Compliance & Regulation

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 early January. 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 well over $200 billion in subprime-related securities during the height of the nonprime boom.

A former loan processor who was based in Houston has pleaded guilty to mail and wire fraud conspiracy charges before U.S. District Judge Nancy F. Atlas. The processor, Babette Jammer, admitted to conspiring with others to defraud residential mortgage lenders by misstating facts relevant to the lending decisions. Jammer assisted loan officers at two Houston area mortgage brokerage firms in preparing fraudulent documents used to induce lenders to provide 100% financing for homes the borrowers falsely claimed were to be their primary residences. Jammer created false IRS documents, including W-2 forms and tax returns, which were provided to the lenders.

SigniaDocs, Houston, has integrated its electronic vault technology with Equifax's identity verification engine to address their respective users' interest in using secure automation to counter increasing ID fraud through means in line with new federal rules. The engine, which is called Equifax Secure's eIDverifier, verifies online mortgage applications and the company promises borrower identification that is compliant with the Federal Trade Commission's Fair and Accurate Credit Transactions Act red flag rules. The rules, which first went into effect in November 2008 and are set for full enforcement as of May 1, require companies to look out for and address potential indicators that may be signs of ID fraud. A February report by Javelin Strategy & Research, San Francisco, indicated that the number of identity fraud victims increased 22% to 9.9 million adults in the United States in 2008.

Freddie Mac Wednesday morning named its current non-executive chairman, John Koskinen, interim chief executive officer and then appointed a director, Robert Glauber, to fill Mr. Koskinen's role. Both appointments will be effective this Friday when current CEO David Moffett officially steps down from the government controlled mortgage investing giant. Mr. Koskinen is currently serving as the company's non-executive chairman, a position he's held since September when the government placed Freddie into a conservatorship. Previously he was president of the United States Soccer Foundation, and before that deputy mayor and city administrator of Washington. Mr. Glauber joined Freddie's board of directors in 2006. He is a lecturer at Harvard's Kennedy School of Government and a visiting professor at the college's law school. Prior to that, he served as chairman and CEO of the National Association of Securities Dealers. Mr. Moffett unexpectedly announced his resignation earlier this month. Freddie reports earnings later this week.

The Senate has approved final passage of an omnibus appropriations bill that increases FHA's commitment level to $315 billion for this fiscal year, up from $185 billion in FY 2008. Ginnie Mae, which securitizes Federal Housing Administration and other government-backed mortgages, also is getting a $100 billion increase in its commitment level to $300 billion. Lenders originated $66.4 billion in FHA single-family loans in the fourth quarter of FY 2008, which ended Sept. 30. In the first quarter of FY 2009, FHA endorsements totaled $71.9 billion. It appears FHA loan production could easily hit $300 billion as many lenders are using FHA loans to modify and refinance nonprime loans. Congressional appropriators allotted $13 million to the HUD Inspector General to keep a closer watch on the FHA single-family program. The appropriators also instructed the Government Accountability Office to determine whether the Inspector General's office has enough resources to audit FHA's "expanded role" in refinancing subprime, Alt A and other home mortgages.

Two high-ranking Senate Democrats have introduced a bill to create a consumer credit protection agency that could police mortgage products offered by any lender — including federally chartered banks. The legislation sponsored by Sens. Richard Durbin (Ill.) and Charles Schumer (N.Y) would create a Financial Product Safety Commission to ensure mortgages and other consumer financial products are safe and not abusive or predatory. The new commission would ensure "companies are held accountable when they abuse, deceive or take advantage of the consumer," Sen. Durbin said. "The time is right for a financial services regulator with a consumer focus," Sen. Schumer said. Consumer, community, labor and civil rights groups are supporting the bill, which they claim will not only protect consumers but the entire economy. "It is now widely accepted that the current international economic crisis was triggered by the failure of federal regulators to stop abusive lending, particularly in the housing sector," according to a joint letter to the sponsors. But many industry groups are wary of the senators' approach. "We think it makes sense to keep the concepts of safety and soundness combined with consumer protection with the current regulators," said Scott Talbott, chief lobbyist for the Financial Services Roundtable.

Zacks Equity Research predicts that when Freddie Mac releases full-year results shortly the GSE will have lost $39.50 a share. Meanwhile, the Chicago based research firm — which has a "sell" rating on the government controlled GSE — says the company will lose $13.12 a share in 2009, and $9.81 next year. In trading Tuesday, Freddie's shares were selling for 39 cents each. "Though recently the government laid out an expanded role for the GSEs in the housing market as part of its Homeowner Affordability and Stability Plan, we anticipate the price volatility to continue as the market looks for further information on the future structure of the GSEs and their role," Zacks says in a new research note. "Further, as the housing situation continues to worsen, we anticipate higher losses and write-offs. As a result, the conservatorship is expected to continue for a long time and this will yield no value to the common shareholders of the company."

Federal Reserve Board chairman Ben Bernanke said current accounting and capital policies for financial institutions are excessively "pro-cyclical" and need to be reformed. "It is too difficult for banks to raise capital during an economic downturn," he said. "Regulatory capital should be built up during good times and drawn down during bad times in a manner consistent with safety and soundness," the Fed chief told a Council of Foreign Relations meeting. Determining asset values in illiquid markets can be "very difficult, to put it mildly," Mr. Bernanke said. But he encouraged the accounting standard setters to move "expeditiously" in their efforts to improve mark-to-market accounting. "[F]urther review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their pro-cyclical effects without compromising the goals of disclosure and transparency," the Fed chairman said.

Central States Mortgage, Wauwatosa, Wisc., which provided residential origination services to more than 250 credit unions, shut its doors on Monday, the second closure of a major CU-related mortgage firm in as many months. CSM is owned by 25 credit unions and the Wisconsin Credit Union League. Central States originated $538 million in residential loans in 2008, compared to $707 million the year before. The lender has been embroiled in controversy over the past eight months - first with the firing of its CEO and founder Richard Jungen, then with a suit claiming Mr. Jungen defrauded it of $15 million through a secondary funding vehicle he owned called Interim Funding. (The alleged fraud took place while he was still managing Central States.) Members United Corporate FCU of Illinois, which provided a warehouse line of credit to Central States, is also preparing to write-off millions of dollars in loans to CSM. A message at the Central States switchboard this morning says the company has suspended operations. Mr. Jungen founded Central States in 1984, then sold a majority stake to the credit unions in 1997. He continued to head the operation until last July when he was fired.

Richard Shumway of Brewerton, NY, was sentenced in U.S. District Court in Burlington, Vermont, to 51 months of imprisonment followed by three years of supervised release following his guilty plea to a federal wire fraud charge. Chief U.S. District Judge William K. Sessions III also ordered that Shumway pay $1.34 million in restitution. Shumway skimmed a total of nearly $1 million from more than 200 loans he brokered while owning and operating TSC Funding, a South Burlington-based mortgage brokerage business, by means of payments taken outside of closing, without the knowledge of the borrower. As part of the scheme, Shumway arranged for Gerald Mullaney, formerly a licensed real estate appraiser in the Albany, N.Y., area, to prepare falsified appraisals for the homes the borrowers were purchasing. This enabled Shumway to induce the borrower to take out a larger loan than necessary to buy the home, and also enabled Shumway to divert some of the proceeds of each loan to his own benefit. Shumway misled borrowers into believing the extra fees were to be paid to the lending institution to obtain a lower interest rate. Nazzarra Bernardo of Syracuse, the owner of the title company that processed the closing paperwork on each loan and served as escrow agent, aided Shumway in this scheme. Mullaney and Bernardo have pleaded guilty to related charges and await sentencing.