Compliance & Regulation

After being found guilty in April 2008 of charges related to a scheme obtaining property via forged deeds, Duane McKinney of Washington, was sentenced in the U.S. District Court for the District of Columbia before the Honorable Judge Reggie B. Walton to 150 months in prison and ordered the defendant to pay $912,630 in restitution and to forfeit three luxury vehicles and two real properties. The court also ordered two money judgments in the amounts of $770,872 and $59,000. The evidence established that McKinney obtained title to about $1 million worth of D.C. and Maryland properties through forged deeds. In fact, the owners did not sign the deeds, as the vast majority of the owners were dead at the time of the forged deeds. Co-conspirator Joe D. Liles assisted McKinney by signing his name to these false deeds as the notary falsely stating that he saw the owner sign the deeds as grantor and that the owner personally appeared before him. Once the deeds were notarized, McKinney would sell the properties as if they belonged to him or his business and would use the money for himself. Liles pleaded guilty on Jan. 16, 2008, to a charge of false statements and was sentenced on Jan. 6, 2009, to 180 days of a suspended sentence, three years probation and to pay restitution of $691,587.

The Department of Housing and Urban Development is launching a new advertising campaign on Jan. 14 to alert troubled homeowners about foreclosure rescue scams. Outgoing HUD secretary Steve Preston will make the announcement along with New York City Mayor Michael Bloomberg at a press conference that morning to be held at the offices of Neighborhood Housing Services in New York. The new campaign, called "Keep Your Home. Know Your Loan." seeks to fight the proliferation of rescue scams that "often victimize struggling homeowners and push them closer to financial ruin," HUD said. The Federal Trade Commission recently sanctioned a Florida-based operation, Mortgage Foreclosure Solutions, which promised, for a $1,200 fee, to stop foreclosures and save their clients' homes. "Many consumers who paid the company ultimately lost their homes to foreclosure, and others avoided foreclosure only through their own efforts," FTC said.

The commercial real estate market is facing its worst year since the S&L and banking crisis of the early 1990s, according to a new report by Merrill Lynch. "Our outlook is for property values to fall and CMBS credit problems to ratchet up," writes commercial mortgage-backed securities analyst Roger Lehman in a new report. Merrill estimates that $23.5 billion in CMBS loans are set to mature this year - most of it conduit issuance. Property owners have been complaining for months that banks and other funders are unwilling to either lend or renegotiate loans at favorable terms. The Treasury Department is toying with the idea of using Troubled Asset Relief Funds to jump start new issuance in the CMBS market but nothing has been decided yet. How future TARP funds will be spent is now up to the incoming Obama Administration.

The Federal Home Loan Bank of Seattle told its members on Jan. 12 (depositories mostly) that it may not meet its risk-based capital requirement for the period ending Dec. 31, blaming accounting rules that affect the value of its investment in private label mortgage-backed securities. In a letter to members, the FHLB says it must mark-to-market the non-prime assets, incurring a charge that is larger than any loss it anticipates on these investments. "We believe that the calculation of risk-based capital under the current rules significantly overstates our market risk in the current market environment," writes president Richard Riccobono, a former top thrift regulator in Washington. In the third quarter the bank took a $49.8 million charge on its private label investments, and lost $18.8 million in the quarter. If the FHLB cannot meet it risk-based capital goal it will be unable to pay dividends to members.

The Mortgage Bankers Association wants to raise the net worth requirements for mortgage brokers originating Federal Housing Administration loans from $63,500 to $150,000. But the mortgage brokers want to do away with net worth requirements altogether. "Net worth requirements serve to assure that a vendor has a stake in the mortgage industry and they also provide some resources for a borrower to seek in the event of misfeasance," MBA chairman chief executive John Courson told a congressional panel. The National Association of Mortgage Brokers noted that net worth could disappear quickly as evidenced by the recent failure of hundreds of mortgage bankers, lenders and Wall Street firms over the past two years. NAMB past president George Hanzimanolis suggested that all originators should contribute to an FHA recovery fund instead and eliminate net worth requirements. "There is no evidence to demonstrate that loans originated by high net worth originators perform better that those with a low net worth," Mr. Hanzimanolis testified. The current FHA net worth requirement for mortgage bankers is $250,000. MBA would support a "reasonable increase," Mr. Courson said.

If the Treasury supplements injections of capital by removing troubled assets such as mortgages from institutions' balance sheets, as was originally proposed for the U.S. financial rescue plan, Treasury may consider public purchases, as originally proposed, or two other options involving asset guarantees or "bad banks," Federal Reserve chairman Ben Bernanke suggested in a speech at the London School of Economics early Tuesday morning. He addressed criticism of such efforts as unfair bailouts of institutions that chose to take excessive risk as necessary given their influence on the financial system and the economy. He said that, "in the future financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking." Under the asset guarantees, the government would agree to absorb, probably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks, he said. Alternatively, bad banks could purchase assets from financial institutions in exchange for cash or equity in these banks. The chairman also said the facility that is slated to lend against AAA-rated asset-backed securities collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration may, if successful, have its "basic framework" expanded to accommodate additional classes of securities "as situations warrant." Efforts to reduce preventable foreclosures also are being considered, Mr. Bernanke said. The Fed chairman also reportedly said the Obama Administration's proposed stimulus package would be helpful, but not enough to solve the current financial crisis.

KDX Ventures, Boston, a partnership of DebtX and KEMA Advisors, will sell $144 million in multifamily and healthcare loans for the U.S. Department of Housing and Urban Development. The portfolio includes 15 multifamily loans and four healthcare loans, ranging in size from approximately $1 million to $30 million. The collateral is located in 12 states in the east, south and midwest. Investors may bid on any individual loan or on pre-determined pools of loans. "KDX Ventures is expecting strong interest in these HUD loans due to increasing demand for product from investors around the world," said DebtX chief executive Kingsley Greenland. "Over the past three months, a significant new number of investors have entered the whole loan marketplace. The increasing liquidity is likely to mean very active bidding for the HUD loans." The transaction announced today is the first since KDX Ventures signed a multi-year agreement with HUD in October to sell loans. Bids will be accepted at http://www.debtx.com on Feb. 4, 2009.

A bill introduced by House Financial Services Committee chairman Barney Frank, D-Mass., would direct the Treasury secretary to create a new program that stimulates home purchases by ensuring the availability of low mortgage rates. Treasury would purchase these affordable mortgages from Fannie Mae, Freddie Mac and the Federal Home Loan Banks if the bill is passed by both houses of Congress and signed by the president. The National Association of Realtors has been pushing for an interest rate buy-down program. The group welcomed the introduction of Rep. Frank's bill, which spells out how the new Obama administration should spend the remaining $350 billion of the Troubled Asset Relief Program. "The bill proposed by chairman Frank is an important first toward launching a real estate recovery," NAR president Charles McMillan said. The bill also directs Treasury to make sure that homeowners refinancing under the Federal Housing Administration's Hope for Homeowners program receive affordable interest rates.

President-elect Barack Obama on Monday asked the Bush Administration to seek the final $350 billion of TARP funds from Congress. Over the weekend Mr. Obama said he plans to tell Congress specifically what the new Treasury Department will do with the money. The president-elect told ABC News that he is disappointed "how the whole TARP process has unfolded" noting that he is concerned about a lack of accounting of how banks are spending the billions invested in them by the government. Congress has 15 days to accept or reject the TARP request. In October President Bush signed the $700 billion 'Emergency Economic Stabilization Act' with the expectation that most of the funds would be used to buy troubled mortgages from financial institutions. But instead of doing that, the Treasury Department has invested most of the first $350 billion in preferred shares of commercial banks, hoping depositories will use that money to originate new business and consumer loans. EESA requires the TARP funds to be allocated to Treasury in two, $350 billion chunks.

Edward Gotschall, co-founder of New Century Financial Corp. - once one of the largest subprime lenders in the nation - died late last week of natural causes, according to a report in The Orange County Register. He was 53. New Century's collapse is now the subject of a criminal investigation by the Department of Justice. Mr. Gotschall and three others founded New Century in 1995. He managed the books of the publicly traded company and worked with Wall Street investment banking firms. The company failed in early 2007. At one time, Merrill Lynch had considered buying it but passed on the deal. At its peak it was funding $60 billion in mortgages, according to the Quarterly Data Report.