Compliance & Regulation

Federal banking regulators are pressing the Office of Federal Housing Enterprise Oversight to exempt federally regulated institutions from proposed appraisal standards Fannie Mae and Freddie Mac agreed to implement under a settlement with New York Attorney General Andrew Cuomo. The appraisal standards or code would "materially disrupt mortgage lending processes and raise costs," according to a joint letter signed by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration. Comptroller of the Currency John Dugan previously urged OFHEO Director James Lockhart to withdraw the appraisal code, which would ban the use of in-house or affiliated appraisers on loans sold to the two government-sponsored enterprises. "If not withdrawn, the agreements and code should be revised to exempt federally regulated lenders," the June 19 letter says. Meanwhile, the Senate is likely to vote on an amendment to a major housing bill this week that directs OFHEO to issue regulations that establish appraisal standards for Fannie and Freddie. The appraisal amendment by Sen. Elizabeth Dole, R-N.C., would nullify the appraisal code the GSEs worked out with the New York AG. Senate Banking Committee Chairman Christopher J. Dodd, D- Conn., opposes the Dole amendment.

Former Bear Stearns executives Ralph Cioffi and Matthew Tannin, who managed two subprime hedge funds that collapsed last summer, have been indicted on securities fraud and insider trading in regard to the funds' management. Until recently, little was known about the hedge funds because they were organized under a Bear affiliate, Bear Stearns Asset Management, and incorporated in the Cayman Islands, where bankruptcy laws allow companies to disclose a minimum about their operations. According to the U.S. attorney's office in Brooklyn, where the indictments were handed up, the hedge funds held at least $1.4 billion in investors' money by the end of 2006. In a statement, the U.S. attorney's office said that Messrs. Cioffi and Tannin "believed that the funds were in grave condition and at risk of collapse. However, rather than alerting the Funds' investors and creditors to the bleak prospects of the funds and facilitating an orderly wind-down, the defendants made misrepresentations to stave off withdrawal of investor funds." (For the full story, see the June 23 issue of National Mortgage News.)

The Federal Bureau of Investigation is undertaking 19 subprime-related corporate fraud investigations, according to FBI Director Robert Mueller. "The majority of these corporate fraud investigations address accounting fraud, insider trading, and the failure to disclose the proper evaluations of the securitized loans or derivatives," Mr. Mueller said at a news conference. "In many of these investigations, we are working with the Securities and Exchange Commission and the Department of Justice to determine the criminal intent of these identified violations." The FBI director added that targets are "relatively large corporations." He declined to comment on when the first indictments would be issued in the cases.

Over 400 individuals have been charged with mortgage fraud as the result of a national "takedown" led by the Department of Justice and the Federal Bureau of Investigation. The law enforcement operation called "Malicious Mortgage" netted real estate agents, mortgage brokers, appraisers, and others allegedly engaged in lending fraud, foreclosure rescue schemes, and mortgage-related bankruptcy schemes. So far, the three-month sweep had led to 287 arrests and 173 convictions, and 82 individuals have been sentenced, the DoJ said. The Mortgage Bankers Association and the American Financial Services Association welcomed the crackdown. "We support efforts to prosecute unscrupulous operators who give the mortgage industry a bad name," AFSA president Chris Stinebert said. MBA president Kiernan Quinn said the sweep shows that federal authorities are taking the issue of mortgage fraud seriously. "We will continue to work with the FBI to help them target these kinds of crimes," Mr. Quinn said. The FBI said it has set up 42 task groups and working groups around the country that are investigating 1,400 mortgage fraud cases.

The National Association of Home Builders is supporting the housing bill despite it limitations, and the trade group is urging others to compromise so that the landmark legislation can be passed and sent to the president. "We are urging everyone to stop demagoguing and start compromising for the sake of economy," NAHB chief executive Jerry Howard said. The NAHB wanted a broader homebuyer tax credit and a net operating loss carry-back provision so builders could deduct losses in 2008 and 2009 from their profits in prior years and receive a tax rebate. But the housing bill now under consideration in the Senate limits the tax credit to first-time homebuyers, and the NOL provision has been dropped. Mr. Howard said the organization is willing to support the limited tax credit and expressed hope that "others on Capitol Hill that have a couple of outstanding issues will realize the value and necessity of being flexible, too." Otherwise the most important housing bill since 1992 "could go down the tubes," he said.

The Federal Insurance Deposit Corp. has approved the application for a newly formed California-chartered industrial bank subsidiary of CapitalSource Inc., Chevy Chase, Md., to receive deposit insurance. The approval is the final regulatory OK needed for CapitalSource to acquire certain assets and liabilities of Fremont Investment & Loan, which is being sold by its troubled parent company, Fremont General Corp., Brea, Calif. The FDIC also approved that purchase as well as the establishment of 22 FIL branches as offices of CapitalSource Bank. Under the agreement, CapitalSource is not acquiring the FIL charter, which remains with Fremont General. The California Department of Financial Institutions approved the deal on June 13. "Further diversifying our funding sources has long been an important strategic goal," said John K. Delaney, CapitalSource chairman and chief executive. "The formation and operation of a regulated bank with significant deposits meets that objective."

Several financial services groups, and even the U.S. Chamber of Commerce, say they support a major housing bill pending in the Senate, but they want a section of the bill dealing with the licensing and registration of mortgage originators dropped from the legislative package. Title VI has "serious faults" and imposes suitability requirements on employees of lending institutions that will create uncertainty in the origination and underwriting process, according to the six industry groups. The American Financial Services Association, the Consumer Bankers Association, the Consumer Mortgage Coalition, the House Policy Counsel of the Financial Services Roundtable, the Mortgage Bankers Association, and the CoC signed the June 17 letter. "We strongly support" the GSE regulatory reforms and the FHA modernization provisions in the housing bill, as well as the FHA foreclosure rescue program, says the letter addressed to Sens. Christopher J. Dodd, D-Conn., and Richard C. Shelby, R-Ala. "Therefore, we urge that Title VI be separated from the rest of the bill and be considered separately once the licensing and registration provisions are perfected," the groups say.

Nine Republican senators are demanding the right to fully debate and amend a major housing bill that Senate leaders may try to bring to the floor Tuesday, but their demands could delay passage of the bipartisan bill until after the July Fourth recess. The bill would "greatly expand access to taxpayer-backed Federal Housing Administration loans for delinquent borrowers," and "reorganize the regulation of Fannie Mae, Freddie Mac and the Federal Home Loan Banks," according to a June 16 letter the senators sent to Sen. Mitch McConnell, the Republican leader. "Due to the seriousness and complexity of this issue, we ask that you protect our rights to fully debate and amend this legislation." Supporters of the housing bill want to limit debate and amendments. But the nine Republicans, including several Senate Banking Committee members, could stonewall the proceedings when the measure comes up for debate. Meanwhile, sources say that Sen. McConnell wants to move the bipartisan housing bill through the Senate. However, the Republican leader is trying to block other Democratic initiatives, which could also delay legislative action.

The National Association of Home Builders has dropped demands that struggling builders receive tax rebates, and now the trade group is urging Congress to pass a "robust" homebuyer tax credit to stimulate the housing market. "That tax credit needs to be as big and unencumbered and as rapid-acting as Congress can make it," NAHB chief executive Jerry Howard told reporters. In February, the NAHB cut off political contributions to legislators because Congress refused to include a net operating loss carry-back provision in an economic stimulus package. The NOL provision would have allowed homebuilders and other unprofitable companies to deduct losses in 2008 and 2009 from their profits in prior years and receive tax rebates. In April, the Senate passed a foreclosure prevention bill that included an NOL provision, but it came under heavy criticism. House tax writers did not include an NOL provision in a bill that gives first-time homebuyers a $7,500 tax credit. However, the tax credit works like an interest-free loan that has to be paid back in 15 years. The builders want a real tax credit that is not limited to first-time homebuyers. The NAHB's analysis shows that a robust tax credit would have a more stimulative effect on the economy than an NOL provision, Mr. Howard said.

With price declines of 50% and more, home sales are picking up in the Central Valley of California thanks to higher loan limits on Federal Housing Administration-insured mortgages, but more losses for the banking industry are in the pipeline, according to Friedman Billing Ramsey. "With interest rate resets, defaults and foreclosures still growing, the peak in industry losses will probably be sometime in 2009," said FBR Capital Markets managing director Paul Miller. In Sacramento, a house that sold for $385,000 in April 2005 is likely to be sold at auction for $120,000 today, the company said. Prices are generally down 30% to 70% from peak values, with the average decline around 50%. FBR equity analysts who toured the valley during the week of June 9 said they were "surprised by just how bad things are" in the Central Valley and that it would be "even worse" without FHA financing, which is the "only game in town." Construction activity in the Central Valley has stopped, and speculators are getting back into the market because they can purchase properties for rentals at prices "with breakeven or even positive cash flows," the FBRCM report says.