Compliance & Regulation

Mortgage companies pared their payrolls by only 200 full-time employees in February and it appears employment is finally stabilizing with the increasing demand for refinancings and loan modifications. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector fell from 271,300 in January to 271,100 in February, down 18% from a year ago. Orawin Velz, director for economic forecasting at the Mortgage Bankers Association, expects the refinancing boom will be sustainable and mortgage executives will have to begin hiring. "We should see some pickup in the coming months," Ms. Velz said. But she cautioned industry employment will rise very slowly, possibly to 300,000 by the end of the year.

Fannie Mae has warned its servicers that they face a new wave of mortgage buyback requests — this time for defects on unsecured loans that were extended to delinquent mortgage borrowers. According to a report in American Banker, the GSE last week cited six errors that servicers frequently make as it issued new guidelines for its HomeSaver Advance program, under which an unsecured loan for up to $15,000 is given to the borrower to cover arrears. These range from clerical mistakes, such as filling out the wrong form, to more significant problems like using the program on mortgages that are ineligible. Such errors can put a servicer on the hook to repurchase the unsecured loans, Fannie said. The new guidelines apply retroactively, meaning the GSE can make a servicer buy back any of the 71,000 advances Fannie has bought since it started the program last year, if they are found to be defective. "Everybody gets the sense that there's going to be a big 'gotcha' because delinquencies are rising and they want to put the risk on somebody else," said Cheryl Lang, the president of Integrated Mortgage Solutions, a Houston consulting firm.

Tyler Cassity, the chief executive of Midvale, Utah-based 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 allegedly 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.

A New Jersey nonprofit organization said it will pay $5.4 million to buy mortgages from JPMorgan Chase that originally were part of a fraud scheme. The Orange, N.J. nonprofit, Housing and Neighborhood Development Services Inc., is buying the mortgages on 47 vacant homes in the greater Newark area. HANDS plans to renovate the homes — many of which are run down — and turn them into affordable housing. The loans, which HANDS bought in bulk, were part of a fraud scheme involving one real estate investor who received financing from Washington Mutual. JPMorgan Chase bought WaMu with federal aid.

The Federal Home Loan Bank of Boston may have to take a larger impairment charge on its investments in private-label mortgage-backed securities and it has delayed the issuance of the 2008 combined financial report of the 12 FHLBanks. The other 11 FHLBanks have filed their 10-K reports with the Securities and Exchange Commission. "The Boston Bank is still completing its "other-than-temporary impairment" analysis relating to certain investments," the FHLBank Office of Finance said. The Boston bank recently issued a preliminary report that estimated an OTTI charge of $339.1 million for the fourth quarter. But in a SEC filing on Tuesday, the FHLBank said it might have to take additional charges after completing its OTTI assessment. The Boston bank has $652.9 million in private-label MBS. The preliminary report said the bank only expects a $22 million loss over the life of the securities.

Obama administration officials believe they have designed a loan modification program that will fit a wide range of struggling homeowners and they want to ensure that these borrowers are guided quickly to the right servicer. "This mod program is the right option for most folks," said William Apgar, senior advisor to the HUD secretary for mortgage finance. And special emphasis is being placed on the "triage function to make sure that folks that just need information about whether they are eligible can be sent directly to the appropriate servicer," Mr. Apgar told a Washington meeting of the National Alliance of Community Development Associations. The Department of Housing and Urban Development official also noted that servicers are responding to the "generous" loan modification incentives and building up their processing capacity. "We are already seeing announcements of servicers hiring new staff and opening up new call centers," Mr. Apgar said. At the same time, the administration is concerned foreclosure rescue scam artists are ramping up, too. "There are so many scams out there that people won't be able to tell the true mods from the false ones." He said HUD is working with state attorneys general, the Federal Trade Commission and others to keep a lid on these scams.

The House of Representatives has passed a bill that prohibits financial firms and government-sponsored enterprises from receiving capital infusions from the government from paying retention or other supplemental bonuses until they repay all federal assistance. The bill, H.R. 1664, passed by a 247-171 vote. It allows performance bonus provided those bonuses are not "excessive or unreasonable" as determined by the Treasury secretary, federal banking regulators and a watchdog panel that oversees the Troubled Asset Relief Program. If passed by the Senate and signed into law, the legislation would stop retention bonus programs at Fannie Mae and Freddie Mac. "Any company bent on paying its employees unreasonable and excessive compensation can do so after the American taxpayers get their money back," said Rep. Alan Grayson, D-Fla.

The National Association of Mortgage Brokers has withdrawn its lawsuit against the Federal Housing Finance Agency, one day after it sent a letter to Congress asking it for help to stop implementation of the Home Valuation Code of Conduct. The trade group called the withdrawal a "strategic maneuver;" it said it wants to assess the FHFA's claim that no court may review its decisions while Fannie Mae and Freddie Mac are in conservatorship. "This issue goes beyond the bounds of this particular case," said NAMB president Marc Savitt. "All companies, investors, and trade groups should understand there may not be a court, any court, able to hear their case while FHFA is utilizing their conservatorship powers." NAMB said its options include filing suit again with revised and expanded arguments directed at FHFA's new claim.

The trustee for bankrupt subprime giant New Century Financial Corp. is suing the lender's auditor, KPMG, for $1 billion in damages, charging that it abetted the firm in misstating its true financial condition. Among other things, the trustee accuses the auditor with negligence noting that KPMG "did not act as a watchdog." The bankruptcy trustee is represented by the California law firm of Thomas, Alexander & Forrester, which filed claims in New York and California. New Century, whose shares once traded as high as $55, collapsed in the spring of 2007, wiping out shareholders. At its peak, the nation's second largest subprime lender had a market capitalization of almost $3 billion. KPMG issued a statement denying that it was responsible for New Century's collapse, saying it acted "in accordance with professional standards." The accounting firm said it would vigorously fight the lawsuits. A report issued last summer said creditors of NCFC are owed as much as $1.6 billion. KPMG's predecessor firms were sued for negligence by federal regulators during the S&L crisis. Some of those claims were settled out of court.

The Financial Accounting Standards Board has approved major changes to its mark-to-market rules that could allow banks to reverse of some of the writedowns they have taken on mortgage-backed securities and report an increase in earnings and capital for the first quarter. Under pressure from Congress and the banking industry, FASB clarified its "other than temporary impairment" guidance so banks don't have report the entire estimated impairment as a loss on the income statement. Institutions would report only credit losses in income, provided they don't expect to sell the MBS until there is an economic recovery. FASB also made the change retrospective to all securities with OTTI. Banks will probably start issuing press releases soon advising investors on the impact the new mark-to-market rules will have in the first quarter financial results, according to Barry Epstein, a partner with the accounting firm Russell Novak & Co. in Chicago. "Assuming the revised mark-to-market adjustments are less burdensome than what they previously reported, they are going to have a bounce back in their regulatory capital. That, in theory, will encourage them and permit them to expand their lending activity," Mr. Epstein said.