Compliance & Regulation

The Philadelphia Housing Authority, in a recent lawsuit, has accused Housing Secretary Alphonso Jackson of taking retaliatory action against the agency because it would not transfer, at a steep discount, a $2 million piece of public property to a friend of the secretary. Previous to the lawsuit, HUD had accused the PHA of not providing enough housing units to people with disabilities, an allegation that if confirmed, could lead to loss of federal funds for the authority. The existence of the PHA lawsuit was first reported by The Washington Post. PHA director, Carl Green, in an affidavit, said Mr. Jackson called the city's mayor, demanding that the parcel be transferred to developer Kenny Gamble, who is described by the newspaper as a "business friend" of the secretary. The PHA chief alleges that Mr. Jackson's aides at the agency followed up with "menacing" threats about the property. The Department of Housing and Urban Development would not comment on specifics but said in a statement that "this litigation will vindicate our actions to enforce our nation's fair housing laws." Besides being a real estate developer, Mr. Gamble is a songwriter who penned such Motown classics as "Love Train" and "Me and Mrs. Jones."

The acquisition of Countrywide Financial Corp. by Bank of America Corp., Charlotte, N.C., has drawn opposition from SRM Global Fund, a Cayman Islands-based hedge fund that controls 5.19% of Countrywide's stock. In a Securities and Exchange Commission filing, SRM said "the merger agreement does not provide sufficient value to holders of [Countrywide's] common stock." The company also issued a news release saying it will vote against the merger and that the Calabasas, Calif.-based Countrywide is "strong and will rapidly return to profit on a standalone basis." If this is not true, SRM said it wants to know what management did to maximize shareholder value. As the deal now stands, SRM said Countrywide shareholders would get less than $8 dollars per share. But even after the fourth-quarter loss, it maintained that Countrywide still has a book value "in excess of $20 per share, in addition to its substantial franchise value as the leading mortgage business in the United States and its insurance business." It added that it is not surprised that BoA will proceed on the deal because it is paying a substantial discount to book value. SRM also asked the SEC to investigate movements in Countrywide's stock price in the days before the merger was announced.

Now that Congress has changed the tax laws on debt forgiveness, it is more feasible for servicers to write down the principal amount of a mortgage to help struggling borrowers, according to a federal regulator. "Such an option might be considered for borrowers having financial difficulties making their payments after their loans reset and where foreclosure is a looming possibly," FDIC Chairman Sheila Bair told a Senate panel. The Federal Deposit Insurance Corp. chairman noted that Congress has passed the Mortgage Forgiveness Debt Relief Act, so borrowers no longer have to pay taxes when the principal amount of their mortgage is reduced. Servicers should "carefully consider" whether writedowns or forgiveness of arrearages of principal and interest are "better options than foreclosure, or even short sales in appropriate circumstances," Ms. Bair testified.

Examiners are taking a sharp look at national banks with high concentrations of construction and development loans in declining markets, according to the comptroller of the currency, who expects to see some bank failures this year. "There will be more criticized assets, increases to loan loss reserves; and more problem banks," Comptroller John Dugan told the Florida Bankers Association. "And yes, there will be an increase in bank failures." The comptroller noted that large and small homebuilders are under stress, and the percentage of nonperforming C&D loans 90 days or more past due in Florida is 3.34% -- up 70% from a year ago. "We see clear signs of credit quality declining," and bank management needs to make "realistic assessments" of their portfolio's current conditional and get new appraisals, Mr. Dugan said.

Ryland Homes has agreed to implement a substantial portion of a shareholder proposal by a LIUNA pension fund requiring better disclosure of the homebuilder's mortgage risk. LIUNA -- the Laborers' International Union of North America -- said it filed the proposal as part of an initiative to help restore confidence in the housing industry. The Ryland proposal, filed by the Indiana State District Council of Laborers and HOD Carriers Pension Fund, sought regular reporting of the types of mortgages originated so investors can identify the level of exposure to prime, subprime, and alternative-A loans. The proposal also sought reporting on sales of those mortgages, including identification of buyers and terms. "We applaud Ryland for taking this action and call upon other homebuilders and mortgage originators to enact the provisions of our proposal," LIUNA general president Terence M. O'Sullivan said. "We believe restoring confidence to the industry must be multipronged and include responsible shareholder proposals, legislative action, and self-regulation by homebuilders, lenders, and credit rating agencies." LIUNA can be found online at http://www.liuna.org.

Five lender groups that are supporting quick passage of a Federal Housing Administration reform bill want the House and Senate banking committee leaders to drop a provision that would allow mortgage brokers to buy a $50,000 surety bond in lieu of meeting FHA net-worth and audit requirements. Because there is no federal oversight of brokers, "it is critical that they continue to submit the annual audited financial statements to the FHA in order to participate in the program, and more importantly, protect the integrity of the FHA," the five trade groups say in a letter to the committee chairmen. The National Association of Mortgage Brokers maintains that more brokers would be willing to distribute FHA loans if they didn't have to pay for an expensive audit. The surety bond provision in the House-passed FHA bill has "belts and suspenders to protect the FHA program," NAMB executive vice president Roy DeLoach said. He stressed that the FHA commissioner can control the number of brokers using surety bonds. In addition, every broker has to be coupled with an FHA-approved direct endorsement lender, who reviews every loan before the closing. The Mortgage Bankers Association, the Lenders One/National Alliance of Independent Mortgage Bankers, the Independent Community Bankers of America, the American Bankers Association, the American Financial Services Association, and the American Institute of Certified Public Accountants signed the Jan. 30 letter.

The Hope Now initiative might help 250,000 subprime borrowers avoid foreclosure, but another 2 million homeowners are likely to lose their homes over the next 24 months if they can't petition the bankruptcy courts for relief, according to economist Mark Zandi."While the Hope Now initiative is laudable, it should not forestall passage of H.R. 3609 to provide hard-pressed homeowners facing foreclosure more protection in a Chapter 13 bankruptcy," the chief economist at Moody's Economy.com told a House Judiciary panel. Former Housing Secretary Jack Kemp also testified in favor of the bill, which would allow bankruptcy judges to reduce the interest rate and principal amount of a residential mortgage. But the Mortgage Bankers Association warned that passage of the bankruptcy bill could destabilize the mortgage market. "This would have an immediate and severe impact on the mortgage market as companies book the diminished value of their loans and servicing rights," MBA chairman-elect David Kittle said.

The Federal Open Market Committee dropped the target federal funds rate and the discount rate by 50 basis points at its regular meeting Wednesday. "Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," said the FOMC, the Federal Reserve Board's monetary policy-making panel. "Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets." The Fed can be found on the Web at http://www.federalreserve.gov.

Countrywide Financial Corp., Calabasas, Calif., said Wednesday that it has been subpoenaed by the Florida attorney general's office, which is looking into its foreclosure practices, among other things. Florida joins several other states, including Illinois and Pennsylvania, that are reviewing allegations that the nation's largest lender/servicer charged excessive fees in regard to foreclosures and used high-pressure sales tactics in pushing payment-option adjustable-rate mortgages. Countrywide can be found on the Web at http://www.countrywide.com.

Financial institutions filed a record 15,000 suspicious activity reports (including instances of mortgage fraud) with the Federal Bureau of Investigation in the first fiscal quarter of this year. If the pace keeps up, more than 60,000 SARs will be filed, outstripping 2007, when 46,717 reports hit the system. In a briefing on Jan. 29, FBI officials said the agency has 14 major "corporate fraud" investigations under way involving mortgage or related companies. The focus, officials said, was on subprime firms, their accounting and lending practices, and insider trading. The agency did not specify any cases, but it is well known that the collapse of New Century Financial Corp. of Irvine, Calif., is the subject of a major probe. As previously reported, the Securities and Exchange Commission is investigating the failure of several subprime firms, focusing on -- among other things -- their investment bankers, including Bear Stearns, Merrill Lynch, and Morgan Stanley.