Compliance

Federal authorities in Newark, N.J., arrested four more individuals last week they believe are responsible for draining millions of dollars from credit unions and banks around the country by tapping into home-equity lines of credit. The arrests make a total of 17 individuals charged in the international scheme by which the suspects engineered fraudulent wire transfers or gained unauthorized access to the victims' online accounts to drain HELOCs, then wired millions of dollars in proceeds overseas. The scheme is reminiscent of the TJX credit card breach, where stolen credit union and bank account information was sold over the Internet and used to siphon millions of dollars from American shoppers from sites all over the world. "Home-equity lines of credit are an expanding front in the battle against mortgage fraud," said Christopher Christie, U.S. attorney for the District of New Jersey. "Homeowners should carefully review their statements to make sure their hard-earned equity is not disappearing from under their noses," he said.

House Financial Services Committee chairman Barney Frank, D-Mass., wants to create a new "set of rules" for the securitization of mortgages and empower servicers to modify loans as part of his 2009 agenda. "Our job is to come up with a set of rules that diminishes excessive risk-taking while still giving us the benefits of securitization," Rep. Frank told a Consumer Federation of America Washington conference. He said issuers of mortgage-backed securities will have to retain some liability. "They can't lay off all of the risks" to investors. Servicers of MBS should be able to make decisions about resolving troubled mortgages, he advocated. The committee chairman also said he expects to pass a tough subprime bill that will do away with yield-spread premiums that gives mortgage brokers an incentive to raise interest rates.

Derrick Polk of Los Angeles, Oludola Akinmola and Oladeji Craig, both of Brooklyn, and Oluwajide Ogunbiyi of Springfield, Ill., have been charged with engaging in an international conspiracy to deplete millions of dollars from U.S. victims' home equity lines of credit using personal information obtained through identity theft and unauthorized computer access. According to the FBI, the four men allegedly conspired to deplete available funds from HELOCs belonging to identity theft victims either by engineering fraudulent wire transfers or by gaining unauthorized access to the victims' online bank accounts. The defendants and their co-conspirators have been accused of acquiring the identity information of thousands of victims and used that information to conduct numerous fraudulent schemes, withdrawing more than $2.5 million from HELOC accounts and attempting to withdraw at least $4 million more in unsuccessful transfers. Hakeem Olokodana and Yomi Jagunna, both of Queens, N.Y., Abayomi Lawal of Brooklyn and Daniel Yummi of New York, have also been charged with conspiring to identify HELOCs with large balances and to acquire all of the confidential customer information necessary to transfer money out of victim accounts.

The United Kingdom's government has made plans for a program designed to help those experiencing a temporary loss of income stay in their homes, according to the U.K. Treasury. "The new Homeowner Mortgage Support Scheme will enable households that experience a significant and temporary loss of income as a result of the economic downturn to defer a proportion of the interest payments on their mortgage for up to two years," the U.K. government entity said. "The government will guarantee the deferred interests payments in return for banks' participation in the scheme," it added. The plan is set to become available early in 2009 and the U.K. government said the eight of largest banks have pledged to work with it in developing the program.

Reported incidents of mortgage fraud in the U.S. increased by 45% on fewer loan applications in the second quarter of 2008 from a year ago, according to a new report released by the Mortgage Asset Research Institute. Key findings from the MARI Quarterly Fraud Report, which is based on data submitted by MARI subscribers on loans originated in the second quarter of this year that have since been classified as fraudulent, include that fraud most often occurs at the beginning of the loan process. According to the report, the top three states for reported incidents of mortgage fraud in the second quarter of 2008 are Florida, California and Illinois. Florida saw a 5% increase in general application misrepresentation in the second quarter, while California saw a 20% decrease. Illinois has the highest percentages of income and employment misrepresentation on the loan application. More than 65% of fraud incidents are attributed to "general application misrepresentation," a trend where information is potentially misrepresented during the application process. This fraud trend is followed closely by reported misrepresentations related to income at 36% of seconds quarter applications and employment at 20% of 2Q08 applications.

A Federal Reserve Board study discovered that banks and thrifts made only a small percentage of subprime loans in their Community Reinvestment Act assessment areas and these findings refute critics who claim CRA lending contributed to the subprime crisis. "Only 6% of all higher-priced [subprime] loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas," Fed governor Randall Kroszner said. This evidence does not support the view that CRA contributed in any substantial way to the subprime mortgage crisis, he added. In examining foreclosure data, Fed researchers also discovered that foreclosure filings have increased at a faster pace in middle-income and higher-income areas than in lower-income areas served by CRA lenders.

In an attempt to spark a housing recovery the Treasury Department is working on a plan that ultimately could lead to a 4.5% 30-year fixed rate loan for consumers. According to combined news reports breaking Thursday morning, Treasury would be the ultimate buyer of mortgage-backed securities that yield 4.5%. Over the past two days 30-year 'A' paper loans were yielding just over 6%. The bonds would be backed by newly originated loans that would be used by homebuyers to purchase new or existing homes. The Department would buy guaranteed MBS from Fannie Mae or Freddie Mac. The loans would meet underwriting criteria of the two GSEs and the Federal Housing Administration. The idea is still in the planning stages and at press time Treasury officials were not commenting about the idea.

Howard Gaines, an attorney and licensed title agent from Delray Beach, Fla., has been convicted of charges relating to his participation in a $10 million mortgage loan scheme to defraud mortgage lenders on properties located in Broward County. Sentencing is scheduled for Feb. 10, 2009. According to the evidence presented at trial, Gaines was a licensed title agent at Your Title Choice in Deerfield Beach, Fla. Gaines, as a title agent, aided co-conspirator Anthony Dehaney and others to close on fraudulent loans. Among the fraudulent documents presented at closings were HUD-1 Settlement Forms, which falsely represented that buyers were using their own money to close on the purchases. The evidence showed that Gaines helped Dehaney close more than $10 million in loans during 2004, 2005, and 2006, including $5 million in fraudulent mortgages. There were seven who were originally arrested and Gaines' conviction was the sixth conviction in this matter. The following five conspirators have pleaded guilty: Anthony Dehaney, Marcia Mestre, Angela Angela Manalaysay, Beverly Ireland and Donna Patricia Grant. The seventh defendant, Andrea Dehaney, is still pending trial.

Roy Keith Fife, a real estate agent from Tucson, Arizona, pleaded guilty to fraud and forgery charges in Pima County Superior Court on Dec. 2, 2008. At the hearing, Fife admitted forging the signature of a client for whom he served as a residential real estate sales agent. Fife forged the signature on loan documents to facilitate the sale of the client's property. Through this sale, Fife obtained a commission of more than $100,000. As a result of Fife's forgery, his client's carryback loan was made junior to a million-dollar equity loan taken out by the buyers. The seller specifically required in the sales contract that his carryback would be in first position. The buyers of the property have since defaulted on both loans. Fife, whose real estate license is now inactive, faces unrelated real estate fraud charges in federal court. His sentencing will occur after his federal trial, now scheduled for October 2009.

A Federal Reserve Board study discovered that banks and thrifts made only a small percentage of subprime loans in their Community Reinvestment Act assessment areas and these findings refute critics who claim CRA lending contributed to the subprime crisis. "Only 6% of all higher-priced [subprime] loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas," Fed governor Randall Kroszner said. This evidence does not support the view that CRA contributed in any substantial way to the subprime mortgage crisis, he added. In examining foreclosure data, Fed researchers also discovered that foreclosure filings have increased at a faster pace in middle-income and higher-income areas than in lower-income areas served by CRA lenders.

The Treasury Department, to date, has spent $150 billion of taxpayer money investing in preferred shares of 52 different institutions, outgoing secretary Henry Paulson said Monday afternoon. Mr. Paulson noted that hundreds of banks have applied for Troubled Asset Relief Program money, adding that, "we will work through the remaining applications in the coming weeks and months." He said the agency is continuing "to examine potential foreclosure mitigation ideas" that could use TARP funds. He also complemented the FDIC's loan modification effort at IndyMac Bank, Pasadena, Calif., calling it "effective." IndyMac is expected to be sold by the Federal Deposit Insurance Corp. this month. It's anticipated that whichever investor buys IndyMac will continue the loan modification program.

Tahir Ali Khan has pleaded guilty to charges related to leading a multi-mullion dollar mortgage fraud scheme. Ali Khan was the lead defendant in a 15 defendant, multi-count indictment and is the tenth defendant to plead guilty. According to the U.S. attorney's office for the Southern District of New York, Ali Khan was the leader of a fraud ring that produced false identification documents purporting to have been issued by state and federal government authorities produced in the names of fraudulent identities, to which members of the ring referred to among themselves as "chickens." In order to build financial credit for these fake identities, the ring fraudulently established bank accounts, credit card accounts, apartment leases and telephone and utility accounts in the names of the "chickens" and applied for and obtained bank loans, home mortgage loans, increased credit card limits, lines of credit and other financial benefits in the names of the fraudulent identities or in the names of sham businesses supposedly operated by those fraudulent identities. The ring then defaulted on the loans and credit card debt. In addition to Ali Khan, nine other defendants have pleaded guilty to charges related to the scheme. Criminal charges remain pending against four defendants. One defendant remains a fugitive.

The Federal Reserve Board could take further actions to reduce mortgage rates, including purchases of longer-term Treasury and government sponsored enterprise debt, according to Fed chairman Ben Bernanke. He noted that that the response to the Fed's decision to purchase up to $500 billion in Fannie Mae and Freddie Mac mortgage-backed securities and $100 billion in GSE debt over the next few quarters has been positive. "It is encouraging that the announcement of that action was met by a fall in mortgage interest rates," the Fed chief told the Austin (Tex.) Chamber of Commerce. However, he noted that housing markets "remain weak," house prices are falling and an eventual stabilization of the housing market would be a plus for the economy. "The Fed could purchase longer-term Treasury or agency securities in the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand," Mr. Bernanke said.

Two investment funds have filed a class action lawsuit to stop Countrywide Financial Corp. from passing off losses on loan modifications to investors in mortgage-backed securities. The complaint alleges that Bank of America's settlement with state attorneys general could lead to the modification of nearly 400,000 Countrywide loans totaling $80 billion and to a reduction in payments to investors by $8.4 billion and a reduction in value of the MBS. Under the pooling and servicing agreements, Countrywide must purchase the loans out of the securitized pools at par with accrued interest before the loans can be modified, according to the plaintiffs, Greenwich (Conn.) Financial Services and QED LLC. "The only way to modify the loan according to the contract is to purchase it," said William Frey, who manages both funds. There is no contractual ability for CFC to modify the loans and keep them in the securitized trusts, he added. Bank of America said loan modifications benefit both homeowners and investors. "We are confident any attempt to stop this program will be legally unsupportable," a statement issued by the bank said. The plaintiffs filed the class action lawsuit in a New York state court on behalf of investors in 373 CFC MBS totaling $150 billion.

Fred Stevens of Easton, Conn., pleaded guilty to participating in a mortgage scheme to defraud IndyMac Bank and other financial institutions. According to documents filed with the court, from approximately April 2006 to September 2007, Stevens was a mortgage broker in Westport, Conn., where, working with property developers, lawyers, "hard money" lenders, an appraiser, employees of financial institutions and others, he submitted fraudulent mortgage applications with IndyMac and other financial institutions to secure mortgages for certain clients. Stevens earned a fee for the fraudulent mortgage applications that he submitted on his clients' behalf. Stevens submitted a fraudulent mortgage application package to IndyMac related to a property located in Westport. The application contained numerous false pretenses and representations such as an inflated borrower's income, a false claim that the property was owner-occupied, a falsified appraisal and a false claim that the payments developers made on the property were a bonus given to the borrower by his employer. IndyMac approved the mortgage application and the loss resulting from Stevens' scheme exceeded $1 million. Sentencing is scheduled for Feb. 13, 2009.

Mary Reagan of Alpharetta, Ga., was sentenced to serve nearly five years in federal prison for her role in a multi-million dollar mortgage fraud scheme. Reagan pleaded guilty in July 2008 shortly before she was to go to trial and agreed to assist the government in the prosecution of the scheme. Reagan was sentenced to four years, nine months in federal prison, to be followed by five years of supervised release. Reagan was also ordered to pay more than $4 million in restitution. According to David Nahmias, U.S. attorney for the Northern District of Georgia, from mid-2004 through June 2006, Reagan was an attorney doing business as The Reagan Law Group, closing fraudulently inflated mortgage loans provided to unqualified straw buyers. Reagan was responsible for representing the mortgage lenders at the closing table. However, when the loans closed, she transferred the inflated loan proceeds to her co-conspirators by falsifying closing documents and concealing the true recipients and purposes of payments made from the lenders. She also concealed from the lenders that the unqualified straw buyers did not make sizeable down payments required by lenders as a condition of closing.

Canada's RBC Mortgage Co. has agreed to pay the United States more than $10.7 million to resolve allegations arising under the False Claims Act concerning 219 Federal Housing Administration loans, according to the U.S. Department of Justice. The government had alleged that, between 2001 and 2005, the subsidiary of the Royal Bank of Canada falsified documentation in support of loan applications, violated due diligence underwriting requirements and improperly submitted loans for endorsement by the Department of Housing and Urban Development that were not eligible for FHA insurance. "The settlement reached between RBC and the United States resolves these allegations," the DoJ said. In addition to the settlement, RBC also has agreed to pay $264,000 to resolve administrative claims with respect to 39 federally insured loans, according to the Justice Department.

President-elect Barack Obama has selected key members of his economic team, including Timothy Geithner as Treasury secretary, who will be working on an economic recovery and stimulus plan to get credit moving again and address the growing foreclosure crisis. Mr. Obama said at a press conference that he plans to release an overview of the plan in the coming weeks and he wants Congress to begin work on passing the package early in January. Mr. Geithner is currently the president of the New York Federal Reserve Bank and he has been working with Treasury secretary Henry Paulson in propping up Citicorp and American International Group. "We will honor commitments made by the current administration," Mr. Obama said. The president-elect also plans to nominate former Harvard University president and Treasury secretary Lawrence Summers to be his chief economic advisor in the White House. "We need a recovery plan for both Wall Street and Main Street. A plan that stabilizes our financial system and makes credit flow again while at the same time addressing our growing foreclosure crisis, helping out the struggling auto industry and creating and saving 2.5 million jobs," Mr. Obama said.

Home prices declined at a record pace in the third quarter, according to the S&P/Case-Shiller Home Price Index, and that is fueling concern that home loans originated this year could soon be under water. S&P/Case-Shiller reported that home prices nationally were down 16.6% in the third quarter from a year earlier. That was higher than the rate of decline posted in the first and second quarters. That puts prices back to where they were in 2004, down 21% from their peak on a national average basis, with the largest declines being posted in once-hot Sun Belt markets, including Phoenix, Las Vegas, Miami, San Francisco, Los Angeles and San Diego. Moreover, the index shows that prices declined on a month-to-month basis in September across all metropolitan areas covered by the index. And with unemployment - a key default driver - still rising, further price declines could leave many borrowers who took out home loans this year and next at risk of owing more money than their home is worth, economist Karl Case, a professor at Wellesley College and founding partner of the index said during a conference call. "If prices keep dropping, 2008 and 2009 mortgages could be bad news. If prices continue to fall substantially next year, then that book is going to be underwater too, and that's going to be very devastating to the economy," Mr. Case said. Separately, the Federal Housing Finance Agency also reported that home prices declined in the third quarter. FHFA's index estimates that home prices declined 1.8% in the third quarter from second quarter. But over the past year, the FHFA index shows prices down just 6%, considerably less than the Case-Shiller data indicates.

A new effort by the Treasury Department to revive the market for asset-backed securities could include "non-agency" mortgages, the government said today. Treasury secretary Henry Paulson cautioned that any effort in regard to non-prime would involve "highly rated residential MBS." Treasury said the Federal Reserve Bank of New York will spend up to $200 billion to revive the ABS market. (Treasury is pitching in $20 billion to kick start the program.) The money will be used to finance buyers of ABS through non-recourse loans. Initially, the effort will focus on ABS backed by automobile loans, credit cards, student loans and small business loans. At a press conference Tuesday Mr. Paulson said the effort could be expanded to also include ABS backed by commercial mortgages. Only AAA-rated paper will be considered. The ABS market, according to Treasury, ground to a halt in 3Q with very few deals coming to market.