Compliance

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.

Federally regulated lenders will file more than 60,000 mortgage-related suspicious activity reports this fiscal year, a federal crime fighter said at last week's Mortgage Bankers Association's National Fraud Issues Conference in Chicago. The Financial Crimes Enforcement Network fielded nearly 15,000 SARs in the first quarter of fiscal `08, according to FBI special agent Scott Broshears. And he expects the flood of filings to continue at the same pace as the year progresses. "We'll get over 60,000" reports from suspicious lenders, the FBI's mortgage fraud coordinator said. In fiscal `07, 46,717 SARs were filed, up from 35,617 in fiscal `06. The FBI is currently working on 1,284 cases. Last fiscal year, the unit worked on 1,210 cases, some of which are still open. According to Mr. Broshears, the investigations cover "approximately $3 billion" in mortgage losses, which is the highest government estimate yet of the impact fraud has had on the lending business.

Freddie Mac is seeking public comments until April 30 on the appraisal policies it agreed to implement as part of a settlement with New York Attorney General Andrew Cuomo. Freddie Mac and Fannie Mae are slated to implement the new appraisal code by Jan. 1 under the March 3 settlement with Mr. Cuomo. "To implement the Code with minimum disruption to the market and, as required under the agreement, Freddie Mac is requesting comments on operational and implementation issues, as well as unintended consequences or risks you identify in connection with the requirements of the Code," Freddie said. The agreement bars Freddie and Fannie from purchasing mortgages from lenders that use in-house appraisers or subsidiary appraisal firms. On brokered loans, lenders must certify that the mortgage broker did not select the appraiser. Freddie Mac can be found online at http://www.freddiemac.com.

The Federal Deposit Insurance Corp. board of directors has decided to keep the assessment rates it charges banks and thrifts for deposit insurance unchanged for 2008 as it builds reserves to deal with more bank failures. The FDIC fund stood at 1.22% of estimated insured deposits at year-end 2007, and the agency wants the reserve ratio to reach 1.25% before the end of 2009. "We will closely monitor the progress of the fund along with the condition of the banking industry," FDIC Chairman Sheila Bair said. "As the fund reaches the 1.25% target, I expect the board to consider reducing rates to a maintenance level." The American Bankers Association contends that the FDIC has adequate reserves, and it wanted the assessments lowered. The ABA said it is "deeply disappointed" by the board's decision. "Every excess dollar pulled from bank capital into FDIC coffers means $10 of lending and related banking services that will not be available to support economic recovery," ABA executive vice president Wayne Abernathy said.

The Department of Housing and Urban Development has issued its long-awaited RESPA reform proposal, and it is more ambitious than the industry expected or wants to implement during the current market turmoil. Most observers expected HUD to issue a Real Estate Settlement Procedures Act proposal narrowly focused on providing consumers with concise and understandable disclosures of loan terms and settlement costs. However, HUD has "cast a wider net," according to RESPA attorney Phillip Schulman, who says the RESPA proposal is "complicated," "confusing," and "controversial." The RESPA proposal mandates the use of a standardized four-page good faith estimate that discloses loan terms and settlement costs, including the mortgage broker's compensation. HUD also wants the closing agent to read a closing scripting that summarizes important loan terms and highlights differences between the GFE and the HUD-1 settlement sheet. HUD Assistant Secretary Brian Montgomery expects industry opposition, but he told reporters it is "no longer acceptable" for industry to stand in the way of giving consumers clear disclosures. HUD has issued the proposal for a 60-day comment period. Seven major financial services trade groups, including the American Bankers Association and the Mortgage Bankers Association, have asked HUD to extend the comment period to 120 days.

Although Florida remains a hotbed for mortgage fraudsters, the crime is becoming more evenly spread among all states as opposed to being concentrated in just a few, according to the latest report from the Mortgage Asset Research Institute. MARI's 10th period fraud case report also found that while the most common types of fraud continue to involve erroneous employment histories and false income statements, the failure to disclose debts, liens, or judgments is an up-and-coming problem. "The tertiary issue of undisclosed or incorrect debts, liens or judgments increased 50% between 2006 and 2007," the report said. Merle Sharick, MARI's vice president of sales, told the meeting that "perpetrators are devising new and improved ways to beat the system." He also said that fraud for housing by individuals who fudge on their loan applications "is a much bigger deal that we thought it was." The report, which was issued in Chicago at the Mortgage Bankers Association's National Fraud Issues Conference, is based on 2007 data. But it stressed that many instances of fraud in last year's book of business have yet to be unmasked. "It will likely take three to five years to uncover most of the fraud and misrepresentation" in the `07 book, the report said.

While it has always been difficult to get a handle on the size of the mortgage fraud problem, a new report by a leading provider of fraud detection products indicates that the incidence of the crime may be much greater than anyone thinks. Analysts at Interthinx, Agoura Hills, Calif., say they found more than 42,000 mortgage applications in the second half of last year that contained significant misrepresentations of the borrowers' incomes. In total, the loans were worth nearly $11 billion. "I have no idea how many of the loans were funded, but I hope none of them," Ann Fulmer, the company's vice president of industry relations, said at the Mortgage Bankers Association's National Fraud Issues Conference in Chicago, where the six-month analysis was released. The questionable loans were discovered by Interthinx' income alert program, which warns clients that a borrower has submitted multiple loan applications and his income has jumped by at least 15% over a prescribed period. "Fraud is like water -- it always seeks the lowest level," Ms. Fulmer said. "That's why it is finding ways around the barriers lenders set up to uncover them." The company can be found on the Web at http://www.interthinx.com.

The FBI has set mid-June for another "national sweep" in its continuing effort to nab perpetrators of mortgage fraud. The new sweep, which involves law enforcement agencies at the federal, state, and local levels and has been dubbed "Operation Malicious Mortgage," is intended as "an important statement," according to John Arterberry, executive deputy chief in the Justice Department's Fraud Section. "We want to send the message that law enforcement takes mortgage fraud seriously," Mr. Arterberry said at the Mortgage Bankers Association's National Fraud issues Conference in Chicago. The planned sweep will be the FBI's third such effort. The first, in 2004, resulted in charges against 150 alleged criminals. The second was a year later and resulted in charges against 155 people. But this time, Mr. Arterberry said, the goal is to "double the number" of defendants. "We want to send a strong deterrent message," the Justice Department official told the conference. The MBA can be found online at http://www.mortgagebankers.org.

Refinance.com has received government approval to refinance subprime borrowers that are a few months delinquent into Federal Housing Administration-insured loans once the mortgage insurer, investor, or servicer makes up the necessary payments to bring the loan current. The New York-based lender received FHA approval a few weeks ago. "We have told our servicers and mortgage insurance companies of its availability," Refinance.com chairman and chief executive Nicholas Bratsafolis told MortgageWire. Mr. Bratsafolis noted that a lot of refinances will face loan-to-value problems, and he is encouraging servicers to use a shared-equity mortgage to reduce the principal amount of the mortgage to an affordable level. His branded "Appreciating America Second Mortgage" does not trigger a writedown until it is paid off or the property appreciates by 15%. FHA officials have "confirmed it would be appropriate" to use a shared appreciation mortgage in FHA refinancing, the CEO said. The borrower does not have to make payments on the SAM and receives a 30% share of the appreciation plus reimbursement for improvements when it's paid off. The company, also known as Homebridge Corp., is launching a marketing campaign for the Appreciating America Second Mortgage in a few weeks.

Treasury Secretary Henry Paulson continues to dismiss calls for helping borrowers with "underwater" mortgages through principal reductions that are being advocated by some federal banking regulators. It's not the "government's job" to help borrowers who would walk away from their homes because the properties' values have dropped and they don't want to pay the mortgage, Secretary Paulson told the American Bankers Association. The Treasury secretary played an important role in getting mortgage servicers to join the Hope Now alliance, which is focused on helping struggling homeowners who want to stay in their homes but can't afford their mortgage payment because of a change in their ability to pay or the reset of an adjustable-rate mortgage. He stressed that it is important for the Hope Now servicers to publicly disclose the results of their workout efforts so that everyone can see whether the servicers are following through on the commitments. "I won't look kindly on free riders," Mr. Paulson said. Last week, Federal Reserve Board Chairman Ben S. Bernanke called on lenders to make permanent reductions in the principal amount of a mortgage to help troubled borrowers stay in their homes or refinance into a Federal Housing Administration-insured mortgage.

In late 2006 Countrywide Financial Corp. chairman and chief executive Angelo Mozilo accelerated his insider stock sales just as the company had decided to spend $2.5 billion of its own money to buy back stock, according to the House Oversight Committee. At a congressional hearing on Friday, committee chairman Henry Waxman, D-Calif., questioned Mr. Mozilo about the buyback plan and his decision to exercise options and sell $150 million worth of stock just as Countrywide's share price was peaking. "Countrywide's stock has fallen almost 85% since February [2007, when it was $45 a share]," Rep. Waxman noted. "Why was the buyback plan in the best interests of the shareholders?" Mr. Mozilo defended his sales, saying there was "no relationship" between Countrywide's stock buyback plan and his exercising of options. Instead of selling his shares through a planned schedule, Mr. Mozilo said, "I could have sold them all at once." Countrywide's shares were trading at just over $5 on Friday, compared with a 52-week high of $42 and a low of $4. Bank of America is buying the company for about $7 a share. The company can be found online at http://www.countrywide.com.