Compliance & Regulation

The U.S. District Court for the District of Columbia has issued a preliminary injunction barring the Department of Housing and Urban Development from enforcing its new regulation prohibiting downpayment assistance by charities if any part of the funds came from the real estate seller.The injunction will be in effect until the court decides whether the regulation is valid, the court said. The regulation was to take effect on Oct. 31. "We believe that the findings of the Court underscore the weakness of HUD's actions in developing and implementing its rule in the first place, particularly while Congress is still actively working on the subject, as well as HUD's failure to consider reasonable proposed alternatives," said Scott Syphax, president and chief executive officer of DPA pioneer Nehemiah Corporation of America. The plaintiffs in the case are: AmeriDream Inc., The Genesis Foundation, Home Downpayment Gift Foundation, The Sovereign Grant Alliance, The Future Home Assistance Program, and Partners in Charity Inc.

New York Attorney General Andrew Cuomo has announced that he is suing First American Corp. and its eAppraiseIT unit for allegedly colluding with Washington Mutual Inc. to use a list of preferred appraisers to inflate mortgage appraisals.According to the AG's office, eAppraiseIT -- in a scheme detailed in numerous e-mail messages -- caved in to pressure from WaMu to use a list of preferred "proven appraisers" who provided inflated appraisals on homes. The e-mail also shows that executives at eAppraiseIT knew their behavior was illegal, but intentionally broke the law to secure future business with WaMu. "The blatant actions of First American and eAppraiseIT have contributed to the growing foreclosure crisis and turmoil in the housing market," Mr. Cuomo said. "By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion." Howard Glaser, a mortgage industry consultant based in Washington, says the Cuomo action marks the most significant legal action to date by the state or federal government in the wake of the mortgage meltdown. "The Cuomo suit sheds light on what has been an open secret in the mortgage industry, pressure by banks on appraisers to hit a particular target value in order to close a loan," he said.

Members of the Hope Now alliance have agreed to do a mass mailing to reach 200,000 troubled borrowers and develop methods for quickly determining whether a loan modification or refinancing would prevent foreclosure, according to Treasury Secretary Henry Paulson."Members of the alliance told me they are developing methods, criteria, and metrics that any industry participant can use to systematically evaluate a borrower's ability to pay a resetting adjustable mortgage," Secretary Paulson said. This approach will allow servicers to fast-track borrowers who are current on their ARM into a loan modification or refinancing and provide others with different options. Treasury Under Secretary Robert Steel, Iowa Attorney General Tom Miller, Sandor Samuels, executive managing director of Countrywide Financial Corp., and others will be testifying at a House Financial Services Committee hearing Nov. 2 on the Hope Now efforts to prevent foreclosures and encourage loan modifications.

House Financial Services Committee Chairman Barney Frank, D-Mass., wants to start the mark-up of his controversial predatory-lending bill on Nov. 6.The Mortgage Reform and Anti-Predatory Lending Act would establish a minimum federal lending standard (but not pre-empt state lending laws) along with a limited form of assignee liability for securitizers of subprime mortgages. The bill (H.R. 3915), co-sponsored by Reps. Brad Miller and Mel Watt, both North Carolina Democrats, also appears to ban the payment of yield-spread premiums to mortgage brokers. The National Association of Mortgage Brokers is seeking a clarification to this anti-steering provision.

A properly designed bankruptcy bill with firm guidance for modifying loans could reduce the number of expected foreclosures by 500,000, Mark Zandi, chief economist of Moody's Economy.com, has told a congressional panel.Mr. Zandi warned that 2 million families could lose their home by early 2009 and that the current cycle of rising foreclosures and falling housing prices could lead to a national recession. "There is no more efficacious way to short-circuit this cycle than by adopting legislation to allow bankruptcy judges the authority to modify first mortgages by treating them as secured only up to the market value of the property," he testified. He suggested that this legislation should sunset after three years so Congress can review its impact. But he dismissed claims by the Mortgage Bankers Association that such a bankruptcy bill would force lenders to increase mortgage rates and fees [see item above]. And the founder of Economy.com testified that current voluntary efforts by mortgage servicers to modify loans is unlikely to stop the increase in foreclosures. The Moody's dot-com can be found online at http://www.economy.com.

If bankruptcy judges begin to reduce or "cram down" the principal amount of residential mortgages, Federal Housing Administration servicers would have to absorb the losses because the government cannot pay a claim on a cramdown, according to the Mortgage Bankers Association.Passage of the bankruptcy bill (H.R. 3609) to permits cramdowns and loan modifications would make it riskier for lenders to originate FHA-insured and Department of Veterans Affairs-guaranteed loans, MBA chairman-elect David Kittle warned a House Judiciary Committee panel. As a result, lenders would have to charge higher interest rates and fees. The MBA also noted that Fannie Mae and Freddie Mac would be required to purchase loans out of mortgage-backed securities pools if loans are modified. "If this bill becomes law, we believe mortgage rates would jump significantly, going up 1 1/2 to 2 points for everyone taking out a loan," Mr. Kittle told the commercial and administration law subcommittee. The association can be found on the Web at http://www.mortgagebankers.org.

The Federal Housing Administration has issued a "policy alert" to stop lenders from paying large fees to nonapproved FHA mortgage brokers for simply referring borrowers to their loan officers.The policy alert reminds FHA lenders that nonapproved brokers cannot perform loan origination services and that any fees paid by the lender or financed through the loan would be considered "duplicative" or "unearned" fees that violate the Real Estate Settlement Procedures Act. Department of Housing and Urban Development officials discovered in early September that some lenders were charging points and paying nonapproved brokers $3,000 to $5,000 in fees. HUD officials considered this to be excessive and began calling lenders about the practice. (FHA lenders can pay yield-spread premiums to brokers if they are approved by the FHA.)

The Department of Housing and Urban Development would require upfront disclosure of mortgage brokers' compensation in a proposed revision of the good-faith estimate the department is expected to send to the Office of Management and Budget any day now."Lender payments to mortgage brokers tied to the interest rate of the loan (yield-spread premiums) would be disclosed on the GFE because of the borrower's need to understand the trade-off between the upfront settlement costs and the interest rate," HUD says in an outline of the proposal that it used to brief key members of Congress Oct. 30. The outline obtained by MortgageWire says HUD's testing of the GFE shows that consumers could identify the cheapest loan 90% of the time whether the offer was made by a lender or a mortgage broker. The National Association of Mortgage Brokers has already pledged to oppose HUD's revisions to the GFE. The outline also shows that HUD will ask Congress to amend the Real Estate Settlement Procedures Act to require delivery of the HUD-1 settlement three days before closing and to provide for civil money penalties for RESPA violations. "A lack of enforcement authority and clear remedies for violations of critical sections of RESPA negatively impact consumers and diminish the effectiveness of the statute," HUD says.

Six homebuilders have entered into settlements totaling $1.4 million for alleged violations of the Real Estate Settlement Procedures Act and agreed to stop participating in captive title reinsurance arrangements, according to the Department of Housing and Urban Development.HUD Assistant Secretary Brian Montgomery said there is "no legitimate purpose" for single-family captive title reinsurance. "It is increasingly clear to us that these complicated business arrangements serve no other purpose than to hide referral fees and kickbacks, which are expressly forbidden by law," he said. As part of the settlements with HUD, Pulte Homes Inc. agreed to pay $466,000; KB Home, $456,000; Beazer Homes USA Inc., $261,000; Ryan Group Inc., $84,000; Meritage Homes Corp., $66,000; and Technical Olympic USA Inc., $52,000.

Office of Thrift Supervision economists see a "high" probability of continued housing market deterioration, along with rising foreclosures and house price declines, according to the premier issue of the agency's Monthly Market Monitor."The probability of further deterioration in housing conditions remains high, leaving asset prices vulnerable to more declines and credit spreads susceptible to greater widening," the OTS report says. The monthly report also seems to warn thrifts that they could be facing a "prolonged" correction in the housing market. "Contributing to the malaise is higher mortgage rates and tighter credit conditions as lenders, saddled with loans on balance sheets, have fewer funds to lend and less desire to extend credit to other-than-prime borrowers," the Oct. 26 monitor says.