Compliance & Regulation

The Treasury Department has opened the door for privately held bank and thrift holding companies, as well as Community Development Financial Institutions, to apply for capital injections under Treasury's capital purchase program. "Top tiered" financial institutions must apply by Dec. 8 to their federal regulator for a capital injection, according to Treasury. For institutions that are not in a holding company structure, they can qualify if they file a holding company application by Dec. 8. Meanwhile, community banks are still waiting for Treasury to spell out how mutual and S-Corporation institutions can apply for capital injections. Treasury Secretary Henry Paulson told a congressional committee that $148 billion has already dispersed under the capital purchase program and more applications are being processed. "We are developing a matching program for possible future use which could apply to banks and/or non-bank financial institutions." Under a matching program, the secretary said a bank might have to raise $1 in common stock for every $1 received from Treasury.

There will not be a recovery in the home market until all the "five timers" are out of their homes, said Bob Simpson, the president of IMARC, a Newport Beach, Calif.-based mortgage fraud investigations firm. The fact that those who owe five times more than what they make are still in their homes means the bottom has not been reached, he said, speaking at NAMB/West in Las Vegas after having made similar comments at the SourceMedia Mortgage Fraud Conference. The "five timers" need to turn in their house keys and move into something they can afford. "You're not qualified" is a phrase mortgage originators have to start using again, Mr. Simpson said. At NAMB/West, he made an analogy to the markers casinos give to high rollers. In the lending industry, those markers have now gone bad. The origination process was not about cost but about monthly debt service; originators sold payments. Compounding the problem, Mr. Simpson said, is lenders no longer required borrowers "have skin in the game" in the form of a downpayment. He added that he was not a fan of downpayment assistance programs. There need to be barriers to homeownership and the borrower's ability to save is important, Mr. Simpson said.

The Home Valuation Code of Conduct is "potentially the most dangerous regulation" with the effect of cutting the mortgage broker out of the origination process, declared Dave Biggers, the chief executive of appraisal technology firm a la mode, Oklahoma City. While the intent of the HVCC, which is actually a legal settlement, is good, he told attendees at NAMB/West in Las Vegas, it singles out mortgage brokers as the source of pressure on appraisers to deliver a certain value. It "drives a wedge between you and the lending process," he reiterated. Under the settlement, a firewall has to be created between the lender and appraiser. In many cases, that has taken the form of the lender hiring an appraisal management company. Mr. Biggers called the situation "absurd" because the lawsuit that resulted in the HVCC was filed against an appraisal management company. Whether or not the HVCC takes effect, many lenders will likely adopt its terms, he said. A number of Federal agencies, including the Federal Reserve Board, have just introduced their own regulation that could trump the HVCC, Mr. Biggers said. Unlike the HVCC, the regulation will not cut the mortgage broker out of the appraisal ordering process. The broker also will be able to have contact with the appraiser but will not be allowed to discuss a target value.

The National Association of Mortgage Brokers contends it is "unfair" that brokers have to disclose their indirect compensation on the newly revamped good faith estimate differently from banks and other competitors. "It is basically unfair to have direct competitors disclosing differently," said Joe Falk, a former NAMB president. The new Real Estate Settlement Procedures Act rule issued by the Department of Housing and Urban Development re-characterizes the yield-spread premium on the GFE as a charge or credit in relation to origination fees. Meanwhile, lenders' indirect compensation is "hidden at the bottom of a page and without relation to any other fees," Mr. Falk said. The American Bankers Association also said it is "disappointed" with many aspects of the RESPA rule and the new disclosure of YSPs. "ABA believes the new formulation [of YSPs] will be confusing to consumers," ABA's weekly newsletter says.

Congress needs to pass legislation that "unlocks" securitized trusts so servicers could sell distressed mortgages to the Treasury Department for restructuring, according to a former Treasury official in the Clinton administration. Michael Barr told a House panel that the Real Estate Mortgage Investment Conduit statute could be amended so that mortgage-backed securities investors don't face a tax penalty when loans are sold to Treasury, which is administering the Troubled Asset Relief Program. "We need to free servicers from the conflicting requirements and give them an incentive to sell mortgages to Treasury for refinancing and foreclosure avoidance," he testified. Mr. Barr is a law professor and a senior fellow at the Center for American Progress, a liberal think tank. He served as a special assistant to former Treasury secretary Robert Rubin and as Treasury deputy assistant secretary for community development (1997-2000). His testimony could signal options that the President-elect Obama's transition term is considering. Mr. Barr also supports a Federal Deposit Insurance Corp. plan to guarantee modified loans. "FDIC has proposed a plan to use guarantee authority, and the [Bush] administration should implement it," he said.

Pressure is continuing to mount for a credit union-centric assistance program in the wake of the Treasury Department pulling the plug on its plan to use $700 billion in government money to buy distressed mortgage assets. According to a report in The Credit Union Journal, canceling the purchase of troubled mortgages effectively leaves the CU industry out of the bailout. These non-profits are not eligible for Treasury's capital purchase program where the government buys stakes in depositories through the acquisition of preferred shares. Credit union officials told CUJ that the bailout bill was sold to Congress as a program to buy distressed mortgage assets. "Right now we're still urging Treasury to continue the congressional intent of the program," said Brad Thaler, senior lobbyist for National Association of Federal Credit Unions. "The Treasury's announcement today causes us concern," said Credit Union National Association president Dan Mica. "Although the Economic Emergency Stabilization Act explicitly includes America's credit unions, the implementation of the program thus far has not included credit unions, and the Treasury's announcement makes it unclear how credit unions will be included."

Genworth Financial - after recently posting a large third quarter loss - struck a deal over the weekend to buy a $1 billion thrift in Minnesota, which it will use to file an application for a capital infusion under the $700 billion bailout bill. Genworth of Richmond, Va., also owns a mortgage insurance division, which it is considering selling. At press time a Genworth spokesman had not returned a telephone call about the thrift purchase. In conjunction with its planned purchase of InterBank FSB of Maple Grove, Minn., Genworth also has filed a savings and loan holding company application with the Office of Thrift Supervision. To participate in the Treasury's capital purchase program, it must first file an application with OTS. Last week Genworth said it has borrowed $930 million of a $1.7 billion credit line.

Catherine Hanaway, U.S. attorney for the Eastern District of Missouri, has formed a mortgage fraud task force made up of law enforcement, government regulators, and real estate professionals. The first meeting of the task force was on Nov. 12 at the U.S. attorney's office in St. Louis. At the first meeting, Ms. Hanaway mapped out the goals of the organization, which include stopping mortgage fraud before it starts, educating industry officials, and ensuring that cases are brought promptly to the attention of law enforcement officials.

The key to combating mortgage fraud is "regulation, regulation, regulation," the director of research and policy for the Community Law Center told attendees at SourceMedia's Mortgage Fraud Conference in Las Vegas. Robert J. Strupp said part of the problem is that existing laws were not enforced. He warned against what he called "self-proclaimed" loss mitigation specialists and "certified" foreclosure consultants. No state certifies foreclosure consultants, Mr. Strupp declared, adding, "In my opinion, this whole industry needs to be regulated and it is not." Rodney Nelsestuen, research director for TowerGroup, took an opposite position on increased and detailed regulation. At first, he said, it can be prescriptive in dealing with the problem, but in the end it will fail because the prescription will provide fraudsters with a road map to get around the problem. Any solution to fraud needs to be principal-based, Mr. Nelsestuen said.

Residential loan modifications could be ripe for mortgage fraud, according to panelists speaking at a SourceMedia mortgage conference in Las Vegas. Gary Lacefield, executive vice president and director of compliance at WR Starkey Mortgage of Texas, said part of the problem is that lenders are modifying loans, keeping homeowners in a product that was not suitable for them in the first place. The modification continues the predatory pattern and practice, he said. Al Macdonald, chief executive and founder of NominoData, when asked about borrowers who were involved in mortgage fraud, said before just simply modifying the loan, the originator should re-screen the borrower to make sure there was not fraud. He later said that technology is merely a tool to help catch fraud. Lenders need to be constantly monitoring their systems to make sure technology is filling the role that was originally intended.