Compliance & Regulation

The financial crisis has exposed the "weaknesses" in the securitization market, FDIC chairman Sheila Bair said, and it needs to be reformed through a re-alignment of interests to improve the long-term performance of mortgage-backed securities. "The regulatory system needs to make certain that the right people have skin in the game and get paid not for short-term gains, but for taking the long view," Ms. Bair said at an event sponsored by American Banker. "Investors have lost faith" in the private-label MBS market, she said. Over $1 trillion dollars of private-label MBS was issued in 2005 and 2006, but issuance has dropped to "virtually zero" in the third quarter of this year. "Securitization will eventually come back," she said. "But fundamental reforms will be necessary to ensure that incentives are aligned to produce transparency, stability and confidence of all market participants."

After pleading guilty to charges relating to participating in a mortgage fraud scheme totaling more than $6.5 million, three Palm Beach County residents have been sentenced. Lauren Jasky was sentenced to 36 months in prison followed by five years of supervised release. Ralph Michel was sentenced to 30 months in prison followed by four years of supervised release. Berry Louidort was sentenced to 37 months in prison followed by five years of supervised release. According to R. Alexander Acosta, U.S. attorney for the Southern District of Florida, the Florida Office of Financial Regulation audited 24 subprime mortgage loans initiated by Boca Raton-based Compass Mortgage Service. The initial audit revealed that the loans included excessively large fees, ranging from $29,000 to $650,000, paid to Louidort and Michel. The fees were described as marketing and/or assignment fees but were in fact kickbacks to Louidort and Michel based on inflated sales prices. Jasky, who served as senior vice president of Compass Mortgage, originated the majority of the suspect loans.

Federal authorities in Newark, N.J., arrested four more individuals last week they believe are responsible for draining millions of dollars from credit unions and banks around the country by tapping into home-equity lines of credit. The arrests make a total of 17 individuals charged in the international scheme by which the suspects engineered fraudulent wire transfers or gained unauthorized access to the victims' online accounts to drain HELOCs, then wired millions of dollars in proceeds overseas. The scheme is reminiscent of the TJX credit card breach, where stolen credit union and bank account information was sold over the Internet and used to siphon millions of dollars from American shoppers from sites all over the world. "Home-equity lines of credit are an expanding front in the battle against mortgage fraud," said Christopher Christie, U.S. attorney for the District of New Jersey. "Homeowners should carefully review their statements to make sure their hard-earned equity is not disappearing from under their noses," he said.

The FDIC's "Temporary Liquidity Guarantee" program has opened the door to banks and thrifts issuing unsecured debt, but is hurting all the housing government sponsored enterprises, including the 12 Federal Home Loan Banks. A new report issued by the FHLBs says the FDIC's program - which guarantees all debt instruments issued by depositories - is making it harder for the GSEs to access long-term debt. Since the Federal Deposit Insurance Corp. announced the TLG program, "the pricing of long-term debt of all the housing GSEs, including the FHLBanks, deteriorated," according to the bank system's combined third quarter financial report. The financial discussion section of the report points out the FHLBanks have "limited access to the term-debt market," and they are "receiving a large proportion of their funding from money funds." FDIC finalized the bond guarantee program in late November and so far banks and bank holding companies have issued $38.6 billion in TLGP bonds. Meanwhile, banks and thrifts increased their borrowings from FHLBanks during the third quarter and outstanding advances jumped $97.8 billion or 11% to $1 trillion as of Sept. 30. But the FHLBanks are concerned the TLG and other government programs to provide liquidity and capital to the banking system "may lower future demand for advances."

House Financial Services Committee chairman Barney Frank, D-Mass., wants to create a new "set of rules" for the securitization of mortgages and empower servicers to modify loans as part of his 2009 agenda. "Our job is to come up with a set of rules that diminishes excessive risk-taking while still giving us the benefits of securitization," Rep. Frank told a Consumer Federation of America Washington conference. He said issuers of mortgage-backed securities will have to retain some liability. "They can't lay off all of the risks" to investors. Servicers of MBS should be able to make decisions about resolving troubled mortgages, he advocated. The committee chairman also said he expects to pass a tough subprime bill that will do away with yield-spread premiums that gives mortgage brokers an incentive to raise interest rates.

The plummeting yield on the 10-year Treasury - which historically has served as a benchmark for mortgage rate direction - hit a new 45-year low on Friday. Early in the afternoon the benchmark yield was at 2.57%, more than 20 basis points lower than where it was earlier in the week. The last time the 10-year Treasury yield was lower came in 1962 when it was at 2.55%, according to Thomas L. di Galoma, managing director and head of U.S. Treasuries at Jefferies & Co. An employment report released Friday morning has been a "focus" for Treasuries as has "the plan to lower mortgage rates by the Fed/Treasury," Mr. di Galoma and fixed-income researchers at Jefferies said in their Friday morning Treasury market report. International rate cuts also have played a role, the researchers said.

Mortgage companies dropped 8,400 full-time employees from their payrolls in October after mortgage originations fell to an eight-year low in the third quarter. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector fell to 343,400 positions from 351,800 in September, a 9% decline from a year ago. The mortgage industry took its biggest job hit in 2007 when 110,000 workers lost their jobs or left the industry. Friday's job report shows "we are the deepest part" of the recession, said Brian Bethune, chief U.S. financial economist at IHS Global Insight. The overall U.S. unemployment rate rose to 6.7% as 533,000 workers lost their jobs in November. Although the government's response to the financial crisis came six to 12 months too late, said the economist, he expects mortgage rates to fall below 5%, and spur a surge in refinancing activity. "It is going to get hot," Mr. Bethune said. But he warned there will be a "huge bottle neck" because the banks don't have people in place in process the applications.

Apollo Management, an investment fund controlled by Leon Black, is one of three finalists for the government controlled IndyMac Bank, mortgage and investment banking officials told MortgageWire. Apollo is backing Vantium Capital, managed by Amy Brandt, the former head of subprime lender WMC Mortgage of California. Vantium is investing in both troubled mortgages and functioning as a "scratch and dent servicer." A spokesman for Apollo declined to comment. A FDIC spokeswoman would not discuss the status of the sale except to say, "We'll announce the winning bidder by year end." Early on in the bidding process two other investment funds - Cerberus Capital and J.C. Flowers & Co. - expressed an interest in the thrift, which services roughly $180 billion in mortgages. IndyMac, created by Countrywide Home Loans two decades ago, is based in Pasadena, Calif.

Derrick Polk of Los Angeles, Oludola Akinmola and Oladeji Craig, both of Brooklyn, and Oluwajide Ogunbiyi of Springfield, Ill., have been charged with engaging in an international conspiracy to deplete millions of dollars from U.S. victims' home equity lines of credit using personal information obtained through identity theft and unauthorized computer access. According to the FBI, the four men allegedly conspired to deplete available funds from HELOCs belonging to identity theft victims either by engineering fraudulent wire transfers or by gaining unauthorized access to the victims' online bank accounts. The defendants and their co-conspirators have been accused of acquiring the identity information of thousands of victims and used that information to conduct numerous fraudulent schemes, withdrawing more than $2.5 million from HELOC accounts and attempting to withdraw at least $4 million more in unsuccessful transfers. Hakeem Olokodana and Yomi Jagunna, both of Queens, N.Y., Abayomi Lawal of Brooklyn and Daniel Yummi of New York, have also been charged with conspiring to identify HELOCs with large balances and to acquire all of the confidential customer information necessary to transfer money out of victim accounts.

The United Kingdom's government has made plans for a program designed to help those experiencing a temporary loss of income stay in their homes, according to the U.K. Treasury. "The new Homeowner Mortgage Support Scheme will enable households that experience a significant and temporary loss of income as a result of the economic downturn to defer a proportion of the interest payments on their mortgage for up to two years," the U.K. government entity said. "The government will guarantee the deferred interests payments in return for banks' participation in the scheme," it added. The plan is set to become available early in 2009 and the U.K. government said the eight of largest banks have pledged to work with it in developing the program.