Compliance & Regulation

Lee Howlett of Portland, Oregon, pleaded guilty before U.S. District Court Judge Robert E. Jones to charges related to his participation in a mortgage fraud scheme. Howlett was charged as part of Operation Malicious Mortgage, a nationwide mortgage-fraud sweep involving more than 400 defendants. According to Karin J. Immergut, U.S. attorney for the District of Oregon, between 2002 and 2006, Howlett conspired with others to purchase real property in the name of co-conspirators. He caused false information to be given to mortgage lenders in applications for mortgage loans by the co-conspirators to induce lenders to approve mortgage loans. He created false appraisal reports for properties used in the conspiracy and signed the reports using the name and license number of a licensed appraiser without the appraiser's knowledge or authority. Appraisals on some properties were inflated and the higher value was used to apply for larger loans. According to court records, between 2003 and 2006, Howlett made false statements on applications for mortgages on approximately 16 transactions involving seven properties and financing totaling around $3.7 million. Howlett took the excess funds for his own use and to share with his co-conspirators. The properties were either sold or went into default. Sentencing is set for May 5, 2009.

After being convicted in November 2008 for charges related to organizing a mortgage fraud scheme, Mitchel A. Fuchs, a.k.a. "Mike Fox," of Rockford, Illinois, was sentenced by U.S. District Judge Frederick J. Kapala to 144 months in prison. In addition to the 12 years of imprisonment, Judge Kapala also ordered Fuchs to pay $183,890 in restitution. According to Patrick J. Fitzgerald, U.S. attorney for the Northern District of Illinois, Fuchs, and co-conspirators Frank G. Anast of Rockford, and Jessica L. Gibson of Loves Park, Ill., defrauded commercial lenders by causing unqualified loan applicants to receive commercial loans. From 2002 through approximately 2005, Fuchs was a loan officer at two Rockford mortgage brokerage firms that earned fees by assisting customers in obtaining mortgage-backed loans from commercial lenders. From February of 2004 through August of 2004, Gibson worked for Fuchs as a loan processor. During this same time period, Anast was self-employed doing computer work. Fuchs defrauded commercial lenders by deceiving them into funding loans for unqualified loan applicants by paying Anast to create fictitious pay stubs and W-2s for Fuchs' loan customers. In addition, Fuchs and Gibson falsely altered pay stubs and W-2s for other loan customers and altered credit reports for Fuchs' loan customers. Fuchs created fictitious cashier's checks and official bank checks to falsely show that his customers had invested their own funds in the properties. In addition, Fuchs and Gibson created fraudulent investment statements in order to show that loan customers had sufficient funds available to close on the loans they were seeking. Both Anast and Gibson were sentenced on Nov. 14, 2008. Anast was sentenced to five years of probation, 10 months of which are to be served on home confinement and ordered to pay $87,369 in restitution. Gibson was sentenced to four years of probation, two months of which are to be served on home confinement and ordered to pay $29,510 in restitution.

After admitting to leading a scheme to fraudulently obtain more than $12 million in home loans, David Kostelec of Leawood, Kansas, has been sentenced to 154 months in federal prison and ordered to pay more than $1.3 million in restitution. In his plea in October 2008, Kostelec admitted that from July 20, 2002, through Oct. 14, 2005, he and others conspired to defraud lenders by submitting fraudulent loan applications and false real estate appraisals and attempted to conceal the crimes by laundering the money through accounts at various banks. Kostelec submitted false and fraudulent appraisal reports to lenders containing inflated property values and forged signatures of licensed appraisers. Conspirators stole the identities of licensed appraisers by searching the Internet for information including the appraisers' state license numbers. After closing, the conspirators used straw entities to receive the money from escrow companies. Then they moved the money to personal accounts. Kostelec admitted to committing these schemes with properties in Kansas, Missouri and Florida.

Chandra Jones of Lanham, Maryland, pleaded guilty to charges related to a mortgage fraud scheme that falsely promised to help homeowners facing foreclosure keep their homes and repair their damaged credit. According to her plea agreement, in July 2005, Jones was hired to work as a loan processor at the now-defunct Metropolitan Money Store in Lanham, Md., which offered foreclosure consultation and credit services to financially distressed homeowners. At MMS, Jones conspired with others to fraudulently promise to help troubled homeowners avoid foreclosure. The homeowners were directed to allow title to their homes to be put in the names of straw buyers for a year, during which time MMS promised to improve the homeowners' credit ratings, help them obtain more favorable mortgages and eventually return title to their homes to them. Using the homeowners' properties, the conspirators applied for mortgages to extract the maximum available equity from the homes and prepared and submitted to mortgage lenders fraudulent loan applications to obtain inflated loans on the target properties in the straw buyers' names. At settlements, the conspirators imposed numerous fees and required "seller contributions," which were far in excess of industry standards. They also imposed fees for services that were not performed. The total loss attributable to Jones is $4.19 million. Jones, daughter of former MMS CEO Jennifer McCall and her husband Clifford McCall, is the sixth defendant to plead guilty in the MMS mortgage fraud scheme. The McCalls also pleaded guilty to fraud charges connected with the scheme. U.S. District Judge Roger W. Titus scheduled sentencing for Jones on Oct. 5, 2009.

Ginnie Mae guaranteed the issuance of $26.5 billion in single-family mortgage-backed securities in January, just as issuance has leveled off over the past few months after a major upswing last year. Ginnie single-family MBS issuance hit an all time high of $29.2 billion in October and topped Fannie Mae and Freddie Mac in MBS issuance. But Ginnie volume dropped back to $27 billion in November and $23.6 billion in December. The agency also guarantees multifamily securitizations, including $342 million in January. Total issuance of Ginnie Mae MBS (including multifamily) for the first four months of fiscal year 2009 stands at $108.9 billion as of January 30, compared to $43.3 billion in the same four months of FY 2008. "Ginnie Mae was created to be there when the market needs it most and provide stability, and that is exactly what we are doing now," said Ginnie Mae president Joseph Murin.

House and Senate conferences have cut the $15,000 homebuyer tax credit in half, according to sources, and limited the benefit to first-time homebuyers in hammering out the final version of the economic stimulus package. As MortgageWire went to press the conferees have not released the conference report on the $789 billion stimulus bill (H.R. 1) and it is unclear when the House will vote on the final bill. Industry lobbyists are confident the final bill will restore the maximum $729,750 loan limit for Fannie Mae, Freddie Mac and Federal Housing Administration loans for the rest of this calendar year. The $7,500 first-time homebuyer tax credit is due to expire September 1, one source said. The full amount of the tax credit is available to families with a maximum adjusted gross income of $150,000 and $75,000 for individuals.

Federal Housing Administration single-family endorsements totaled $71.7 billion in the first quarter of fiscal year 2009, up 235% from the same period a year ago. Lenders originated $22.8 billion in FHA loans in December alone, compared to $21.4 billion during the three months in the first quarter of FY 2008. The latest data also shows that FHA condominium and 203(k) purchase/improvement loans are growing at a fast clip. Lenders made $3.7 billion in condo loans in the first quarter of FY 2009, up 314% from a year ago and $541.5 million in 203(k) loans, up 255%. The condo and 203(k) loans are included in the $71.7 billion total of FHA single-family loans. Meanwhile, defaults continue to creep up, despite a 24% increase in FHA's portfolio of insurance-in-force over the previous four quarters. FHA loans 90 days or more past due hit 6.8% as of December 31, up from 5.98% in the first quarter of FY 2008.

The government could purchase delinquent or underwater mortgages in bulk and restructure the loans using existing Federal Housing Administration programs, according to a Federal Reserve governor. Congress is considering several changes to the FHA Hope for Homeowners to make it more attractive to homeowners and servicers, Fed Gov. Elizabeth Duke told a risk management group. She suggested the government might consider reducing the interest rate that H4H borrowers pay. "The government might also consider purchasing delinquent or at-risk mortgages in bulk and then refinancing them into H4H or other FHA programs," Governor Duke said.

The Office of Thrift Supervision is urging federally chartered thrifts to suspend all foreclosures of owner-occupied homes until the Treasury Department finalizes a comprehensive housing plan to prevent foreclosures. Treasury secretary Timothy Geithner is expected to unveil a new home loan modification program in a few weeks that may include loan guarantees for newly modified loans. The new administration wants to use $50 billion of the Troubled Asset Relief Program funds to bring down mortgage payments and reduce mortgage interest rates on troubled loans. It is expected to include a mortgage interest rate buydown component. "OTS-regulated institutions would be supporting the national imperative to combat the economic crisis by suspending foreclosures until the new plan takes hold," OTS director John Reich said.

Private investors are interested in purchasing highly illiquid mortgage assets from banks and other financial institutions with the aid of long-term government financing, according to Treasury Department officials. There is "tremendous interest" in purchasing these assets but currently the investors can only secure short-term financing, a Treasury official told reporters. Providing longer-term financing will make it more "comfortable" for them to buy and hold these assets, he said. Treasury secretary Timothy Geithner said the Obama administration is willing to put up $500 billion in financing capacity and possibly expand it to $1 trillion if this private/public partnership program is successful in cleansing banks of bad assets. It is one part of the administration's plan to stabilize the financial system and increase the flow of credit. Treasury officials are still working on the structure of these partnerships, which would allow the government to share in the upside, if the investors make an attractive return. Treasury is not planning to shield investors from losses through insurance or guarantees - at least initially. "The program will evolve," the Treasury official said. But that is "not our intent at the moment."