Compliance & Regulation

The nation's top GSE regulator is urging federal banking regulators to provide a 10% capital risk weight for Federal Home Loan Bank debt, just like they are proposing for Fannie Mae and Freddie Mac debt. In a comment letter, Federal Housing Finance Agency director James Lockhart says the reduced risk weight will give Fannie and Freddie an "advantage" relative to the FHLBanks and other government-sponsored enterprises. In addition, it "will put further funding pressure" on the FHLBanks. "We hope we are getting a sympathetic ear," Federal Housing Finance Agency director James Lockhart told reporters on Wednesday. But he noted that the banking regulators have not responded to his letter. After Fannie and Freddie were placed into conservatorships, the banking regulators proposed to reduce the risk-based capital ratio to 10% from 20% to make their debt and mortgage-backed securities more attractive to banks and thrifts. This action also reflected the fact that the Treasury Department had extended special lending privileges and net worth protections to the two GSEs. "The ABA strongly recommends that the agencies apply a comparable risk weight to the FHLBanks," the American Bankers Association says in a comment letter.

Federal Deposit Insurance Corp. researchers estimate that 839,000 single-family mortgages fell into the 60-days-plus late category during the third quarter, up 14% from the second quarter. Mortgages entering foreclosure fell 10% from the previous quarter to 574,000. "It is still the second highest quarterly number of foreclosures, double the number of two years ago," said FDIC chief economist Richard Brown. He attributes the slowdown in new foreclosures to state moratoriums, delays in processing, and more attempts by servicers to engage in workouts. "Even though foreclosures slowed to 574,000 during the quarter, the number of loans 60-days to 90-days past due rose by almost 265,000, and now total 1.9 million," Mr. Brown said.

Eric Philpot of Cincinnati, Ohio, was sentenced to 37 months in prison for a scheme he ran that defrauded mortgage lenders out of more than $200,000 in less than two years. Philpot, who pleaded guilty on June 17, 2008, to one count of mail fraud and one count of conspiracy to commit money laundering, solicited people to buy residential properties and helped them secure financing by providing lenders with false information about the buyers' income, source and scope of the down payments and other information. Additionally, Philpot failed to disclose to the lenders material information about the true nature of the real estate deals so that appropriate business decisions could be made by the lenders. Philpot admitted that, once the loans were approved, he maintained control both of the properties that were often deeded in the names of others and the loan proceeds. These actions led to losses for the lenders. Philpot also fraudulently obtained financing for the sale of one property while he knew he was under federal investigation for mortgage fraud. A hearing is scheduled for Feb. 2, 2009, to determine the amount of restitution Philpot must pay.

After pleading guilty on Oct. 2, 2008, to charges relating to a mortgage fraud scheme, Marty Ray Folwick, a real estate officer from Portland, Oregon, was sentenced to 63 months in prison, followed by 48 months of supervised release. In addition, Folwick was ordered to pay $536,514 in restitution to one bank. Other victim banks will have 60 days to seek further restitution. Folwick's scheme related to a single property in Woodburn, Ore., which was purchased for $390,000. Folwick found buyers for the property and then falsified their loan application by overstating their monthly income, failing to disclose that the buyers had an outstanding mortgage on another property, and failing to disclose that Folwick was receiving a $25,000 kickback from the transaction. At the plea hearing, prosecutors argued that Folwick had engaged in similar illegal conduct with respect to almost 70 properties. The government submitted a memorandum asserting that there were 32 victim banks and 21 straw buyers used by Folwick to perpetuate his mortgage fraud scheme.

Fannie Mae and Freddie Mac are projected to force mortgage originators to buy back over $1 billion in whole loans in 2009 because of misrepresentations or fraud, according to their regulator. "In 2006 and 2007, the underwriting was so poor and there was a lot of mortgage fraud," Federal Housing Finance Agency director James Lockhart told reporters. "They have the right under their agreements to require the originator to repurchase the loan," he added. The government sponsored enterprise regulator indicated the buybacks could range from $1 billion to $1.5 billion. Buybacks can put "some real discipline into the origination system," the GSE regulator told a Women in Housing and Finance luncheon. "If you know you are going to get the mortgage back, you may be a little more careful in the future," he said.

Sen. Dick Durbin, D-Ill., slammed the Mortgage Bankers Association for continuing to oppose his bankruptcy bill and for grossly underestimating the foreclosure problem. At a press conference, the second ranking Democrat in the Senate noted that MBA chairman David Kittle recently testified at a committee hearing that allowing bankruptcy judges to modify mortgages would result in a $295 tax per month on every homeowner. The Senate Judiciary Committee member said he challenged that tax number and MBA has provided no evidence to support it. "It is just a number thrown at the committee by the mortgage bankers who I don't believe enjoy the greatest credibility," Sen. Durbin said. "We are in the process of responding to the committee's questions," said MBA spokesman John Mechem. But allowing bankruptcy cramdowns will increase the mortgage rates by 150 to 200 basis points, he said. "We stand behind that estimate." Allowing judicial modifications would give servicers an "incentive to modify mortgages," Sen. Durbin said at the press conference, and it would give struggling homeowners "some leverage" in negotiating with servicers.

GMAC Financial Services warned Wednesday that unless more of its note holders agree to an exchange program, its plans to become a bank holding company and potentially tap TARP funding will collapse. The exchange offer involves $38 billion worth of corporate notes. (GMAC extended the "early delivery" time of the exchange three days to 5 p.m. this Friday.) To date 21% of GMAC, and 21% of Residential Capital Corp. note holders, have agreed to an exchange, far shy of the 75% needed. In a statement, GMAC Financial - the parent of ResCap, the nation's sixth largest mortgage servicer - said the Federal Reserve is requiring GMAC to have minimum regulatory capital of $30 billion to become a bank holding company. The note exchange offer is key to achieving that goal. The exchange offer involves cash and/or issuing new corporate notes. In a public filing back in November ResCap warned that if GMAC stops providing liquidity to its mortgage division it could be forced into bankruptcy. GMAC Financial is 51% owned by hedge fund giant Cerberus Capital and 49% owned by General Motors, the ailing automaker. ResCap services $391 billion in home mortgages, according to the Quarterly Data Report.

Congressional approval for the second $350 billion installment of TARP funds may depend on the Treasury Department's ability to show that banks are actually using their government investment money to make new loans, House Financial Services Committee chairman Barney Frank, D-Mass., said Wednesday. At a House hearing lawmakers lambasted TARP chief Neel Kashkari and his agency for not adopting the FDIC's loan modification model and pulling a "bait and switch" on Congress by abandoning their stated early goal of buying troubled mortgages in favor of making preferred stock investments in banks. Mr. Kashkari, an assistant secretary at Treasury, said his boss, Henry Paulson, has made no decision on when he will ask for the remaining $350 billion. To date, 87 banks in 30 states have received government investments under the $700 billion Troubled Asset Relief Program. Members of the House Financial Services Committee complained that there is no requirement for the recipients to increase their lending and no mechanism to measure it.

U.S. District Judge J. Frederick Motz sentenced Marny Arlen Bailey of Highland, Md., to 21 months in prison followed by five years of supervised release for wire fraud in connection with a scheme to steal real estate settlement funds that were intended to pay off the homeowners' previous loans. Judge Motz also ordered that Ms. Bailey pay restitution of $877,000 to the title company who paid off the homeowners' loans after the fraud was discovered. According to Rod J. Rosenstein, U.S. attorney for the District of Maryland, Ms. Bailey owned Executive Settlements, a company that handled residential real estate closings. Whenever real property that was subject to a lien or mortgage was sold or refinanced, Executive Settlements and Ms. Bailey were obligated to pay the original mortgage lender out of the proceeds of the transaction. Beginning in late 2007 or early 2008, Ms. Bailey used funds, which were intended to pay off mortgage lenders, for her own purposes. In early 2008, she diverted whole settlement amounts to her personal accounts and started gambling in an attempt to recoup the amounts she had stolen. When the bank where Bailey had her escrow account advised her to take her business elsewhere, Bailey transferred the balance in her escrow account, over $184,000, to an operating account and spent it. In February and March of 2008, she stole settlement monies from as many as four homeowners, for a total of over $877,000. The FBI arrested Bailey on May 23, 2008 in Atlantic City, N.J., where she was living in casinos and gambling.

Rosario Divins, a self-represented foreclosure prevention specialist from San Antonio, has been arrested for allegedly engaging in a fraudulent foreclosure prevention scheme. According to Johnny Sutton, U.S. attorney for the Western District of Texas, Divins allegedly unjustly enriched herself by collecting large sums of cash or property titles from individuals in desperate financial situations who responded to her mail offering to stop their residential foreclosures. Despite three separate sanctions from the U.S. Bankruptcy Court for the Western District of Texas ordering her to stop misrepresenting herself and making false promises to her clients, the indictment alleges that Divins has continued to implement her scheme.