Compliance & Regulation

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 it 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.

Jack Ferm, a former radio talk show host in Las Vegas, was arrested on two counts of felony theft and related charges in connection with the operation of U.S. Justice Foundation, a mortgage rescue firm. Mr. Ferm is the president and owner of U.S. Justice Foundation, a document preparation business that allegedly misled customers into believing his service would stop ongoing foreclosures on their homes without the need to retain an attorney. His company website indicates he has a participated in successful litigation against numerous large corporations. The Nevada Attorney General's office received numerous complaints about alleged misrepresentations made by Mr. Ferm, including several clients who paid thousands of dollars to the U.S. Justice Foundation with no legal documents having been prepared or filed on their behalf. In many cases, Mr. Ferm required the victims to pay a monthly charge — in addition to the original retainer.

A lawsuit filed by the National Association of Home Builders to block implementation of a RESPA rule has been put on hold while the Department of Housing and Urban Development reconsiders its position on prohibiting builders from tying price discounts to the use of their affiliated mortgage companies."All aspects of the litigation are put on hold until HUD completes its renewed public comment process," a NAHB spokeswoman said. A U.S district court judge was scheduled to hear arguments April 3 in NAHB's suit to overturn the new "required use" provision in the Real Estate Settlement Procedures Act rule that the Bush administration issued shortly after the November elections. On March 6, HUD said it will delay the implementation date until July 16, while it solicits public comment on whether to "withdraw" the required use rule. "Proposing to withdraw this rule is the right thing to do so that home builders can offer consumers the best possible deal on the purchase of a new home. We are hopeful that HUD will do what is right for consumers and take final action to strike the rule later this year," NAHB chairman John Robson said.

The nation's remaining private mortgage insurance companies will need at least $4 billion of new capital to maintain a 15-to-1 risk capital level, according to a new white paper from Keefe, Bruyette & Woods. This total — which could grow to $6.6 billion if cumulative losses are 10% worse than analysts' projections — does not take into account needing additional capital for increasing the amount of business being written. "In the event the government decided to inject capital into the MI industry, the level would likely need to be above what we have in our matrix, because the government's goal would not just be industry stabilization from a loss perspective, but industry utilization as a method for helping more borrowers either refinance or purchase new homes," the report says. KBW analysts Nathaniel Otis and William Clark added that if the GSEs continue to operate in the future as they do now, mortgage insurers would not become obsolete. But they note: "there is also the possibility that the future structure of the GSEs will be completely different than exists today, which could threaten the need for a private mortgage insurance industry," KBW says.

Freddie Mac servicers will only have to pay a 25 basis point "delivery" fee when refinancing loans under the new "Home Affordable Refinance" program mandated by the Treasury Department."We have waived all the delivery fees with the one minor exception — the across-the-board market conditions fee," said Freddie spokesman Brad German. Freddie charges the 25 bp market conditions fee on all loans it purchases from lenders. Fannie Mae has similar 25 bp fee. Fannie has not waived its delivery fees for Home Affordable refinancings. However, the GSE will allow borrowers to roll the closing costs into the new loan. They can also shop around for the best refinancing deal offered by Fannie seller/servicers. Freddie allows borrowers to roll $2,500 of closing costs into new loan, but only if they refinance through their current servicer.

The New York Federal Reserve Bank ramped up its purchase of GSE mortgage-backed securities the past two weeks due to an increase in refinancings and agency issuance of MBS.MBS issuance by Fannie Mae, Freddie Mac and Ginnie Mae increased to $97 billion in February, compared to $61 billion in January. A new Credit Suisse report says issuance could reach $130 billion in March. "The Fed's purchases of agency MBS have been very effective in lowering rates, improving liquidity in the market and spurring refis," said CS mortgage strategist Mahesh Swaminathan. From February 26 through March 11, the New York Fed purchased $57.2 billion in agency MBS compared to $44.9 billion for previous two-week period. Meanwhile, Treasury said it purchased $12.7 billion in Fannie and Freddie MBS in February, down from $22.6 billion in January.

Kara McIntosh of Bethesda, Maryland, pleaded guilty to mail fraud related to the fraudulent purchase of properties in Maryland and Washington, D.C. using false mortgage documents. According to the plea agreement, McIntosh, Timothy Reed and others recruited straw buyers to purchase houses. McIntosh knew the straw purchasers were not planning to live in the properties and did not qualify for the mortgages. Some of the straw buyers purchased multiple properties at the same time. To enable straw buyers to purchase the properties, McIntosh was paid to prepare fraudulent mortgage applications, which misrepresented the straw buyers' income and assets. McIntosh also received part of the fraudulently obtained mortgage funds. For example, at one closing, McIntosh falsely claimed $109,600 for "renovations" that her company purportedly performed. No such renovations ever occurred. Beginning in 2006, this scheme involved fraudulent loans worth more than $19 million. More than 10 individuals and banks were harmed. The loss amount foreseeable to McIntosh is between $2.5 million and $7 million. Many of the purchased properties have been foreclosed upon. U.S. District Judge J. Frederick Motz has not yet scheduled her sentencing. Her co-conspirator, Reed, pleaded guilty on Feb. 10 to the same offense. No date has been scheduled for his sentencing. To date, four defendants have pleaded guilty to their participation in this scheme.

The originators of subprime mortgages and securitizers would have to retain an interest in any securities sold to investors under a subprime lending bill House Financial Services Committee chairman Barney Frank, D-Mass., is drafting. "We are going to have originator liability," the chairman told a Washington meeting of the National Community Reinvestment Coalition. Rep. Frank said the originator will be in the first loss position and the issuer of the mortgage-backed security would be the "next one in line." The percentages for these loss positions have not been determined yet, he told reporters. He also told NCRC members the subprime lending bill will "toughen up the liability on the securitizer. We are going to put more penalties on the person who sells it." The chairman expects his committee will pass the subprime lending bill in April. Later this year when the committee takes up regulatory reform, Rep. Frank wants impose similar originator/securitizer liability on all MBS and asset-backed securities.

Ginnie Mae's year-to-date issuance for the 2008 fiscal year jumped to $135.9 billion from $55.2 billion during the first five months of the previous fiscal year. Total issuance for its mortgage-backed securities program reached $27.9 billion in February, according to the government agency. Ginnie guaranteed $27.5 billion in single-family MBS and $379 million in multifamily MBS during the month.

Freddie Mac posted a $23.9 billion loss in the fourth quarter, noting that its regulator has filed a request with the U.S. Treasury for $30.8 billion in new funding to maintain the GSE's net worth position above zero. For the full year, Freddie lost a stunning $50.8 billion, a record for the company which has been operating under a federal conservatorship since last summer. Two weeks ago Freddie's fellow GSE, Fannie Mae — also a ward of the government — reported a 4Q net loss of $25.2 billion and full year loss of $58.7 billion. Freddie's new CEO John Koskinen blamed the quarterly loss on mark-to-market accounting adjustments of $13.3 billion, and problems in its derivatives portfolio, among other items. The mortgage investing giant also cited credit-related charges on its residential portfolio. The firm cited rising delinquencies, weak labor markets, and "steeper" declines in home prices. Freddie and Fannie together invested in well over $200 billion in subprime-related securities during the height of the nonprime boom.