Compliance

The Mortgage Bankers Association and the Commercial Mortgage Securities Association have joined with the Real Estate Roundtable and the National Association of Realtors to oppose differentiation between the ratings of structured finance products and those of other asset classes. In a letter to Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., and the panel's ranking member, Sen. Richard C. Shelby, R-Ala., the groups warn that differentiating between ratings, as some are proposing, would further erode investor confidence and threaten a fragile economy. "At a time when we need to restore liquidity and confidence in the market, the last thing we ought to be doing is be making the ratings process more complicated," said Kieran P. Quinn, chairman of the MBA. "We recognize improving the ratings process is a key to getting players back in the market, and we want to work with Congress to find the best way to do that. This just isn't it." The letter recommends educating investors about the risk associated with all securities, as opposed to focusing exclusively on structured securities. The letter was sent in advance of a committee hearing on the role of credit rating agencies in U.S. credit market turmoil.

The Office of Federal Housing Enterprise Oversight wants to ensure that Fannie Mae's and Freddie Mac's application of fair-value accounting promotes transparency and consistency in financial reporting and will take corrective actions if the practice "distorts earnings or capital," according to newly issued examiner guidance. "It is important that Fannie Mae and Freddie Mac apply fair value in a sound and consistent manner," OFHEO Director James Lockhart said. OFHEO says it expects the government-sponsored enterprises to document their decisions for applying fair value to selected financial assets and liabilities and provide the regulator with a full fair-value balance sheet each quarter. "If OFHEO detects patterns of use of the fair value option that impair transparency or distort earnings or capital, OFHEO will evaluate whether such application of the FVO is unsafe and unsound," the examiner guidance says.

One in 33 U.S. homeowners will likely be in foreclosure over the next two years as a result of subprime loans made in 2005 and 2006, according to a report released by The Pew Charitable Trusts. The numbers projected for Nevada and Arizona are much higher -- 1 in 11 and 1 in 18, respectively -- and another 40 million neighboring homeowners may see their property values and their municipalities' tax bases decline by up to $356 billion, says the report, "Defaulting on the Dream: States Respond to America's Foreclosure Crisis." Pew said states are generally in the forefront of developing policies aimed at preventing abusive lending. "Let's make certain federal laws build upon, rather than pre-empt, the strong and smart state efforts already under way and ensure that states retail flexibility to respond to local circumstances," said Shelley A. Hearne, managing director of Pew's Health and Human Services Program. Pew can be found online at http://www.pewtrusts.org.

ValuAmerica, Pittsburgh, a developer of settlement services technology, has announced a new release of its ValuNet xsp software aimed at preventing directed appraisals and ensuring compliance with federal valuation requirements. The system will also help lenders comply with a recent agreement on appraisals between the New York attorney general and Fannie Mae, Freddie Mac, and the Office of Federal Housing Enterprise Oversight, the company said. "It's the industry's worst-kept secret: some lenders apparently would rather face a fine from their regulators than risk alienating their commission-based loan officers by preventing them from meddling in the appraisal selection and review process," said Robert Murphy, chairman and chief executive of ValuAmerica. ".... Now that Fannie and Freddie have developed their new code, lenders should be looking for new ways not only to end appraisal pressure but to document their compliance." ValuNet xsp is designed to prevent loan officers from selecting or contacting appraisers by automatically selecting appraisers based on their licensing, skill levels, location, price, workload, and past performance, ValuAmerica said. The company can be found online at http://www.valuamerica.com.

The comptroller of the currency says he is uncomfortable with the way New York Attorney General Andrew Cuomo is trying to impose an appraisal standard on all institutions through a settlement agreement with Fannie Mae and Freddie Mac. "To have a situation where a one-off agreement with a single state would have a national policy impact raises questions as to whether that is an appropriate way to make these kinds of policies," Comptroller John Dugan said. The supervisor of national banks is planning to submit a comment letter on the settlement agreement by April 30. Mr. Dugan also questioned whether the settlement's "blanket prohibition" on the use of in-house appraisers or affiliated appraisal firms is necessary to assure "real" independence between the lending and appraisal functions. "It's not at all clear to me that means the appraisal function has to be outside the institution," the comptroller told members of the Exchequer Club in Washington.

All the Federal Home Loan Banks could use affordable housing grants to help refinance or restructure nontraditional and subprime mortgages under a proposed rule issued by the Federal Housing Finance Board. The proposal is modeled after a $10 million pilot program initiated by the San Francisco FHLBank to provide matching grants of up to $25,000 to member banks and thrifts that want to refinance troubled mortgages that are "under water" due to negative amortization or declining property values. The Finance Board approved the San Francisco pilot on Jan. 15, and now it is issuing a proposal that would allow the other FHLBanks to develop similar affordable housing programs. "The proposed rule would temporarily add authority for the banks to use the AHP direct set-aside subsidy to refinance or restructure low- and moderate-income households' subprime or nontraditional mortgages held by bank members or their affiliates," the Finance Board said. The proposed rule is being issued for a 60-day comment period.

The American Financial Services Association says it could support the Federal Reserve Board's HOEPA proposal for dealing with yield-spread premiums if lenders are not held responsible for a mortgage broker's actions. The Home Ownership and Equity Protection Act proposal requires brokers to negotiate their fee in a dollar amount with the borrower upfront before an application fee is charged and to provide the lender with a signed document. Lenders are expected to rely on this document in paying the YSP to the broker. However, AFSA points out that the lender would not know when it was signed and could be liable if it is not signed and dated contemporaneously. "AFSA asks that the Board clearly and unambiguously remove liability from the lender for things that the broker controls," AFSA executive vice president Bill Himpler says in a comment letter. The Consumer Federation of America is asking the Fed to prohibit YSPs on subprime mortgages. "Negotiating fees up front is good, but it still leaves opportunities for abuse," CFA housing and credit policy director Allen Fishbein told MortgageWire.

House Financial Services Committee Chairman Barney Frank, D-Mass., is warning mortgage servicers that they could face very restrictive regulation next year if they don't cooperate in modifying loans for distressed borrowers. The chairman said he is picking up anecdotal evidence that servicers, not investors, are the reason so few mortgages are being restructured. "I want to put the servicers on notice," Rep. Frank said. "If we see a widespread refusal on the part of servicers to cooperate, they can expect much tougher regulation in the future." The lawmaker is working on a regulatory restructuring bill that he wants to pass next year. "We can't abrogate [servicing] contracts, but going forward we can be very restrictive," Rep. Frank said.

Zoot, Bozeman, Ariz., has created a set of tools to help consumer credit grantors comply with so-called red-flag regulations. Section 315 and Section 114(B) of the FACT Act mandate that financial institutions manage and reduce the risk of identity theft fraud for customers. Any organizations, including nonlenders such as brokers and auto dealers, that use consumer credit data are required to comply with red-flag regulations by Nov. 1, 2008. To satisfy red-flag requirements, programs must have reasonable policies and procedures for detecting, preventing, and mitigating identity theft; demonstrate the ability to identify relevant patterns of activity considered red flags, including address discrepancies; and undergo periodic updates to reflect changes in risks from identity theft. Zoot's tool automates the process of complying with these regulations. The vendor can be found on the Web at http://www.zootweb.com.

Financial institutions that file "suspicious activity reports" are getting better at detecting mortgage fraud before the loan is funded, according to a Financial Crimes Enforcement Network report. "Suspected fraud was detected prior to loan disbursements in 31% of the mortgage loan fraud SARs filed" in 2006, the FinCEN report says, compared with 21% in previous years. Reporting companies filed 37,313 SARs citing mortgage fraud in 2006 -- a 44% increase from the previous year's level -- and a sample analyzed by FinCEN showed that loans originated by mortgage brokers were reported in over half of those SARs. The SAR update report "demonstrates that in this period of mortgage crisis we also have witnessed a substantial increase in fraudulent activity that targets lenders and borrowers," said Richard Reise, an American Bankers Association executive.

A federal judge in Pittsburgh has ruled that a bankruptcy trustee can subpoena loan documents from Countrywide Financial Corp. and interview company executives under oath as part of a civil case involving the nation's largest residential servicer. Judge Thomas Agresti is overseeing a months-old case in which 293 Pennsylvania homeowners sued Countrywide, charging that the servicer sought improper fees and payments from distressed borrowers that violated bankruptcy regulations. In a Tuesday ruling, the judge said it has not been proven that Countrywide did anything wrong but that a bankruptcy trustee involved in the case "has made a showing of a common thread of potential wrongdoing" in several instances where it moved to foreclosure on bankrupt homeowners. At deadline time, a Countrywide spokesman had not returned a telephone call about the matter. Countrywide's foreclosure practices are under investigation in Florida, Georgia, and Ohio. The company is being sold to Bank of America. The sale is expected to close by the third quarter. Countrywide can be found online at http://www.countrywide.com.

The Senate voted 94-1 Tuesday to begin debate on a foreclosure prevention bill after Republican leaders agreed to stop a filibuster and work with Senate Majority Leader Harry Reid, D-Nev., on a consensus bill. The consensus bill was scheduled to be introduced on Wednesday (April 2) and will probably include tax-exempt revenue bonds for refinancing subprime borrowers, Community Development Block Grants for cities to purchase and rehab foreclosed properties, additional funding for housing counseling, and a net-operating-loss carry-back provision for homebuilders. "I think industry can get behind that," said American Financial Services top lobbyist Bill Himpler. He noted that there is also a lot of support for a homebuyer tax credit, which might be included in the package or offered as an amendment. The AFSA lobbyist is wary, however, that Sen. Richard Durbin, D-Ill., might offer a controversial amendment that allows bankruptcy judges to modify mortgages. There are also discussions about attaching a Federal Housing Administration modernization bill to the foreclosure package.

The Treasury Department is proposing a federal Mortgage Origination Commission that would rate the adequacy of state regulation and licensing of mortgage lenders and brokers as part of a larger plan to restructure the financial regulatory system. Treasury Secretary Henry Paulson said the MOC would provide "important information to the marketplace about the strength of each state's mortgage compliance standards." If a state is rated "weak," mortgages originated in that state "should be viewed cautiously before being securitized," he said. The secretary noted that a large percentage of "problematic" subprime loans were originated by state-licensed lenders. (The Office of Thrift Supervision, which oversees thrifts, would be incorporated into the Office of the Comptroller of the Currency under the Treasury plan.) The "powerful" new commission, coupled with the Federal Reserve's Home Ownership and Equity Protection Act rules to ban abusive lending practices, "should go a long way in preventing recent issues from recurring," he said. The Conference of State Banking Supervisors responded that the Treasury plan "disregards" recent improvements in state licensing standards and reporting systems. In addition, the CSBS supports legislation currently under consideration in Congress that would strengthen the states' initiatives.

Although the comment period isn't over until April, the Federal Reserve Board is already working with other federal and state regulators to enforce the Fed's proposed new rule to combat abusive lending practices. "It is not too early to emphasize that the effectiveness of the final rule will depend critically on effective enforcement," said Fed Governor Randall Kroszner at the National Association of Hispanic Real Estate Professionals' annual legislative conference in Washington. The Fed's initiative will apply to all mortgage lenders, not just federally supervised banks. And in that regard, the central bank is leading a pilot project with other agencies to conduct compliance reviews of nondepository lenders and "other industry participants." The "expansive scope" of the proposal is essential, and enforcement is key, Mr. Kroszner said. Whatever shape the final rule takes, if it is not enforced, it will not be effective, he said.

Senior management at New Century Financial Corp. "largely rejected or ignored" staff recommendations to tighten credit standards in 2004, which evidentially lead to a "tsunami of impaired and defaulted mortgages" and the subprime lender's bankruptcy, according to a court-appointed investigator. "The increasingly risky nature of New Century's loan originations created a ticking time bomb that detonated in 2007," according to 550-page report filed in a U.S. Bankruptcy Court by investigator Michael Missal. The Irvine, Calif.-based company was the second-largest subprime lender when it filed for bankruptcy in April 2007. The examiner found numerous accounting problems and faulted KPMG, New Century's independent auditor, for allowing the publicly traded company to reduce its repurchase reserve in 2006 when it was being "flooded with repurchase claims" from investors. "New Century understated its repurchase reserve by as much as 1000% in the third quarter of 2006, reported a profit of $63.5 million ...when it should have reported a loss," the Missal report says. A KPMG spokesman said the firm "strongly" disagrees with the report's conclusions. A New Century representative said the submission of the report will allow the bankruptcy process to continue, and "we can take the next steps of confirming the liquidation plan."

Losses from mortgage fraud will reach $2.5 billion in 2008 and comparable losses will continue for several years thereafter, according to new research from TowerGroup, Needham, Mass. The report says the substantial rise in mortgage fraud over the past 10 years is an important factor in mortgage credit woes, though falling home prices and poor mortgage underwriting have been given most of the blame in recent months. TowerGroup anticipates that lenders will respond by deploying technology to assist in the detection and prevention of mortgage fraud and that their annual spending on such tools will reach several hundred million dollars in the next few years. The research and advisory company can be found on the Web at http://www.towergroup.com.

Interthinx Inc., Agoura Hills, Calif., has expanded its PredProtect product to allow for loan-level regulatory compliance in order to respond to regional differences in limits for "mini-jumbo" conforming loans. The tool handles loans between $417,000 and $729,000 in California, Colorado, Hawaii, Maryland, New Jersey, New York, Virginia, and Washington, D.C., without waiting for system enhancements or upgrades, the company said. "The new 'mini-jumbo category was introduced to allow consumers to qualify for loans that could be purchased by Fannie Mae and Freddie Mac," said Roger Fendelman, vice president of compliance for Interthinx. "However, since the limits can vary by county or metropolitan statistical abstract, lenders have been faced with challenges to make sure that this new class of loans complies with the maze of existing federal, state, and local consumer protection laws, including anti-predatory-lending laws." Interthinx can be found on the Web at http://www.interthinx.com.

The Office of Federal Housing Enterprise Oversight has reversed course and decided to keep the conforming loan limit at $417,000 in "2009 and subsequent years" in using final guidance on calculating the loan limits for Fannie Mae and Freddie Mac. OFHEO initially proposed to lower the conforming loan limit if house prices declined by more than 1% nationally. Mortgage industry groups opposed the change, and OFHEO backed off as house prices started to decline. OFHEO's index shows that house prices have declined by 3% since January 2007. "The revised guidance responds to the comments that we received and OFHEO's belief that stability in the mortgage market is very important," OFHEO Director James Lockhart said. OFHEO said it will not raise the conforming loan limit "until cumulative increases in house prices exceed cumulative decreases since the $417,000 limit was first reached." The agency can be found online at http://www.ofheo.gov.

Compliance Coach Inc., San Diego, has launched Web-based software that enables compliance with a federal regulation that imposes new responsibilities on businesses to prevent consumer identity theft. The new FACT Act Identity Theft Red Flags Rule requires affected entities to perform a risk assessment and take steps to implement a written Identity Theft Prevention Program by Nov. 1, 2008. Failure to comply can lead to a civil money penalty for each violation, regulatory enforcement action, or private plaintiff lawsuits. Companies are required, among other things, to identify all accounts covered by the rule; perform a risk assessment of each covered account; identify "red flags" that may indicate identity theft; develop a written program; provide training to appropriate employees; and provide a compliance status report at least annually. CompliancePal walks the user through a series of questions to help users meet the requirements. The company can be found on the Web at http://www.compliancecoach.com.

The 12 Federal Home Loan Banks have been given a green light by their regulator to purchase over $100 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac over the next two years to provide additional liquidity for the MBS market. The Federal Housing Finance Board agreed by notational vote to raise the cap on MBS investments from 300% to 600% of capital as part of the government's effort to help stabilize the housing market. The FHLBanks held $136.4 billion in MBS as of Sept. 30. Fannie and Freddie will be testing the market soon with the issuance of jumbo MBS for the first time. In addition, the Finance Board said the FHLBanks can purchase agency MBS that are secured by subprime and nontraditional mortgages that meet federal regulatory guidance. "Increasing the agency MBS investment authority for the banks is another way in which the FHLBank System can perform its traditional mission," said Finance Board Chairman Ronald Rosenfeld. Fannie's and Freddie's regulator recently relaxed their capital requirements so the two government-sponsored enterprises could expand their investment portfolios and purchase $200 billion in mortgage loans and MBS.