Compliance & Regulation

The Federal Housing Administration just completed one of its best years ever in terms of loan originations and the mortgage insurer's auditor expects the surge in FHA originations to continue for several years. FHA endorsed a record 154,240 single-family loans in FY 2008 and it is projected to endorse 280,400 loans in FY 2009 and 331,100 in FY 2010, according to a FY 2008 actuarial review. However, declining house prices are expected to undermine the performance of FY 2008 loans and result in high claims rates. The independent auditor pegged the economic value of the FY 2008 book of business at a negative $3.6 billion over the life of the loans. The auditors also reduced the estimated economic value of the FHA Mutual Mortgage Insurance fund by 39% to $12.9 billion. This reduction, combined with a 29% increase in the number of insured FHA loans, decreased the capital ratio of the MMI fund to 3% from 6.4% in FY 2007. The auditors estimate that loans originated in the current year (FY 2009) will perform better and have a positive $2.4 billion economic value.

Seasonally adjusted refinance applications tracked by the Mortgage Bankers Association skyrocketed in the week ending Nov. 28 by 203% as a result of falling mortgage rates sparked by the Federal Reserve's plan to buy housing government-sponsored enterprises' mortgage-backed securities and debt. "When rates plummeted following the Fed's announcement that it would buy GSE debt and MBS, many of those on the sidelines decided to quickly jump in and take advantage of lower rates before they started to rebound," said Orawin Velz, associate vice president of economic forecasting at the MBA. Seasonally adjusted purchases also rose during the week by 28% and the seasonally adjusted Market Composite Index that combines both refis and purchases jumped 112%. On an unadjusted basis, the composite index was up 51.4% compared to the previous week and down 21.9% from a year ago. Refis dominated the market, representing 69% of apps compared to 49.3% the previous week. The seasonally adjusted four-week moving averages for the composite, purchase and refi indices were respectively up 29.7%, 9.5% and 56.1%. In the latest week, conventional purchases jumped 37.4% while government purchases increased by 39.2%. Adjustable-rate mortgage activity decreased to 1.4% of applications from 3.0% the week previous. Average contract interest rates for 30-year fixed rate mortgages, 15-year FRMs and one-year adjustable-rate mortgages with 80% loan-to-value ratios respectively slid to 5.47% from 5.99%, to 5.13% from 5.78% and to 6.61 from 6.87%. Average points, including the origination fee, fell to 1.16 from 1.23 for 30-year FRMs; to 1.28 from 1.29 for 15-year FRMs and to 0.52 from 0.64 for one-year ARMs.

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.

The Treasury Department, to date, has spent $150 billion of taxpayer money investing in preferred shares of 52 different institutions, outgoing secretary Henry Paulson said Monday afternoon. Mr. Paulson noted that hundreds of banks have applied for Troubled Asset Relief Program money, adding that, "we will work through the remaining applications in the coming weeks and months." He said the agency is continuing "to examine potential foreclosure mitigation ideas" that could use TARP funds. He also complemented the FDIC's loan modification effort at IndyMac Bank, Pasadena, Calif., calling it "effective." IndyMac is expected to be sold by the Federal Deposit Insurance Corp. this month. It's anticipated that whichever investor buys IndyMac will continue the loan modification program.

Tahir Ali Khan has pleaded guilty to charges related to leading a multi-mullion dollar mortgage fraud scheme. Ali Khan was the lead defendant in a 15 defendant, multi-count indictment and is the tenth defendant to plead guilty. According to the U.S. attorney's office for the Southern District of New York, Ali Khan was the leader of a fraud ring that produced false identification documents purporting to have been issued by state and federal government authorities produced in the names of fraudulent identities, to which members of the ring referred to among themselves as "chickens." In order to build financial credit for these fake identities, the ring fraudulently established bank accounts, credit card accounts, apartment leases and telephone and utility accounts in the names of the "chickens" and applied for and obtained bank loans, home mortgage loans, increased credit card limits, lines of credit and other financial benefits in the names of the fraudulent identities or in the names of sham businesses supposedly operated by those fraudulent identities. The ring then defaulted on the loans and credit card debt. In addition to Ali Khan, nine other defendants have pleaded guilty to charges related to the scheme. Criminal charges remain pending against four defendants. One defendant remains a fugitive.

The Federal Reserve Board could take further actions to reduce mortgage rates, including purchases of longer-term Treasury and government sponsored enterprise debt, according to Fed chairman Ben Bernanke. He noted that that the response to the Fed's decision to purchase up to $500 billion in Fannie Mae and Freddie Mac mortgage-backed securities and $100 billion in GSE debt over the next few quarters has been positive. "It is encouraging that the announcement of that action was met by a fall in mortgage interest rates," the Fed chief told the Austin (Tex.) Chamber of Commerce. However, he noted that housing markets "remain weak," house prices are falling and an eventual stabilization of the housing market would be a plus for the economy. "The Fed could purchase longer-term Treasury or agency securities in the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand," Mr. Bernanke said.

Two investment funds have filed a class action lawsuit to stop Countrywide Financial Corp. from passing off losses on loan modifications to investors in mortgage-backed securities. The complaint alleges that Bank of America's settlement with state attorneys general could lead to the modification of nearly 400,000 Countrywide loans totaling $80 billion and to a reduction in payments to investors by $8.4 billion and a reduction in value of the MBS. Under the pooling and servicing agreements, Countrywide must purchase the loans out of the securitized pools at par with accrued interest before the loans can be modified, according to the plaintiffs, Greenwich (Conn.) Financial Services and QED LLC. "The only way to modify the loan according to the contract is to purchase it," said William Frey, who manages both funds. There is no contractual ability for CFC to modify the loans and keep them in the securitized trusts, he added. Bank of America said loan modifications benefit both homeowners and investors. "We are confident any attempt to stop this program will be legally unsupportable," a statement issued by the bank said. The plaintiffs filed the class action lawsuit in a New York state court on behalf of investors in 373 CFC MBS totaling $150 billion.

Fred Stevens of Easton, Conn., pleaded guilty to participating in a mortgage scheme to defraud IndyMac Bank and other financial institutions. According to documents filed with the court, from approximately April 2006 to September 2007, Stevens was a mortgage broker in Westport, Conn., where, working with property developers, lawyers, "hard money" lenders, an appraiser, employees of financial institutions and others, he submitted fraudulent mortgage applications with IndyMac and other financial institutions to secure mortgages for certain clients. Stevens earned a fee for the fraudulent mortgage applications that he submitted on his clients' behalf. Stevens submitted a fraudulent mortgage application package to IndyMac related to a property located in Westport. The application contained numerous false pretenses and representations such as an inflated borrower's income, a false claim that the property was owner-occupied, a falsified appraisal and a false claim that the payments developers made on the property were a bonus given to the borrower by his employer. IndyMac approved the mortgage application and the loss resulting from Stevens' scheme exceeded $1 million. Sentencing is scheduled for Feb. 13, 2009.

Mary Reagan of Alpharetta, Ga., was sentenced to serve nearly five years in federal prison for her role in a multi-million dollar mortgage fraud scheme. Reagan pleaded guilty in July 2008 shortly before she was to go to trial and agreed to assist the government in the prosecution of the scheme. Reagan was sentenced to four years, nine months in federal prison, to be followed by five years of supervised release. Reagan was also ordered to pay more than $4 million in restitution. According to David Nahmias, U.S. attorney for the Northern District of Georgia, from mid-2004 through June 2006, Reagan was an attorney doing business as The Reagan Law Group, closing fraudulently inflated mortgage loans provided to unqualified straw buyers. Reagan was responsible for representing the mortgage lenders at the closing table. However, when the loans closed, she transferred the inflated loan proceeds to her co-conspirators by falsifying closing documents and concealing the true recipients and purposes of payments made from the lenders. She also concealed from the lenders that the unqualified straw buyers did not make sizeable down payments required by lenders as a condition of closing.

With the pace of bank failures quickening, the Federal Deposit Insurance Corp. is going outside the banking community to line up investors to bid on the assets and deposits of failed banks and thrifts. "FDIC recognizes that investors not organized as an FDIC-insured depository institution or holding company may potentially be interested in bidding on a failing institution," according to the agency. The FDIC has designed an expedited application process to get conditional approval for deposit insurance and to get on the FDIC's bidders list. However, investors still have to get preliminary regulatory approval for a bank charter. Applicants should have a business plan that is compliant with the Community Reinvestment Act, readily available capital and an identified management team, the FDIC said. There are 171 institutions on the FDIC's problem bank list with $115.6 billion in assets.