Compliance

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.

Anthony Affatati of Parkland, Florida, pleaded guilty to charges related to two separate fraud schemes, one of them a multi-million dollar mortgage fraud scheme. According to documents filed with the court and statements made during the plea, Affatati became involved in mortgage fraud and purchased his Parkland home through a straw buyer who provided false financial information to the mortgage lender to secure the loan on Affatati's behalf. In a separate case, Affatati also pleaded guilty to conspiracy to sell fraudulent securities to the public. Sentencing has been set for Jan. 8, 2009.

Riccardo White pleaded guilty in federal court in White Plains, N.Y., to charges relating to his participation in a scheme to defraud homeowners in the New York metropolitan area and mortgage brokers across the country. According to Michael J. Garcia, U.S. attorney for the Southern District of New York, White and his co-conspirators engaged in a scheme to defraud homeowners around the New York metropolitan area through misrepresenting the terms of mortgages. White contacted homeowners and offered them mortgages with low interest rates and attractive rate caps. The terms of the mortgages obtained by homeowners from White and his co-conspirators were materially different from those White and his co-conspirators offered. The loss to the homeowners defrauded by the scheme was more than $1.3 million. White also participated in a scheme to defraud residential mortgage brokers throughout the country. He and his co-conspirators contacted residential mortgage brokers and sold them lists of names containing individuals purportedly interested in obtaining mortgages, as well as services associated with those lists. In actuality, the lists that they provided to the mortgage brokers were not lists of people interested in obtaining mortgages and the services the defendants promised to provide were not provided. The loss to the residential mortgage brokers defrauded by the scheme was more than $350,000. White is scheduled for sentencing on April 3, 2009.

August Blass, a former wholesale mortgage executive, has started a company that will provide quality control, risk assessment, and fraud prevention services to banks and lenders. The Walnut Creek, Calif., company, National Loan Auditors Inc., said Monday that it will "assist loan modification professionals, review loan documents for errors or misrepresentations and help in reducing the high foreclosure rates that have overcome the real estate market." Mr. Blass is a former Western regional correspondent manager for Wholesale Lending Online in Millbrae, Calif. In the 1990s he wrote "Internet Strategies for the Mortgage Banking Industry," published by Faulkner & Gray, which is now part of NMN's publisher SourceMedia Inc. "There is a need in the current market to provide an in-depth look at loan portfolios and financial documents to find potential errors and expose hidden liabilities," Mr. Blass said in a press release Monday. National Loan Auditors "will help financial institutions save millions in foreclosure dollars by providing them with an accurate report of which loans present the most risk."

The National Association of Mortgage Brokers has vowed to pull out all the stops in an effort to kill the final rule implementing changes in the Real Estate Settlement and Procedures Act. "We are not going to stand for this," President Marc Savitt said at the NAMB West regional conference in Las Vegas. The West Virginia broker wouldn't reveal the group's exact strategy but said "nothing is off the table," including legal action against the Department of Housing and Urban Development. "We have several ideas up our sleeves but we'll wait for the new administration to take over before we do anything," Mr. Savitt said. NAMB has numerous issues with the new RESPA regulations, but its main complaint is the method HUD has chosen to disclose yield spread premiums - first as a borrower paid item and then as a broker credit back to the borrower. "We thought that dog was dead but it came back to life," Mr. Savitt said, referring to the fact that the disclosure plan first surfaced in 2002. The final RESPA rule takes effect Jan. 1, 2010.

There will not be a recovery in the home market until all the "five timers" are out of their homes, said Bob Simpson, the president of IMARC, a Newport Beach, Calif.-based mortgage fraud investigations firm. The fact that those who owe five times more than what they make are still in their homes means the bottom has not been reached, he said, speaking at NAMB/West in Las Vegas after having made similar comments at the SourceMedia Mortgage Fraud Conference. The "five timers" need to turn in their house keys and move into something they can afford. "You're not qualified" is a phrase mortgage originators have to start using again, Mr. Simpson said. At NAMB/West, he made an analogy to the markers casinos give to high rollers. In the lending industry, those markers have now gone bad. The origination process was not about cost but about monthly debt service; originators sold payments. Compounding the problem, Mr. Simpson said, is lenders no longer required borrowers "have skin in the game" in the form of a downpayment. He added that he was not a fan of downpayment assistance programs. There need to be barriers to homeownership and the borrower's ability to save is important, Mr. Simpson said.

The Home Valuation Code of Conduct is "potentially the most dangerous regulation" with the effect of cutting the mortgage broker out of the origination process, declared Dave Biggers, the chief executive of appraisal technology firm a la mode, Oklahoma City. While the intent of the HVCC, which is actually a legal settlement, is good, he told attendees at NAMB/West in Las Vegas, it singles out mortgage brokers as the source of pressure on appraisers to deliver a certain value. It "drives a wedge between you and the lending process," he reiterated. Under the settlement, a firewall has to be created between the lender and appraiser. In many cases, that has taken the form of the lender hiring an appraisal management company. Mr. Biggers called the situation "absurd" because the lawsuit that resulted in the HVCC was filed against an appraisal management company. Whether or not the HVCC takes effect, many lenders will likely adopt its terms, he said. A number of Federal agencies, including the Federal Reserve Board, have just introduced their own regulation that could trump the HVCC, Mr. Biggers said. Unlike the HVCC, the regulation will not cut the mortgage broker out of the appraisal ordering process. The broker also will be able to have contact with the appraiser but will not be allowed to discuss a target value.

The National Association of Mortgage Brokers contends it is "unfair" that brokers have to disclose their indirect compensation on the newly revamped good faith estimate differently from banks and other competitors. "It is basically unfair to have direct competitors disclosing differently," said Joe Falk, a former NAMB president. The new Real Estate Settlement Procedures Act rule issued by the Department of Housing and Urban Development re-characterizes the yield-spread premium on the GFE as a charge or credit in relation to origination fees. Meanwhile, lenders' indirect compensation is "hidden at the bottom of a page and without relation to any other fees," Mr. Falk said. The American Bankers Association also said it is "disappointed" with many aspects of the RESPA rule and the new disclosure of YSPs. "ABA believes the new formulation [of YSPs] will be confusing to consumers," ABA's weekly newsletter says.

Congress needs to pass legislation that "unlocks" securitized trusts so servicers could sell distressed mortgages to the Treasury Department for restructuring, according to a former Treasury official in the Clinton administration. Michael Barr told a House panel that the Real Estate Mortgage Investment Conduit statute could be amended so that mortgage-backed securities investors don't face a tax penalty when loans are sold to Treasury, which is administering the Troubled Asset Relief Program. "We need to free servicers from the conflicting requirements and give them an incentive to sell mortgages to Treasury for refinancing and foreclosure avoidance," he testified. Mr. Barr is a law professor and a senior fellow at the Center for American Progress, a liberal think tank. He served as a special assistant to former Treasury secretary Robert Rubin and as Treasury deputy assistant secretary for community development (1997-2000). His testimony could signal options that the President-elect Obama's transition term is considering. Mr. Barr also supports a Federal Deposit Insurance Corp. plan to guarantee modified loans. "FDIC has proposed a plan to use guarantee authority, and the [Bush] administration should implement it," he said.

The key to combating mortgage fraud is "regulation, regulation, regulation," the director of research and policy for the Community Law Center told attendees at SourceMedia's Mortgage Fraud Conference in Las Vegas. Robert J. Strupp said part of the problem is that existing laws were not enforced. He warned against what he called "self-proclaimed" loss mitigation specialists and "certified" foreclosure consultants. No state certifies foreclosure consultants, Mr. Strupp declared, adding, "In my opinion, this whole industry needs to be regulated and it is not." Rodney Nelsestuen, research director for TowerGroup, took an opposite position on increased and detailed regulation. At first, he said, it can be prescriptive in dealing with the problem, but in the end it will fail because the prescription will provide fraudsters with a road map to get around the problem. Any solution to fraud needs to be principal-based, Mr. Nelsestuen said.

Residential loan modifications could be ripe for mortgage fraud, according to panelists speaking at a SourceMedia mortgage conference in Las Vegas. Gary Lacefield, executive vice president and director of compliance at WR Starkey Mortgage of Texas, said part of the problem is that lenders are modifying loans, keeping homeowners in a product that was not suitable for them in the first place. The modification continues the predatory pattern and practice, he said. Al Macdonald, chief executive and founder of NominoData, when asked about borrowers who were involved in mortgage fraud, said before just simply modifying the loan, the originator should re-screen the borrower to make sure there was not fraud. He later said that technology is merely a tool to help catch fraud. Lenders need to be constantly monitoring their systems to make sure technology is filling the role that was originally intended.