Compliance & Regulation

Realtors, homebuilders and mortgage bankers are asking Congress to extend and make permanent, before year-end, the $729,750 maximum loan limit for Fannie Mae, Freddie Mac and Federal Housing Administration loans. Congress increased the loan limits in high-cost markets back in February as part of a stimulus bill to revive lending in the jumbo loan market. The increase, though, expires on Dec. 31. Without an extension, the loan limit will fall to $625,500 on Jan. 1. "Specifically, we ask that Congress eliminate the forthcoming decreased limit for high cost areas," the Mortgage Bankers Association said in a Nov. 13 letter to House and Senate leaders. MBA also wants Congress to increase the conforming loan limit from $417,000 to $625,000 to provide a "broader range of secondary market support.

Freddie Mac posted a $25.3 billion loss in the third quarter, admitted that its negative net worth now totals almost $14 billion, and mentions in a new filing that unless it receives a cash infusion it could be placed into receivership. The company, however, fully expects that Treasury will lend money to bolster its net worth, bringing the firm into a positive cash position. "We expect to receive such funds by Nov. 29," it says in a new filing with the Securities and Exchange Commission. It notes that maintaining a positive net worth "could constrain some of our business activities," including buying residential loans from banks, mortgage companies and other originators. Freddie and its "sister" company Fannie Mae have been operating under a government conservatorship since Sept. 6. The GSE blamed its third-quarter loss on money set aside to deal with its deferred tax assets ($14.3 billion) and $15.1 billion in charges and impairments on "available-for-sale" MBS and other holdings. Earlier this week Fannie Mae posted a $29 billion third-quarter loss and said it was having trouble rolling over its debt.

Senate Banking Committee chairman Christopher Dodd, D-Conn., said he will try to pass a change to bankruptcy laws during the lame-duck session that would allow a judge to restructure a mortgage on a primary residence in foreclosure. At a committee hearing, Sen. Dodd indicated the bankruptcy change would be temporary - possibly three to five years - but is necessary to deal with the nation's foreclosure crisis. Wells Fargo Bank executive vice president Jon Campbell warned that investors would likely demand higher downpayments and pricing on home loans to offset cramdowns. Sen. Dodd said he has heard arguments that such a bankruptcy change would affect credit availability for primary residences. "But I just don't see the evidence of that," he said, stressing that cramdowns would be temporary. Congress returns on Monday to consider a stimulus package that would bailout the auto industry. Some observers expect the legislative session will continue into December but note it's impossible to predict if anything will pass in a crisis environment.

The federal government would guarantee up to 50% of any losses on a modified loan that subsequently defaults under a proposal being promoted by the Federal Deposit Insurance Corp. The agency's effort is geared toward modifying 2.2 million non-Fannie Mae/Freddie Mac loans by the end of 2009. "Assuming a re-default rate of 33%, this plan could reduce the number of foreclosures during this period by some 1.5 million at a projected program cost of $24.4 billion," the agency said Friday, revealing details about its plan. The Treasury Department, however, is refusing to back the agency's idea with any of the $700 billion allocated under the Emergency Economic Stabilization Act. Servicers participating in the FDIC program could receive $1,000 for successfully modifying delinquent loans once the borrower makes six payments. In restructuring a loan, the borrower's monthly payment must be reduced to 31% of monthly income. The 50% loan guarantee would apply to modified loans with loan-to-value ratios of up to 100%. "For LTVs above 100%, the government loss share would be progressively reduced from 50% to 20% as the current LTV rises," FDIC says. Modified loans with LTVs above 150% would not eligible for the program. Loan guarantees would expire after eight years.

The Federal Deposit Insurance Corp. hopes to complete a deal to sell a majority of IndyMac Federal Bank in December, according to an agency spokesman. "Our intent is to sell as much of it as possible to one buyer," the spokesman said. It's unclear that if sold, what will happen to the FDIC's loan modification efforts at the thrift. One source said he expected continuation of the loan-mod program to be a pre-condition of a sale. An investment banking source familiar with the transaction said at least two parties are involved in the latest round of bidding for the Pasadena, Calif.-based thrift, once a top player in the alt-A market. The investment banker described the parties as "consortium bids" that have syndicated out their financing. He said there is one lead negotiator for each consortium. The FDIC spokesman declined to discuss the bidding process except to say, "We'll be conducting bidding later this month." The FDIC placed IndyMac into a conservatorship this past summer. The company was formed two decades ago by Countrywide Financial founder Angelo Mozilo.

After pleading guilty in July 2008 for her role in a multi-million dollar mortgage fraud scheme, Adriene Newby-Allen of Alpharetta, Ga., was sentenced to 135 months in federal prison to be followed by five years of supervised release and ordered to pay $5.28 million in restitution. According to the U.S. attorney for the Northern District of Georgia, from mid-2004 through March of 2006, Newby-Allen siphoned off millions of dollars in fraudulently inflated mortgage loans being provided to unqualified straw buyers, one of whom was her husband and co-defendant, Brinson Allen, who was found guilty of multiple charges relating to the fraudulent scheme on July 30, 2008 and will be sentenced at a later date.

Ronald Persaud, Esther Persaud and Shawn Persaud, all of Saratoga, N.Y., were convicted for their roles in a mortgage fraud scheme. Ronald and convicted defendant Indranie Persaud perpetuated a scheme to inflate the latter's employment income on a mortgage application to obtain a $712,000 mortgage to obtain a real property known as 12 Beacon Hill, Saratoga Springs, N.Y. Ronald and Esther Persaud also perpetrated a wire fraud conspiracy by enticing investors to pay advance fees on the false promise that the investors would receive millions of dollars in commercial funding. The investors made advance fee payments in excess of $1 million and received no commercial funding. Ronald purported to be the person with banking connections while Esther purported to be a bank executive. Ronald, Esther and Shawn Persaud then conspired to conduct a series of financial transactions calculated to conceal and disguise the source, ownership and control of the advance fees paid to the Persauds and others. All are scheduled for sentencing on March 9, 2009.

Despite Fannie Mae posting a $29 billion third quarter loss, Treasury Secretary Henry Paulson believes the company - and its sister GSE, Freddie Mac - are on "stable" financial footing. At a press conference Wednesday, Mr. Paulson said in a few weeks he will share his "views" on the future of Fannie and Freddie. He noted that Fannie's third quarter loss was "in the range of what we expected." Meanwhile, FBR Capital Markets issued a report predicting that Fannie could post losses of $20 billion to $40 billion over the next four quarters. As reported, Fannie Mae executives recently said they are worried that the company's credit facility with the Treasury "may prove to be insufficient," noting that it could run into liquidity problems that would impair its ability to support the mortgage market.

A wave of forced loan repurchases that has resulted from Fannie Mae and Freddie Mac stepping up loan underwriting reviews over the past couple months may hit small lenders harder going forward. Small and mid-sized lenders may not have felt the full impact yet, said Rob Chrisman, the director of capital markets at Residential Pacific Mortgage, Walnut Creek, Calif. The buybacks have been affecting older loans that have been outstanding for up to four years rather than only loans that have been outstanding for up to three years as in the past, according to Joe Garrett, a principal at Garrett, Watts & Co., Berkeley, Calif. Fannie and Freddie said they could not make executives available to discuss the issue. One real estate brokerage mortgage business, the Chantilly, Va.-based Long & Foster, said it has shifted to doing "more than required" to meet investors' guidelines due to these mounting loan quality pressures and has, for example, cut off a large brokerage when one of its brokers submitted two loan documents for one property.

Fannie Mae and Freddie Mac have adopted a "streamlined" approach to modifying delinquent mortgages that regulators and industry groups hope will be accepted by investors in private-label nonprime mortgage-backed securities. For borrowers who are 90-days past due and not in bankruptcy, servicers of Fannie and Freddie MBS can reduce the interest rate to 3%, extend the loan up to 40 years and defer payments on part of the principal. The objective is to reduce borrowers' payments to 38% of gross income through a process that is fast and simple and helps homeowners who have seen their credit scores deteriorate and their home equity disappear. GSE regulator James Lockhart announced the new streamlined modification program and urged private-label securities investors to quickly adopt the program as an industry standard. "Broad acceptance and effective implementation could stabilize communities and property values," he said. The two government-sponsored enterprises will require their servicers to implement the new modification program by Dec. 15.