Compliance

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.

Delanie Belfield Ross of Phoenix, Ariz., has been found guilty of charges related to a mortgage fraud scheme. According to court documents, Ross, along with his wife, Veronica Cooper Ross, and his brother-in-law, Willard Cooper, fraudulently obtained mortgage loans for the purchase of a $3.2 million Paradise Valley home in 1994. To obtain these loans, they created shell corporations and also used fraudulent corporate tax returns and other forged documents to create the impression that Cooper was a wealthy businessman with substantial assets. After taking possession of the house, Delanie Ross recorded fraudulent releases of the liens on the loans with the Maricopa County Recorder. He then represented the house as being owned free and clear to potential investors and obtained an $850,000 line of credit from a private family of investors, using the house as collateral. These fraudulent corporate documents and tax returns were also used to obtain leases on four SUVs from a Scottsdale automotive dealership. Sentencing for Ross is scheduled for Dec. 19. Veronica Cooper Ross pleaded guilty to hindering prosecution and attempted hindering prosecution, both felonies. She is serving a three-year probation term in Mississippi. Cooper pleaded guilty to one count of felony theft in 2005 and is also on probation in Mississippi.

Kandace Marriott and Darrell Lynn Marriott, both of Gun Barrel City, Texas, their daughter, Kally Marriott of Dallas, and Karen Hayes of Mabank, Texas, have been charged with orchestrating a mortgage fraud scheme whereby they allegedly forged signatures and falsified home loan applications, which included creating and using numerous fraudulent documents containing statements the borrowers never made. The fraudulent documents were allegedly prepared for prospective homeowners who otherwise would not have qualified for loans backed by HUD. Evidence indicates that the defendants allegedly supervised the falsification of residential loan applications to ensure that mortgage lenders would approve the buyers' loans. The defendants allegedly falsified supporting documents and information, including the buyers' rent payment verification statements, proof of employment and information about Social Security Administration benefits, among other documents. Investigators believe the defendants targeted lower-income purchasers whose residential loans would be guaranteed by HUD. As a result, when unqualified buyers defaulted on their home loans, HUD, as guarantor of the loans, had to cover these costs, not the mortgage lenders.

Seniors will be able to use Federal Housing Administration reverse mortgages in conjunction with the purchase of a new home under new guidelines issued by the Department of Housing and Urban Development. Starting Jan. 1, seniors that want to downsize or move to a new location can use the proceeds from the sale of their home and an FHA Home Equity Conversion Mortgage to purchase a new residence. "Proceeds from sale of their former home can be combined with funds from a reverse mortgage on the new home, allowing the home purchase to be made without any future responsibility of monthly mortgage payments," said Peter Bell, president of the National Reverse Mortgage Lenders Association. This new feature of the FHA HECM program also avoids the expense of taking out a regular mortgage on the new residence and then getting a HECM.

Fannie Mae and Freddie Mac are suspending all foreclosures and evictions of homeowners during the holiday season -- November 26 to January 9 -- while their servicers get up to speed on a new streamlined loan modification program favored by the Treasury Department. The temporary suspension is expected to give troubled borrowers already 90 days past-due a chance to benefit from the new streamlined approach that servicers are trying to implement by December 15. "Until the streamlined modification program is fully implemented, we felt it was in the best interest of both borrowers and Fannie Mae to take this extra step," said Fannie chief executive Herb Allison. Freddie has instructed its servicers and foreclosure attorneys to contact 6,000 borrowers with pending foreclosure sales. If the single-family property is occupied the foreclosure sale will be halted. Fannie estimates the suspension will benefit 10,000 homeowners. Under the streamlined approach, the government sponsored enterprises can reduce the interest rate to 3%, extend the loan up to 40 years and even defer payments on part of the principal if necessary. The objective is to reduce borrowers' payments to 38% of gross income through a fast and simple process. "With this suspension, seriously delinquent borrowers may have an opportunity to avoid foreclosure and workout terms to stay in their homes," GSE regulator James Lockhart said.

House Financial Services Committee chairman Frank Barney, D-Mass., is urging the Treasury Department to reduce the cost of mortgage insurance premiums on the FHA's "Hope for Homeowners" program by using money from the Troubled Asset Relief Program. In a new letter to Treasury, Rep. Frank urges the secretary Henry Paulson to use the TARP funds to reduce the "high level" of upfront and annual fees on H4H loans. The Federal Housing Administration is required to charge a 3% upfront and a 1.50% annual premium. "These high fees are depressing program usage, and using TARP funds to pay them down could significantly increase the number of foreclosures averted," Rep. Frank says in the November 20 letter. (On a regular FHA loan, the upfront premium is 1.75%. The annual premium is 55 basis points.) The committee chairman also wants Treasury to begin purchasing whole loans on a "large scale" for the specific purpose of modifying the loans and keeping the borrowers in their homes."

Jose Serrano of Stockton, Calif., has been sentenced to 15 months in prison and ordered to pay more than $219,000 in restitution to Washington Mutual Bank for his role in a mortgage fraud scheme involving the purchase of numerous residential properties in the Stockton area between 2003 and 2005. According to Matthew Stegman, assistant U.S. attorney for the Eastern District of California and prosecutor of the case, the investigation has also resulted in charges against other defendants, including Iftikhar Ahmad, Manpreet Singh, John Ngo, William Bridge and Paul Bridge. Each of these defendants has entered guilty pleas to various charges and awaits sentencing. Another defendant, Joel Blanford, has been charged and awaits trial.

Revis Otto Willis, a former mortgage broker from Houston, has been sentenced to 121 months in federal prison without parole followed by three years of supervised release for his leadership role in a mortgage fraud scheme. According to Tim Johnson, U.S. attorney for the Southern District of Texas, Willis was a mortgage broker who owned and operated Advanced Mortgage Services in Houston. Between October 2004 and May 2008, Willis recruited straw buyers to make false statements about their income, employment and bank account balances on loan applications to purchase residential properties in the Houston area. He encouraged the buyers to apply for mortgages in amounts greater than the actual sales price of the home. The loan applications containing the false statements were submitted to various financial institutions that traded mortgages on the secondary market. The difference between the actual sales price and the exaggerated loan amount was divided among Willis and others involved in the scheme. Almost all the loans secured as part of the scheme were defaulted upon and resulted in foreclosures. Willis' scheme involved 21 different residences and resulted in $2 million in losses.

After operating a residential mortgage scam that defrauded four Phoenix seniors of more than $400,000, Rick Thomas McCullough, a Phoenix mortgage broker, has been sentenced to three-and-a-half years in prison along with seven years probation and ordered to pay $343,811 in restitution. According to court documents, McCullough was the president of licensed mortgage broker CactusCash. In 2005 and 2006, he used this position to persuade four seniors, two single women and one couple, to refinance their homes through him for amounts far greater than the balance of their existing mortgages. McCullough also convinced them to invest their net refinancing proceeds with him, effectively obtaining for himself much of the equity that these elderly clients had in their homes. He claimed he would invest the victims' funds in real estate and personally guaranteed the loans. According to the terms of their investments, McCullough agreed to make monthly payments between $650 and $3,150 to the victims when in fact he lacked the assets to guarantee any of the loans and failed to make payments to three of the victims after several months. In one case, he failed to make any payments at all. Instead, McCullough used the money to make personal purchases.

Brian Tray of Pittsburgh has been sentenced in federal court to 41 months of imprisonment and five years of supervised release for his connection with a mortgage fraud scheme. According to information presented in the court, Tray worked as a loan officer for, among other places, America's Mortgage Outlet and Single Source Mortgage. In connection with numerous loans, Tray submitted loan applications on behalf of borrowers that he knew contained false information related to the borrowers' income and financial condition. In addition, Tray submitted fraudulent documents to the lending institutions, including fraudulent verifications of employment, verifications of rent and appraisals.

The Department of Housing and Urban Development, in rewriting the RESPA rules, has clamped down on builder discounts that are tied to use of the homebuilder's mortgage company. Starting Jan. 16, builders won't be able to offer $10,000 discounts on the purchase price if the homebuyer uses their affiliated mortgage or title company. The final Real Estate Settlement Procedures Act rule issued by HUD on Nov. 17 says these referral arrangements are potentially "problematic" under RESPA. "RESPA and this final rule limit tying such a discount to the use of an affiliated settlement provider," HUD says. Homebuilders, Realtors, mortgage bankers and other industry groups opposed this rule change. The National Association of Home Builders contends the change will eliminate significant savings for homebuyers. But a NAHB spokesman said the builders are not ready to comment on HUD's action. RESPA attorney Phillip Schulman said builders will have to change the way they promote their affiliates. "They won't be able to link the incentive to the use of the affiliate," the K&L Gates partner said.