Compliance

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.

The House has passed a landmark housing bill that includes a financial backstop for Fannie Mae and Freddie Mac by a 272-152 vote, and the measure now goes to the Senate, where a few Republican stalwarts might delay final passage for a few days. The bill increases Fannie's and Freddie's line of credit at the U.S. Treasury and authorizes the Treasury secretary for the first time to purchase stock in the two government-sponsored enterprises, if necessary. The bill also strengthens regulation of Fannie and Freddie, and passage of the bill should make it easier for the mortgage giants to raise additional capital, according to James Lockhart, director of the Office of Federal Housing Enterprise Oversight. Freddie has pledged to raise $5.5 billion in additional capital. "We are hopeful passage will help them do that quicker," Mr. Lockhart told Bloomberg TV. Once the bill is signed by President Bush, Mr. Lockhart will become the chief regulator for Fannie, Freddie, and the Federal Home Loan Banks. The massive housing bill also updates the Federal Housing Administration mortgage insurance programs and creates an FHA refinancing program to help 400,000 homeowners avoid foreclosure. The foreclosure rescue program will begin Oct. 1. Tax provisions in the bill provide a $7,500 tax credit for first-time homebuyers.

More than 10,000 people with criminal records were allowed to work in Florida's mortgage industry, according to a report in The Miami Herald. Of those, more than 4,000 cleared background checks despite committing crimes that state law requires regulators to screen, including fraud, racketeering, and extortion. The state's chief financial officer, Alex Sink, is calling for an executive order to stop issuing and renewing mortgage broker licenses to convicted felons. He has also requested that Florida's chief mortgage regulator, Don Saxon, step down. Mr. Saxon is commissioner of the Office of Financial Regulation.

The Securities and Exchange Commission has issued an emergency order effective July 21 designed "to enhance protections against naked short selling in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks." Under the emergency order "anyone effecting a short sale in these securities" must "arrange beforehand to borrow the securities and deliver them at settlement." The SEC said its emergency order will terminate on July 29, but "may be extended for no more than 30 calendar days in total duration." The commission said it plans on following up the emergency order with marketwide rulemaking. The SEC can be found at http://www.sec.gov.

The Department of Housing and Urban Development should withdraw its RESPA proposal and work with the Federal Reserve Board in developing "more simplified mortgage and real estate settlement cost disclosure forms," according to a "dear colleague" letter being circulated in the House. Reps. Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill., are leading the effort to get Housing Secretary Steve Preston to abandon HUD's proposed Real Estate Settlement Procedures Act rule. The two House Financial Services Committee members are urging fellow members of Congress to sign a letter that petitions HUD to immediately commence a joint rulemaking process with the Fed, which is working on improving Truth in Lending Act disclosures for mortgage borrowers. "It is critically important for consumers that any revision to RESPA achieve the following goals: simplify, clarify and reduce the cost of mortgage and real estate settlement processes," the letter to the HUD secretary says. However, HUD's RESPA proposal does not meet those goals, according to Reps. Hinojosa and Biggert. "We are profoundly concerned that HUD's proposed RESPA rule will hinder rather than help the recovery of the housing market." Over a dozen banking, mortgage, and settlement provider trade groups will be lobbying lawmakers to sign the letter.

Even though mortgage fraud for housing "doesn't seem quite as violent" as mortgage fraud for profit, it has its own consequences, according to a representative of the Florida Office of Financial Regulation's Bureau of Financial Investigations. Rui Goncalves told attendees at the Florida Association of Mortgage Brokers annual convention in Kissimmee, Fla., that fraud for housing is "more of a temptation" because it is easy for people to think they are trying to help someone get into a home. But those who participate might not realize the consequences, even if the loan never goes into default. For example, having unqualified buyers in the market competing for properties drives up prices, and eventually there will be a crash, Mr. Goncalves said. He called on originators to strive for transparency in their dealings and to ask questions of their customers.

Suitability is a key point in determining what might be mortgage fraud, the chief of the Florida state attorney general's mortgage fraud task force told attendees Wednesday at the Florida Association of Mortgage Brokers annual convention in Kissimmee, Fla. R. Scott Palmer, who is also the special counsel for antitrust enforcement, said that under his office's definition of suitability, it is a violation of the state's unfair and deceptive practices act to put someone into a loan if the originator knows the borrower cannot repay it. Questioned by an audience member, Mr. Palmer added that suitability is "a developing concept" that is in its infancy and that case law will likely be developed around it. The real issue, he said, is whether the broker is aware that the information is false. Don Saxon, commissioner of the Office of Financial Regulation, said the concept could be similar to what exists in the securities industry, where (while there is no hard and fast rule) practitioners have to consider the consumer's portfolio as a whole to determine suitability.

The FBI had launched an investigation of IndyMac Bank for possible mortgage fraud shortly before the insolvent Pasadena, Calif.-based thrift was closed by regulators and placed into receivership, according to news reports. The $32 billion thrift, which specialized in alternative-A lending, is apparently one of 21 companies under scrutiny for possible mortgage fraud. "The FBI is currently investigating 21 companies involved in the mortgage/subprime industry," the bureau said in a statement in response to news reports about IndyMac. One month ago, FBI Director Robert Mueller told reporters that his agency had initiated 19 subprime-related corporate fraud investigations. Many of these investigations are coordinated with the Department of Justice and the Securities and Exchange Commission. In testimony July 15, SEC Chairman Christopher Cox told Congress that his agency has over four dozen law enforcement investigations in the subprime area. The Federal Deposit Insurance Corp. is operating IndyMac as a conservatorship and offering banking services to depositors and borrowers.

R&G Financial Corp., San Juan, Puerto Rico, has announced the receipt of notices from Freddie Mac terminating the eligibility of R&G Mortgage Corp. and R-G Premier Bank to sell mortgages to Freddie or to service mortgages for the government-sponsored enterprise. The holding company said it has obtained a temporary restraining order from U.S. district court against the terminations and will appeal the actions. It also reported that Freddie Mac's notice indicated that the terminations were based on concerns about the two R&G subsidiaries' ability to continue to act as a servicer and to meet their obligations to the GSE. As of June 30, Freddie Mac servicing amounted to approximately 42% of R&G Mortgage's servicing portfolio, R&G Financial said, adding that it estimates that an additional 25%-30% of the servicing portfolio could be affected due to contractual commitments related to Freddie Mac seller/servicer status.

Sandler O'Neill Research has reiterated its Sell rating on Home BancShares Inc., citing a disclosure that an internal investigation by the company had uncovered apparent fraud at a subsidiary bank. The alleged fraud by a senior officer was estimated at approximately $2.1 million, but has apparently not resulted in customer losses, the research firm said. While noting that the bank's disclosure was hedged, Sandler O'Neill said the announcement "does not seem to be cause for significant concern." Pointing to Home Bancshares' decentralized system, with local management heading up the bank's subsidiaries, the research firm said it "would not be surprised to see management tighten its oversight of the subsidiary banks." Home BancShares, based in Conway, Ark., owns community banks in Arkansas and Florida.

Fulbright & Jaworski LLP has announced the formation of a Global Subprime and Credit Crisis Practice Group. The law firm said the group would address the needs of financial institutions, brokerage firms, title companies, corporate directors and officers, and public accounting firms. Fulbright said five co-heads from various disciplines have been designated to steer the practice group: Rodney Acker, a financial institutions litigator in Dallas; David Barrack, a bankruptcy litigator in New York; Anne Rodgers, a securities and complex commercial litigator in Houston; Richard Smith, a white collar defense and government investigations litigator in Washington, D.C.; and Chris Warren-Smith, a financial disputes and investigations lawyer in London. "Issues similar to those we now face with the subprime fallout date back to the late 1980s when many of our lawyers were handling litigation involving the failed savings-and-loan industry," said Stephen C. Dillard, the head of Fulbright's Global Litigation Department. "This is an area where we can offer our clients the advice and experience they need to successfully deal with the subprime collapse." The international law firm can be found online at http://www.fulbright.com.