Servicing

Franklin Credit Management Corp., the Jersey City third-party mortgage servicer, has expanded its operations to include Face-to-Face Home Solutions, a door knocking division that tries to reach delinquent borrowers. Gordon Jardin, Franklin Credit's chief executive, said the unit was started from scratch earlier this year as part of a broader repositioning of the company, which now offers underwriting, due diligence and asset valuations. Franklin had been a subprime lender that $54 billion-asset Huntington Bancshares Inc., in Columbus, Ohio, inherited from its 2007 purchase of Sky Financial Group. The company currently services 32,000 loans, most of them second mortgages, worth more than $2 billion. "We are definitely actively involved in trying to find ways to maximize the returns to Huntington on that portfolio," Jardin said in an interview. Franklin's strategy had been "to maximize cash flow," Jardin said, while Huntington's strategy now is to work out the loans. "I think most companies are trying to determine what their strategy should be," he said. "It's too early to determine how well the performance of loans will be if we modify them," under the Obama Administration's Home Affordable Modification Program. Franklin "has had the beginnings of some success" is reaching delinquent borrowers though it is too early to tell if the contact rate is better than the industry average. Roughly 50% of delinquent borrowers have no contact with their servicer before a home goes into foreclosure. "That's frustrating, because you do have a legal contract, you have an agreement with the borrower and why they can't make a payment often is unclear," Jardin said.

Angelo Mozilo, the founder and former chairman/CEO of Countrywide Financial Corp. — and an icon in the industry for many years — was slapped with a massive civil fraud complaint by the Securities and Exchange Commission on Thursday afternoon, accused of deliberately misleading investors in the company's stock and engaging in insider trading. David Siegal, Mr. Mozilo's attorney released a statement calling the SEC charges "baseless," adding that the lender's risks "were well disclosed to and understood by the marketplace." The SEC also sued former CFC executives David Sambol and Eric Sieracki, accusing them and Mr. Mozilo of "falsely assuring investors" that Countrywide was funding "primarily" prime quality loans and had avoided the excesses of its competitors. The two men could not be reached for comment. Last summer Bank of America bought CFC for a few dollars a share compared to a one-time high of $40. The agency released a memo that Mr. Mozilo wrote in April 2006 where he refers to Countrywide's subprime business as "the poison of ours." According to figures compiled by National Mortgage News Countrywide was the nation's largest subprime lender and servicer during its final years of operation, but had not made a serious run at A- to D lending until the early 2000s. The agency accuses him of selling $140 million of stock from November 2006 until August 2007 while "he was aware of material, non-public information concerning Countrywide's increasing credit risk." In past interviews with NMN Mr. Mozilo maintained that his stock sales were legal and followed the rule of law. In March 2007 he told this newspaper that he was selling the stock in question, noting, "I have almost all my personal net worth tied up in the company." He defended the sales, saying "I have created $25 billion in value for the shareholders. It's been one of the best performing stocks on the New York Stock Exchange. I gave them 98% of the value and took 2%. And they [the shareholders] didn't have to do the work. I did it for them."

In charging former Countrywide CEO Angelo Mozilo with fraud, the Securities and Exchange Commission is zeroing in on the lender's payment option ARM business, a controversial product that Mr. Mozilo initially embraced and then later cursed. According to figures collected by National Mortgage News Countrywide Financial Corp. was the nation's largest POA lender in 2006, a year in which Mr. Mozilo wrote several memos cited by the SEC in its complaint. (CFC was also the largest POA funder in 2007, originating a record $86 billion in these notes which eventually can become negatively amortizing.) In one memo Mr. Mozilo laments that CFC has "no way, with reasonable certainty, to assess the real risk of holding" POAs on its balance sheet. He adds that by putting so many loans on CFC's books "we are flying blind on how these loans will perform in a stressed environment." One loan broker who funded POAs for CFC told this newspaper that the loans were hugely profitable for the company because of all the points it charged on them. When CFC was eventually sold to Bank of America last year it had $80 billion in loans on its balance sheet -- including POAs and second liens. The SEC accuses Mr. Mozilo of knowing how risky these products were but without sharing his opinions with investors. "Concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk," said SEC director of enforcement Robert Khuzami. During CFC's last year of operations, the lender began sending out warning letters to borrowers who were choosing the 'neg am' option on POAs, telling them of the risks.

Freddie Mac's HomeSteps real estate owned unit has renewed its agreement with Vendor Resource Management, Irving, Texas. VRM is an REO disposition provider that also provides loss mitigation services to the government-sponsored enterprise. It has been an outsourcer for Freddie Mac since 2006. VRM also is a subsidiary of PCV Murcor, a national real estate valuation company based in Pomona, Calif.

After pleading guilty to facilitating the fraudulent sale of seven residential properties through straw buyers, U.S. District Court Judge Marcia Cooke has sentenced Jose G. Martin to 65 months in federal prison, followed by three years of supervised release. Judge Cooke also ordered a restitution hearing to determine the identity of the victims to be paid by Martin in connection with the $3.2 million in losses that resulted from his participation in the scheme. According to R. Alexander Acosta, U.S. attorney for the Southern District of Florida, Martin was arrested in January 2009 for his involvement in a mortgage fraud scheme that resulted in more than $6.6 million in fraudulent loans and pleaded guilty in April. At closings, Martin submitted fraudulent invoices for construction work on these properties and received hundreds of thousands of dollars as payment for construction work that was never performed. Martin then distributed these proceeds to himself, the straw buyers and other co-conspirators. After closings, Martin and the straw buyers failed to make payments on the mortgages to the victim lenders and the properties went into foreclosure. In one instance, Martin flipped a property in Coral Gables, Fla., three times in two years, more than doubling the price of the property to $1.2 million from $550,000. In the course of the Coral Gables property flips, Martin diverted to himself $450,000 for construction work purportedly performed on this property. In addition, Martin paid off three straw buyers of this property, none of whom ever intended to live in the property or pay the mortgages. Ultimately, the Coral Gables property went into foreclosure, resulting in significant losses to the lender.

GMAC Financial Services said it has priced $4.5 billion of debt guaranteed by the Federal Deposit Insurance Corp. through the agency's Temporary Liquidity Guarantee Program. GMAC, the parent of Residential Capital Corp., the nation's fifth largest mortgage servicer, said the offering will further improve its liquidity position. The securities offering included $3.5 billion of senior fixed-rate notes and $1 billion of senior floating rate notes. The debt comes due in December 2012. In May 2009, GMAC received regulatory approval to participate in the TLGP for up to $7.4 billion. Earlier this year the company received a $5 billion infusion through the Treasury Department's TARP program.

Increasing numbers of corporate credit unions — which service as wholesale banks to retail CUs — are reporting large losses due to their holdings of mortgage-backed securities. According to a report in The Credit Union Journal, corporate credit unions provide liquidity and investment services to the nation's 7,800 regular credit unions. The combination of MBS losses and exposure to their own wholesale bank, U.S. Central FCU, which failed in March because of its MBS holdings, has sent regulatory capital at most of the corporates below regulatory minimums. But because of a regulatory forbearance offered by the CU regulator, the National Credit Union Administration, all of the corporates are now allowed to use their capital levels of last November. Florida-based Southeast Corporate FCU recently reported that charges related to its shares in U.S. Central and its mortgage-backed securities created a $79 million loss for the month of April. And SunCorp FCU, in Colorado, said it restated its 2008 financials to show a $135 million loss for the year. CUJ is a sister publication to National Mortgage News.

The Obama administration's Making Home Affordable loan modification program will not show real results until later this summer, according to a key regulator. Federal Housing Finance Agency director James Lockhart told a Congressional panel the impact of the MHA program will be delayed as the servicers register for the program and contractually agree to the program's terms and conditions. "Second, borrowers are required to submit the required documentation, be approved for a modification, and successfully perform under a three-month trial modification before the loans can be formally modified. Therefore, FHFA expects to see the results of current activities ramp up in late summer," Mr. Lockhart testified. Separately, Herbert Allison, President Obama's nominee to be Treasury assistant secretary and run the Troubled Asset Relief Program, told the Senate Banking Committee that 14 servicers are already active in the MHA program and they have sent modification offers to 100,000 homeowners. TARP is providing funds for incentive payments and to cover some of the modification costs. "There is a great deal of pressure on everyone" to get this program going, Mr. Allison said at his confirmation hearing. But he stressed it going to take time to ramp up. Mr. Allison recently served as president and chief executive of Fannie Mae.

Weighted-average delinquencies and cumulative losses in the United Kingdom's securitized residential mortgages have doubled since the first quarter of last year, according to Moody's Investors Service's index. These had reached 18.0% and 0.78%, respectively, by the end of the first quarter of this year. "While a number of forward looking indicators point towards the pace of the economic decline abating, consensus forecasts look for 3.8% contraction in [gross domestic product] over 2009 as a whole, which will be the worst yearly growth rate since modern records began in 1949," said Nitesh Shah, a Moody's economist and co-author of a report on the index. "The U.K. unemployment rate was 7.1% in the three months [leading up] to March, up from 5.2% a year ago. As the economy contracts, more jobs are expected to be removed from the market." In addition, Moody's noted that home price declines also contributed. The downward slide in housing values will likely continue even though the monthly pace of the decrease has been slowing, Moody's said.

Maria Sanchez, a real estate agent and loan officer from El Monte, Calif., was found guilty of fraud and money laundering charges for scheming with her sister to falsify home loan applications. The evidence presented during Maria's trial showed she submitted loan packages to purchase residential real estate in the names of family members. Those applications contained false statements and forged signatures. When the loans were funded, Maria fraudulently obtained more than $1 million in loan proceeds from financial institutions and mortgage lenders. She financially benefited from this scheme by flipping one of the properties, as well as collecting points, fees and commissions from the loan transactions. In three of the deals, Maria's sister Beatriz Sanchez, Los Angeles, was identified as the buyer of the property. Beatriz also has pleaded guilty, specifically to charges that she filed false documents with the IRS. Beatriz is scheduled for sentencing on Aug. 17. Maria is scheduled for sentencing on September 10.