government, Mr. Lockhart said.

The White House is contemplating naming Fannie Mae CEO Herb Allison to head the government's $700 billion Troubled Asset Relief Program, according to breaking press reports and sources familiar with the situation.At press time government officials weren't commenting on the situation, nor was Fannie Mae, which has been operating under a conservatorship since the fall. If Mr. Allison does depart for Treasury, it would leave both housing GSEs without a permanent CEO. In early March Freddie CEO David Moffet resigned after conflicts arose on how to run the mortgage investing giant, in particular a difference of opinion over profit versus its public mission of helping revive the housing market, the latter of which might force Freddie to forgo certain potential fee income. If Mr. Allison is named to head TARP he would replace Neel Kashkari, a Bush appointee who holds the title of assistant secretary, Office of Financial Stability.

U.S. District Judge William C. O'Kelley sentenced Andrew John Smith of Cleveland, Ga., to serve three and a half years in prison, followed by five years of supervised release on charges arising from a mortgage fraud scheme. The court also ordered Smith to pay restitution but has not yet set a final amount. According to the information presented in court, in early 2007, Smith was employed as a part-time loan officer at a Buford, Ga.-based mortgage firm when he originated a fraudulent loan for his own residence. An alleged co-conspirator not named in the indictment later recruited Smith to refinance loans with other lenders, as well as to sell foreclosed properties on which construction was not complete to unqualified straw borrowers funded by other lenders, according to court information. Smith's own loan for his residence had been included in the company's portfolio of nonperforming loans facing imminent foreclosure. In June 2008, Smith and his alleged co-conspirator were caught in an FBI sting after Smith had arranged for the sales price of a property to be inflated to $4 million from $2 million. Prior to his arrest, Smith submitted fraudulent documents to federally insured banks to arrange a $3.2 million purchase money mortgage loan to finance the purchase of the property. Smith then allegedly negotiated a side agreement with the sellers who were, unbeknownst to Smith, cooperating with the FBI, for a $2 million kickback to his shell company. Federal agents at the property arrested Smith during a subsequent meeting to negotiate his multi-million dollar kickback for the fraudulent deal. The property was sold for its true market value of $1.8 million immediately upon conclusion of the FBI's sting operation. The FBI's investigation is ongoing.

An analysis by federal regulators of investments held by two large corporate credit unions prior to their March 20 takeover shows that they had a vast exposure to risky subprime, Alt-A and payment option ARM mortgage securities. The two corporate CUs — U.S. Central FCU and WesCorp FCU — provided liquidity to smaller credit unions. Placed into conservatorship by federal regulators last month, U.S. Central and WesCorp accumulated billions of dollars in losses on their mortgage securities. The National Credit Union Administration analysis released Friday and based on a review by bond experts PIMCO shows that securities backed by the risky mortgages (most of them rated AAA at the time of purchase) continued to deteriorate over the past two years with defaults and foreclosures skyrocketing and forcing down the ratings on many of them to below investment-grade. At U.S. Central, where 95% of its $35 billion of holdings were rated AAA at purchase, more than half of those holdings — a staggering $17 billion — had slid below AAA, while almost one-third, $11 billion worth, were below investment grade at Feb. 23.