Compliance & Regulation

Even though mortgage fraud for housing "doesn't seem quite as violent" as mortgage fraud for profit, it has its own consequences, according to a representative of the Florida Office of Financial Regulation's Bureau of Financial Investigations. Rui Goncalves told attendees at the Florida Association of Mortgage Brokers annual convention in Kissimmee, Fla., that fraud for housing is "more of a temptation" because it is easy for people to think they are trying to help someone get into a home. But those who participate might not realize the consequences, even if the loan never goes into default. For example, having unqualified buyers in the market competing for properties drives up prices, and eventually there will be a crash, Mr. Goncalves said. He called on originators to strive for transparency in their dealings and to ask questions of their customers.

Suitability is a key point in determining what might be mortgage fraud, the chief of the Florida state attorney general's mortgage fraud task force told attendees Wednesday at the Florida Association of Mortgage Brokers annual convention in Kissimmee, Fla. R. Scott Palmer, who is also the special counsel for antitrust enforcement, said that under his office's definition of suitability, it is a violation of the state's unfair and deceptive practices act to put someone into a loan if the originator knows the borrower cannot repay it. Questioned by an audience member, Mr. Palmer added that suitability is "a developing concept" that is in its infancy and that case law will likely be developed around it. The real issue, he said, is whether the broker is aware that the information is false. Don Saxon, commissioner of the Office of Financial Regulation, said the concept could be similar to what exists in the securities industry, where (while there is no hard and fast rule) practitioners have to consider the consumer's portfolio as a whole to determine suitability.

The FBI had launched an investigation of IndyMac Bank for possible mortgage fraud shortly before the insolvent Pasadena, Calif.-based thrift was closed by regulators and placed into receivership, according to news reports. The $32 billion thrift, which specialized in alternative-A lending, is apparently one of 21 companies under scrutiny for possible mortgage fraud. "The FBI is currently investigating 21 companies involved in the mortgage/subprime industry," the bureau said in a statement in response to news reports about IndyMac. One month ago, FBI Director Robert Mueller told reporters that his agency had initiated 19 subprime-related corporate fraud investigations. Many of these investigations are coordinated with the Department of Justice and the Securities and Exchange Commission. In testimony July 15, SEC Chairman Christopher Cox told Congress that his agency has over four dozen law enforcement investigations in the subprime area. The Federal Deposit Insurance Corp. is operating IndyMac as a conservatorship and offering banking services to depositors and borrowers.

R&G Financial Corp., San Juan, Puerto Rico, has announced the receipt of notices from Freddie Mac terminating the eligibility of R&G Mortgage Corp. and R-G Premier Bank to sell mortgages to Freddie or to service mortgages for the government-sponsored enterprise. The holding company said it has obtained a temporary restraining order from U.S. district court against the terminations and will appeal the actions. It also reported that Freddie Mac's notice indicated that the terminations were based on concerns about the two R&G subsidiaries' ability to continue to act as a servicer and to meet their obligations to the GSE. As of June 30, Freddie Mac servicing amounted to approximately 42% of R&G Mortgage's servicing portfolio, R&G Financial said, adding that it estimates that an additional 25%-30% of the servicing portfolio could be affected due to contractual commitments related to Freddie Mac seller/servicer status.

The Federal Deposit Insurance Corp. has approved a policy statement that should facilitate the issuance of covered bonds this fall by a few large federally insured banks and thrifts. "Covered bonds can serve as an additional source of financing for mortgage lending, and thereby offer potential benefits for banks and homebuyers," FDIC Chairman Sheila Bair said. The final policy statement assures investors that they will have quick access to the mortgage collateral of covered bonds if an institution fails and goes into an FDIC receivership. However, proponents of covered bonds are disappointed that the FDIC is limiting covered-bond issuance to 4% of total liabilities, which not only restricts issuance but essentially locks midsize banks out of the covered-bond market. The chairman acknowledged that the FDIC wants to see how the market develops before raising the cap. Ms. Bair also served notice that the FDIC may issue guidance later this year that limits a bank's reliance on secured liabilities. Federal Home Loan Bank advances and covered bonds are considered secured liabilities. The failure of the $32 billion-asset IndyMac Bank is going to be very costly for the deposit insurance fund because the thrift had $10 billion in FHLBank advances. The FHLBank has first rights to the mortgage collateral that backs the advances.

The House is not expected to vote on the housing bill until July 22 at the earliest as doubts about Treasury Secretary Henry Paulson's plan to provide financial backstops for Fannie Mae and Freddie Mac have slowed progress on the legislation. The House was expected to vote on the massive housing bill on Thursday and send it back to the Senate. But the Paulson plan suddenly added a new and controversial issue to the mix. Now House and Senate banking committee leaders are discussing possible changes to the plan to make it more acceptable to the Congress. "There needs to be enough time for people to digest and figure out how they want to vote and what they want to support," said Robert Davis, executive vice president of the American Bankers Association. At a Senate Banking Committee hearing, several Republican and Democratic senators raised concerns about giving Fannie and Freddie an unlimited line of credit at the U.S. Treasury and giving the Treasury secretary the authority to purchase stock in the government-sponsored enterprises. In addition, concerns are being raised about giving the Federal Reserve Board a role in overseeing the housing GSEs, including the Federal Home Loan Banks.

Mortgage brokers can breathe easier now that the Federal Reserve Board has dropped a controversial provision from its Home Ownership and Equity Protection Act rules that would have required brokers to disclose their fees upfront and get consumers to sign a contract. In testing model disclosures and broker contracts with consumers, Fed staffers found consumers were confused by the paperwork and often concluded "erroneously" that they would pay less working directly with a lender than working with a broker. "In the time frame that we wanted to get these rules out, we weren't able to craft something that would actually help consumers rather than confuse them," Fed governor Randall Kroszner said. However, Fed chairman Ben Bernanke has directed staff to continue working on disclosures, broker fees and yield spread premiums. "This effort is not over," governor Kroszner said. The Fed decision to drop the broker provision from the final HOEPA rule is a major victory for the National Association of Mortgage Brokers, which has claimed the contract proposal is unworkable from a practical standpoint and discriminates against small businesses.

The Federal Reserve Board has banned prepayment penalties on subprime adjustable-rate mortgages during the first four years of the loan, effectively discouraging a proliferation of 3/28 and 2/28 ARMs if there is a revival of subprime lending. The Fed took this action in finalizing its Home Ownership and Equity Protection Act rules to beef up consumer protections. The final rules are "intended to protect consumers from unfair and deceptive practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership," Fed chairman Ben Bernanke said. The final HOEPA rule requires subprime lenders to determine a borrower's ability to pay and allows borrowers to sue lenders that place them in unaffordable loans. This provision and the ban on prepayment penalties go into effect October 1, 2009. Starting April 1, 2010, all subprime loans must have an escrow account for the first 12 months. With the current turmoil in mortgage markets and little subprime lending, the Fed is giving lenders plenty of time to adjust to the new lending rules. The Fed also changed the benchmark for determining subprime loans. Instead of using a Treasury index, it is switching to the Freddie Mac primary mortgage market survey. Any first mortgage with an interest rate 150 basis points above the Freddie Mac PMMS is considered subprime. This change will exclude almost all prime loans except some higher-cost jumbo loans that might be considered subprime under the HOEPA rules.

The Federal Reserve is opening its lending window to Fannie Mae and Freddie Mac to head off any short-term funding problems and on Sunday Treasury secretary Henry Paulson outlined a number of immediate steps Congress can take to bolster investor confidence in the two government-sponsored enterprises. The Treasury secretary is asking Congress to temporarily increase the mortgage giants' current $2.25 billion line of credit with the U.S. Treasury along with temporary authority for Treasury to purchase stock in the two mortgage giants. "I look to work closely with the congressional leaders to enact this legislation as soon as possible, as one complete package," Mr. Paulson said Sunday evening. Administration officials want Congress to include the temporary measures in a major housing bill that Congress is expected to pass in a few weeks. Senate Banking Committee chairman Christopher Dodd, D-Conn., suggested, however, that emergency measures might be handled in a separate bill. "It is a matter of some debate," he said. The Fed also acted on Sunday to support Fannie and Freddie by allowing the GSEs to borrow from the Federal Reserve Bank of New York. "Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities," the Fed said. Fannie and Freddie chief executives welcomed the government's support, but insisted they have adequate capital. "We are in the process of finalizing our June 30, 2008 results and we estimate that they will show we have a substantial capital cushion above the 20% mandatory target surplus established by our regulator," Freddie chairman and CEO Richard Syron said.

The White House Council on Financial Literacy is recommending underwriting standards for "responsible" subprime lending in an effort to encourage lenders to make this form of mortgage credit available again in low- and moderate-income communities. The council's report highlights the differences between responsible and irresponsible subprime mortgage lending. It also recommends parameters for fixed- and adjustable-rate subprime mortgages that the council says would benefit borrowers. Council Vice Chairman John Hope Bryant said one feature recommended by the council would benefit borrowers who have made their payments on time but suddenly face the loss of a job or death in the family. "Nobody loses, the person gets six months to deal with their change-in-life event, and those payments go to the back of the loan -- principal and interest," Mr. Bryant said at a recent Federal Deposit Insurance Corp. forum on mortgage lending to low- and moderate-income households. Wells Fargo Home Mortgage, Banco Popular, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency have endorsed the council's recommendations. The report says responsible subprime lending has done more to help the poor out of poverty than anything else in the past 50 years, and that the subprime mortgage crisis is a result of irresponsible, predatory, and greed-based lending, not subprime lending itself.