Compliance & Regulation

Congressional Democrats and Obama administration officials want to make consumer protection an integral part of any reforms to the mortgage finance system. Consumer protection needs to be at the "very heart of our system of mortgage finance, not an after-thought or relegated to second class status," said Michael Barr, counselor to the White House National Economic Council. Consumers and investors should be able to "rely on the fact that underwriting is being conducted appropriately," Mr. Barr told a mortgage reform forum sponsored by the Center for American Progress. Meanwhile, the Mortgage Bankers Association is working on reform proposals to restore confidence in the system by establishing more effective consumer protections. "We know that these proposals will constrain some in the industry, but they will also help our members and their customers in the long-run," MBA chairman David Kittle told a congressional panel last week.

Fannie Mae and Freddie Mac increased the pace of loan modifications in the fourth quarter, but repayment plans continue to represent over 75% of the GSEs' workout efforts, according to a Federal Housing Finance Agency report. The GSEs completed nearly 23,780 loan modifications in the fourth quarter, compared to 13,500 in 3Q. In December, the GSEs initiated 29,100 workout plans compared to 8,700 loan modifications. The FHFA report shows Fannie is continuing to deploy its 'HomeSaver Advance' program, which allows the agency to make small, unsecured loans to homeowners so they catch up on their payments. These advances immediately cure delinquent loans and Fannie does not have to absorb the cost of purchasing the loans out of securitized pools. Fannie made 9,300 HomeSaver advances in December, compared to 8,760 in September when the GSEs were was placed in conservatorships. Freddie does not have a similar program. Meanwhile, GSE loans 90 days or more past due (including those in bankruptcy and foreclosure) rose to 2.14% in December from 1.52% in September. "When adjusted for the suspension of foreclosure sales, the rate would have been 2.1%," the GSE regulator said. Fannie and Freddie suspended foreclosure sales in late November and December for the holidays.

The Obama administration has created a niche outlet for certain commercial real estate loans as part of its effort to boost business lending through the purchase of Small Business Administration-backed loans. The Treasury Department has pledged to purchase $15 billion in SBA loans, including SBA '504' first-lien mortgages that are used to finance owner-occupied buildings and construction projects. (The 504 loans cover up to 50% of a project's cost but are not government guaranteed.) Treasury will begin purchasing 504 loans no later than May. SBA also is working on the development of a "secondary market guarantee program for securities issued from pooled 504 first mortgage loans," Treasury said.

Three defendants have been sentenced for their involvement in a straw borrower fraud scheme to obtain residential construction loans, defrauding Zions Bank of $20 million. Christopher A. Upchurch, a building contractor from Meridian, Idaho, was sentenced to 33 months in prison, followed by five years of supervised release and ordered to pay $633,634 in restitution to Zions Bank. Barbara L. Cobos, a Zions Bank loan officer from Mountain Home, Idaho, who received $125,000 in kickbacks from Upchurch in order to assure funding of fraudulent loan applications, was sentenced to 18 months in prison, followed by five years of supervised release and ordered to pay $125,000 in restitution. Nicholas R. Gossi of Boise, Idaho, who worked first for a bank and later as a mortgage broker, pleaded guilty to submitting a false loan application to a mortgage lender and was sentenced to six months in prison, followed by six months of home detention and five years of supervised release and to pay restitution to National City Bank in an amount to be determined later. The scheme began in October 2004 and lasted until November 2005. Once straw buyers were located, their information was used as the borrowers' on residential construction loan applications. In many cases, the loan applications overstated the "borrower's" income and credit and falsely said that they were planning to build "owner-occupied" homes. Upchurch and others also forged the borrowers' names on loan documents. The applications were not reviewed or approved by supervisory officials at Zions Bank. Once the fraudulent loans were approved, Upchurch had the straw borrowers sign blank draw requests so he could draw on the loans at any time. He then filled out the draw requests for specific construction purposes, but diverted many of the loan proceeds for his own benefit. The bank did not return a call for comment.

Michael Gee, a Mooresville, N.C-based real estate appraiser, pleaded guilty in connection with his participation in a mortgage fraud scheme involving about $15 million in loans and more than 200 properties. Gee, along with Victoria L. Sprouse and Michael D. Pahutski, both of Charlotte, N.C., were charged in a superseding indictment in Federal District Court for the Western District of North Carolina with perjury, conspiracy to commit money laundering, mail, wire and bank fraud. Ms. Sprouse, a licensed North Carolina real estate attorney, and Pahutski, a mortgage broker, were alleged in the indictment to have participated in a scheme from 2001 through September 2002, in Mecklenburg County, N.C, to obtain money and property by means of false and fraudulent pretenses, representations and artifices to defraud financial institutions of money and their right to honest services. Specifically, Ms. Sprouse and Pahutski were accused of preparing materially false mortgage applications and supporting documents to submit to lenders for approval. The defendants also allegedly prepared and signed materially false HUD-1 settlement statements, appraisals and accepted downpayment checks from persons other than the buyers listed in the HUD-1 settlement statements. Pahutski pleaded guilty and awaits sentencing. Ms. Sprouse has pleaded not guilty and is scheduled to go on trial March 23. She could not be reached for comment at press time.

The NAACP has filed separate class action claims against Wells Fargo Home Mortgage, and HSBC Mortgage, accusing the two of discriminatory lending policies that unfairly placed African Americans in higher cost subprime loans. The civil rights group claims creditworthy African Americans were steered into subprime mortgages when they could have qualified for prime loans. Wells Fargo provided mortgage brokers with incentives to steer consumers into subprime loans, according to the NAACP, and did not undertake a "meaningful review" of applications to determine if the applicants would qualify for a prime loan. "It is time for these lenders to be held accountable. We look forward to forcing real change and real relief through this lawsuit," said NAACP president Benjamin Jealous. In a statement, Wells Fargo said, "We intend to vigorously defend these unfounded allegations. We are confident we will prevail." HSBC said it does not comment on pending litigation. "We stand by our fair lending and consumer protection practices," it said. The London-based HSBC acquired Household Finance and its Beneficial Finance subprime affiliate earlier in the decade. Prior to that HSBC was not a subprime lender.

The fourth-quarter 2008 results for all 12 Federal Home Loan Banks are now in and they show a combined net loss of $672 million, compared to $846 million in earnings a year ago, mainly due to impairment charges on private-label mortgage-backed securities. "The combined net loss for the fourth quarter of 2008, resulted primarily from $1.8 billion in 'other than temporary impairment' charges on certain private-label MBS and home equity loan investments, and net losses on derivatives and hedging activities related to SFAS 133," the FHLBank's Office of Finance said. The Atlanta FHLBank saw earnings of $74.6 million in the fourth quarter after taking an OTTI charge of $99 million on its private label MBS. In related news, more than half of Fannie Mae and Freddie Mac's $178 billion holdings of AAA-rated, private-label subprime and Alt-A MBS are not below investment grade, according to GSE regulator James Lockhart.

Senate Democratic leaders want to pass a bankruptcy cramdown bill in the next three weeks, but it could get bottled up in the Senate Banking Committee, which has no jurisdiction over the bankruptcy code. "We're trying to get it adopted in the next couple of weeks," Banking Committee chairman Christopher Dodd, D-Conn., told the Consumer Federation of America. The House-passed bankruptcy bill (H.R. 1106) was referred to his committee because it includes provisions to strengthen the federal deposit insurance system and enhance the effectiveness of a Federal Housing Administration program to restructure underwater mortgages. Even opponents of allowing bankruptcy judges to reduce the principal amount of a mortgage say Sen. Dodd has been placed in a difficult spot because his committee cannot amend the bankruptcy provisions in H.R. 1106. "If anything, it slows up the process," one financial industry lobbyist said. The Senate may leave for its spring recess on April 6 with the bankruptcy bill still in limbo, he added. Meanwhile, consumer groups remain optimistic the Senate will pass a bankruptcy loan modification bill but there are concerns that Democratic senators are not united on the issue and their leaders lack a clear strategy for passing a bill.

The Department of Housing and Urban Development has made plans to temporarily tighten its rules on FHA cash-out refinancings due to falling house prices and rising defaults on refis. Starting April 1, the loan-to-value ratio on a Federal Housing Administration cash-out refinancing cannot exceed 85% of the appraised value of the one-to-four family property, according to a HUD letter to FHA lenders. HUD had raised the cash-out limit to a 95% LTV ratio from 85% over three years so FHA could be competitive with the conventional refinancing products offered by subprime lenders. "Given the continued deterioration in the housing market and FHA's need to limit its exposure to undue risk, this reduction to the maximum LTV for cash-out refinancings is being instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken," FHA commissioner Brian Montgomery says in the mortgagee letter. FHA consultant Bud Carter said a tightening has been under consideration at HUD for several months. "It is not surprising given market conditions. It really just goes back to what they had prior to October 2005," he said. Mr. Carter is with Potomac Partners in Washington.

The NAACP has filed separate class action claims against Wells Fargo Home Mortgage, and HSBC Mortgage, accusing the two of discriminatory lending policies that unfairly placed African American in higher cost subprime loans.The civil rights group claims credit-worthy African Americans were steered into subprime mortgages when they could have qualified for prime loans. Wells Fargo provided mortgage brokers with incentives to steer consumers into subprime loans, according to the NAACP, and did not undertake a "meaningful review" of applications to determine if the applicants would qualify for a prime loan. "It is time for these lenders to be held accountable. We look forward to forcing real change and real relief through this lawsuit," said NAACP president Benjamin Jealous. In a statement, Wells Fargo said, "We intend to vigorously defend these unfounded allegations. We are confident we will prevail." HSBC said it does not comment on pending litigation. "We stand by our fair lending and consumer protection practices," it said. The London-based HSBC acquired Household Finance and its Beneficial Finance subprime affiliate earlier in the decade. Prior to that HSBC was not a subprime lender.