Compliance & Regulation

The Senate has approved the confirmation of Timothy Geithner to be the new Treasury secretary and he was quickly sworn-in Monday evening to play a major role in President Barack Obama's efforts to stabilize the financial system and housing markets. At his swearing-in ceremony, Mr. Geithner said the Obama administration intends to move quickly and "launch programs that will bring economic recovery sooner." President Obama has directed his economic team to develop a comprehensive plan to stabilize the banks, revive credit markets and address the foreclosure crisis that could be unveiled in a week or two. The new cabinet secretary has worked at Treasury Department before. He most recently served as president of the New York Federal Reserve Bank, where he was involved in the rescues of Merrill Lynch, AIG and Citigroup. The Senate approved Mr. Geithner's confirmation by a 60-34 vote. Many Republicans and four Democrats voted against Mr. Geithner, who will oversee the Internal Revenue Service, because of his failure to pay $43,000 in payroll taxes earlier in the decade.

With Congress set to eliminate the recapture feature that goes along with the $7,500 tax credit for first-time homebuyers, four key housing and finance groups are urging lawmakers to also extend the credit for the remainder of 2009. Currently, the credit, which has failed to light a fire under the sagging housing market, expires June 30. Thus, if the latest economic stimulus package were adopted in February, as President Obama has asked, the revised credit would elapse in little more than four months. Allowing the credit to expire so quickly "undermines" its potential, especially since it would end before the key summer and fall buying seasons arrive, the Mortgage Bankers Association, National Association of Home Builders, National Association of Realtors and the Independent Community Bankers said in a joint letter to the Senate Finance Committee. The groups also asked the panel to "monetize" the credit so it is available as cash at closing, maintaining that the money would be spent by buyers on updates and upgrades. "This multiplier effect would increase demand for a host of goods and services, thereby increasing activity and demand in other sectors of the economy," they wrote. Currently, the credit, which was put into place last July, is taken as a write-off on tax returns filed for the year in which the house is purchased, and must be paid back in $500 yearly increments.

Federal regulators should not allow banks to modify mortgages without requiring full and accurate appraisals, according to three appraisal groups that are raising "strong objections" to a proposed rewrite of bank appraisal guidelines. "Given the mortgage crisis we are experiencing and given the taxpayers' obligation to assume losses, it is astonishing that the bank regulatory agencies would continue to propose an exemption from their appraisal requirements of transactions involving mortgage loan modifications and workouts," according to the appraisers' comment letter. The American Society of Appraisers, American Society of Farm Managers and Rural Appraisers and National Association of Independent Fee Appraisers also object to other exemptions that allow banks to use automated valuation models and broker price opinions, instead of certified and licensed appraisers. "If the agencies truly believe that independent and reliable valuations are core to real estate decisions, it is difficult to understand why the guidelines permit such widespread use of valuation techniques which are often unreliable and, at best, only marginally reliable," the appraisers say.

The Mortgage Bankers Association is trying to get the Obama administration interested in a bifurcated refinancing program that the Treasury Department could implement using funds for the Troubled Asset Relief Program. The MBA program would allow borrowers who are underwater and cannot get help any other way a chance to obtain a new affordable mortgage with a 90% loan-to-value ratio. The government could probably sell the first mortgage but it would end up holding a second mortgage with little or no equity. The second lien would have priority over all other second liens under the MBA concept, and it would be payable on the gain from any future sale or refinancing. "It is geared toward borrowers who have the income and capacity to make a reduced payment," said MBA senior vice president Steve O'Connor. But it is also designed for borrowers who cannot qualify for a loan modification or regulator refinancing because of negative equity or the servicing and pooling agreement, he said.

Fannie Mae estimates it will ask the U.S. Treasury for $11 billion to $16 billion in funds to cover fourth-quarter losses and maintain a positive net worth. The losses stem from what it calls "credit expenses" and fair market writedowns on the value of its massive MBS holdings. Fannie said the "actual amount of the draw may differ materially this estimate" because it is still finalizing its financial statements. It would be Fannie's first draw-down under a senior-preferred stock purchase agreement Treasury set up for Fannie and Freddie Mac when they were placed into conservatorships in early September. Both GSEs can tap Treasury for $100 billion each. Freddie has already received $13.8 billion and is requesting $35 billion more. All totaled, the government will have invested $64.8 billion in taxpayer money in the GSEs when the funding requests are finally approved.

Cramdown legislation pending in Congress could cause a "substantial" surge in bankruptcy filings by consumers, including mortgagors who are currently paying their loans, according to a new report by Friedman Billings Ramsey. FBR notes that banks, thrifts and other large holders of second liens "would most likely be wiped out by a bankruptcy judge in the modification process." Banks with large HELOC portfolios that might be hurt include Bank of America, Citigroup and U.S. Bancorp, among others, FBR predicts. The Mortgage Bankers Association is lobbying to have cramdowns limited to subprime loans originated during the peak of the housing boom and that cramdown relief should be temporary. The House Judiciary Committee is expected to vote on cramdown legislation on Tuesday afternoon. According to a report in American Banker, concessions have been made to the mortgage industry that might soften the blow of cramdowns, including a provision that would allow lenders to share in the appreciation of a home's value with borrowers who discharge mortgage debt in a bankruptcy. Legislators are including language in the bill that would exempt Federal Housing Administration and Department of Veterans Affairs guaranteed loans from being crammed down. The MBA is adamant that a sunset date be attached to any cramdown authority.

Federal regulators should not allow banks to modify mortgages without requiring full and accurate appraisals, according to three appraisal groups that are raising "strong objections" to a proposed rewrite of bank appraisal guidelines. "Given the mortgage crisis we are experiencing and given the taxpayers' obligation to assume losses, it is astonishing that the bank regulatory agencies would continue to propose an exemption from their appraisal requirements of transactions involving mortgage loan modifications and workouts," according to the appraisers' comment letter. American Society of Appraisers, American Society of Farm Managers and Rural Appraisers and National Association of Independent Fee Appraisers also object to other exemptions that allow banks to use automated valuation models and broker price opinions, instead of certified and licensed appraisers. "If the agencies truly believe that independent and reliable valuations are core to real estate decisions, it is difficult to understand why the guidelines permit such widespread use of valuation techniques which are often unreliable and, at best, only marginally reliable," the appraisers say.

Ralondria Stafford of San Francisco, and Necole Ward of Las Vegas, were indicted on charges relating to a mortgage fraud scheme they allegedly carried out in Vallejo, Calif., where the sisters used to reside. According to Kyle Reardon, assistant U.S. attorney for the Eastern District of California, who is prosecuting the case, the indictment alleges that between July 2005 and August 2006, the defendants operated RN Realtors in Vallejo, and used straw buyers to purchase properties that they owned to avoid foreclosure. The buyers were approached and offered $5,000 for the use of their name and financial information. The defendants allegedly represented to the buyers that the purchase would be in name only and that Ms. Stafford would purchase the properties back from the straw buyers in six to 12 months. In the course of the conspiracy, the defendants are alleged to have prepared Uniform Residential Loan Application forms in the straw buyers' names containing material false statements. These false statements included, among other things, overstating of the straw buyer's income, claiming employment at employers for which the straw buyers did not work and misidentifying the purpose of the purchased locations as a primary residence. The indictment also alleges that on one occasion, in support of the materially false statements, the defendants attached to the application falsified Internal Revenue Service form W-2s and a lease agreement. A trial date has not yet been set. John Richard Manning, Ms. Stafford's attorney, was unavailable for comment at deadline. Bruce Locke, Ms. Ward's attorney, declined to comment.

Steven Gordon, a former principal at Bayview Financial LP, Coral Gables, Fla., pleaded guilty to wire fraud charges related to a five-year scheme to inflate the value of mortgage loans to increase his commission compensation. The Miami resident was dismissed from the firm in 2006. Bayview bought portfolios of loans from lending institutions, pooled these loans into "special purpose entities" and then issued securities backed by those loans to the investing public. While employed at Bayview, Gordon negotiated the purchase of thousands of loans for Bayview's residential mortgage securitization program. His incentive compensation was based, in part, on his ability to buy those loans at a low cost. Gordon admitted that between 2001 and 2006, he engaged in a scheme to defraud Bayview, in which he regularly altered credit information affecting the value of more than 2,800 loans acquired for the residential mortgage securitization program. Gordon's fraud caused Bayview to pay him more than $2.8 million in excessive and undeserved bonuses. Sentencing has been scheduled for April 23, 2009.

Single-family existing home sales unexpectedly jumped 7% in December from November but prices continue to slide as nearly half of all sales involved foreclosed houses. The National Association of Realtors reported that sales of previously owned homes rose from a seasonally adjusted annual rate of 4 million in November to 4.26 million in December. The recent drop in mortgage rates really did not affect December sales so it may be a good sign that sales will rebound in the months ahead. However, NAR estimates that 45% of December sales were foreclosed properties as buyers took advantage of large discounts. The home sales report shows that single-family house prices have fallen by 14.8% since December 2007. The Realtors are hoping the Congress will pass an economic stimulus package that will increase sales and quickly soak up the large inventory of unsold homes that continues to drag down home prices. "The Obama administration and Congress need to move fast to stimulate a spring sales upturn which will help to stabilize home prices and set the foundation for a sustainable economic recovery," said NAR chief economist Lawrence Yun.