Compliance & Regulation

Fund managers seeking to run and raise capital for the Public-Private Investment Program will have an extra two weeks to file their applications with the Treasury Department. Treasury said it is extending the deadline from April 10 to April 24 to increase small business participation in the Legacy Securities program. Prospective fund managers are being encouraged to partner with small businesses, including firms owned by veterans, minorities and women. "There are several ways smaller firms can partner with fund managers including as an asset manager, an equity partner or a fundraising partners," Treasury said. Others can provide services, such as trade execution or valuation. Originally, Treasury wanted to select only five managers in the first round. But that may be changing also. "More than five pre-qualified fund managers may be selected depending on the number of applications deemed to be qualified," Treasury said. Successful applicants will be notified by May 15. The Public-Private Investment Program is designed to purchase bad residential and commercial mortgage-backed securities from banks and other financial institutions. The goal is to create a market for these securities and clean up bank balance sheets. Fund managers are expected to have a demonstrated capacity to raise $500 million of private capital and a minimum of $10 billion of eligible MBS under management.

There now have been eight convictions in a Maryland case involving a fraud that falsely promised to help homeowners facing foreclosure keep their homes and repair their damaged credit. Kurt Fordham of Fort Washington, Md., pleaded guilty to charges in connection with the activities at Metropolitan Money Store, Lanham, Md. In May 2005, Joy Jackson, Fordham's wife, along with co-conspirator Jennifer McCall, incorporated MMS, which fraudulently promised to help troubled homeowners avoid foreclosure and repair their damaged credit. The homeowners were directed to allow title to their homes to be put in the names of third party purchasers for a year, during which time MMS promised to improve the homeowners' credit ratings and eventually return title to their homes to them. Using the homeowners' properties, the conspirators applied for mortgages to extract the maximum available equity from the homes and submitted fraudulent loan applications to lenders to obtain inflated loans on the properties in straw buyers' names. At settlements, the conspirators imposed numerous fees and required seller contributions that were far in excess of industry standards and imposed fees for services that were not performed. They also transferred the sale proceeds out of the escrow accounts into the conspirators' business and personal bank accounts and converted a substantial portion of those funds to their personal use. In addition to directing straw buyers to participate in the scheme, Fordham served as straw buyer on at least six properties. As a result of this scheme, the total loss attributable to Fordham is $13.6 million. Fordham is the eighth defendant to plead guilty in this scheme. Sentencing for Fordham if scheduled for July 10. Jackson and McCall also have entered guilty pleas.

Fannie Mae said its refinancing volume totaled $77 billion in March, up from $41 billion in the previous month, as borrowers took advantage of lower mortgage rates and a new flexible refinancing program. The mortgage giant it has not seen this level of activity since refinancing boom of 2003. "We anticipate that volumes will increase even more as millions of additional homeowners become eligible to refinance" under the Home Affordable Refinance initiative, according to Fannie executive vice president Tom Lund. Under that initiative, Fannie and Freddie Mac are expected to use flexible underwriting to refinance mortgages they already own or guarantee. Borrowers with loan-to-value ratios between 80% and 105% can refinance at current market rates under this initiative. Mortgage insurance requirements have been waived on those refinancing transactions. Existing insurance policies will be transferred to the new loan, however. Lenders and brokers can use Fannie's Desktop Underwriter to process those refinancing applications.

Federal bank and thrift regulators are warning servicers the redefault rate on loan modifications where the homeowner's monthly payment is unchanged or increased is "unacceptably high." They said servicers should strive to reduce and make the payments more affordable. The Office of the Comptroller of the Currency and Office of Thrift Supervision have discovered through their quarterly Mortgage Metrics Report that redefaults are cut in half to 23% if the monthly payment is reduced by at least 10%. "By contrast, about 51% of the loans in which payments remained unchanged were seriously delinquent after six months. The comparable number for loan modifications in which payments increased was 46%," the OCC/OTS report says. Only 42% of loan modifications in 2008 resulted in lower monthly payments, although that percentage rose to 50% in the fourth quarter. Modifications that increase payments or leave then unchanged "should only be used on a case-by-case basis where borrowers and servicers can have confidence that the modification is likely to be sustainable," comptroller John Dugan said. Separately, FDIC chairman Sheila Bair told bankers that the streamlined modification program FDIC introduced at IndyMac Bank last October has an 8% redefault rate. The IndyMac program modified 13,000 loans by reducing the homeowners' monthly payments to a mortgage debt-to-income ratio of 38%. After a few months in operation, FDIC adopted a 31% DTI ratio.

The Treasury Department will continue to encourage banks to sell problem loans and securities to government-sponsored investment funds despite recent changes to the mark-to-market accounting rules, according to secretary Timothy Geithner. While the accounting rules may make its easier for banks to hold on to problem assets, the secretary stressed that the administration wants banks to clean up their balance sheets so they can raise private capital and increase lending. The proposed public-private investment funds give banks a way to sell problem assets and cleanse their balance sheets. "We will make sure that we encourage that kind of action," Mr. Geithner said on the CBS news show "Face the Nation." The secretary also said the administration is prepared to remove chief executives of banks receiving government assistance if those CEOs are not moving to restructure and strengthen their institutions. "We will do what is necessary to make sure our banking system emerges out of this stronger. The economy depends on credit to recover," he added.

Federal and state authorities announced a new joint effort to stop scam artists who target troubled owners struggling to hold onto their homes. "If you prey on vulnerable homeowners," U.S. attorney general Eric Holder said at a press conference, "we will find you and we will punish you." As part of the initiative, the Treasury Department's Financial Crimes Enforcement Network has issued an advisory to help financial institutions spot questionable loan modification schemes and report that information to the authorities. FinCEN, working with other law enforcement agencies and regulators, will identify possible suspects for civil and criminal investigations. "We will shut down fraudulent companies more quickly than before," said Treasury secretary Timothy Geithner, vowing to target "companies that otherwise would have gone unnoticed under the radar." Calling perpetrators of fraudulent rescue schemes "bottom feeders," Federal Trade Commission chairman Jon Leibowitz said five new cases have been brought against companies who "kick people when they are down, sabotaging" their efforts to save their homes. Four of the cases name outfits which use "copy-cat names and logos" to try to trick homeowners into thinking they are working with legitimate government agencies, while the fifth calls itself the "Federal Loan Modification Center" even though it has no federal connection. The FTC also has sent warning letters to 71 additional possible scam artists who promise to stop foreclosures, save people's houses and claim a 97% success rate of doing so. Such companies "will promise" to do these things "but they don't," said Illinois attorney general Lisa Madigan. "All they do is take your money."

Tyler Cassity, the chief executive of Utah Financial Inc., and his wife, Olivia Cassity, have been charged with 18 felony counts for allegedly running a mortgage fraud scheme.According to the Utah Attorney General's Office, the Cassitys prepared their own appraisals using the name of a separate licensed appraiser and substituting photos of more lavish homes as part of those appraisals to inflate the value of the real estate described in those appraisals. They then allegedly used straw buyers to obtain loans far in excess of the true value of the properties. Equity was then allegedly skimmed from the properties in order to gain tax advantages and buy other properties. The alleged scheme may have netted several million dollars. The Attorney General's Office has asked a judge to freeze the assets of the defendants and is seeking criminal forfeiture of their business and their home in Salt Lake City. Prosecutors asked that bail be set at $500,000 for each defendant.

Nearly one third of Federal Housing Administration foreclosures completed in 2008 involved FHA loans with seller-funded downpayment assistance, HUD secretary Shaun Donovan told senators. FHA loans where the downpayment assistance was arranged by non-profit housing groups represented only 12% of all FHA loans at the start of 2008. "Much or our recent loss activities have been attributed to the growth of seller-funded downpayment assistance," the Department of Housing and Urban Development secretary testified. Congress banned such down payment assistance on FHA loans. That ban went into effect October 1, 2008. "The termination of this program should substantially reduce FHA losses in new originations in the years ahead," Mr. Donovan testified.

Federal Housing Administration is experiencing elevated defaults and foreclosures, but FHA loans continue to outperform subprime loans, according to HUD secretary Shaun Donovan. "Although this is a challenging time for all entities in the mortgage market, FHA is unlikely to face the catastrophic losses borne in the subprime sector," the Department of Housing and Urban Development secretary told a Senate appropriations subcommittee. He noted that only 7% of FHA loans are seriously delinquent or in foreclosure, compared to 23% for subprime loans. In addition, FHA is not overexposed in high-cost markets like California because of its loan limits. The Office of Management and Budget is expected to release its fiscal year 2010 budget in a few weeks. It will include re-estimates of FHA's performance and financial strengths. It is unclear if this re-estimate will lead to losses that Congress will have to cover or force FHA to charge higher mortgage insurance premiums. "We should, within a few weeks, be able to present to you our estimates of whether it will be self financing," Mr. Donovan told a Senate appropriations subcommittee. FHA single-family insurance program has always operated without congressional appropriations.

California's real estate professionals are putting their money where their collective mouths are. The California Association of Realtors is dedicating $1 million to back a mortgage protection plan for first-time buyers. Under the group's Housing Affordability Fund, should buyers who haven't owned a home within the last three years lose their jobs, they will receive up to $1,500 a month to cover their house payments for six months. A qualified co-buyer also can participate in the program, and receive an additional monthly benefit of $750 per month for up to six months. The plan is for W-2 employees only, self-employed persons need not apply. "The Mortgage Protection Program was developed to help ease the anxiety of consumers who are concerned about potential job loss," said CAR President James Liptak, who estimated that as many as 3,000 families will benefit from the plan. There are some other requirements. A CAR member must be involved in the transaction. And the property must be located in the Golden State. The program, which will be open to rookie buyers who close by the end of the year, also includes coverage for accidental disability and a $10,000 death benefit. With 180,000 members, CAR is the largest state affiliate of the National Association of Realtors.