Compliance

Reported incidents of residential mortgage fraud in the United States increased by 42% in the first quarter from the level recorded a year earlier, according to a new report from the Mortgage Asset Research Institute. Florida led the states in mortgage fraud, accounting for 24% of all properties with material misrepresentation for loans originated in the first quarter, according to the MARI Quarterly Fraud Report. California ranked second, followed by a three-way tie for third place among Illinois, Maryland, and Michigan. The top fraud incident type was in general application misrepresentation, followed closely by misrepresentations related to income and employment, MARI said. The report is based on data submitted by MARI subscribers about loans originated in the first quarter that have since been classified as fraudulent. MARI, a ChoicePoint company, can be found online at http://www.marisolutions.com.

Nonprofit housing groups and the National Association of Home Builders are forming a coalition to press Congress to reverse a ban on seller-funded downpayment assistance on Federal Housing Administration-insured loans. "We would like to see it happen this year, but the prospects are bleak," said Jerry Howard, executive vice president and chief executive of the NAHB. Nevertheless, the builders will be talking to the presidential candidates and their campaigns along with senators and congressmen to "make sure we can move this bill early next session," Mr. Howard said. Congress passed a major housing bill in July that bans seller-funded downpayment assistance on FHA loans starting Oct. 1 because of high defaults rates and losses to the FHA insurance fund. The builders are working with Nehemiah Corporation of America, AmeriDream, and other nonprofit housing groups on a grassroots effort to pass a bill sponsored by Rep. Al Green, D-Texas. The Green bill protects the insurance fund by allowing the FHA to charge higher premiums on DPA borrowers with low credit scores.

To encourage more loan modifications, the Federal Housing Administration will allow servicers to increase the interest rate on the loan to reduce the investor's loss when it is sold or repooled. The FHA set the maximum interest rate increase at 200 basis points above the 10-year Treasury rate, according to FHA mortgagee letter 2008-21. Mortgage servicing consultant Bob Lyons noted that it is difficult to sell modified loans at par in today's market environment and that servicers have to consider that in deciding to do a loan modification. The FHA is "trying to give them a little more latitude," he said, provided the borrower can afford payments and it results in a performing loan. Mr. Lyons' firm, Lyons McCloskey, is based in Fairfax Station, Va. The FHA is also encouraging servicers to undertake loan modifications even after the borrower has filed for foreclosure. According to the mortgagee letter, servicers can add legal fees and other expenses related to a canceled foreclosure action into the principal amount of a modified loan.

North Carolina Gov. Mike Easley has signed a bill that bars lenders from paying yield-spread premiums on subprime mortgages starting Oct. 1. North Carolina is the first state to ban YSPs, which is a form of mortgage broker compensation that is based on the interest rate of the mortgage. Consumer groups like the Center for Responsible Lending supported passage of House Bill 2188, and they contend that YSPs provide brokers with an incentive to steer borrowers into higher-interest-rate subprime mortgages. "By getting rid of yield-spread premiums, we are eliminating one of the root causes of the foreclosure crisis," said CRL senior counsel Chris Kukla. Roy DeLoach, executive director of the National Association of Mortgage Brokers, noted that the North Carolina law simply allows the lenders to pocket the YSP without disclosing it to the consumer. "Consumers are going to pay more money in the long run," Mr. DeLoach said.

The Department of Housing and Urban Development says it intends to move ahead with RESPA reform and provide homebuyers with better disclosures of mortgage terms and costs even though 243 members of Congress have petitioned HUD to withdraw its rule. "The current housing finance situation has dramatically highlighted the need to move forward responsibly and expeditiously with measures to help American homebuyers," HUD Assistant Secretary Sheila Greenwood said in a letter to Reps. Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill. "This response is unacceptable," Rep. Biggert said. "Our concerns are serious, and they are shared by a broad, bipartisan coalition of industry and consumer interests." A majority of the House of Representatives signed a letter circulated by Reps. Hinojosa and Biggert that says HUD's Real Estate Settlement Procedures Act proposal is too complex and would confuse consumers and hurt small businesses. The HUD assistant secretary for congressional relations stressed that HUD is "carefully considering" the comment letters by industry groups, consumer groups, and other interested parties and that HUD "will make appropriate modifications and improvements to the rule."

Due to lax underwriting on four defaulted Federal Housing Administration loans, the HUD inspector general is recommending that Wells Fargo Home Mortgage indemnify the FHA for the full unpaid balance on the loans -- $816,000. "Wells Fargo could not provide justification for the [Delaware] branch office's noncompliance with Department of Housing and Urban Development requirements," the auditors' report says. The IG auditors found that Wells Fargo's branch office approved the underwriting of two loans without verifying the rental payment histories of borrowers and another loan that overstated the borrower's overtime income. On an FHA 203(k) rehabilitation loan, part of the loan proceeds paid for labor performed by the borrower, which violates FHA rules. The four loans were in default within two years of origination. HUD officials can accept, amend, or reject the HUD inspector general's recommendations. As one of the largest FHA lenders, "we are audited periodically by the Office of Inspector General," Wells Fargo said. When loan-level issues are uncovered, Wells Fargo, OIG, and HUD officials "arrive at the appropriate resolution, such as indemnification or reimbursement."

An attorney who spoke at the Western States Loan Servicing Conference in Las Vegas predicts that the Federal Trade Commission will produce a "significant enforcement action" involving a major mortgage servicer within the next several months. Anand Raman, a partner at Skadden, Arps, Slate, Meagher & Flom, said the FTC has broad authority to scrutinize loan servicing practices under its broad authority to address "unfair and deceptive trade practices," and that even practices that are not "manifestly illegal" may get servicers into trouble. Issues the FTC and other regulatory agencies are likely to investigate include internal documentation, monthly billing statement information, and customer service, he said, noting that regulators are under political pressure to get tough with the mortgage industry. "There is a lot of pressure to bring home scalps," Mr. Raman said during a panel session at the conference, which was sponsored by the California Mortgage Bankers Association. "Unfortunately, those servicers that are not operating at a best-practices level make easy targets."

Over 240 members of Congress are urging the Department of Housing and Urban Development to withdraw a proposed RESPA rule and undertake a joint rulemaking effort with the Federal Reserve Board to improve mortgage disclosures. The 243 lawmakers signed a letter circulated by Reps. Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill., that says HUD's Real Estate Settlement Procedures Act proposal fails to improve and simplify disclosures of mortgage terms and settlement costs. "We are profoundly concerned that HUD's proposed RESPA rule will hinder rather than help the recovery of the housing market," says the letter to HUD Secretary Steve Preston. Over a dozen housing groups lobbied members of Congress to sign the letter, which was circulated a few weeks ago. "When an overwhelming bipartisan majority in the U.S. House of Representatives asks you to withdraw your rule, it's time to listen to your critics and go back to the drawing board," said Kurt Pfotenhauer, executive vice president of the American Land Title Association. Earlier this year, when HUD first issued the RESPA proposal, the industry groups succeeded in getting 140 members of Congress to sign a petition requesting a 60-day extension of the public comment period. HUD agreed to a 30-day extension.

LIUNA is calling on Fannie Mae and Freddie Mac to exercise greater scrutiny of mortgages originated by corporate homebuilders, saying the economy faces a ticking time bomb set to go off in 2010 when five-year adjustable-rate mortgages start resetting. In a new report, the Laborers' International Union of North America said over a third of all mortgages originated by lending subsidiaries of Richmond American, Lennar, and KB Home in 2005 and 2006 in Maricopa County, Ariz., are five-year ARMs that will reset in 2010 and 2011. The report says many homeowners will be unable to refinance before the rates reset due to high loan amounts and falling home values. According to the report, home values in the area have declined an average of over $50,000 in the past year. "We need real and immediate action to help struggling homeowners, to bring the creation of good jobs back to the construction industry, to protect our retirement security from tainted investments, and to stabilize the mortgage and housing industry," said Terence M. O'Sullivan, LIUNA's general president. ".... Congress and regulators must scrutinize those who helped cause this crisis -- including corporate homebuilders -- and consider action to both defuse this ticking time bomb and prevent a recurrence." The construction union can be found online at http://www.liuna.org.

Connecticut Attorney General Richard Blumenthal is the latest state AG to file suit against Countrywide Financial Corp. for allegedly pushing consumers into deceptive, unaffordable loans and workouts, and allegedly charging homeowners in default unjustified and excessive legal fees. Mr. Blumenthal's lawsuit, filed in Superior Court in Hartford, seeks restitution of up to $100,000 per violation of state banking laws and up to $5,000 per violation of state consumer protection laws. "Countrywide conned customers into loans that were clearly unaffordable and unsustainable, turning the American Dream of homeownership into a nightmare," Mr. Blumenthal said in a statement. "When consumers defaulted, the company bullied them into workouts doomed to fail. Countrywide crammed unconscionable legal fees into renegotiated loans, digging consumers deeper into debt." A spokeswoman for Bank of America, which now owns Countrywide, said in a statement: "While we cannot comment on pending litigation, we will respond to the AG in due course."

Stewart Information Services Corp., Houston, has revised its second-quarter earnings as a result of the discovery of more fraudulent activity. Originally, the company reported a $26.6 million loss ($1.47 per share) for the period. However, Stewart has since connected several independent claims to a series of fraudulent transactions, which has resulted in the reclassification of the claims into a single, large title claim. As a result, Stewart has taken a pretax charge of $3.0 million ($2.0 million after taxes, or $0.11 per share). This brings the net loss for the second quarter to $28.6 million ($1.58 per share).

AllRegs, an Eagan, Minn.-based information provider for the mortgage industry, has announced the creation of the FHA Hotline to support the growth of Federal Housing Administration loan programs. The company said the hotline will answer questions about the FHA program, how to become an FHA lender, and the interpretation of regulations and of the housing law signed recently by the president. AllRegs said there are two service-level options: an individual level suggested for mortgage brokers or companies with one or two questions, and a corporate level suggested for branches, regions, or organizations that are moving into the FHA business and need assurance that they will have someone to answer questions. "This new FHA Hotline will provide peace of mind for all those mortgage companies trying to increase their origination volume using the FHA program," said Dan Thoms, senior vice president of AllRegs. To support the hotline, AllRegs said it has entered into an agreement with Mortgage Dynamics Inc., a management consulting firm. AllRegs can be found online at http://www.allregs.com.

Seller-funded downpayment assistance on Federal Housing Administration loans could get a second life under a bill introduced by Rep. Al Green, D-Texas, that also authorizes the FHA to charge risk-based premiums. The Green bill would repeal sections of the recently passed housing bill that bans seller-funded downpayment assistance and institutes a 12-month moratorium on risk-based pricing starting Oct 1. The bill (H.R. 6694) would require the FHA to charge higher mortgage insurance premiums for homebuyers with credit scores below 680 that receive seller-funded downpayment assistance from nonprofit groups, such as Nehemiah Corporation of America and AmeriDream. Borrowers with credit scores below 620 would be charged risk-based premiums. "I have introduced this bipartisan bill to revive this critical program under new standards that will effectively balance the risk of potential foreclosures with the goal of increasing homeownership," Rep. Green said. The Texas congressman introduced the bill on July 30 just before the House adjourned for the August recess.

The Mortgage Asset Research Institute, Reston, Va., has announced the release of the MARI Loan Fraud Alert Service Pro, which helps lenders discover fraudulent loan applications before funding via comparative loan application analysis and identity risk management tools. MARI said its original LFAS is a comparative loan tool that helps uncover patterns of common mortgage fraud schemes. LFAS Pro, with patent-pending technology, takes the process a step further, providing insight into the identity of applicants and information about professionals involved in the transaction, such as mortgage brokers, appraisers, and closing attorneys. LFAS combines the Midex credentialing database with ChoicePoint's identity verification tools and adds the capabilities of a comparative analysis loan tool. "Lenders now have a tool that helps them ensure the loans they are about to make are not tainted by fraudulent activity and detect patterns indicative of fraud within their loan pipeline and other contributed lender pipelines," said Tom Chmielewski, vice president of ChoicePoint Financial Services. MARI can be found online at http://www.marisolutions.com, and ChoicePoint can be found at http://www.choicepoint.com.

The Department of Housing and Urban Development should reconsider its approach to RESPA reform and withdraw its current proposal, according to a letter to HUD Secretary Steve Preston signed by 10 industry trade groups. "We have serious concerns about HUD's current Real Estate Settlement Procedures Act proposal, and we oppose its finalization in anywhere near its current form," the July 31 letter says. The trade groups want HUD to work with the Federal Reserve Board and harmonize the RESPA and Truth in Lending Act mortgage disclosures. "If HUD adopts a final rule now, without coordinating with the [Fed] board, it will be to the detriment of consumers, forcing them to confront a baffling host of disclosures, and forcing the mortgage industry to comply with inconsistent rules," the industry groups say in the letter, which was also sent to the White House budget office. The Fed is working on TILA disclosures that provide borrowers with a better understanding of financing costs and mortgage broker fees. The American Bankers Association, the Mortgage Bankers Association, and the National Association of Realtors are among the signers. The associations can be found online at http://www.aba.com, http://www.mortgagebankers.org, and http://www.realtor.org.

The Securities and Exchange Commission has extended its emergency order designed "to enhance protections against naked short selling in the securities of Fannie Mae, Freddie Mac and primary dealers at commercial and investment banks" until Aug. 12. The SEC said it would not extend the order beyond that date. "The order is designed to protect legitimate short-selling in these securities, but helps prevent illegitimate, naked short-selling and potential 'distort and short' manipulation," said SEC Chairman Christopher Cox. "In addition to continuing the existing order against naked short-selling, the commission will continue to explore other remedies for the broader marketplace to further protect investors from 'distort and short' artists." Under the emergency order "anyone effecting a short sale" in the securities specified must "arrange beforehand to borrow the securities and deliver them at settlement."

The Senate voted 72-13 on Saturday to pass a landmark housing bill that will provide up to $300 billion in new FHA money for distressed homebuyers and create a new, tougher regulator for Fannie Mae, Freddie Mac, and the other housing GSEs. President Bush is expected to sign the bill by midweek. The House passed the bill last week. Among other things, the "Housing and Economic Recovery Act of 2008" permanently raises the Fannie/Freddie loan limit to $625,000 and bans downpayment assistance programs in regard to Federal Housing Administration loans. It also allows for the Treasury Department to invest in Fannie/Freddie securities, if need be. "For Americans out there today with distressed mortgages and worried about their economic future, we hope this legislation could be the first piece of good news in a long time," Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., told reporters over the weekend.

Some members of Congress are pushing for additional legislation to strengthen regulation of mortgage servicing practices and mandate additional forbearance relief for troubled borrowers. At a House Financial Services Committee hearing Friday, several Democratic lawmakers -- including Reps. Barney Frank, D-Mass.; Maxine Waters, D-Calif.; and Melvin Watt, D-N.C. -- expressed skepticism about the ability of current voluntary homeowner relief programs to stem the growing tide of foreclosures. Consumer advocate Julie Gordon of the Center for Responsible Lending said her group supports several bills that may require servicers to reduce the principal of outstanding mortgage balances in some circumstances. The group also supports legislation that would create a foreclosure "timeout" and mandate court-supervised loan modifications in some circumstances. "Despite the loss mitigation encouragement by Hope Now, the federal banking agencies, and state agencies, voluntary efforts by lenders, servicers, and investors have failed to stem the tide of foreclosures," Ms. Gordon said.

Noting that the FHA foreclosure stabilization provisions of a bill passed by Congress Thursday do not become effective until October, the chairman of the House Financial Services Committee is urging mortgage servicers to hold off on foreclosure in applicable cases "so borrowers can take advantage of the program." Rep. Barney Frank, D-Mass., noted that an earlier version of the bill would have made the Federal Housing Administration refinancing program for troubled borrowers available immediately. However, the housing bill that eventually passed both the House and the Senate does not make the FHA foreclosure prevention program effective until Oct. 1.

The Federal Housing Administration section of a massive housing bill is causing heartburn for lenders because they will have to abandon a newly implemented risk-based pricing structure. The Department of Housing and Urban Development mandated implementation of the RBP structure by July 14, but the housing bill imposes a 12-month moratorium on risk-based pricing starting Oct. 1. "Lenders are angry at HUD and Congress," said Brian Chappelle, a mortgage banking consultant in Washington. It cost millions of dollars to implement risk-based pricing, and "now it will cost millions of dollars to straighten it out," he said. HUD also has to convert back to charging a standard upfront mortgage insurance premium for all borrowers. "Now, FHA will be required to increase prices on all customers," HUD Secretary Steven Preston said. And it will require HUD to eliminate the newly expanded FHA Secure program that relies on RBP, he added. Before July 14, the standard upfront premium was 1.5%. Some expect the FHA to raise the premium to 2%, but HUD could raise it up to 3% under a provision of the housing bill.