Compliance & Regulation

Sen. Dick Durbin, D-Ill., went after the Mortgage Bankers Association for opposing his efforts to allow bankruptcy judges to modify loans while the servicers MBA represents continue to do little to prevent foreclosures. The Senate assistant majority leader said at a Senate Judiciary Committee hearing that the "very groups that helped to create this crisis" have opposed his bankruptcy bill. MBA chairman David Kittle told Sen. Durbin that progress is being made in modifying mortgages. "We would like to see more," he said. However, allowing homeowners to file for bankruptcy will provide a false hope for many homeowners, Mr. Kittle testified, because two-thirds will likely end up losing their homes. Other witnesses at the hearing expressed doubts about this failure rate. Meanwhile, Sen. Durbin expects to pass his bankruptcy bill next year. "Change is coming to Washington. I am confident that early next year we will be able to take effective steps to finally address the economic crisis where it started - by helping families save their homes."

The Financial Services Roundtable is urging the Treasury Department to "explicitly" guarantee Fannie Mae and Freddie Mac debt and reverse falling demand for the mortgage-backed securities issued by the two enterprises. FSR president and chief executive Steve Bartlett told a House panel the financial markets are "confused" about the extent of federal support for the government-sponsored enterprises. "Treasury should eliminate market confusion" by "explicitly guaranteeing GSE debt in a manner identical to the FDIC support for bank debt," Mr. Bartlett testified before the House Financial Services Committee. Treasury also should purchase GSE debt and MBS on a "more systematic and public basis," he said, which would reduce mortgage rates and stimulate the housing market.

Reps. Barney Frank, D-Mass., and Gary Miller, R-Calif., are urging federal housing officials to reverse a decision that would lower Fannie Mae, Freddie Mac and FHA loan limits in 399 counties starting Jan. 1. The Federal Housing Administration has recalculated local median housing prices nationwide and 157 counties have experienced double-digit price declines. However, "there is no statutory requirement to make the downward adjustments," the two congressmen say in letter to FHA commissioner Brian Montgomery and Federal Housing Finance Agency director James Lockhart. House Financial Services Committee chairman Frank and Rep. Miller also note that the maximum federal loan limit is scheduled to decline from $729,750 to $625,000 on Jan. 1 along with local loan limit dropping from 125% to 115% of area median house prices. (Despite industry lobbying efforts, it appears unlikely Congress will extend the $729,750 loan limit.) Lowering local median house prices is "likely to exacerbate problems which already exist in many housing markets. Therefore we request that you not make adjustments for declining local area median home prices at this time," the congressmen say.

Housing secretary Steve Preston wants Congress to allow his agency to assess civil money penalties on lenders that do not follow new disclosure requirements on the revamped "Good Faith Estimate" sheet. Speaking at the National Press Club, the HUD secretary said he is working "on a list" of new powers he would like Congress to grant the agency. HUD recently unveiled the new GFE form, which is covered under the Real Estate Settlement Procedures Act. Lenders have a full year to comply with new GFE rules and train their staffs accordingly. Changes made to GFE rules require lenders to make clear disclosures on a borrower's monthly payment, rate and other items, and adhere to terms quoted on the price sheet.

In an attempt to spur usage of its Hope for Homeowners refinancing program, the Department of Housing and Urban Development said Wednesday it will buy out second-lien holders - likely for pennies on the dollar. Speaking at the National Press Club, HUD secretary Steve Preston admitted that the H4H program has failed to catch fire with residential servicers looking to refinance struggling homeowners into new FHA insured mortgages. Mr. Preston unveiled several changes to the H4H program, including extending new loans with terms as long as 40 years (compared to 30 years previously). Also, HUD will now allow lenders to write down the value of the house to 96.5% of its current value. Previously, the requirement was 90%. And in one other change, borrowers using H4H can have debt-to-income ratios as high as 50%. Mandated into law this summer, the original H4H program required that holders of a second mortgage relinquish their lien in exchange for sharing in a homes' price appreciation once a new mortgage is written. Mr. Preston noted that second-lien holders "have low expectations already" adding that HUD likely will pay "pennies on the dollar" for these seconds. The housing secretary said he is "confident the changes will increase participation significantly."

After operating a residential mortgage scam that defrauded four Phoenix seniors of more than $400,000, Rick Thomas McCullough, a Phoenix mortgage broker, has been sentenced to three-and-a-half years in prison along with seven years probation and ordered to pay $343,811 in restitution. According to court documents, McCullough was the president of licensed mortgage broker CactusCash. In 2005 and 2006, he used this position to persuade four seniors, two single women and one couple, to refinance their homes through him for amounts far greater than the balance of their existing mortgages. McCullough also convinced them to invest their net refinancing proceeds with him, effectively obtaining for himself much of the equity that these elderly clients had in their homes. He claimed he would invest the victims' funds in real estate and personally guaranteed the loans. According to the terms of their investments, McCullough agreed to make monthly payments between $650 and $3,150 to the victims when in fact he lacked the assets to guarantee any of the loans and failed to make payments to three of the victims after several months. In one case, he failed to make any payments at all. Instead, McCullough used the money to make personal purchases.

Brian Tray of Pittsburgh has been sentenced in federal court to 41 months of imprisonment and five years of supervised release for his connection with a mortgage fraud scheme. According to information presented in the court, Tray worked as a loan officer for, among other places, America's Mortgage Outlet and Single Source Mortgage. In connection with numerous loans, Tray submitted loan applications on behalf of borrowers that he knew contained false information related to the borrowers' income and financial condition. In addition, Tray submitted fraudulent documents to the lending institutions, including fraudulent verifications of employment, verifications of rent and appraisals.

The National Credit Union Administration has come up with a plan to refinance billions of dollars of at-risk mortgages by funneling new loans to credit unions through the Central Liquidity Facility, the lending arm of the NCUA. NCUA chairman Michael Fryzel said the agency has allocated $2 billion in loans to facilitate the Credit Union Homeowners Affordability Relief Program, or CU HARP, which could be expanded if its proves successful. Refinanced mortgages could carry rates as low as 1.75%, according to a report in The Credit Union Journal. "My principal reason for advancing CU HARP is simple," said Mr. Fryzel, "The consumer must not be left out of the broader government efforts to mitigate the housing and credit market dislocations." (Member credit unions own the CLF, which exists within the NCUA.) Credit unions believe they are not eligible for the Treasury's capital purchase program since they are nonprofits.

The Department of Housing and Urban Development, in rewriting the RESPA rules, has clamped down on builder discounts that are tied to use of the homebuilder's mortgage company. Starting Jan. 16, builders won't be able to offer $10,000 discounts on the purchase price if the homebuyer uses their affiliated mortgage or title company. The final Real Estate Settlement Procedures Act rule issued by HUD on Nov. 17 says these referral arrangements are potentially "problematic" under RESPA. "RESPA and this final rule limit tying such a discount to the use of an affiliated settlement provider," HUD says. Homebuilders, Realtors, mortgage bankers and other industry groups opposed this rule change. The National Association of Home Builders contends the change will eliminate significant savings for homebuyers. But a NAHB spokesman said the builders are not ready to comment on HUD's action. RESPA attorney Phillip Schulman said builders will have to change the way they promote their affiliates. "They won't be able to link the incentive to the use of the affiliate," the K&L Gates partner said.

Sen. Arlen Specter, R-Pa., has introduced a bill that would make it harder for investors to sue servicers for loan modifications and it would temporarily amend pooling and service agreements so at least 25% of underlying loans in mortgage-backed securities could be modified. "The bill addresses the litigation threat by requiring investors' attorneys to conduct a careful inquiry into the factual and legal basis of their claims, including consideration of the recent statutory clarification that the servicer's duty is to the entire pool of investors," Sen. Specter said. In addition, the attorneys would have to get an opinion from a newly created Treasury Department office of foreclosure evaluation that the modification was "unreasonable or not permitted" under the Real Estate Mortgage Investment Conduit regulations. Sen. Specter indicated at a Judiciary Committee hearing that he wants to pass legislation before the end of year to increase loan modifications.