Compliance & Regulation

Over one-third of outstanding U.S. prime and alternative-A credit residential mortgage-backed securities may have so-called bankruptcy carveouts, Fitch Ratings found as part of its review of the cramdown legislation's potential effects on current RMBS transactions. Deals with carveouts allocate certain bankruptcy losses in atypical ways that tend to vary. Fitch found about 29% of prime deals and 46% of alt-A transactions have bankruptcy carveouts. These carveouts allocate the amount of the bankruptcy loss to bonds in reverse sequential order in amounts ranging from about $100,000-$400,000, Fitch said. "Bankruptcy losses in excess of this limit are then allocated, pro rata, across the capital structure," the rating agency said.

House Democrats have agreed to a compromise on pending bankruptcy/cramdown-related legislation that gives preference to interest rate reductions over reducing the loan amount. According to combined press reports, principal reductions would still be allowed but lenders would have to share any profit on the eventual sale of their residence with the owner of the mortgage. Also, limits would be placed on cramdowns if the homeowner has already modified his loan. Details were still being worked on at press time. The compromise comes just as new figures show that 8.3 million homes are now worth less than their loan value with another 2.2 million units approaching a negative equity position. (See related item.)

William Athan of Shelton, Conn., waived his right to indictment and pleaded guilty before U.S. District Judge Vanessa L. Bryant to his role in a $3.6 million mortgage fraud scheme. According to public statements and documents filed with the court, Athan, Jose Guzman, Brian Guimond and others participated in a real estate and mortgage fraud scheme that arranged for individuals to purchase properties and fund mortgages of houses located in Connecticut. Athan, Guzman and another individual created a New London-based real estate investment company, which was engaged in both the business of buying and selling real estate properties and the mortgage origination business. Through this scheme, the conspirators arranged for and assisted in arranging for various straw borrowers to obtain funding from various lenders.

TCB Financial, Wayzata, Minn., a top 50 ranked residential servicer, has asked permission to return $361.2 million in Troubled Asset Relief Program funds to the Treasury as soon as possible. Under current rules depositories receiving TARP money can return the money after giving the government 30 days notice. In a statement TCB CEO William Cooper said, "TCF has sufficient capital and access to capital to operate without the TARP money," adding that, "we believe participation in TARP has created a competitive disadvantage" for the bank. According to a research note put out by Sandler O'Neill, "TCB is perhaps among the few with the wherewithal to pay back the funds immediately."

Critics of the Obama administration's loan modification proposal say that it would not adequately address consumers' nonmortgage debt loads or the second liens on their homes, and that many borrowers would end up defaulting again.According to a report in American Banker, the proposal, part of a broad housing plan unveiled last month, would subsidize principal or interest rate reductions that lower a monthly mortgage payment to 31% of the borrower's income. But there is no maximum for the total debt-to-income ratio a borrower may carry to be eligible for a modification. Nor is there any requirement or incentive for a consumer's other creditors to write down their loans. "You're not getting a complete picture of what the borrower can afford to pay if you don't take into account all their debt," said Fred Melgaard, executive vice president of DRI Management Systems, a Newport Beach, Calif., provider of default management software.

Financial institutions last year filed 62,084 mortgage-related "suspicious activity reports" with government regulators -- a 44% increase from the prior year, according to new figures released by the Financial Crimes Enforcement Network. FinCEN director James H. Fries said one trend the agency found "is the increase in mortgage fraud detection in connection with mortgage purchasers sending home loans back to originators for repurchase." FinCEN also is seeing an increase in foreclosure-related fraud. The SARs figures cover reports filed for the 12-month period ending June 30, 2008.

Anne Justesen of Stillwater, Minnesota, former vice president of Jennings State Bank, pleaded guilty in U.S. District Court in Minneapolis to one count of mortgage fraud through identify theft. According to court documents, in November 2005, Justesen forged her husband's signature on documents for a $200,000 mortgage for a lake home near Luck, Wis., owned by Justesen and her husband. As a result of the forged mortgage documents, Jennings State Bank was left with inadequate collateral. The bank discovered the fraud during a routine examination of its documents. According to Jennings State Bank, an employee found a document that looked unusual and confronted Justesen about it, which triggered the investigation.

Micah Bowens of Henderson, Nev., was sentenced to 48 months in prison for leading a mortgage fraud scheme in Phoenix, San Diego and Las Vegas. Jennifer Sellers, a real estate agent from Las Vegas, was sentenced to 24 months in prison and Alonzo Love of San Diego was sentenced to 14 months. All three pleaded guilty to charges related to their participation in a five-year conspiracy involving the purchase of 19 properties using fraudulent loan documents. Seven other co-conspirators have pleaded guilty for their involvement and will be sentenced over the next few months. According to Diane J. Humetewa, U.S. attorney for the District of Arizona, from May 2002 through May 2007 Bowens, Sellers, Love and others conspired to commit mortgage fraud in Phoenix, San Diego and Las Vegas by fraudulently submitting mortgage loan applications on behalf of straw buyers under false pretenses, obtaining and disbursing the proceeds of fraudulently obtained loans, including directing portions of the proceeds to bank accounts in Bowen's, Seller's, Love's and other defendants' control. The trio used the proceeds to purchase expensive homes, luxury vehicles, jewelry and other personal expenses. The conspiracy resulted in a loss to lending institutions of approximately $2.5 million.

A civil lawsuit filed against CU National Mortgage last week - hours before the company filed for bankruptcy - charges that the owner and CEO of CUNM masqueraded as an executive vice president of another credit union and approved "allonges," assigning millions of dollars of that credit union's mortgages to Fannie Mae as part of a wide-ranging fraud scheme that may involve hundreds of millions of dollars of credit union loans. CUNM was a private-label lender/servicer for more than a dozen credit unions. During a hearing last week in U.S. bankruptcy court (where CUNM and its parent U.S. Mortgage of Pinebrook, N.J. filed for protection), lawyers for the other CU, Picatinny FCU of Dover, N.J., said CUNM may have sold as much as $14 million of its loans to Fannie Mae without authorization and without sending the receipts to the credit union. "[USM CEO Michael] McGrath endorsed Picatinny's name to a note which assigned the mortgages to Fannie Mae," said James Forte, Picatinny's lawyer in the case. "These loans were sold without our authorization." Picatinny and dozens of other CUs are currently working with officials of USM/CUNM for the return of tens of millions of mortgages sold to Fannie Mae without their authorization, according to a report in Credit Union Journal. Lawyers for Mr. McGrath did not return telephone calls about the matter. The FBI is now investigating the collapse of USM and CUNM.

The ceiling on FHA-insured loans has been raised to $729,750 in 76 high-cost counties, including 51 in just four states - 15 in Virginia, 14 in California, 12 in New Jersey and 10 in New York. In 666 other counties, meanwhile, the FHA maximum has been set somewhere between the $271,000 floor and the high-cost ceiling. The new limits, which were authorized under the American Recovery and Reinvestment Act signed into law by President Obama on Feb. 17, will remain in effect until Dec. 31, 2009. A complete list of the affected counties is attached to HUD mortgagee letter 09-07.