Compliance & Regulation

Former Freddie Mac chairman and chief executive Leland Brendsel has agreed to disgorge $10.5 million in salary and bonuses to settle an administrative enforcement action by the Office of Federal Housing Enterprise Oversight.Mr. Brendsel also agreed to pay the U.S. government $2.5 million and waive claims against Freddie for $3.4 million in additional compensation in settling allegations that the government-sponsored enterprise allowed improper earnings management under his leadership. The former CEO was ousted by Freddie Mac's board of directors in 2003 after an internal investigation discovered that the company had understated profits by $5 billions to show steady and increasing earnings. OFHEO charged Mr. Brendsel with operating the GSE in an unsafe and unsound manner.

Late Wednesday night the House Financial Services Committee passed predatory-lending legislation that could put a crimp in yield-spread premiums, a key component of how loan brokers are compensated.The National Association of Mortgage Brokers is concerned that a section of the bill that bans "incentive payments" to brokers also bans all YSPs. Rep. Gary Miller, R-Calif., proposed an amendment to clarify that YSPs are permitted if the broker's fee is disclosed early in the process and if the fee is not changed based on the consumer's decision to finance certain closing costs. Rep. Barney Frank, D-Mass., the committee chairman and sponsor of the bill, said the ban on incentive pay is designed to prevent brokers from steering borrowers into higher-cost loans. Among other things, the bill imposes standards on the origination and securitization of subprime loans. (For full details, see the Nov. 12 issue of National Mortgage News.)

New York Attorney General Andrew Cuomo said Wednesday that his office will subpoena Fannie Mae and Freddie Mac as part of a widening probe of the residential mortgage industry.Among other things, the subpoenas seek information on mortgages purchased by the government-sponsored enterprises from their seller/servicers, including Washington Mutual of Seattle. The GSEs also agreed to a demand by the New York AG that they hire an independent examiner to conduct a review of all WaMu appraisals on mortgages they purchased. In 2006, according to the eMortgage Industry Directory, WaMu sold north of $30 billion in loans to the GSEs. "In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," the attorney general said in a statement. At deadline time, only Fannie had commented on the matter, saying it would fully cooperate.

The National Association of Mortgage Brokers has officially launched its "Lending Integrity Seal of Approval" at an NAMB West news conference, where association officials described it as going beyond federal, state, and other industry requirements.Among the requirements for the seal are: three business references; passing a national criminal background check; professional education training that includes instruction in ethics; agreeing to abide by the NAMB's formal ethics grievance review process; and a current state-issued mortgage license or registration. Asked about the seal's relationship to developments in Washington, where at least two proposed changes to industry rules have raised concerns among brokers, NAMB president George Hanzimanolis said it "wasn't done to send a message to Congress," but rather because the association "saw a need on the consumer side." However, Mr. Hanzimanolis said he believes Congress will see the NAMB's seal as a positive move. The NAMB can be found online at http://www.namb.org.

Since July, residential lenders have tightened their underwriting standards on prime jumbo mortgages, as well as alternative-A and subprime loans, according to a Federal Reserve Board survey of senior loan officers.Banks increased their loan fees, spreads, and downpayment and income documentation requirements on prime jumbo mortgages, according to the October survey. Over one-third of respondents said originations of prime jumbos had declined, and 10% reported an increase. Meanwhile, 40% of the loan officers reported tightening credit standards on conforming prime loans, 50% reported tightening on "nontraditional" mortgages (alt-A, interest-only, and payment-option adjustable-rate mortgages), and 55% reported tightening on subprime loans over the past three months. At a fair-lending conference, Fed Governor Randall Kroszner said Fed surveys show significant tightening on subprime loans. He added that delinquencies and foreclosures on subprime loans are "likely to continue to rise for a number of quarters."

Forty states are planning to participate in the Nationwide Mortgage Licensing System that will track state-licensed mortgage lenders, loan officers, and brokers, and seven states are ready to go onto the system within 60 days of its launch on Jan. 2."These seven states are creating the initial critical mass necessary for a successful launch of the system," said David Bleicken, president of the American Association of Residential Mortgage Regulators. The states are Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, and Rhode Island. The AARMR and the Conference of State Bank Supervisors have developed the licensing system to track unethical mortgage professionals as they move from state to state and from company to company. At the same time, the House Financial Services Committee is considering a predatory-lending bill (H.R. 3915) that would require federal regulators to create a registry for mortgage originators at federally regulated banks and their subsidiaries. And like state-licensed mortgage lenders, bank loan officers would have to have a "unique identifier."

The Federal Reserve Board is close to proposing that all subprime mortgages should have escrow accounts, according to a Fed governor who is working on updating the Home Ownership and Equity Protection Act regulations.The failure to escrow taxes and insurance can lead to payment shock, Randall Kroszner told a Consumer Bankers Association fair-lending conference. "It is common practice for these payments to be escrowed in prime markets, and I see no reason that escrows should not be standard practice in the subprime markets, too," Mr. Kroszner said. The Fed is expected to issue proposed changes to the HOEPA regulations before the end of the year. Mr. Kroszner said the Fed also plans to issue proposals by the year-end that ban several deceptive advertising practices and require important consumer disclosures earlier in the mortgage process so consumer can shop around and compare loan products.

Fannie Mae has announced that it will file its first-, second-, and third-quarter financial reports with the Securities and Exchange Commission on Nov. 9 and host a conference call to brief investors and analysts."With these filings, the company will become current in its financial reporting requirements," the giant mortgage company said. Fannie Mae has not filed a quarterly report (Form 10-Q) since the second quarter of 2004 after it was discovered that the company manipulated accounting standards and overstated earnings by billions of dollars. The publicly traded company paid a $400 million fine to the SEC and restated earnings for 2001, 2002, 2003, and the first half of 2004. Fannie's regulator currently requires the company to maintain a 30% capital surplus until it returns to timely financial reporting and corrects its internal controls and accounting systems. Analysts will be waiting to hear how much longer the expensive process of rebuilding those systems will take. Fannie Mae can be found online at http://www.fanniemae.com.

New York Attorney General Andrew Cuomo is planning to file more lawsuits related to problems associated with lender pressuring of appraisers, but he is also preparing to take other legal actions that highlight another "systemic, industrywide" problem next week."We will begin other cases that make other points on systemic frauds within the housing arena," Mr. Cuomo said at a news conference in Washington, where he endorsed a bill to reform appraisal and servicing practices. The New York AG recently filed a lawsuit against First American Corp. and its appraisal management company for allegedly succumbing to pressure to change valuations. He stressed that his office pursued the First American case because it provides the "most graphic illustration of this issue" and that it cannot be dismissed as an isolated case. WaMu has said it was "surprised and disappointed by the allegations in the complaint related to [First American's] eAppraiseIT unit" and has suspended its business relationship with eAppraiseIT "until we can further investigate the situation." First American has said it believes the allegations have no basis in fact or law and that the program challenged by the attorney general "has been vetted and approved by the federal regulator responsible for oversight of such programs."

The president of Long & Foster, one of the largest realty firms in the Washington, D.C. area, is said to be discouraging his agents from using mortgage bankers that are not affiliated with the company. According to a report in The Washington Post, P. Wesley Foster recently sent an e-mail to thousands of Long & Foster agents urging them to refer business to the Realtor's own mortgage company, Prosperity Mortgage, instead of using lenders such as Bank of America. According to the report, Mr. Foster chastised his workers for referring at least 2,200 mortgages to BoA last year. At press time, Mr. Foster and BoA had not returned telephone calls on the matter.