Compliance

After pleading guilty in July 2008 for her role in a multi-million dollar mortgage fraud scheme, Adriene Newby-Allen of Alpharetta, Ga., was sentenced to 135 months in federal prison to be followed by five years of supervised release and ordered to pay $5.28 million in restitution. According to the U.S. attorney for the Northern District of Georgia, from mid-2004 through March of 2006, Newby-Allen siphoned off millions of dollars in fraudulently inflated mortgage loans being provided to unqualified straw buyers, one of whom was her husband and co-defendant, Brinson Allen, who was found guilty of multiple charges relating to the fraudulent scheme on July 30, 2008 and will be sentenced at a later date.

Ronald Persaud, Esther Persaud and Shawn Persaud, all of Saratoga, N.Y., were convicted for their roles in a mortgage fraud scheme. Ronald and convicted defendant Indranie Persaud perpetuated a scheme to inflate the latter's employment income on a mortgage application to obtain a $712,000 mortgage to obtain a real property known as 12 Beacon Hill, Saratoga Springs, N.Y. Ronald and Esther Persaud also perpetrated a wire fraud conspiracy by enticing investors to pay advance fees on the false promise that the investors would receive millions of dollars in commercial funding. The investors made advance fee payments in excess of $1 million and received no commercial funding. Ronald purported to be the person with banking connections while Esther purported to be a bank executive. Ronald, Esther and Shawn Persaud then conspired to conduct a series of financial transactions calculated to conceal and disguise the source, ownership and control of the advance fees paid to the Persauds and others. All are scheduled for sentencing on March 9, 2009.

Federal law enforcement officials are close to announcing settlements in several mortgage and securities fraud probes that were started in 2007, according to one litigator watching the cases. "There are some discussions that are active," said attorney James Wareham of the Paul Hastings law firm. Settlements involving lenders and even home builders could be announced in a few weeks but there are no timetables, said Mr. Wareham, who supervises 300 litigators. The Department of Justice, and the Securities and Exchange Commission want to close out some of the cases and re-direct experienced investigators to bigger cases involving packaging of mortgage-backed securities and collateralized debt obligations, Mr. Wareham said in an interview. DOJ is investigating at least 20 subprime lenders and several Wall Street firms.

Tavant and Wolters Kluwer Financial Services said they are working together to make the compliance documentation process for mortgage lenders easier, faster and more accurate while giving them multiple document delivery options. The two companies have integrated Wolters Kluwer Financial Services' Document Services Platform with Tavant's point-of-sale solution suite. The new integration will enable users to generate standard and customized compliance documents and disclosures through Wolters Kluwer Financial Services' Document Services Platform, and then electronically deliver them to borrowers for e-consent and signature. The platform also gives lenders the option of completely and securely outsourcing the printing and mailing of paper disclosures when needed or requested by the borrower through Wolters Kluwer Financial Services' SAS 70-certified mail fulfillment center.

If there was one point that a state legislator and an industry representative agreed on during a panel on state and federal regulation at the Mortgage Bankers Association, it was that any legislative solutions being crafted have to avoid unintended consequences. California State Sen. Michael Machado said there is a need to update statutes but the effort need not to be so capricious it would hurt the marketplace. Being able to meet the desires of those who live in their districts and take actions that do not exacerbate the problem is a balancing act, he said. Jack Konyk, senior vice president at National City Corp., said, "Everybody is trying to find a fair solution to a complex problem." The problem is finding out what exactly constitutes a fair approach. He then gave the example of an iceberg where it is easy to see and react to the 5% above the water, but it takes patience and perseverance to see the 95% below the water. It is easy, Mr. Konyk said, to call for a moratorium on foreclosures. But it is a difficult task for loan servicers, who are still responsible for advancing principal and interest payments to the investor whether they are made or not.

The Department of Housing and Urban Development will issue a final rule by year-end revising the Real Estate Settlement Procedures Act, HUD secretary Steve Preston told attendees at the Mortgage Bankers Association's annual convention in San Francisco. Bankers and lenders, who have long opposed the rule, will have a year to implement it, he said. "With so many families in trouble with their mortgages because in many cases they didn't understand, our goal is to make sure it never happens again," he said. On RESPA reform, he said the "unnecessary complexity" of mortgages had contributed to the housing crisis. "We must make mortgages more understandable and the process more transparent," he said. HUD has proposed a four-page form that would require mortgage lenders and brokers to provide an estimate of closing costs, interest rates, monthly mortgage payments as well as settlement services, prepayment penalties and balloon payments.

Metavante Corp. now offers support for new FHA compliance regulations enabling lenders to take advantage of this significant business opportunity. According to the Federal Housing Administration (FHA), twice as many people with subprime loans are refinancing into government-insured FHA mortgage loans and these types of loans are also ideal for first time homebuyers and those who may have less than perfect credit. Metavante's LOS supports the FHA Loan Transmittal, the Maximum Mortgage Worksheet for 203k and 203k Streamline loans and the Mortgage Credit Analysis Worksheets (MCAW-PUR for purchases and MCAW-W/S for refinances). Metavante's LOS also supports key components of the FHA Modernization Act of the Housing and Economic Recovery Act of 2008 (HERA), as well as the minimum cash investment requirement and maximum combined loan-to-value changes.

Clayton Holdings, which is cooperating with an investigation into mortgage underwriting fraud on Wall Street, named Paul T. Bossidy its new chief executive officer on Tuesday. A spokeswoman said he replaces Frank Fillips who retired from the Connecticut-based Clayton this summer. Mr. Bossidy, 48, has worked for various divisions of General Electric, including GE Vendor Financial Services. Clayton is owned by Greenfield Partners, a hedge fund. Earlier this year New York attorney general Andrew Cuomo granted Clayton immunity from prosecution in exchange for providing information on the due diligence work it conducted for Wall Street firms that securitized subprime mortgages over the past five years. One key issue AG Cuomo is looking at is underwriting "exceptions" granted by projects managers working for Clayton on Wall Street accounts. Over the past three years subprime firms funded $1.7 trillion in A- to D and other non-conforming loan types -- much of it securitized through Wall Street firms such as Bear Stearns, Credit Suisse, Deutsche Bank, Lehman Brothers, and Merrill Lynch.

Led by the ranking minority member on the House Financial Services Committee, 28 Republican members of Congress are asking the Justice Department to include Fannie Mae and Freddie Mac in their targeted probe into mortgage fraud. Led by Rep. Spencer Bachus, R., Ala., the group sent a letter to Attorney General Michael Mukasey, asking whether the Department of Justice is focusing on MBS fraud "and/or accounting fraud committed or aided and abetted by Fannie Mae and Freddie Mac." The 28 also want to know if the government is looking into the 'Friends of Angelo' program where certain elected officials, past and present GSE employees, and others, received breaks on mortgages that were funded by Countrywide Home Loans, Mr. Mozilo's former company. (Countrywide is now owned by Bank of America.) Both GSEs were investigated for fraud in regard to their past accounting scandals. No charges were ever brought. DOJ's wide ranging investigation into mortgage fraud is called "Operation Malicious Mortgage" and includes probes of more than 20 subprime lenders and some Wall Street firms.

SourceMedia, the publisher of Mortgage Technology magazine, gave out awards in seven categories honoring achievement in mortgage lending technology at the MBA's annual convention in San Francisco. The Steve Fraser Visionary Award is given to an outstanding mortgage technology innovator, visionary or evangelizer. The winner of the award is Kim Weaver of Fiserv for her dedication to furthering the e-mortgage and getting lenders live in an e-mortgage environment. The Release of the Year Award is given to the announcement of a technology product, platform, alliance or initiative that seems likely to have the broadest impact on mortgage lending. The winner of the award is DocVelocity for making lender-proven paperless technology available to all mortgage participants. The Synergy Award is given to technology initiatives and alliances that show exemplary inter-operability in a production setting to advance the cause of automation and e-commerce. The winners of the award are Optimal Blue and Secondary Interactive for bridging the gap between pricing and secondary marketing. The Lasting Impact Award is given to an individual, group or company that launched a technology initiative or development that has had a lasting impact. The winner of the award is Roger Gudobba for evangelizing on behalf of a data-driven process and working to help the mortgage industry embrace this vision. The 10X Award is given to a company, product or technology application having an exponential impact on mortgage lending. The winner of the award is The Turning Point for MACH 3, which helps lenders get repeat business through technology in a down market. The Help Desk Award is given for outstanding customer service and technical support. The winner of the award is Mortgage Builder for combining experienced support staff with cutting-edge technology to help clients. The Fix-It Award is given to a technology tool providing an effective solution for a particular industry problem, need or channel. The winner of the award is Zaio, for solving the problem of appraiser fraud through automation.

MRG Document Technologies has integrated with San Francisco-based ComplianceEase to provide automated compliance auditing for closing documents prepared by MRG. MRG is a provider of compliance and documentation services for the financial industry. ComplianceEase's automated compliance system, ComplianceAnalyzer, is accessible through MRG's document preparation system, MIRACLE ONLINE. The integration enables lenders using MRG to access all ComplianceEase tests and reports online. Audit results for possible compliance issues are available in both summary and detail formats. There is no additional charge for users to access ComplianceEase via MIRACLE ONLINE. Lenders simply sign up directly with ComplianceEase and the integration is handled by MRG.

A group of Idaho appraisers have filed a class-action lawsuit against the Bank of America-owned Countrywide Financial Corp., claiming the lender used strong arm tactics, intimidating appraisers to generate reports and "blacklisted" some for not cooperating with the company. The lawsuit, filed in U.S. District Court in Seattle, claims Countrywide forced appraisers to use improper appraisal techniques that benefited the lender. BoA/Countrywide is the nation's largest residential lender, according to figures compiled by the Quarterly Data Report. The lawsuit claims Countrywide's actions caused "substantial damage to thousands of appraisers on top of distorting real estate prices in the marketplace." At press time, a spokesman for BoA had not returned a telephone call about the matter.

Rapid Reporting, Ft. Worth, Texas, has released EmploymentChek, a third-party employment verification service offering verbal verification of employment. VVOE picks up where automated employment verification services leave off by providing confirmations that come from live, person-to-person contact with the employer. With EmploymentChek, lenders and brokers can get definitive answers on a borrower's employment in 24 hours or less. All mortgage loans contain four major risk factors for fraud: identity, income, employment and collateral. The mortgage industry is particularly challenged by employment fraud because of the labor-intensive and paper-laden, manual process of verification, which opens lenders up to a variety of errors, oversights and opportunities for fraud. In most mortgage shops, the verification process is not measurable or accountable, and the mortgage companies do not capture the data. Rapid Reporting's EmploymentChek solves those issues with a process that validates the existence of the employer thorough a search of public and private records, and also provides a person-to-person verbal verification of employment conducted by a trained employment fraud specialist.

Prosecutors in Houston have indicted five individuals for scheming to defraud residential lenders out of $17 million. According to Don DeGabrielle, U.S. attorney for the Southern District of Texas, the indictment alleges that Anthony Wayne Hawkins, Brandon Alonzo Crenshaw, Nehemiah Jamal Douglas, Babette Jammer and David Vasser engaged in a mail and wire fraud conspiracy which resulted in the defendants and their co-conspirators fraudulently obtaining more than $17 million in loan proceeds. The defendants and their co-conspirators are accused of recruiting individuals to purchase residential properties with the intent to deceive mortgage lenders concerning the borrower's ability and incentive to repay the loans. According to the indictment, falsified documents were prepared and provided to the mortgage lenders to support loan applications.

Two Federal Home Loan Banks with multiple interest rate swap transactions with a Lehman Brothers unit are suing the bankrupt investment bank to recover $220 million in collateral. The Atlanta FHLB is suing Lehman for the return of $179 million in excess collateral and the Pittsburgh FHLB is suing for the return of $41 million in cash. Lehman Brothers Special Financing Inc. filed for bankruptcy in early October. "At this early stage of the bankruptcy proceedings, the Bank is unable to predict whether, and to what extent, it will be able to recover the claimed amounts," the FHLB Atlanta said in a public filing. The bank said it is analyzing the impact to its financial statements of the Lehman and LBSF bankruptcy filings, including any necessary loss contingencies, "which could be significant." The 12 FHLBs have aggregated credit exposure to Lehman entities of approximately $260 million, according to the Office of Finance, which issues consolidated debt securities for the FHLB system.

The Treasury secretary will be able to use loan guarantees and credit enhancements to facilitate loan modifications under the newly passed Emergency Economic Stability Act, which gives the Treasury broad authority to purchase $700 billion of troubled mortgage assets. Such guarantees may give the Treasury a carrot to get institutions to modify their loans without directly acquiring the loans. "It has the ability to create incentives to leverage the private sector with minimal initial cash outlays," said FDIC Chairman Sheila Bair. "I am particularly pleased the bill includes provisions for loan guarantees and credit enhancements on whole loans." The Treasury is expected to conduct its first auction to purchase troubled assets in about four weeks, and it is planning to hire 5-10 asset managers to service and modify the assets, sources say. In addition to private asset managers, the Treasury also can contract with Federal Deposit Insurance Corp. to manage residential mortgages and mortgage-backed securities.

The House of Representatives, by a vote of 263-171 early Friday afternoon, approved a $700 billion rescue package of the credit and mortgage markets paving the way for the bill to be sent to President Bush. The president signed the bill almost immediately and thanked members of Congress for passing the legislation so quickly. "By coming together on this legislation, we have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country." Mr. Bush warned, however, that it will take time to implement an effective troubled-asset purchase program and it will take some time before it has an impact on the economy. Treasury Secretary Henry Paulson said he will move rapidly, but carefully, in implementing the new tools provided in the rescue bill. "In the coming days, we will work with the Federal Reserve and the FDIC to develop strategies to deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system," the secretary said. Rep. Judy Biggert, R-Ill., said during the debate Friday that market volatility, changes to the bill, regulatory commitments, and Republican attempts to limit its price tag helped persuade her to come on board after voting no on Monday. "I reluctantly support the bill and look forward to revisiting the issue as Congress monitors the program to ensure that we minimize risks and that taxpayers see a return on this investment," she said.

Asset flippers beware -- the Treasury Department doesn't want you to profit unjustly by selling your mortgage bonds to Uncle Sam. According to details of the financial rescue bill, investors that want to sell assets to the Treasury cannot do so at a price higher than the one they bought them at. In other words, if an investor buys discounted mortgage-backed securities from a seller, he cannot turn around and unload the bonds to Treasury at a higher price. However, the legislation leaves a loophole: if a seller of bad assets took control of mortgage bonds through a merger/acquisition or bought them out of a conservatorship, they are exempt from the Treasury's "unjust enrichment" clause. The bill also allows Treasury to aid ailing depositories of less than $1 billion in assets if their capital positions were damaged by their investments in preferred stock issued by Fannie Mae and Freddie Mac. The legislation stipulates that the executive in charge of the Troubled Asset Relief Program must be an assistant secretary of the Treasury appointed by the president.

Just after 9:30 Wednesday night, the full Senate passed a $700 billion rescue plan to revive the credit and mortgage markets. The final tally was a lopsided vote of 74 to 25. The passage came two days after Republicans -- fearing a voter backlash at the polls -- torpedoed the House version of the bill. However, senators stuffed their version of the bailout legislation with tax breaks and other sweeteners. House members were slated to return to work Thursday redrafting the bill that was defeated on Monday. It appears that mortgage "cramdown" language will not be included, but some liberal members of Congress are still holding out hope that it may be.

Bowing to pressure from Congress and industry groups, the Securities and Exchange Commission and the Financial Accounting Standards Board have issued a last-minute clarification that will allow companies to use expected cash flows to value illiquid mortgage assets in preparing their third-quarter financial reports. The two accounting bodies stopped short of suspending a fair-value accounting rule (Financial Accounting Standard 157) that some of members of Congress are trying to kill as part of a $700 billion financial stabilization bill. "When an active market for a security does not exist, the use of management estimates that incorporate current market participants' expectations of future cash flows, and include appropriate risk premiums, is acceptable," according to a joint statement by SEC and FASB staff. Critics have been complaining that FAS 157, which went into effect Jan. 1, has forced banks and other financial institutions to value some assets at fire-sale prices. This rule has exacerbated the credit crisis by forcing "massive writeoffs," according to the Consumer Mortgage Coalition. "It makes no sense to unnecessarily cripple institutions that could otherwise weather this storm of financial uncertainty by being forced to continue to mark down their assets to unrealistic fire sale prices," CMC executive director Anne Canfield says in a letter to SEC Chairman Christopher Cox.