Compliance

After being found guilty in April 2008 of charges related to a scheme obtaining property via forged deeds, Duane McKinney of Washington, was sentenced in the U.S. District Court for the District of Columbia before the Honorable Judge Reggie B. Walton to 150 months in prison and ordered the defendant to pay $912,630 in restitution and to forfeit three luxury vehicles and two real properties. The court also ordered two money judgments in the amounts of $770,872 and $59,000. The evidence established that McKinney obtained title to about $1 million worth of D.C. and Maryland properties through forged deeds. In fact, the owners did not sign the deeds, as the vast majority of the owners were dead at the time of the forged deeds. Co-conspirator Joe D. Liles assisted McKinney by signing his name to these false deeds as the notary falsely stating that he saw the owner sign the deeds as grantor and that the owner personally appeared before him. Once the deeds were notarized, McKinney would sell the properties as if they belonged to him or his business and would use the money for himself. Liles pleaded guilty on Jan. 16, 2008, to a charge of false statements and was sentenced on Jan. 6, 2009, to 180 days of a suspended sentence, three years probation and to pay restitution of $691,587.

The Department of Housing and Urban Development is launching a new advertising campaign on Jan. 14 to alert troubled homeowners about foreclosure rescue scams. Outgoing HUD secretary Steve Preston will make the announcement along with New York City Mayor Michael Bloomberg at a press conference that morning to be held at the offices of Neighborhood Housing Services in New York. The new campaign, called "Keep Your Home. Know Your Loan." seeks to fight the proliferation of rescue scams that "often victimize struggling homeowners and push them closer to financial ruin," HUD said. The Federal Trade Commission recently sanctioned a Florida-based operation, Mortgage Foreclosure Solutions, which promised, for a $1,200 fee, to stop foreclosures and save their clients' homes. "Many consumers who paid the company ultimately lost their homes to foreclosure, and others avoided foreclosure only through their own efforts," FTC said.

The Federal Home Loan Bank of Seattle told its members on Jan. 12 (depositories mostly) that it may not meet its risk-based capital requirement for the period ending Dec. 31, blaming accounting rules that affect the value of its investment in private label mortgage-backed securities. In a letter to members, the FHLB says it must mark-to-market the non-prime assets, incurring a charge that is larger than any loss it anticipates on these investments. "We believe that the calculation of risk-based capital under the current rules significantly overstates our market risk in the current market environment," writes president Richard Riccobono, a former top thrift regulator in Washington. In the third quarter the bank took a $49.8 million charge on its private label investments, and lost $18.8 million in the quarter. If the FHLB cannot meet it risk-based capital goal it will be unable to pay dividends to members.

Edward Gotschall, co-founder of New Century Financial Corp. - once one of the largest subprime lenders in the nation - died late last week of natural causes, according to a report in The Orange County Register. He was 53. New Century's collapse is now the subject of a criminal investigation by the Department of Justice. Mr. Gotschall and three others founded New Century in 1995. He managed the books of the publicly traded company and worked with Wall Street investment banking firms. The company failed in early 2007. At one time, Merrill Lynch had considered buying it but passed on the deal. At its peak it was funding $60 billion in mortgages, according to the Quarterly Data Report.

A St. Louis man has pleaded guilty to mortgage fraud charges in connection with loans extended by Wells Fargo Home Mortgage and others. In the scheme Henry Broussard admitted to using phony gift letters to convince mortgage lenders that buyers were financially suitable to purchase properties owned by Broussard, when in fact he had provided the funds to satisfy downpayment requirements of various lenders. Broussard also admitted to fraudulently obtaining a loan of approximately $60,000 from Wells Fargo Home Mortgage. In all, Broussard admitted his fraudulent activities involved in excess of $120,000 of actual and intended losses. Broussard pleaded guilty to mail fraud before U.S. District Court judge Henry E. Autrey. Sentencing is set for April 2009.

Craig A. Long of Kansas City, Missouri, has pleaded guilty to federal mortgage fraud charges. In his plea, Long admitted he conspired with others to defraud lenders by submitting fraudulent loan applications and false real estate appraisals. Long and his co-conspirators obtained loans for purchase or refinancing of real property by submitting to the Federal Housing Administration and other lenders loan applications containing false information about borrower's identities, employment and income, as well as false information about liens, occupancy and sales contracts. In June 2005, he provided false information to lenders for money to finance the purchase of a house in Kansas City. A sales contract falsely represented there was a $43,800 lien on the property. The loan application falsely stated the buyer was earning $8,500 a month as the owner of a construction company when in fact the buyer was retired and living on Social Security. Additionally, the value of the property was fraudulently inflated. Sentencing is set for Apr. 6, 2009.

Michael P. Rumore, who ran his law practice from his Lyndhurst, N.J., home, pleaded guilty to stealing approximately $4 million entrusted to him for real estate closings, which he used to gamble in Atlantic City. Rumore entered his plea before Superior Court Judge Harry G. Carroll in Bergen County to first-degree money laundering and second-degree theft by failure to make required disposition of property received. Rumore was hired as an attorney and settlement agent for real estate purchasers. Between April 2007 and August 2008, he received approximately $4 million from various mortgage companies to disburse the funds for closings and use them to pay balances on existing mortgages and other associated costs and fees. Rumore admitted that he instead transferred the funds into his personal and business accounts and used them to gamble at casinos in Atlantic City. Rumore surrendered his license to practice law in the state and was disbarred by the Office of Attorney Ethics in September 2008. Sentencing is scheduled for Apr. 17, 2009.

Timothy Pearson of Beavercreek, Ohio, was sentenced to 20 months in federal prison, followed by three years of supervised release and ordered to pay $171,211 in restitution to the Internal Revenue Service for his role in a mortgage fraud scheme. Pearson had previously been employed as a loan officer. Pearson pleaded guilty on March 12, 2007 to one count of conspiracy to commit money laundering and to two counts of income tax evasion. According to court documents, Pearson was involved in a mortgage fraud conspiracy between March 2001 and December 2005 where he directly and indirectly participated in at least 365 fraudulent real estate closings in the greater Dayton, Ohio area. Pearson prepared and submitted fraudulent mortgage loan applications on behalf of prospective purchasers of residential properties, a majority of which were located in the Dayton area. In addition, Pearson fraudulently provided downpayments for the purchasers at the real estate closings.

Federal regulators have decided to give banks and thrifts Community Reinvestment Act credit for helping to prevent foreclosures. "Examiners may consider favorably" the establishment of loan programs to modify and restructure mortgages for homeowners facing foreclosure, according to a newly revised "Interagency Questions and Answers Regarding Community Reinvestment." Banks can also receive community development services points by providing foreclosure prevention programs to low- and moderate-income homeowners. "The new and revised Questions and Answers encourage financial institutions to participate in foreclosure programs that have the objective of providing affordable, sustainable, long-term restructurings and modifications for homeowners who are facing foreclosure on their primary residences," according to a joint statement by the regulators.

In downgrading its ratings on Carmel, Ind.-based insurance company Conseco Inc., Fitch Ratings cites concerns with the company's commercial and residential mortgage investments. "Fitch believes Conseco's statutory capital will be pressured by impairments in the deteriorating market for commercial mortgage backed securities and commercial mortgages. Fitch also notes Conseco's exposure to a sizable but highly rated alt-A residential mortgage-backed security portfolio and below-investment-grade fixed maturity corporate securities that are greater than 100% of statutory capital. The company has a meaningful exposure to GAAP unrealized losses on its investment portfolio that under statutory accounting rules are not reflected in capital," the rating agency said. The report added that Conseco is working on various initiatives to improve statutory capital and the future of its ratings will be based on the ability to improve is financial profile.

Roughly 50 different investors received confidential bid packages on IndyMac Bank FSB, the insolvent thrift that is also the nation's ninth largest residential servicer. A spokesman for the Federal Deposit Insurance Corp. also clarified that the investor group awarded IndyMac this past Friday is putting roughly $2.9 billion into the deal: $1.6 billion that represents the difference between the thrift's liabilities and the value of its assets (after the assets have been marked-to-market) and another $1.3 billion in cash that will be used to capitalize the re-constituted lender/servicer. "It's failed bank math," he said. The spokesman said at least 80 different investors were invited to bid but declined to say how many were involved in the final bid process. Of the 80, 50 received bid packages. Late last week the FDIC agreed to sell the Pasadena, Calif.-based IndyMac to IMB Management Holdings, a consortium of hedge funds led by Dune Capital, J.C. Flowers, Paulson & Co., and others. IndyMac has $13.9 billion in assets and $12.3 billion in liabilities, said the spokesman.

An accused participant in a mortgage fraud scheme has pled guilty to conspiring to commit mail fraud and wire fraud. Seth Srader entered his plea on Dec. 11, 2008, before U.S. District Judge Keith Ellison. Srader was charged in a mortgage fraud scheme involving the recruitment of individuals to purchase residential properties at or near 100% financing using their good credit. The borrowers were paid from the loan proceeds for their participation in the acquisition of the property. Loan officers at mortgage brokerage offices were utilized to furnish false and fraudulent information to the lenders. Loan proceeds would be disbursed to one or more of the conspirators through checks or wire transfers from the title company to a bank account established in an assumed name. Srader participated in the scheme as a borrower, purchasing two residential properties in the Houston area, borrowing a total of $869,310. Each loan was obtained using false and fraudulent information. The residential loans Srader obtained during the scheme eventually fell into default. Srader has been permitted to remain free on bond pending sentencing, which has been set for March 3, 2009.

The Tennessee Commissioner of Commerce and Insurance is now requiring fingerprints from certain license and registration applicants, including mortgage lenders, brokers, servicers and loan originators. According to written analysis from iComply, which is authored and published by a team of mortgage banking attorneys, there must be provisional authorization for mortgage loan originators to conduct business while awaiting registration approval from the commissioner. The requirement became effective on January 1. In other regulatory news, with the start of the new year North Carolina is requiring mortgage servicers to be licensed by the its Commissioner of Banks before acting as a servicer. The bill also changes the "brick-and-mortar" requirements for mortgage brokers to specify that a broker's physical location in North Carolina may not be a home or residence.

Federal Housing Administration lender Shore Mortgage, Birmingham, Mich., which is licensed in 25 states, said it is planning to significantly grow its origination staff due to rate-driven increases in its business and its reputation for swift mortgage closings. President Robert Rahal said in a prepared statement that the company is seeking to hire an additional 80 to 100 new employees and has a training program for those lacking experience. He said positions the company is seeking to fill include loan officers (10-20 people per month for the next three months), underwriters, processors, closers, post-closing specialists and account executives. The company is licensed to do business in Alabama, Arkansas, Arizona, Florida, Georgia, Illinois, Indiana, Maine, Michigan, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Virginia, Washington and Wisconsin.

The National Association of Mortgage Brokers is opposing implementation of reforms that would prohibit brokers from picking or working with appraisers in mortgage transaction. The appraisal code of conduct that Fannie Mae and Freddie Mac, along with their regulator, have agreed to implement as part of a settlement with New York Attorney General Andrew Cuomo tries to ensure that loan officers and brokers don't influence or interfere with the property valuation process. The code is slated to go into effect May 1 and applies to loans purchased by Fannie and Freddie. "This agreement will create a severe disadvantage to small business mortgage brokers, and prevent them from engaging competitively in the mortgage marketplace," said NAMB president Marc Savitt.

The American Financial Services Association is urging president-elect Barack Obama's transition team to consider several options to increase consumer credit, including bond insurance for asset-backed securities issued by finance companies. "Government must play a direct and immediate role in bringing liquidity and confidence back to the securitizations market through the purchase of securities or by issuance of insurance or guarantees," according to an AFSA report sent to the transition team. "Finance companies extend 40% to 50% of all consumer lending in the United States," AFSA executive vice president Bill Himpler said. But he noted that the flow of credit from finance companies to consumers is threatened by today's financial crisis. AFSA also wants the new administration to give Community Reinvestment Act credit to banks that extend credit to finance companies that are offering workouts to struggling borrowers.

Congress returns Jan. 6 to start a new session and House Financial Services Committee chairman Barney Frank, D-Mass., has already scheduled hearings on the Federal Housing Administration and the future use of Troubled Asset Relief Program funds. The FHA hearing on Jan. 9 will focus on the agency's oversight of FHA lenders. FHA single-family originations have tripled over the past year and more and more lenders are applying to make FHA loans. On Jan. 7, chairman Frank will hold a hearing on how the new administration should use the remaining $350 billion in TARP funds. The chairman has been critical of the Bush administration for failing to fund foreclosure prevention programs and for simply capitalizing banks without any lending or reporting requirements.

The Financial Accounting Standards Board is on track to give investors in mortgage-backed securities a break in the way they determine other-than-temporary impairment for their fourth quarter financial reports. FASB has issued a proposed staff position (FSP) that amends an impairment model, which required financial institutions to use "their best estimate of the cash flows that a market participant would use in determining the current fair value" of MBS. The FSP drops "market participant" and allows management to make a "reasonable judgment" of future cash flows, which should reduce charges if the securities are performing. The comment period on the proposed FSP EITF Issue 99-20-a ends Dec. 30. The Seattle Federal Home Loan Bank recently reported a $49.8 million "other than temporary impairment" charge against three private-label MBS. The FHLBank said it only expects to see a $4.9 million principal loss over the life of the three securities.

GMAC Financial Services has received Federal Reserve Board approval to become a bank holding company, providing the struggling auto and mortgage lender with access to new funding sources and a possible capital infusion from the Treasury Department. "Today's announcement marks a turning point in GMAC's history," said GMAC chief executive Alvaro de Molina. "As a bank holding company, GMAC will be competitively positioned for the long-term to provide financing to auto and mortgage consumers and businesses, such as automotive dealers." The approval order requires General Motors Corp. and Cerberus Capital Corp. to substantially reduce their equity interests in GMAC. It also requires the conversion of GMAC Bank to a state-chartered bank, which was approved by the Utah banking department. BHC status will allow GMAC to reduce its borrowing costs and ease the burden on its mortgage lending and servicing arm, Residential Capital, which is making principal and interest advances on an increasing number of delinquent loans. ResCap services nearly $400 billion in mortgages. GMAC has applied for a capital infusion under the Troubled Asset Relief Program. Treasury has already committed to provide $250 billion in capital assistance to banking companies.

The newly revised Appraisal Code of Conduct will not require lenders to fire in-house appraisers or sell-off their interests in affiliated appraisal shops, which raised so much controversy earlier this year when the code was first proposed by Fannie Mae and Freddie Mac, along with their regulator, and the New York Attorney General. The revised code does not rely on "unwieldy procedural prohibitions" to ensure appraiser independence, according to the Mortgage Bankers Association. "This will permit lenders and others to use their existing appraiser independence and quality control practices rather than mandate structural reorganization," MBA associate vice president Michael Carrier said. The code of conduct proposed back in March as part of a settlement with AG Andrew Cuomo, banned lenders from using affiliated appraisal shops. The Office of the Comptroller of the Currency threatened legal action to block its implementation. When asked about the revised code, an OCC spokesman said officials have no comment at this time.