Compliance

U.S. District Judge Michael M. Baylson sentenced Mahn Huu Doan, a.k.a. "Bruce Doan" of Philadelphia, to 151 months in prison, followed by three years of supervised release, for a mortgage fraud and identity theft scheme. According to Michael L. Levy, U.S. attorney for the Eastern District of Pennsylvania, Doan, a self-described real estate investor, would purchase houses, using false or borrowed identities, and using government insured loans, which he secured using fraudulent information. Doan's scheme also involved fraudulent appraisals that inflated the value of the houses for the purpose of reselling the properties for a higher profit. In addition to the prison term, Judge Baylson also ordered Doan to pay more than $5 million in restitution, a $5,000 fine and a $400 special assessment.

The First Magnus Litigation Trust and StoneWater Mortgage have entered into a settlement that will dismiss with prejudice claims against the mortgage company, its related companies, current officers, directors and employees. Under the terms of the agreement, both sides admitted no fault. No other terms were disclosed. The lead counsel for the First Magnus Litigation Trust, Jamie R. Welton, said in a statement "the settlement reached with StoneWater is a good result for the creditors and increases the assets from which they may be paid." Among those who are involved in the settlement is current StoneWater president Doug Lemke. However former First Magnus and/or StoneWater executives Gurpreet S. Jaggi, Thomas W. Sullivan Sr., Thomas W. Sullivan Jr., Clinton W. Gaylord, Gary K. Malis, Dominick Marchetti and Karl F.W. Young are still active defendants in the lawsuit. The suit alleges the seven men stripped $300 million from First Magnus, prior to its filing for bankruptcy, to start StoneWater, which they deny.

Homeowners and mortgage investors would not be the only ones with "skin in the game" if U.S. Housing Secretary Shaun Donovan's plan for revising the nation's consumer protection laws comes to pass. The secretary of the Department of Housing and Urban Development told the NAREE conference that "fairness" would be a "fundamental principle" that the Consumer Financial Protection Agency proposed by the Obama Administration would follow. Under that heading, he said, mortgage brokers would "owe a duty of best execution" to avoid conflicts of interest between themselves and their borrower clients. In addition, yield spread premiums would be "banned outright" and prepayment penalties would be restricted. And to reward responsible lending, loan originators would be required to retain a vested interest in the mortgages they write. Brokers would be paid "over time" based on the continued performance of the loans they originate rather than at the closing table. At the same time, lenders and mortgage aggregators would be compelled to retain a 5% interest in the loans so they would be rewarded for making good loans and penalized for making bad ones. The HUD secretary said neither he nor President Obama had any desire to prescribe exactly how brokers should be paid. But they "have to have a duty" to provide affordable products. "Putting a borrower in a mortgage (the broker) knew from day one that the borrower could not afford cannot be allowed to continue," he told the conference. "There has to be a chain there to tie some responsibility to the mortgage to ensure that this kind of situation doesn't ever happen again." None of what secretary Donovan proposed is new, but it is the first time the proposals have been adopted by a key government official.

The Obama Administration expects Fannie Mae and Freddie Mac to continue playing a key role in housing finance, the government sponsored enterprises' regulator said. While exactly what structure the GSEs will eventually take is still very much up in the air, James Lockhart, director of the recently minted Federal Housing Finance Agency, said they will be reconstituted with a well-defined mission that does not involve excessive risk taking. That's likely to mean the two companies, which are now in conservatorship and under FHFA's wing, will no longer be required to meet affordable housing goals that were prescribed by their old mission regulator, the Department of Housing and Urban Development. "In retrospect," Mr. Lockhart told attendees at the National Association of Real Estate Editors' annual real estate journalism conference in Washington that the goals "caused (Fannie Mae and Freddie Mac) to do things they shouldn't have done." The federal regulator also said the GSEs should operate under "clear demarcation" of their roles in relation to the private sector, and that any risk they undertake should be explicit, at actuarial cost and in conjunction with sound insurance principles. "Clearly," he said, "it was folly to allow the enterprises to legally leverage their mortgage credit by well over 100 to 1."

Net worth requirements for Federal Housing Administration lenders and brokers need to be raised, Mortgage Bankers Association David Kittle said at a House Financial Services subcommittee hearing. Higher requirements, he said, allow for lenders and brokers to be held accountable for their actions. "Specifically, we recommend that mortgage bankers should have a minimum corporate net worth of the greater of $500,000 or 1% of FHA loan volume up to a maximum of $1.5 million. Mortgage brokers should have a minimum corporate net worth of the greater of $150,000 or half of one percent of FHA loan volume up to the minimum for mortgage bankers. MBA supports mortgage bankers and brokers maintaining a bond sufficient to provide reasonable protection to consumers and taxpayers," Mr. Kittle's prepared testimony said. He added MBA supports a permanent increase in the FHA limit to $625,500, and in high-cost area, it should be raised to $729,750.

After pleading guilty to defrauding several mortgage lending companies, a couple from Oak Grove, Minn., has recently been sentenced. Michelle M. Niska has been sentenced to 36 months in prison and three years of supervised release. Robert G. Bock has been sentenced to 10 months of confinement in a halfway house and three years of supervised release. According to their respective plea agreements, Bock and Niska borrowed $593,740 and granted the lender a mortgage on their jointly owned home. Niska filed a document with the county recorder's office purporting to be a satisfaction of the mortgage the defendants had granted to the lender, even though the defendants had not paid off the loan. The couple then sold the home to a third party for $675,000 and admitted that they knew the title company that closed the home's sale should have used the third-party buyer's loan proceeds to pay off the loan, but instead allowed the title company to believe that the loan had been repaid. The defendants then pocketed proceeds from the sale, amounting to $510,000.

Ten people have been indicted in an alleged $3 million mortgage fraud scheme to scam lenders by recruiting straw buyers to purchase homes in Kansas and Missouri. According to Lanny Welch, U.S. attorney for the District of Kansas, Eric M. Rabicoff, Jason L. Rabicoff, Lucas R. Collier, Anthony E. Carollo, Deborah Saulmon, Bora Ly, Anthony "Gabe" Painton Jr., Kong Bun Ly, Rebecca Gelwix and Richard Ngek have been indicted for their alleged roles in the scheme. According to the indictment, in 2006 Eric Rabicoff allegedly devised a scam to defraud lenders by recruiting straw buyers to purchase homes that were for sale by owners. It was part of the alleged scheme to submit false information to lenders so that borrowers received loans for which they were not qualified. The conspirators allegedly submitted false information to lenders about borrowers' employment history, income and rent history and obtained more than $3 million in loans for borrowers who did not in fact qualify for the loans. The defendants were unavailable for comment.

A California law prohibiting home foreclosures for 90 days went into effect this week, but some residential servicers can earn an exemption if they can prove they are modifying loans. According to a report in The Orange County Register, several companies have already filed for an exemption. The state has 30 days to grant an exemption but during this time the servicer does not have to comply with the moratorium. Only mortgages originated between 2003 and 2007 are eligible. According to the California Foreclosure Prevention Bill, the law does not require a servicer to provide a modification to a borrower who is not willing or able to pay under the modification. According to the Register, it's unclear what "able to pay" means. California represents about 20% of all residential debt outstanding in the U.S.

Massachusetts attorney general Martha Coakley's office has entered into a judgment with Valerie Hanserd, an attorney from Brockton, Mass., resolving allegations of her role as a closing attorney in two companion lawsuits that both allege unfair practices with respect to mortgage brokering services. The first lawsuit involved Ms. Hanserd's closing of a loan allegedly obtained by using false and forged documents and the second lawsuit involved allegations relating to her participation in an unfair and deceptive foreclosure rescue scheme. Under the terms of the consent judgment, filed in Suffolk Superior Court, Hanserd must refrain from acting as a real estate closing attorney or title agent for seven years retroactive to April 27, 2007. In addition, Hanserd must pay $80,000 in restitution to victims of foreclosure rescue schemes as well as $35,000 in fees and penalties to the state. The settlement against Valerie Hanserd resolves allegations against her as the closing attorney in both cases.

Bankrupt subprime lender Fremont General Corp. of California agreed to pay $10 million to settle a lawsuit alleging that it engaged in unfair loan practices in Massachusetts. Fremont, once one of the largest B&C wholesalers in the U.S., also agreed not to foreclose on what the Massachusetts attorney general called "unfair loans." In total about 2,200 foreclosures may be prevented, for now. The payment includes $8 million in consumer relief, $1 million in civil penalties, and $1 million in attorneys' fees. In 2007 the state accused Fremont of engaging in predatory and unfair lending practices by funding mortgages to consumers who could not afford them. Fremont denied wrongdoing. Even though Fremont's depository is no longer in business, the holding company continues to trade on the "pink sheets."

Hours after last week's guilty plea in the $140 million fraud offense at U.S. Mortgage Corp., insurers for the bankrupt mortgage firm moved to cancel the company's surety bond, which would foreclose one potential source of recompense for some 30 credit unions victimized in the biggest fraud ever to hit the industry. In a motion filed with the U.S. Bankruptcy Court, Zurich American Insurance Co. and its Fidelity & Deposit Co. unit asked the court to allow it to cancel the bond it held for U.S. Mortgage and its CU National Mortgage subsidiary because the companies have ceased originating loans. "As such, U.S. Mortgage no longer requires the surety bonds to support or guarantee its business operations," the company said in a filing with the bankruptcy court on Friday. In addition, U.S. Mortgage stopped paying premiums on the bond after it filed for bankruptcy, voiding the policy, the insurer asserted. The filing came the day after Michael McGrath, the 46-year-old owner of U.S. Mortgage, pleaded guilty in federal court to siphoning $140 million from CU customers by selling their loans to Fannie Mae and pocketing the funds. McGrath has agreed to forfeit $13 million, leaving more than $125 million of CU funds unaccounted for. Authorities told The Credit Union Journal last week they believe McGrath gambled away those funds in the stock market over the past year, leaving virtually nothing for credit unions to recover. One stock he invested in was Fannie Mae, which now trades for less than 70 cents a share.

Ryan Keith Miller of Lee's Summit, Mo., has pleaded guilty to mortgage fraud charges in U.S. District Court in Kansas City. Kansas. . According to Lanny Welch, U.S. attorney for the District of Kansas, Miller admitted to conspiring with others to fraudulently obtain mortgage loans on properties in Kansas and Missouri by submitting fraudulent loan applications and property appraisals to lenders to obtain money and then transferred the proceeds to bank accounts they controlled for their own use. Sentencing is set for Sept. 14.

The founder and owner of U.S. Mortgage Corp. has pleaded guilty to a massive fraud that siphoned almost $140 million in funds from almost 30 credit union customers of the company's CU National Mortgage unit. Michael McGrath Jr. pleaded guilty late this past week to federal mail and wire fraud charges and money laundering, according to a report in The Credit Union Journal. Some of the money he took was invested in Fannie Mae common stock, the newspaper reported. Under his plea agreement, he faces between 12 to 20 years in prison when he's sentenced later this year. He also must pay restitution. However, authorities say they have only been able to track about $15 million of the missing money. CU National once provided origination and servicing for more than 120 credit unions. The company filed for bankruptcy in February as the fraud scheme unraveled and sold all of its mortgage servicing rights. Roughly 400 employees lost their jobs.

The Department of Housing and Urban Development has suspended three lenders from originating Federal Housing Administration single-family loans while the agency completes investigations of their lending practices. HUD's Mortgagee Review Board placed Golden First Mortgage Corp. of Great Neck, N.Y., Great Country Mortgage Bankers, Inc. of Coral Gables, Fla., and Beneficial Mortgage Corporation of San Juan, P.R., on suspension. The board cited Golden First Mortgage and Beneficial Mortgage for failing to notify HUD of investigations of their operations by other regulators. Golden First Mortgage's president David Movtady is the subject of an Office of Thrift Supervision investigation, HUD said. Mr. Motvady, who is also the chairman of Golden First Bank, a $27.4 million-asset thrift, said the OTS allegations are "unfounded" and he continues to contest them. However, Golden First Mortgage has surrendered its FHA license and will suspend lending operations "until further notice," he said. Beneficial Mortgage failed to notify HUD of an investigation and sanctions imposed by the Puerto Rico commissioner of financial institutions, including revocation of license to originate mortgages, HUD said. In an audit of Great Country Mortgage Bankers, HUD said it discovered multiple violations of FHA requirements, including failure to ensure that employees worked exclusively for GCMB; failure to disclose business affiliations between GCMB and real estate and title service providers; and failure to properly verify key credit information in 55 FHA-insured mortgage loans. Executives from Beneficial Mortgage and GCMB did not return phone calls.

After pleading guilty to participating in a complex fraud scheme in which he filed and foreclosed on false mortgages in Florida, Sergej Tews was sentenced to 33 months in prison. He also was sentenced to three years of supervised release following the prison term and ordered to pay $636,000 in restitution. According to R. Alexander Acosta, U.S. attorney for the Southern District of Florida, Tews induced homeowners to transfer their properties to him in exchange for his promise to assume their mortgage payments and caused the homeowners to execute warranty deeds, which gave the appearance that the properties were sold to a third party instead of being transferred to Tews. He then fabricated the amount paid for each property, paid the filing taxes based on the false amount and filed fraudulent mortgages on each property. At the foreclosure sales, third-party purchasers were deceived into believing that there were no pre-existing mortgages on the properties and bid on and bought the properties at auction. After the third-party purchasers paid for the properties, the court issued checks to Tews in the names of his purported foreclosing lenders.

New York attorney general Andrew Cuomo is joining other state crime fighters that are going after what they believe are foreclosure rescue scams targeting vulnerable homeowners. The New York AG this week filed a civil complaint against American Modification Agency Inc. and its owner and president, Salvatore Pane Jr., for allegedly charging illegal up-front fees and engaging in consumer fraud. The Uniondale, N.Y.-based firm markets itself as a foreclosure rescue company. It operates in all 50 states. The AG's office says American Modification targets homeowners facing foreclosure by claiming it can save their homes, but often fails to provide the services promised. In a statement released late Tuesday AMA — also known as "Amerimod" — said it is compliant with state foreclosure assistance laws and regulations. "Amerimod has been and will remain a frontrunner for compliance as well as a reliable source for distressed homeowners and consumer advocacy groups," the company said. Meanwhile, the New York AG's office has subpoenaed 14 other loan modification-related firms. Other large states that are investigating and filing charges against loan mod firms include California, Florida, and Georgia.

Former real estate broker Kathy Chen, her ex-boyfriend Richard Salgado Gonzalez and his brother Daniel Gonzalez have been charged with running a $17.5 million mortgage fraud scheme by the Orange County District Attorney's Office. The trio allegedly recruited and paid straw buyers to obtain mortgage loans for the purchase of multiple properties. Between 2005 and 2007, the defendants allegedly obtained 47 fraudulent loans in excess of $17.5 million on 35 California properties, including 13 in Orange County, 16 in San Bernardino County and six in Kern County. The defendants, none of whom were available for comment, allegedly acquired licenses for nonexistent businesses under the pretense that straw buyers owned the businesses to make them eligible for higher income loans. They are accused of fabricating loan applications to reflect higher incomes for the straw buyers, forging the names and signatures of straw buyers on various deeds and loan documents and forging the seal and notary stamp on notarized documents and deeds, which were filed with the Orange County Clerk-Recorder's Department. The defendants used the straw buyers' credit information on several occasions without their knowledge or consent, prosecutors say. After initially making monthly payments on the loans, they defaulted and kept the excess money, according to investigators. Ms. Chen was arrested on June 1 on a $3 million warrant. A warrant has been issued for the Gonzalez brothers, who may be living in Puerto Vallarta, Mexico.

Mortgage companies are scrambling to implement an over-looked Truth-in-Lending Act rule that goes into effect July 30 requiring timely delivery of the good faith estimate on home purchases, refinancings, and home equity loans. On applications taken after July 29, lenders must deliver the GFE to the borrower within three business days and they cannot collect any fees before delivery — except for the credit report. The TILA rule also requires lenders to "wait seven business days after they provide the early disclosures before closing the loan," according to the Federal Reserve Board. If the financing charges or annual percentage rate changes, the lender must provide a new disclosure with the revised APR "and wait another three business days before closing the loan," the Fed says. Consumers can waive this three-day waiting period in emergency situations such as a foreclosure. The Fed approved the rule on May 8. The FDIC recently reminded lenders about banks about the rule.

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.