Compliance

The Federal Bureau of Investigation is working on 1,200 mortgage fraud investigations, a 50% increase from the level recorded in fiscal year 2006, FBI Director Robert Mueller told a Senate panel. "Roughly half of these cases have losses in excess of $1 million, and several have losses greater than $10 million," Mr. Mueller testified. The FBI director also told the Senate Judiciary Committee that the FBI is working with the Department of Justice and several law enforcement and regulatory agencies to target "systematic" mortgage fraud. "Together, we will build on existing FBI intelligence databases to identify large-scale industry insiders and criminal enterprises conducting systematic mortgage fraud," the FBI director said.

The Department of Housing and Urban Development has issued the new loan limits for Federal Housing Administration, Fannie Mae, and Freddie Mac mortgages in high-cost counties of California and will soon release the loan limits for the rest of the country. Congress has temporarily increased the loan limits in high-cost areas to 125% of median home prices, up to a maximum of $729,750, until Dec. 30. Under this authority, lenders will be able to originate mortgages with a principal balance of $729,750 in the counties of Los Angeles, San Francisco, Orange, and Santa Barbara. HUD is also issuing a mortgagee letter that gives FHA lenders the green light to make the higher-balance loans. Lenders can check the new loan limits in their state by going to the FHA website, looking under "Hot Topics," and clicking on "Stay Informed of FHA Mortgage Limits." The FHA can be found online at http://www.fha.gov.

House Financial Services Committee Chairman Barney Frank, D-Mass., plans to circulate a bill next week that would create a government program to buy distressed mortgages that have been written down to an affordable level and meet Federal Housing Administration eligibility standards. Chairman Frank said he expects the mortgages to be purchased in an auction and that "we will buy the cheapest ones." He noted that his foreclosure prevention proposal is similar to one by the Office of Thrift Supervision, except that the government would take a "soft second" mortgage and share in any appreciation in the property. Rep. Frank has the backing of House Democratic leaders for the new program, which will require an initial $10 billion to $12 billion investment to start. He also told reporters that the bill might include a provision to shield servicers from investor lawsuits. Many servicers are reluctant to write down loans because of disgruntled investors. In related news, the committee chairman said a House/Senate conference on the FHA reform bill is going well and he expects to send the bill to the president in April.

FDIC Chairman Sheila Bair says she expects loan modifications to increase, but she is still concerned that servicers continue to rely too heavily on repayment plans. Repayment plans may be "unsustainable for borrowers and lead to delinquencies down the road and ongoing borrower distress," the Federal Deposit Insurance Corp. chairman told the Senate Banking Committee. Hope Now servicers reported that they modified 45,320 subprime loans in January and placed 48,155 subprime borrowers in repayment plans. The FDIC chairman testified that additional approaches may be needed to reduce foreclosures, including writedowns of the principal amount of the "underwater" mortgages. Meanwhile, Federal Reserve Board Chairman Ben S. Bernanke spoke favorably about an Office of Thrift Supervision proposal that would encourage writedowns by giving investors a share in future appreciation. "A writedown that is sufficient to make borrowers eligible for a new loan would remove downsize risk to investors of additional writedowns or a re-default," the Fed chairman told the annual convention of the Independent Community Bankers of America.

A judge in Massachusetts has temporarily barred Fremont Investment & Loan from initiating or advancing foreclosures on "presumptively unfair" mortgage loans unless certain conditions are met, according to Buckley Kolar LLP. However, in granting the state attorney general's motion for a preliminary injunction, a Suffolk County Superior Court judge found that there was no evidence that Fremont had made false representations or had violated any federal or state consumer credit law, the law firm reported. Rather, the court found that the loans at issue fell within the "penumbra" of a state predatory-lending law governing high-cost mortgage loans. The court defined a loan as presumptively unfair if it is an adjustable-rate mortgage with an introductory period of three years or less, has a teaser rate at least 3 percentage points lower than the fully indexed rate, and meets two other tests. The other tests are that it has a loan-to-value ratio of 100%, or carries a substantial prepayment penalty (or a prepayment penalty that extends beyond the initial period), and the borrower has a debt-to-income ratio that would have exceeded 50% if the debt had been measured by the amount due under the fully indexed rate. Buckley Kolar, which serves the financial services industry, can be found online at http://www.buckleykolar.com.

Senate Republicans have blocked Democrats from rushing to the floor a foreclosure prevention bill that allows bankruptcy judges to restructure subprime and certain nontraditional mortgages. Democrats mustered only 48 of the 60 votes needed to invoke cloture and start debate on the bill (S. 3221), which also provides revenue bonds for refinancing subprime borrowers and federal grants to purchase foreclosed properties. Senate Majority Leader Harry Reid called the vote a "big victory" for Wall Street, big banks, and mortgage bankers. But as for the millions of people facing foreclosure, "they lost," Sen. Reid said. The American Financial Services Association's top lobbyist, Bill Himpler, said the industry could support the foreclosure prevention bill if the bankruptcy provision is stripped from the package. With all the market turmoil, this is not the time to consider changes to the bankruptcy code that would "essentially undermine investor confidence in mortgage lending," he said. The Democrats will likely push for another vote before March 15, when the Senate takes a two-week break. Meanwhile, the Senate Judiciary Committee has scheduled a March 6 mark-up of two competing mortgage bankruptcy bills. The bill sponsored by Sen. Richard Durbin, D-Ill., was included in S. 3221. The other bill, sponsored by Sen. Arlen Specter, R-Pa., allows bankruptcy judges to reduce or freeze the interest rate on adjustable-rate mortgages.

Senate Democrats have narrowed the scope of the bankruptcy provisions in a foreclosure prevention bill so that only nontraditional and subprime mortgages could be restructured by bankruptcy judges. The Democrats were pushing for a cloture vote on the bill Thursday (Feb. 28), and the financial services industry was lobbying to defeat it because of the bankruptcy provisions. The White House has threatened to veto the bill. If the Democrats can get 60 votes, it opens the door to debate and amendments before final passage. The original bill (S. 2636) would have given the bankruptcy courts the authority to reduce the principal amount or interest rate on any single-family mortgage. In trying to get Republican support, the authors limited the scope to nontraditional and subprime mortgages originated before the date of enactment. The Democrats also allow lenders to recoup any increase in the property's value if the bankruptcy filer sells the house within five years.

House and Senate banking committee leaders are close to an agreement on a Federal Housing Administration reform bill, and it could clear the way for final passage in a few weeks. "We had a very good meeting on the FHA bill," said House Financial Services Committee Chairman Barney Frank, D-Mass. "I am very optimistic that we are going to get an FHA bill pretty soon." Rep. Frank said he agreed to drop a controversial provision in the House bill that would require the FHA to contribute excess revenues to an affordable housing trust fund. It appears that the major outstanding issue is raising the maximum FHA loan limit to $417,000 or higher. Some observers expect the final bill to include a Senate provision that prohibits seller-funded downpayment assistance on FHA loans. The Mortgage Bankers Association recently signaled that it is changing its position on DPA. "A consensus of our members is moving towards the Senate position," MBA vice president Francis Creighton told MortgageWire.

Any lenders (not just mortgage brokers) who receive a fee from another lender in the origination process will have to disclose their total compensation on the new standardized good-faith estimate developed by HUD as part of its Real Estate Settlement Procedures Act proposal. An "exclusive agent of the lender who is not an employee of the lender, but who renders origination services in a table funded or intermediary transaction, would be subject to the mortgage broker disclosure requirement set forth in the proposed rule," according to a copy of the RESPA proposal obtained by MortgageWire. The Department of Housing and Urban Development is expected to publish the proposed rule soon. The narrative in the proposal describes how HUD continued to consumer-test and make changes to the four-page GFE so that consumers can identify the lowest-cost loan without being confused by yield-spread premiums, which are called ''an adjusted origination charge" on the front page. "HUD is now convinced that by making these changes, any disadvantage to brokers is virtually eliminated," the agency said. The RESPA proposal allows lenders to use "average cost pricing and discounts" in listing the cost of third-party settlement services on the GFE, subject to a 10% tolerance.

Fannie Mae and Freddie Mac may stop accepting appraisals ordered by mortgage brokers by Sept. 1 as part of a settlement the two secondary-market agencies are negotiating with New York Attorney General Andrew Cuomo. In selling loans to Fannie and Freddie, lenders would have to certify in representations and warranties that they did not rely on appraisals provided by the brokers. "This could, in effect, require lenders to always secure their own appraisal of any property purchased through a broker," according to an outline of the "talking points" obtained by MortgageWire. The talking points also show that the AG wants mortgage lenders to curtail their use of in-house appraisers or subsidiary appraisal firms. The settlement talks stem from the New York AG's lawsuit against First American's appraisal unit, which allegedly provided inflated appraisals to one of Fannie's and Freddie's large customers. The New York AG's office could not be reached for comment by deadline time.

Ambac, a New York-based bond insurer that has been wrestling with U.S. mortgage-related woes, may be getting a capital infusion from a group of banks in the wake of recent regulatory pressure on the industry."We haven't concluded negotiations," said an Ambac spokeswoman Monday afternoon, confirming that the company is considering the possibility among its options. A spokesman for the New York Insurance Department, in noting reports that Ambac has been working with a group of banks, said only, "There is stuff going on." New York Gov. Eliot Spitzer, who said in congressional testimony that he considers bond insurers to be largely within his state's jurisdiction, gave companies in the sector a deadline to do something last week to bolster their flagging ratings, according to a Wall Street Journal article. The governor's office referred queries on the matter to the insurance department. A department spokesman said there is "no actual deadline" and that the period mentioned reflected state officials' expectations about when some action should be taken, ideally "as soon as possible." Standard & Poor's, in updating several bond insurer ratings Monday, affirmed some of Ambac's, citing "the scope of Ambac's capital-raising plans and the company's ability to implement those plans," but left them on CreditWatch with negative implications.

To expedite loan modifications, Congress may need to "step in" and shield mortgage servicers from investor lawsuits, according to FDIC Chairman Sheila Bair. "My hope is investors wake up to what's going on and push hard for loan modifications, not fight them," the Federal Deposit Insurance Corp. chairman told an audience in California's Silicon Valley. But she noted that servicers are reluctant to write down the principal amount of distressed mortgage because it could expose them to litigation. "But in this environment of declining home prices, writing down the values of loans to an amount the borrowers can pay in a sustainable manner may result in smaller losses to investors than foreclosure," Ms. Bair said.

Senate Democrats are pushing for a cloture vote Feb. 26 on a foreclosure prevention bill that would allow bankruptcy judges to restructure mortgages for distressed homeowners, and the financial services industry is mobilizing to defeat it. If the Democrats can get 60 votes, it opens the door to debate and amendments before final passage. But industry groups like the Mortgage Bankers Association are adamantly opposed to giving bankruptcy courts the leeway to reduce the principal amount or interest rate on a single-family mortgage. "We are fighting this," said MBA vice president Francis Creighton. "There is not a lot of room for compromise." The bill also provides funding for refinancing subprime borrowers and for grants to cities to purchase and rehabilitate foreclosed properties. In addition, it has a tax sweetener that allows lenders, homebuilders, and other companies to carry back 2006 and 2007 losses and receive refunds on taxes paid in prior years. Mr. Creighton said the outcome of Tuesday's vote is "really up in the air" and that the MBA is calling on its members to contact their senators.

The Department of Housing and Urban Development expects to issue the new loan limits for Fannie Mae, Freddie Mac, and Federal Housing Administration loans by March 7, sources have told MortgageWire. Congress raised the loan limits as part of the economic stimulus bill that President Bush signed on Feb. 13. And lenders are waiting for HUD to compute the new loan limits, which are based on 125% of median home prices, with a $729,750 cap. In a Feb. 20 conference call with industry groups and lenders, HUD officials indicated that separate lists of the higher-priced metropolitan statistical areas would be issued for FHA mortgages and for Fannie and Freddie mortgages. However, FHA lenders were disappointed that HUD has not decided whether the effective date should be determined by the date the lender receives an FHA case number or the date FHA insures the loan. The stimulus bill raised the FHA floor from $201,060 to $271,050, and lenders could begin making those higher-balance loans right now if HUD chose the date the loan is insured.

The Maryland Department of Labor, Licensing and Regulation is examining the servicing practices of Ocwen Loan Servicing, West Palm Beach, Fla., one of the largest subprime servicers in the United States. A spokeswoman for the agency told MortgageWire that "We don't randomly conduct exams," adding that "we saw some flags." She did not elaborate. Ocwen was singled out by Maryland Gov. Martin O'Malley at a news conference on Tuesday. Bill Rinehart, vice president and chief credit officer for the publicly traded Ocwen, said, "We received an examination request in the ordinary course of business. That's as much as we know. If they find something in the exam, we'll address it." Ocwen services $53.5 billion in loans. At year's end, its foreclosure rate was 6.47%, compared with 3.21% a year earlier. Mr. Rinehart noted that less than 1% of Ocwen's foreclosure cures result from "short sales" or "deeds in lieu."

To deal with so-called underwater mortgages, the Office of Thrift Supervision wants to develop a refinancing program that provides lender/servicers with certificates for writing down the principal amount of a mortgage to enable them to possibly recoup "some or all" of the immediate loss when the property is sold or refinanced again. OTS Director John Reich said he is trying to find a way to assist homeowners who cannot refinance to lower their mortgage costs and have negative equity in the homes. "We are concerned this reality is encouraging an increasing number of people to walk away from their homes," Mr. Reich told reporters. The OTS is looking at the Federal Housing Administration Secure program as a refinancing vehicle now that the FHA can insure mortgages above the $417,000 conforming loan limit. The OTS director said there is a potential for the certificates to be sold, like warrants, to investors and traded. OTS officials are promoting and developing the concept and say they hope to get other regulators, the FHA, and the American Securitization Forum on board in a few weeks.

The number of subprime-related cases filed in federal courts is "dramatically outpacing" the litigation filed during the savings-and-loan crisis of the early 1990s, according to Navigant Consulting Inc., Chicago. According to a Navigant study, 278 subprime-related cases were filed in 2007, nearly half the total of 559 S&L cases handled by the Resolution Trust Corp. over several years. "The S&L crisis has been a high-water mark in terms of the litigation fallout of a major financial crisis," said Jeff Nielsen, managing director of Navigant Consulting. "The subprime-related cases appear on their way to eclipsing that benchmark." Mr. Nielsen said the wave of litigation "appears to be just the beginning" and that there has been "a steady acceleration" of such cases so far this year. Navigant can be found on the Web at http://www.navigantconsulting.com.

Senate Democrats have crafted a second stimulus bill that includes bankruptcy changes lenders will oppose and a net operating loss carry-back supported by homebuilders. "This package is aimed at the bull's-eye of our economic crisis -- the housing market," said Sen. Charles E. Schumer, D-N.Y. Included in the package was a bill by Sen. Richard Durbin, D-Ill., that would allow bankruptcy judges to restructure subprime mortgages. "Small changes to the bankruptcy code could help 600,000 at-risk families keep their homes," the Illinois senator said. The Mortgage Bankers Association said there is "much in this bill to applaud." However, the MBA served notice that it will oppose the bill because the bankruptcy provision will increase the cost of mortgage credit. The National Association of Home Builders has been pushing for an NOL carry-back. But it wants a tax credit for homebuyers even more. The builders have frozen all political contributions because the first stimulus bill did not include a homebuyers' tax credit.

New York Gov. Eliot Spitzer has set a three- to five-day deadline for bond insurers hurt by certain mortgage securities exposures to bolster their flagging ratings, according to the Wall Street Journal. A call to the New York insurance department about the deadline had not been returned by deadline time. Mr. Spitzer indicated in congressional testimony Feb. 14 that he feels officials in his state should take the lead in tackling the bond insurance issue because "insurance is regulated by the states, and most of the bond insurance companies are domiciled in and primarily regulated by New York." Moody's Investors Service on Thursday downgraded some ratings of bond insurer FGIC, a New York-based company in which mortgage insurer PMI owns a 42% stake.

Six of the nation's largest servicers -- which control nearly 60% of the $9 trillion residential receivables market -- have agreed to participate in a new Bush administration plan to freeze foreclosures for at least 30 days. Dubbed "Project Lifeline," the program affects both subprime and prime borrowers who are in danger of losing their homes. (The effort was actually created by the servicers, but with the blessing of the Treasury Department.) The servicers in charge of these delinquent loans -- including Countrywide Financial, Wells Fargo, Citigroup, and others -- will contact homeowners who are more than 90 days late, freeze the foreclosure process, and then try to work out a solution for the borrower. According to the Quarterly Data Report, the nationwide foreclosure rate on subprime loans is almost 8%.