Compliance & Regulation

In a few weeks, President Barack Obama will lay out a comprehensive plan to stabilize the banks, revive credit markets and address the housing crisis, according to Timothy Geithner, the president's nominee to be Treasury secretary. The president of the New York Federal Reserve Bank told a Senate panel that the plan will include a bankruptcy provision to help struggling homeowners and possibly a proposal to move toxic assets off bank balance sheets into a "bad bank." Mr. Geithner stressed the comprehensive plan is still under development and he did not want to provide specific details. But he noted the administration wants to craft the bankruptcy proposal so it does not harm the mortgage market and drive capital away. "We are supportive of doing that in the most careful possible way," he said during his confirmation hearing. He also noted it's "enormously complicated" to draw up a bad bank plan that is cost effective. A team is looking at it today, he testified. "It is possible it will be part of the solution going forward." In stabilizing the banks, the administration wants to get the credit markets going again, including commercial and residential mortgage markets. "We also have to provide much more substantial direct support for credit markets," Mr. Geithner said.

Two brothers from New Hampshire have been charged with four counts of wire fraud and one count of mail fraud relating to a scheme to defraud lenders through the acquisition of real estate through straw purchasers using false and fictitious information. The indictment alleges that Thomas Ryder of Hopkinton, N.H., and Paul Ryder of Hudson, N.H., and others, submitted loan applications that included false statements, including statements as to the actual purchase price, the income, assets and employment of the purported purchasers and the intent of the purported purchasers to reside at the residences. The indictment further alleges that the defendants and others then skimmed the difference between the real sales price of the property and the sales price submitted to the lender, for which the lender provided funds, and then divided the proceeds. The brothers were mortgage brokers who operated under the name of M&M Mortgage Consulting located in Salem, N.H. A trial is scheduled for Mar. 3, 2009. The defendants were unavailable for comment.

After pleading guilty to carrying out a scheme to defraud in which he diverted money from his business's escrow account, intended to be used to pay closing costs on real estate transactions handled by his business, Daniel LaMarch of Green Bay, Wisconsin, has been sentenced to six years in prison for tax and wire fraud. LaMarch was also sentenced to a term of three years supervised release and ordered to pay restitution in the amount of $3.66 million. LaMarch is the former owner of Title Services of Green Bay, a company that also maintained offices in Appleton, Shawano, Oconto and Kewaunee. During the period March 2002 through February 2008, LaMarch diverted more than $1.5 million from the escrow account to his own personal benefit and the operation of his business. LaMarch also pleaded guilty to failing to pay to the IRS more than $500,000 in payroll taxes withheld from his employees and underreporting his income by more than $118,000.

The Government National Mortgage Association will consider the effect of the Hope for Homeowners program before taking action against security issuers whose pools have high delinquencies. The agency requires issuers to maintain delinquency rates on outstanding pools below certain thresholds. Ginnie can take a variety of actions against a lender that fails to do so, such as forbidding it to issue new mortgage-backed securities or yanking its license to do business with the agency. In a memo to lenders dated Friday, Thomas R. Weakland, the agency's acting executive vice president, wrote that Hope for Homeowners loans "may experience higher delinquency levels than other FHA loans." The higher delinquency rates may become starkly apparent, because, as Mr. Weakland pointed out, Hope for Homeowners loans can only be pooled into one type of Ginnie security. Hence, "if an issuer's delinquency levels exceed Ginnie Mae's threshold, Ginnie Mae will consider the impact of H4H loans when determining the nature of any action it may take." Hope for Homeowners is a temporary program created last year under which borrowers who are at risk of being foreclosed on can refinance into a new, more affordable loan insured by the Federal Housing Administration. Ginnie also said Friday that Hope for Homeowners loans must have a term of 30 or 40 years, not one in between, to be included in its securities. The agency will create separate pools for the 40-year loans, which may not be commingled with the 30-year ones, Mr. Weakland wrote. Originally the maximum term for the new loan was 30 years, but this month the FHA extended it to 40 years, and said it would let lenders set the term at "some intermediate number of years."

The Federal Home Loan Bank of Pittsburgh expects to take additional writedowns on its $2.73 billion portfolio of private label mortgage-backed securities in the fourth quarter, a move that could make the GSE undercapitalized and endanger its shareholders - banks and thrifts primarily. In a new filing with the Securities and Exchange Commission, the government sponsored enterprise admits that it will not complete an analysis of its private label holdings until late in the first quarter. At December 31 the Pittsburgh bank held $2.43 billion in alt-A bonds with an "unrealized" loss of $847 million. Its $20 billion subprime portfolio is now valued at $15 billion. The bank says that at the time it bought into these bonds all were rated AAA. About 10 days ago the FHLB-Seattle told members it may not meet its risk-based capital requirement for the period ending December 31, blaming accounting rules that affect the value of its investment in private label mortgage-backed securities. Seattle holds roughly $4.52 billion in alt-A private label securities that have declined in value steadily since the second-half of 2007. One executive, who works for a depository, told MortgageWire that if banks and thrifts are forced to write down the value of their FHLB stock investments similar to the way they wrote down their Fannie Mae/Freddie Mac stock, "we're going to need the second half of that TARP money fast."

The Supreme Court has decided to review a decision by the Second Circuit Court of Appeals that essentially frees national banks from all state scrutiny and pits 50 state attorneys general against the Comptroller of the Currency. The appeals court ruled that four national banks did not have to respond to former New York AG Eliot Spitzer's request for information about their mortgage lending practices. Mr. Spitzer wanted information to determine if they unfairly placed minorities into higher cost mortgages. The circuit judges ruled 2-1 that the AG's action represented an "unlawful exercise of visitorial powers" as defined by the Comptroller and previous court decisions. The circuit judges reaffirmed that state officials are not allowed to investigate or interfere with the business or conduct of national banks. But current New York AG Andrew Cuomo and 49 other AGs contend it is inappropriate to defer to the Comptroller's interpretation of visitorial powers when "sensitive issues of federalism are at stake" involving possible discrimination against citizens of New York. The appeals court also erred by failing to consider the Comptroller's "agency bias and a self-serving preemption agenda," the 49 AGs argue in their filing. The Supreme Court will probably hear arguments in Cuomo v. Clearing House Association this spring. The association represents the four national banks.

Home prices have fallen 18% since 2006 and could drop another 10% in 2009, which means the average mortgage could be "underwater" soon, according to a former Fannie Mae executive who served as the GSE's chief credit officer in the 1980s. Speaking before the American Enterprise Institute, former GSE executive Edward Pinto said the average loan-to-value ratio on most single-family loans was roughly 95% at year-end 2008. Mr. Pinto, now a consultant, said that figure could rise to 109% at the end of this year, a first. He noted that a 20%-plus drop in home prices has not occurred since the Great Depression when values fell 24% between 1929 and 1933. LTVs, though, were much lower in the Depression. The consultant relies on home price indexes issued by the Federal Housing Finance Agency and S&P Case Shiller in making his price estimates. Mr. Pinto said the government is on the hook for nearly 70% of all mortgages due to its backing of Fannie Mae, Freddie Mac, the Federal Home Loan Banks, the Federal Housing Administration and Federal Deposit Insurance Corp. If Congress passes bankruptcy reform legislation that allows for mortgage cramdowns, the government will be "cramming down the loans they are responsible for," Mr. Pinto said.

Merrill Lynch & Co. - now the property of Bank of America - has agreed to pay $450 million to settle a subprime collateralized debt obligation lawsuit brought by lead plaintiff the Ohio State Teachers Retirement System. According to the complaint, Merrill Lynch artificially inflated the value of CDOs and other assets backed by subprime mortgages by issuing false and misleading statements about the bonds. In a public filing, Merrill says it settled the case but did not admit any wrongdoing. During the height of the subprime crisis, Merrill financed several non-bank subprime funders, bought their loans and packaged them into ABS and CDO investments, selling them worldwide. Merrill also settled a similar, $75 million case brought against it by employees. In a new SEC filing, the Wall Street firm says that even though a settlement has been reached there is no assurance that a "final" deal will be concluded and gain court approval. According to the law firm of Page, Perry LLC of Atlanta, "This development confirms that even larger, more sophisticated investors can recoup damages when they are misled into purchasing complex investments such as CDOs that are virtually incomprehensible for normal people." It adds that the settlement "may be the first in what is likely to become a trend."

A National Association of Home Builder task force on housing finance has recommended that the politically powerful organization adopt a policy blueprint that calls for a sharing of the interest rate and credit risk by the private sector institutions which benefit from the government's secondary market support. The task force, which was established by the NAHB's senior officers last fall, also recommends that Fannie Mae and Freddie Mac retain their federal backing but be limited primarily to providing credit enhancements for mortgage-backed securities. The sharing concept would be a "cooperative structure" loosely based on the Federal Home Loan Bank model, according to Chellie Hamecs, assistant staff vice president for housing finance. Under the proposal, lenders would be liable for a "significant portion of the risk" in direct proportion to the volume of loans they sell to the government-sponsored enterprises. As envisioned by the task force, Fannie and Freddie would be given only limited portfolio capacity and then only to accommodate mortgages and housing-related investments that have no other secondary market outlet. The report, which is being discussed at the NAHB's annual convention in Las Vegas, noted "serious structural problems" with the nation's housing finance system, including what it called "the inherent conflict" in the current Fannie-Freddie business model in which the companies are required to pursue a public mission while providing competitive returns to private stockholders. These and several other policy recommendations must pass through several committees before they are voted on by the NAHB's board.

Congressman Al Green has introduced H.R. 600, a bill that would reinstate the controversial seller-funded down payment assistance banned last October despite being credited with helping over one million families become homeowners. Scott Syphax, president and CEO of the Nehemiah Corp. of America, Sacramento, CA, a DPA pioneer and supporter, applauded the bill that helps broaden homeownership opportunities for borrowers who qualify for Federal Housing Association-insured loans without using government or taxpayer dollars. "With foreclosures on the rise and banks maintaining their stranglehold on credit, we commend Congressman Green for recognizing the important role down payment assistance can play in the market's recovery," he said in a release. "Through H.R. 600, DPA offers a simple solution that can empower thousands of worthy families to take advantage of depressed home prices therefore reducing the glut of homes on the market. Further, it does so without spending a single government or taxpayer dime, according to the Congressional Budget Office." Mr. Syphax said DPA is a source of opportunity for responsible, sustainable homeownership in times when the housing market is crumbling. DPA supporters hope President Obama's Administration will help reinstate the program.