Compliance & Regulation

Credit Union National Association officials are saying they support a possible Senate compromise on bankruptcy cramdown legislation, but they continue to oppose a bankruptcy bill that the House of Representatives is slated to vote on this Thursday (Feb. 26). "Senators Evan Bayh (D-Ind.) and Arlen Specter (R-Penn.) appear to agree with the approach that CUNA has advocated for over a year now," a top CUNA official told credit union executives at their annual legislative conference. He noted the two senators are working on a bill that would limit the "scope, application and duration" of bankruptcy mortgage relief. But the bill approved by the House Judiciary Committee, which allows judges to reduce or cram down the principal amount of a residential mortgage, would encourage everyone who has a mortgage to game the system. "The good mortgages you made shouldn't be subject to cramdown," he said.

The loan-to-value limit on mortgages that Fannie Mae and Freddie Mac can refinance under the President's foreclosure rescue plan could go higher than 105%, according to an industry veteran who has been advising the Obama Administration on the issue. Stressing that he was speaking for himself and not the White House, William Longbrake, a member of the board at First Financial Northwest, Renton, Wash., said it's "entirely possible" the ceiling could rise above 105% once the government-sponsored enterprises determine the procedures they will follow regarding refinancing underwater loans. Last week, James Lockhart, director of the Federal Housing Finance Agency, said the line was drawn at 105 so the new loans could still be securitized. According to the government, about 75% of the mortgages with LTVs above 80% of current value that the GSEs own or guarantee fit under that cap. Mr. Lockhart said his team did not want to push the lid any higher because of capacity issues. But mortgage professionals said the artificially low LTV limit won't help borrowers in California, Nevada and other markets where values have sagged the most. Mr. Longbrake, who has worked at the FDIC and most recently at WaMu, made his remarks at the National Association of Mortgage Brokers Legislative and Regulatory Conference in Washington.

FHA lenders would be reimbursed for losses on any cramdowns under a housing bill pending in Congress. The bankruptcy bill recently approved by the House Judiciary Committee raised concerns that lenders of FHA and Department of Veterans Affairs guaranteed mortgages could suffer losses if a mortgage is crammed down. The housing bill (H.R.1106) that the House of Representatives is slated to vote on this Thursday allows FHA and VA lenders to cover lender losses (principal and interest) due to a bankruptcy cramdown. Despite these changes, the mortgage industry continues to oppose passage of the bankruptcy section of the housing bill. H.R. 1106 also provides legal protections for servicers that engage in loan modifications.

Expecting another big year for the FHA single-family insurance program, House appropriators are increasing the agency's commitment level to $315 billion, a 70% improvement from last year. Lenders originated $171.8 billion in Federal Housing Administration loans in FY 2008, which ended September 30. In the first quarter of FY 2009, FHA single-family endorsements totaled $71.9 billion, compared to $21.4 billion for the same period a year earlier. The House of Representatives is slated to vote on an omnibus appropriations bill this Wednesday (Feb. 25) that increases commitment levels for the Government National Mortgage Association and FHA. Meanwhile, appropriators have allotted the HUD Inspector General an extra $13 million to keep a closer watch on FHA, focusing on new programs, including the 'Hope for Homeowners Now' initiative which helps consumers refinance their underwater mortgages. On Thursday, the House is expected to vote on a bill (H.R. 1106) to make the H4H program more attractive to borrowers and servicers. H.R. 1106 also includes provisions to allow bankruptcy cramdowns, shield servicers engaged in loan modifications from investor lawsuits, and bolster the federal deposit insurance programs for banks and credit unions.

After pleading guilty in December 2008 to participating in the fraudulent sale of residential property located in Coral Gables and Miami, Florida, Samuel Morejon was sentenced to 27 months in federal prison, followed by three years of supervised release. According to documents filed with the court, the Coral Gables property was flipped three times within about two years, more than doubling the price of the property from $550,000 to $1.2 million. Morejon served as the straw buyer in the second sale of this property and submitted false loan applications to obtain $850,000 in financing to purchase the property. Once the final sale closed, the individual posing as the buyer in the third sale, co-defendant Jose Martinez, allegedly failed to make a single payment on the mortgage and the property ultimately went into foreclosure resulting in a significant loss to the lender. On the same date Morejon posed as a buyer for the Coral Gables property, he served as a straw buyer in the purchase of another residential property in Miami, Florida. Based on fraudulent misrepresentations in the loan application, Morejon obtained $835,000 of financing to purchase this property. He never made a single payment on the mortgage and the property went into foreclosure resulting in a significant loss to the lender. Additionally, U.S. District Court Judge Marcia Cooke ordered a hearing to determine the restitution to be paid by Morejon, which is scheduled for March 18, 2009.

Larry P. Nardelli of Tampa, Florida, was found guilty of six of the eight counts in which he was named as a defendant in a 47-count indictment. According to evidence presented at trial, Nardelli, who was indicted in July 2008 along with three other co-defendants, entered into several bogus purchase/sale contracts, with co-defendant Michael A. Tringali. They pretended that Nardelli had made downpayments totaling $21.5 million to purchase properties owned by Tringali, all for the fraudulent purpose of providing an apparent source of funds. The conspirators allegedly created a scheme in which they agreed that co-defendant Neil Mohammed Husani would enter into a contract with a seller to purchase vacant land in the Sarasota, Florida area and then would immediately flip the property to Tringali at double the price. Tringali then applied for a loan to obtain funding for the purchase. Relying on the sham contracts entered into with defendant Nardelli, Tringali falsely represented to the various banks that he had the required equity to contribute toward the purchase of the property. Tringali also submitted false financial information about himself and his company. Co-defendant John A. Yanchek, in his capacity as the closing attorney for the conspirators, prepared false escrow letters and closing documents. As a result of the criminal activities of the conspirators, the victim banks unwittingly loaned Tringali money totaling approximately 140% of the value of the land. The conspirators purchased the vacant land from the seller and distributed the excess funds among themselves in various amounts. Ultimately, Tringali was unable to pay off the loans. The total face amount of the commercial loans fraudulently obtained from seven banks was $82.7 million. Yanchek pleaded guilty in February 2009 to related charges and awaits sentencing. Tringali pleaded guilty in November 2008 to related charges and is scheduled for sentencing on March 9, 2009. Mr. Husani is a fugitive who was recently arrested in Jordan. Efforts are underway to have him extradited back to the Middle District of Florida. Nardelli's sentencing hearing is scheduled for June 15, 2009.

Four New Yorkers have been indicted for allegedly orchestrating a fraud scheme involving more than $10 million in subprime mortgage loans. Sharmon Howell of Queens, N.Y., was arrested and pleaded not guilty in Manhattan federal court. June Persaud of Brooklyn, N.Y., surrendered to authorities and also pleaded not guilty. David Moore of Brooklyn and Oscar Ancrum of New York, N.Y., remain at large. According to the indictment, from 2006 through 2007, Mr. Howell allegedly led a scheme to obtain dozens of home mortgage loans by submitting applications and supporting documentation containing false and misleading information to various banks and lenders, ultimately obtaining more than $10 million in subprime mortgages. To further the scheme, the defendants allegedly recruited straw buyers from, among other places, a halfway house in New York City that served ex-convicts and a public housing complex in Brooklyn, to purchase properties in and around New York City. The defendants allegedly obtained mortgages on behalf of the straw buyers for amounts greater than the actual sale price of the homes. To do so, the defendants allegedly obtained fraudulent appraisals for the homes and misrepresented various material facts about the straw buyers' income, assets, debts and intent to live in the properties. After obtaining these mortgages, the defendants allegedly distributed the difference between the price of the house and the inflated value of the mortgage among themselves. Currently the vast majority of the mortgages obtained by the defendants are in default and/or foreclosure.

The mortgage insurance industry - after receiving certain assurances from the nation's GSE regulator - has signaled its support for a new Fannie Mae and Freddie Mac program to refinance certain high LTV loans without using MI coverage. The refinance program is designed to lower the interest rate on at-risk risk loans that the GSEs already own or guarantee. Federal Housing Finance Agency director James Lockhart assured the Mortgage Insurance Companies of America that the MI exemption is limited and mortgage insurance will continue to be required on notes with loan-to-value ratios above 80% that are sold to Fannie and Freddie, as required by their charters. "We commend director Lockhart for offering this important clarification of the President's housing recovery plan," said MICA president Kevin Schneider. An estimated 4 million to 5 million borrowers who cannot refi because of falling house prices and tighter loan and mortgage insurance standards could be helped by the GSE refinance program. The GSEs can waive private mortgage insurance in refinancing these high LTV loans unless the borrower already has PMI. In that case, they have to "use best efforts to get the mortgage insurance rolled over to the new mortgage," Mr. Lockhart said. "Thus, it would be beneficial to the success of this initiative for the mortgage insurers to work with both companies as they move toward implementation."

The Obama administration is still standing behind a Real Estate Settlement Procedures Act rule and urged a U.S. district court to dismiss a legal challenge to the rule with "prejudice." Department of Justice attorneys did not present a defense or any praise of the RESPA rule, which the National Association of Mortgage Brokers claims in a lawsuit would place brokers at a "permanent disadvantage in the marketplace." Opponents of the RESPA rule noted that the DOJ response was expected and the new administration still has time to reconsider its position, since the main provisions of the final rule do not go into effect until January 10, 2010. "We hope the new administration will pull back the RESPA rule as they are doing with other regulations that were put into effect by the Bush administration after the election," said Matt Dolan, a NAMB consultant with the Federal Policy Group. The Department of Housing and Urban Development issued the RESPA rule in November. It requires lenders to provide a standardized and expanded good faith estimate disclosure to borrowers shortly after they file a mortgage action. The GFE includes a disclosure of the mortgage broker's compensation, which NAMB claims is unfair - since other originators don't have to disclose their compensation.

The National Association of Mortgage Brokers has filed suit against the Federal Housing Finance Agency to block implementation of a new GSE appraisal rule, claiming it could put brokers out of business and allow appraisal management firms to profit at the expense of independent appraisers and consumers. The new 'Home Valuation Code of Conduct,' which goes into effect May 1, prohibits loan officers and mortgage brokers from directly ordering appraisals. NAMB claims the code has a "bias toward mortgage lenders" and that major banks are already requiring brokers to order appraisals through their affiliated appraisal management companies. The trade groups says the new code of conduct is a result of an investigation led by New York Attorney General Andrew Cuomo into the relationship between an appraisal management company (AMC) and the now defunct Washington Mutual, which sold mortgages to Fannie Mae and Freddie Mac. "Although the WaMu lawsuit ostensibly related to how WaMu's relationship with its AMC generated fraudulent appraisals and contributed to WaMu's financial demise, the resulting agreements focused on mortgage brokers, which had nothing to do with the claims alleged in the WaMu lawsuit," NAMB says. The new appraisal code stems from a GSE/FHFA settlement with the New York AG. The valuation code's "abolition on broker-ordered appraisals will force mortgage brokers and customers to rely on lenders and their affiliates for home value appraisals, disrupting the established business practices of mortgage brokers, decreasing the efficiency of the marketplace and increasing the costs to consumers," NAMB says.