Compliance & Regulation

Fannie Mae has already identified 1,800 ZIP codes where house prices have declined, and it expects appraisals to accurately reflect those market realities, according to Fannie vice president Hope Evans."Sadly, we are seeing a lot of these appraisals with no mention whatsoever about the declining market," Ms. Evans told a Mortgage Bankers Association quality assurance conference. Fannie's automated underwriting system flags appraisals in those ZIP codes. "It is very important that you react to this message. Fannie is looking to see if there is additional field work in the file," she said. The Fannie vice president stressed that lenders need to have a "heightened awareness" that house prices declines have become more "pervasive" over the past year and are no longer just in pockets or isolated areas. She also said Fannie Mae is "working very actively on producing" an exclusionary list that identifies fraudsters. Freddie Mac currently has an exclusionary list that it shares with industry partners.

House and Senate Democratic leaders are urging the Bush administration to act more forcefully in addressing the "foreclosure crisis," and they are threatening to pass a measure to temporarily raise the caps on Fannie Mae's and Freddie Mac's portfolios if the administration does not take such action quickly.Fannie and Freddie could provide more liquidity to the mortgage market and help subprime borrowers refinance to save their homes, said Sen. Charles E. Schumer, D-N.Y., adding that he is prepared to press the Senate to pass a bill that would remove the caps on the government-sponsored enterprises for one year. House Financial Services Committee Chairman Barney Frank, D-Mass., said he would support the Schumer bill if it clears the Senate. Democratic leaders are also calling on the administration to appoint a czar to oversee its response to the foreclosure crisis and to press servicers and lenders to modify loans for distressed homeowners.

Baker, Donelson, Bearman, Caldwell & Berkowitz, a law firm based in Memphis, has announced the creation of a Subprime Mortgage Task Force, a multidisciplinary practice group of attorneys from across Baker Donelson's five-state footprint in the Southeast and Washington, D.C.Linda S. Finley, a shareholder in the Atlanta office, and Hank Arnold, a shareholder in the New Orleans office, are leading the firm-wide effort. "We've assembled a team of attorneys who can assist clients with the wide spectrum of matters [relating to the subprime mortgage crisis], whether involving complex litigation defense in class-action suits, providing advice on regulatory compliance, or tracking and advancing financial institution client interests before local, state, and federal legislative bodies," said Ben Adams, Baker Donelson's chairman and chief executive officer. The firm said task force members are experienced in areas such as representing lenders, servicers, and investors in state, federal, and bankruptcy courts; default representation; quality control/quality assurance review of suspect loans; loss mitigation; state and federal regulatory compliance; and capital market activities. The firm can be found online at http://www.bakerdonelson.com.

The Federal Housing Administration's push to implement a risk-based premium system by Jan. 2 is not going to be easy for lenders or vendors, according to a regulatory compliance and software design consultant.FHA mortgage insurance premiums would be based on the downpayment, the credit score, and the source of the downpayment, which is a "very complicated change," Lance Richmond told MortgageWire. "On the software side, it definitely is a lot of work" and "vendors just can't respond that quickly to a major change like this," Mr. Richmond said. The mortgage consultant for Bellevue, Wash.-based Netupdate also pointed out that risk-based premiums are going to make it more difficult for subprime borrowers to qualify for FHA loans. "We need to get the word to HUD that this isn't the time to do it," Mr. Richmond said. The public comment period on the Department of Housing and Urban Development's FHA risk-based premium proposal ends Oct. 22. Mr. Richmond is a member of the Mortgage Bankers Association's compliance and legal issues committee. Netupdate can be found online at http://www.netupdate.com.

Two major downpayment assistance providers have sued the Department of Housing and Urban Development to block a final rule that prohibits seller-funded DPA on Federal Housing Administration loans starting Nov. 1.Nehemiah Corporation of America, Sacramento, Calif., and AmeriDream Inc., Gaithersburg, Md., filed separate lawsuits. "HUD's action to move forward with banning privately funded downpayment assistance programs is outrageous, and we have responded by filing a lawsuit in federal court to challenge the merits of HUD's damaging rule and to seek an injunction blocking implementation of this rule," said Nehemiah president and chief executive Scott Syphax. He pointed out that HUD received 15,000 comment letters opposing the DPA rule and that the House has just passed an FHA reform bill that creates new standards for DPA providers. (A Senate FHA reform bill would ban seller-funded downpayments on FHA loans.) Due to a 1998 settlement with HUD, Nehemiah is exempt from the HUD rule for six months and can still provide downpayment assistance on FHA loans until April 1.

The Mortgage Bankers Association has released a policy paper that distinguishes the issue of mortgage fraud from predatory lending and discourages adding to or modifying the "already comprehensive" list of federal fraud statutes.The MBA's policy paper, Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts, recommends that Congress increase the resources available to law enforcement and help facilitate the coordination of federal and state law enforcement of financial crimes. "We do not need more federal laws to combat fraud," said Jonathan L. Kempner, president and chief executive officer of the MBA. "Instead, we need a more coordinated effort and more resources to investigate and prosecute. In addition to being illegal and costly, we know that fraud has also contributed to the recent rise in delinquencies and foreclosures, and the industry and government must step up our anti-fraud efforts to help curtail these related problems." The FBI has estimated that fraud cost mortgage lenders as much as $4.2 billion in 2006. The MBA can be found online at http://www.mortgagebankers.org.

The Office of Thrift Supervision has closed NetBank in Alpharetta, Ga., after the $2.5 billion thrift sustained "significant losses" in its mortgage banking business and was unsuccessful in completing a private sale.NetBank, which opened as an Internet bank in 1997, is still solvent, but the OTS said the depository had no remaining prospects for raising capital or achieving profitability. "While the institution continued to operate in excess of minimum capital standards, the actions taken to address these problems were unsuccessful and it became clear that high operating expenses combined with continuing losses were jeopardizing the institution's viability," the regulator said. As the receiver, the Federal Deposit Insurance Corp. has arranged for ING Bank, Wilmington, Del., to assume the insured deposits. The Internet bank had $109 million in uninsured deposits, and those depositors will become creditors of the receivership. Meanwhile, EverBank, Jacksonville, Fla., has agreed to purchase $700 million in mortgages and the FDIC will retain $1.1 billion in assets. The FDIC says it expects the bank failure to cost the Deposit Insurance Fund $110 million.

Four former Freddie Mac executives agreed to pay civil fines totaling $515,000 and to forfeit $258,000 in ill-gotten gains as part of a settlement with the Securities and Exchange Commission.The SEC charged Freddie Mac with securities fraud and the former executives with negligent conduct, which they settled without admitting or denying the allegation. Former Freddie president and chief operating officer David Glenn agreed to pay a $250,000 civil penalty and to disgorge $150,000. Former chief financial officer Vaughn Clarke agreed to pay a $125,000 civil penalty and disgorge $29,227. Former senior vice president Nazir Dossani agreed to pay a $75,000 penalty and disgorge $61,663, and ex-SVP Robert Dean agreed to pay a $65,000 penalty and disgorge $34,658. Former Freddie chairman and chief executive Leland Brendsel, who is facing an enforcement action by the Office of Federal Housing Enterprise Oversight that is before an administrative law judge, is not part of the SEC enforcement action.

Freddie Mac has agreed to pay a $50 million civil money penalty to settle government charges that the giant mortgage company engaged in securities fraud from 1998 to 2002.The Securities and Exchange Commission alleged that the publicly traded government-sponsored enterprise manipulated earnings and engaged in transactions to nullify the effects of a new hedge accounting rule. This resulted in the misrepresentation of the company's financial results and forced Freddie to restate its earnings for 2000, 2001, and 2002. "We take these charges seriously, and that's why the Freddie Mac of today is a very different company from the Freddie Mac of the past," said Freddie Mac chairman and chief executive Richard Syron. As part of the settlement, four former Freddie executives settled charges of negligent conduct without admitting or denying the charges (see item below). Freddie Mac can be found online at http://www.freddiemac.com.

The Department of Housing and Urban Development is sticking to its guns regarding downpayment assistance on Federal Housing Administration-insured mortgages.Despite some congressional opposition, not to mention cries of foul from DPA providers, the agency will publish a controversial final rule Oct. 1 that will bar anyone who has a financial stake in the transaction from providing buyers with cash for a downpayment, even if they give the money to third-party nonprofit organizations that funnel it to buyers. The House recently passed an FHA reform bill that would set new standards for DPA, including a requirement that nonprofits have a net worth of at least $4 million. But the Senate Finance Committee's version of the reform package prohibits DPA. Sources at HUD, who used the term "collusion" and maintained that the funds are not really a gift because sellers tack on the amount to their asking price, said "we are putting out a final rule that would no longer permit seller-financed downpayment assistance for FHA loans." The agency says the default rate of these loans is almost three times that of other FHA loans. Last year, the Internal Revenue Service ruled that the "self-serving, circular financing arrangements" HUD is trying to stop are not charitable operations.