Compliance & Regulation

The Federal Deposit Insurance Corp. on Thursday released for comment its plan to auction and sell toxic assets, asking questions on everything from which assets should be eligible to how fees for government-guaranteed debt should be assessed.The agency also held a conference call with businesses interested in the auction process, and according to one participant, listeners were told that anyone buying "whole loan" mortgages would be required to work them out according to parameters established under the FDIC's loan modification program. This participant, requesting anonymity, said there are "concerns about mark-to-market accounting. Right now there is a big gap between 'bid' and 'ask' prices," he said. The proposal, which is open for comment until April 10, appears aimed at trying to ensure that banks and investors have sufficient incentives to participate. "How can the FDIC best encourage a broad and diverse range of investment participation?" the agency's plan said. "How can the FDIC best structure the valuation and bidding process to motivate sellers to bring assets to the" public-private investment funds? The message was much the same during the FDIC's conference call. According to The American Banker approximately 2,700 participants listened in on the call, which included top FDIC officials, including chairman Sheila Bair, chief operating officer John Bovenzi and others.

The nation's top thrift regulator, Scott Polakoff, has been placed on leave while the Treasury Department Inspector General completes a review of several cases where the Office of Thrift Supervision back-dated capital infusions so the institutions could retain their "well capitalized" classification. Treasury Secretary Timothy Geithner appointed OTS deputy director John Bowman to replace Mr. Polakoff as the acting OTS director. "Mr. Polakoff is on leave pending a review by the Department of the Treasury of the OTS's August 2008 actions related to post-period capital contributions," OTS said. A career regulator, Mr. Polakoff was the senior director under former OTS director John Reich who stepped down in February. In December, the Treasury IG notified Congress that OTS allowed IndyMac Bank to count an $18 million capital contribution made on May 9, 2008 toward the thrift's first quarter financial cash report. IndyMac was closed in July after a run on the bank. After the IG reported the IndyMac case, an OTS review found that three other thrifts were allowed to back date capital infusions from their holding companies. OTS has not identified those institutions.

The House Financial Services Committee on Tuesday will mark up a mortgage reform bill that bans certain types of yield spread premium payments and requires lenders to retain 5% of the credit risk on subprime loans that are sold to investors."A creditor may not directly or indirectly transfer the credit risk it retains," according to the bill sponsored by committee chairman Barney Frank, D-Mass., and fellow Democratic Reps. Brad Miller and Mel Watt of North Carolina. The sponsors want to crack down on compensation that might encourage mortgage lenders and brokers to steer borrowers into higher cost loans. "Specifically, the new measure will strengthen restrictions on compensation paid to mortgage loan originators and brokers that is based on a loan's interest rate and terms, often called a yield-spread premiums," according to Rep. Miller. Marc Savitt, president of the National Association of Mortgage Brokers told National Mortgage News that he is okay with the language in the bill, noting that "this doesn't ban yield spread premiums outright" and instead "prevents people from making a couple of extra points" by putting consumers in higher cost loans. Mr. Savitt added that his reading of the bill indicates that it would require mortgage banking firms to disclose their "servicing released premiums" to the public as well. "The bill means you have to disclose everything," said Mr. Savitt. The legislation also mandates that all licensed and registered originators would be subject to a "federal duty of care" measure under the bill, obligating them to only make loans that a customer can afford. With refinancings, lenders would have to prove a "net tangible benefit."

Operation Madhouse, a federal undercover investigation in which undercover law enforcement agents posed as straw buyers of houses seeking assistance in financing and closing fraudulent mortgage transactions, has resulted in charging 24 defendants for mortgage fraud in the Chicago area. In each of the cases, multiple real estate professionals worked to carry out the frauds. Each case involved a different fraudulent mortgage loan arranged by a different group of defendants based in the Chicago area. Those defendants' alleged roles in the fraudulent transactions included: fraudulently preparing loan applications and other documents; creating fraudulent banking information; fabricating income tax returns; creating fictitious verifications of employment and rental income; creating false appraisals; and submitting the bogus applications and supporting documents to the lenders. In each of the undercover transactions, a cooperating individual allegedly represented that he was selling a house to a nominee buyer who intended to walk away from the property and default on the mortgage after the transaction closed. In reality, the nominee buyers were undercover agents, as were paralegals that assisted in closing the real estate transactions. The houses bought with the fraudulently obtained mortgage loans were actually owned by the federal government. Instead of defaulting on the fraudulently obtained loans after the closings, the government fully repaid the lenders after each transaction closed. The loans involved in the undercover project totaled approximately $1.4 million. In a related case, which did not result from the undercover investigation, the defendants are alleged to have fraudulently obtained approximately $4.2 million in loans, causing losses in excess of approximately $1.1 million. The following individuals have been charged: Mohammed Ali Moallem, Bahidad Javid, Abe Karn, Donna Books, Hichem Julani, Daniel Lietz, Marwan Atieh, Ruwaida Dabbouseh, Khalil Qandil, Khaja Moinuddin, Mohammed Nasir, Louis L. Javell, Aysha M. Arroyo, Juan Gil, Michael Salem, Hakim A. Jaradat, Robert Goldberg, Oscar Paredes, Maryam Khan, Babajan Khoshabe, Sunil Kaushal, James Kotz, Siamak Safavi Fard and Noel Parmar.

The president of Metropolitan Money Store, Joy Jackson of Fort Washington, Md., pleaded guilty for her role in the company's massive mortgage fraud scheme that falsely promised to help homeowners facing foreclosure keep their homes and repair their damaged credit. According to her plea agreement, Jackson helped incorporate MMS, which offered foreclosure consultation and credit services to financially distressed homeowners. From September 2004 to June 2007, Jackson and others conspired to fraudulently promise to help 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 straw buyers for a year, during which time MMS promised to improve the homeowners' credit ratings, help them obtain more favorable mortgages, and eventually return title to their homes to them. The homeowners were told that the equity withdrawn from the properties would be used to pay the mortgage and expenses on their homes and to repair their credit. The straw buyers were paid up to $10,000 to participate in the scheme and allow the properties to be put in their names. Jackson also served as a straw buyer on several properties in Maryland. In addition, Jackson directed others to transfer the equity proceeds of homeowners into the general checking accounts of MMS as well as her personal accounts. She withdrew these funds and paid for goods and services for herself, including art, cars, clothing, credit card bills, homes, fur coats, furniture, airline trips, gambling expenses, jewelry, limousine services, student tuition and a luxury wedding for herself and an alleged conspirator. As a result of this scheme, the total loss attributable to Jackson, including the estimated losses to the mortgage lenders, is $16.88 million. Jackson is the seventh defendant to plead guilty in the MMS mortgage fraud scheme. Sentencing is scheduled for Nov. 16.

The Federal Housing Administration is adopting Fannie Mae and Freddie Mac forms for appraisers to use in collecting more information about property values in declining markets. Starting April 1, appraisals for FHA loans must include the Fannie and Freddie addendum for market conditions in declining markets. In those markets, FHA wants appraisals to include at least two comparable sales that closed within 90 days. "As home prices continue to decline in many housing markets throughout the country due to job losses and increased foreclosed, FHA finds it necessary and prudent to set additional guidance for collateral assessment practices for properties located in a declining market," FHA commissioner Brian Montgomery, a holdover from the Bush administration awaiting Senate confirmation of his replacement, says in the letter to lenders and appraisers.

FBI director Robert S. Mueller told Congress that the growing number of mortgage fraud cases are "straining" the agency's resources and that the bureau now has 250 agents working on investigations — double the number from two years ago. In his prepared testimony Mr. Mueller said there are now 2,000 open mortgage fraud cases. Three years ago the agency had 700 open cases. "We have had to shift resources from other criminal programs to address the fiscal crisis," Mr. Mueller said. He noted that the agency is trying to combat mortgage fraud by using computer programs, including what he called "property flipping computer applications."

Treasury secretary Timothy Geithner is urging Congress to move "as quickly as you can" to pass legislation that would allow the government to place bank holding companies and non-bank financial firms into conservatorships managed by the Federal Deposit Insurance Corp. or provide those troubled firms with financial assistance. Secretary Geithner told a congressional panel the Treasury Department needs additional powers to deal with firms like American International Group to prevent financial meltdowns. "We are still in the midst of a very challenging period. I think it would be in the interest of the country for Congress to do everything they can to make sure we have board tools and manage this effectively," he said. Under legislation proposed by the Obama administration, Treasury would receive positive recommendations from the FDIC and the Federal Reserve Board before seizing troubled hedge funds or life insurance companies. "Depending on the circumstances, the FDIC and Treasury would place the firm into conservatorship with the aim of returning it to private hands or receivership that would manage the process of winding down the firm," the Treasury secretary testified.

The House Financial Services Committee has passed a bill which could prohibit financial firms or government sponsored enterprises receiving capital infusions from the government from paying retention or other supplemental bonuses until they repay all federal assistance. In the version passed by a 38-22 vote, H.R. 1664 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 Congress and signed into law, the legislation would stop retention bonus programs at Fannie Mae and Freddie Mac. The Financial Services Committee chairman Barney Frank, D-Mass., stressed that the restrictions on bonuses will not apply to investors that purchase bad assets from banks and other financial institutions. The House panel also passed a resolution that directs Treasury secretary Timothy Geithner to provide the committee with "any government communications" relating to the payment of bonuses to executives of American International Group.

The Mortgage Bankers Association has asked federal banking regulators to cut the capital requirement on warehouse lines of credit by as much as 80% to alleviate a funding crisis facing non-depositories. Currently, depending on what stage of funding a loan is in, the risk weighting on a warehouse loan can be as high as 100%. This means $8 in capital must be held for every $100 in warehouse credit outstanding. For Fannie Mae, Freddie Mae, Federal Housing Administration and Veterans Affairs loans the trade group wants the capital charge to be 20%. Non-bank mortgage lenders are seeing their lines disappear or reduced with several regional banks exiting the warehouse sector as a way to preserve capital. MBA's letter was sent to the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision.