Compliance & Regulation

President-elect Barack Obama has selected key members of his economic team, including Timothy Geithner as Treasury secretary, who will be working on an economic recovery and stimulus plan to get credit moving again and address the growing foreclosure crisis. Mr. Obama said at a press conference that he plans to release an overview of the plan in the coming weeks and he wants Congress to begin work on passing the package early in January. Mr. Geithner is currently the president of the New York Federal Reserve Bank and he has been working with Treasury secretary Henry Paulson in propping up Citicorp and American International Group. "We will honor commitments made by the current administration," Mr. Obama said. The president-elect also plans to nominate former Harvard University president and Treasury secretary Lawrence Summers to be his chief economic advisor in the White House. "We need a recovery plan for both Wall Street and Main Street. A plan that stabilizes our financial system and makes credit flow again while at the same time addressing our growing foreclosure crisis, helping out the struggling auto industry and creating and saving 2.5 million jobs," Mr. Obama said.

Defaults on single-family mortgages and construction loans continued to accelerate in the third quarter as banks and thrifts added $50 billion to loan loss reserves for the second consecutive quarter, according to the Federal Deposit Insurance Corp. FDIC chairman Sheila Bair said institutions are "aggressively growing reserves. But overall reserve growth continues to lag behind the growth of troubled loans." The serious delinquency rate (90-days or more past due) on single-family mortgages rose to 3.9% in the third quarter, up from 3.3% in the second quarter. Charge-offs in single-family loans totaled $3.9 billion, down from $4.6 billion in second quarter. The decline may be attributable to J.P. Morgan Chase's acquisition of Washington Mutual. Commercial banks originated $228.8 billion in single-family mortgages during third quarter, down 19% from the second quarter. After closing 22 banks this year, FDIC officials said the deposit insurance fund has declined to a 0.76% reserve level and the FDIC board will meet in December to consider a hike in insurance premiums. The FDIC's problem bank list has jumped to 171 institutions with $115.6 billion in assets, up from 117 institutions in second quarter.

Home prices declined at a record pace in the third quarter, according to the S&P/Case-Shiller Home Price Index, and that is fueling concern that home loans originated this year could soon be under water. S&P/Case-Shiller reported that home prices nationally were down 16.6% in the third quarter from a year earlier. That was higher than the rate of decline posted in the first and second quarters. That puts prices back to where they were in 2004, down 21% from their peak on a national average basis, with the largest declines being posted in once-hot Sun Belt markets, including Phoenix, Las Vegas, Miami, San Francisco, Los Angeles and San Diego. Moreover, the index shows that prices declined on a month-to-month basis in September across all metropolitan areas covered by the index. And with unemployment - a key default driver - still rising, further price declines could leave many borrowers who took out home loans this year and next at risk of owing more money than their home is worth, economist Karl Case, a professor at Wellesley College and founding partner of the index said during a conference call. "If prices keep dropping, 2008 and 2009 mortgages could be bad news. If prices continue to fall substantially next year, then that book is going to be underwater too, and that's going to be very devastating to the economy," Mr. Case said. Separately, the Federal Housing Finance Agency also reported that home prices declined in the third quarter. FHFA's index estimates that home prices declined 1.8% in the third quarter from second quarter. But over the past year, the FHFA index shows prices down just 6%, considerably less than the Case-Shiller data indicates.

The Federal Reserve's plan to purchase up to $500 billion of housing-related government-sponsored enterprises' mortgage-backed securities as well as up to $100 billion of their debt could mean a refinancing boom if the initial positive MBS market reaction to the move lasts. The immediate reaction to the move largely was "euphoria" in the MBS market, said Art Frank, director and head of MBS research at Deutsche Bank. "If this holds it's going to kick off a refi wave of some size," Mr. Frank said. But as of late Tuesday morning the market had "given up a little bit" of its initial outperformance based on the reaction of the benchmark Fannie Mae current coupon, he said. Premiums were not performing quite as well due to anticipation of a possible refi wave, Mr. Frank added. Overall, the MBS market as of Tuesday morning had done "very well" in reaction to the Fed's decision to join Fannie Mae, Freddie Mac and the Treasury in buying MBS in hopes of spurring purchases and refinancing that would be helpful to the larger economy, according to Ken Hackel, managing director at RBS Greenwich Capital.

A new effort by the Treasury Department to revive the market for asset-backed securities could include "non-agency" mortgages, the government said today. Treasury secretary Henry Paulson cautioned that any effort in regard to non-prime would involve "highly rated residential MBS." Treasury said the Federal Reserve Bank of New York will spend up to $200 billion to revive the ABS market. (Treasury is pitching in $20 billion to kick start the program.) The money will be used to finance buyers of ABS through non-recourse loans. Initially, the effort will focus on ABS backed by automobile loans, credit cards, student loans and small business loans. At a press conference Tuesday Mr. Paulson said the effort could be expanded to also include ABS backed by commercial mortgages. Only AAA-rated paper will be considered. The ABS market, according to Treasury, ground to a halt in 3Q with very few deals coming to market.

Delanie Belfield Ross of Phoenix, Ariz., has been found guilty of charges related to a mortgage fraud scheme. According to court documents, Ross, along with his wife, Veronica Cooper Ross, and his brother-in-law, Willard Cooper, fraudulently obtained mortgage loans for the purchase of a $3.2 million Paradise Valley home in 1994. To obtain these loans, they created shell corporations and also used fraudulent corporate tax returns and other forged documents to create the impression that Cooper was a wealthy businessman with substantial assets. After taking possession of the house, Delanie Ross recorded fraudulent releases of the liens on the loans with the Maricopa County Recorder. He then represented the house as being owned free and clear to potential investors and obtained an $850,000 line of credit from a private family of investors, using the house as collateral. These fraudulent corporate documents and tax returns were also used to obtain leases on four SUVs from a Scottsdale automotive dealership. Sentencing for Ross is scheduled for Dec. 19. Veronica Cooper Ross pleaded guilty to hindering prosecution and attempted hindering prosecution, both felonies. She is serving a three-year probation term in Mississippi. Cooper pleaded guilty to one count of felony theft in 2005 and is also on probation in Mississippi.

Kandace Marriott and Darrell Lynn Marriott, both of Gun Barrel City, Texas, their daughter, Kally Marriott of Dallas, and Karen Hayes of Mabank, Texas, have been charged with orchestrating a mortgage fraud scheme whereby they allegedly forged signatures and falsified home loan applications, which included creating and using numerous fraudulent documents containing statements the borrowers never made. The fraudulent documents were allegedly prepared for prospective homeowners who otherwise would not have qualified for loans backed by HUD. Evidence indicates that the defendants allegedly supervised the falsification of residential loan applications to ensure that mortgage lenders would approve the buyers' loans. The defendants allegedly falsified supporting documents and information, including the buyers' rent payment verification statements, proof of employment and information about Social Security Administration benefits, among other documents. Investigators believe the defendants targeted lower-income purchasers whose residential loans would be guaranteed by HUD. As a result, when unqualified buyers defaulted on their home loans, HUD, as guarantor of the loans, had to cover these costs, not the mortgage lenders.

Seniors will be able to use Federal Housing Administration reverse mortgages in conjunction with the purchase of a new home under new guidelines issued by the Department of Housing and Urban Development. Starting Jan. 1, seniors that want to downsize or move to a new location can use the proceeds from the sale of their home and an FHA Home Equity Conversion Mortgage to purchase a new residence. "Proceeds from sale of their former home can be combined with funds from a reverse mortgage on the new home, allowing the home purchase to be made without any future responsibility of monthly mortgage payments," said Peter Bell, president of the National Reverse Mortgage Lenders Association. This new feature of the FHA HECM program also avoids the expense of taking out a regular mortgage on the new residence and then getting a HECM.

Single-family existing home sales fell 3.3% in October as sales remain range-bound, but house prices continue to decline, down 11.2% from a year ago. The National Association of Realtors reported that sales of previously owned homes fell from a seasonally adjust annual rate of 4.58 million in September to 4.43 million in October - the same sales pace as in October 2007. Single-family sales have been bouncing between 4.25 million and 4.5 million over the previous 12 months. September's sales appeared to be a breakout. But now some economists are bracing for another leg down in sales due to deterioration in the stock market and economic conditions. Meanwhile, the Realtors report appears to show that prices of previously owned single-family homes are tumbling. In October, house prices are down 11.2% from a year ago. In September, NAR reported house prices were down 8.6% from September 2007.

Freddie Mac, a ward of the government since early fall, bought just $19.27 billion worth of mortgages during October, its worst showing of the year. Meanwhile, the delinquency rate on its single-family portfolio rose to 1.34% in October, a 10% increase in late payments from September. A year ago just 0.54% of its holdings were considered delinquent. Its retained portfolio increased to $763.66 billion, a 4% gain from the pervious month. Compared to the same month last year, its portfolio has increased 9%. Two weeks ago the GSE received a $13.8 billion cash injection from the government after posting a record $25.3 billion loss in the third quarter. Like many mortgage investors the company has been forced to slash the value of its massive mortgage holdings in the wake of rising loan delinquencies.