Compliance & Regulation

Reported incidents of mortgage fraud in the U.S. increased by 45% on fewer loan applications in the second quarter of 2008 from a year ago, according to a new report released by the Mortgage Asset Research Institute. Key findings from the MARI Quarterly Fraud Report, which is based on data submitted by MARI subscribers on loans originated in the second quarter of this year that have since been classified as fraudulent, include that fraud most often occurs at the beginning of the loan process. According to the report, the top three states for reported incidents of mortgage fraud in the second quarter of 2008 are Florida, California and Illinois. Florida saw a 5% increase in general application misrepresentation in the second quarter, while California saw a 20% decrease. Illinois has the highest percentages of income and employment misrepresentation on the loan application. More than 65% of fraud incidents are attributed to "general application misrepresentation," a trend where information is potentially misrepresented during the application process. This fraud trend is followed closely by reported misrepresentations related to income at 36% of seconds quarter applications and employment at 20% of 2Q08 applications.

The Securities and Exchange Commission is putting out for public comment a new set of proposed credit agency reform measures, noting that the agencies' ratings of mortgage securities "backed by subprime mortgage loans" and collateralized debt obligations linked to subprime loans "contributed to the recent turmoil in the credit markets." The new measures "impose additional requirements on credit rating agencies," the SEC said. This is the second set of credit rating agency reforms since the SEC received its new regulatory authority from Congress to register and oversee credit rating agencies. According to Mortgage Bankers Association chairman John A. Courson, the SEC also delayed a vote on a measure that would have "imposed different ratings symbols for structured finance versus other investment products" and likely would have led to "confusion" and "continued disruption to secondary market transactions."

Commercial real estate markets "weakened broadly," according to the Beige Book, which noted that many Federal Reserve district banks reported falling rents and rising vacancy rates. "Leasing activity was down in almost all districts," the Beige Book says. Vacancy rates rose in the Boston, New York, Richmond, Chicago, and Kansas City districts while rents fell in the Boston, New York and Kansas City districts. Meanwhile, CRE and residential lending contracted. Home sales were down in most districts. The only bright spot in the Beige Book is that some district banks reported "relatively stronger demand" for starter homes. In a recent speech, Federal Reserve Board chairman Ben Bernanke noted that the housing correction still has a way to go. "Housing markets remain weak, with low demand and the increased number of distressed properties on the market contributing to further declines in house prices," the Fed chairman said.

A Federal Reserve Board study discovered that banks and thrifts made only a small percentage of subprime loans in their Community Reinvestment Act assessment areas and these findings refute critics who claim CRA lending contributed to the subprime crisis. "Only 6% of all higher-priced [subprime] loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas," Fed governor Randall Kroszner said. This evidence does not support the view that CRA contributed in any substantial way to the subprime mortgage crisis, he added. In examining foreclosure data, Fed researchers also discovered that foreclosure filings have increased at a faster pace in middle-income and higher-income areas than in lower-income areas served by CRA lenders.

Federal Reserve chairman Ben Bernanke criticized residential loan servicers for being slow to add "capacity" to their loan modification programs. Speaking at a Fed conference on housing, Mr. Bernanke said he also backed the idea of giving cash incentives to servicers that engage in loan restructurings. He also supports a reduction in the rate being charged to consumers who try to restructure their loans through the Federal Housing Administration's 'Hope for Homeowners' modification program. "At present, this rate is expected to be quite high, roughly 8%, in part because it is tied to the demand for the relatively illiquid securities issued by Ginnie Mae to fund the program," he said. "To bring down this rate, the Treasury could exercise its authority to purchase these securities, with the Congress providing the appropriate increase in the debt ceiling to accommodate those purchases. Alternatively, the Congress could decide to subsidize the rate." The H4H program has received little usage in the mortgage industry. The Fed chairman nixed the idea of a government-funded insurance program to offer price supports on home values.

In an attempt to spark a housing recovery the Treasury Department is working on a plan that ultimately could lead to a 4.5% 30-year fixed rate loan for consumers. According to combined news reports breaking Thursday morning, Treasury would be the ultimate buyer of mortgage-backed securities that yield 4.5%. Over the past two days 30-year 'A' paper loans were yielding just over 6%. The bonds would be backed by newly originated loans that would be used by homebuyers to purchase new or existing homes. The Department would buy guaranteed MBS from Fannie Mae or Freddie Mac. The loans would meet underwriting criteria of the two GSEs and the Federal Housing Administration. The idea is still in the planning stages and at press time Treasury officials were not commenting about the idea.

Howard Gaines, an attorney and licensed title agent from Delray Beach, Fla., has been convicted of charges relating to his participation in a $10 million mortgage loan scheme to defraud mortgage lenders on properties located in Broward County. Sentencing is scheduled for Feb. 10, 2009. According to the evidence presented at trial, Gaines was a licensed title agent at Your Title Choice in Deerfield Beach, Fla. Gaines, as a title agent, aided co-conspirator Anthony Dehaney and others to close on fraudulent loans. Among the fraudulent documents presented at closings were HUD-1 Settlement Forms, which falsely represented that buyers were using their own money to close on the purchases. The evidence showed that Gaines helped Dehaney close more than $10 million in loans during 2004, 2005, and 2006, including $5 million in fraudulent mortgages. There were seven who were originally arrested and Gaines' conviction was the sixth conviction in this matter. The following five conspirators have pleaded guilty: Anthony Dehaney, Marcia Mestre, Angela Angela Manalaysay, Beverly Ireland and Donna Patricia Grant. The seventh defendant, Andrea Dehaney, is still pending trial.

Roy Keith Fife, a real estate agent from Tucson, Arizona, pleaded guilty to fraud and forgery charges in Pima County Superior Court on Dec. 2, 2008. At the hearing, Fife admitted forging the signature of a client for whom he served as a residential real estate sales agent. Fife forged the signature on loan documents to facilitate the sale of the client's property. Through this sale, Fife obtained a commission of more than $100,000. As a result of Fife's forgery, his client's carryback loan was made junior to a million-dollar equity loan taken out by the buyers. The seller specifically required in the sales contract that his carryback would be in first position. The buyers of the property have since defaulted on both loans. Fife, whose real estate license is now inactive, faces unrelated real estate fraud charges in federal court. His sentencing will occur after his federal trial, now scheduled for October 2009.

Freddie Mac said it is considering a reverse stock split to push the price of its common stock above $1 a share and continue its listing on the New York Stock Exchange. The NYSE recently warned the mortgage giant, which is operating in a government controlled conservatorship, that its stock could be de-listed since it has been trading below $1.00 a share. Under NYSE rules, Freddie has until May 18 to bring its share price and its average share price for 30 consecutive days above $1.00. "Freddie Mac has advised the NYSE that it may undertake a reverse stock split in order to cure the deficiency by the May 18, 2009 date," the company said.

FDIC chairman Sheila Bair has been talking with the Obama transition team about funding a loan guarantee program to facilitate loan modifications and she is encouraged by president-elect Barack Obama's commitment to foreclosures prevention. "We are certainly sharing our best ideas," Ms. Bair told a Fortune 500 forum. The FDIC has developed a systematic loan modification program that could be expanded through the use of loan guarantees or loss sharing arrangements on newly modified loans. But the Bush administration has blocked funding for the loan guarantees. Ms. Bair said such a program could prevent one-third of foreclosures and help stabilize housing prices, which continue to spiral downward due to "unnecessary foreclosures."