Compliance

Ballard Spahr Andrews & Ingersoll LLP, a Philadelphia-based law firm, has announced the formation of a multidisciplinary Subprime Lending Team. The group will provide legal support to clients regarding the litigation, government action, and business problems sparked by the subprime mortgage crisis, the law firm said. "As the subprime crisis grows, it's clear that the effects will be felt across several disciplines and throughout the country," said Henry E. Hockeimer Jr., a partner in Ballard's litigation department and a member of the subprime team. "The specific legal disciplines affected happen to be areas of real strength for Ballard: consumer finance, real estate, securities, commercial litigation, and white collar are all areas where the firm has great depth and experience." The law firm can be found online at http://www.ballardspahr.com.

It's not on the table today, but the chief executive of Fannie Mae says policymakers should consider creating a single national regulatory agency to oversee the entire housing finance system. "I think we need a more unified approach to housing finance policies," Fannie Mae CEO Daniel Mudd told an American Enterprise Institute forum. He also said policymakers should consider a "Mortgage Reinvestment Act" to reward banks for making loans that help keep troubled borrowers in their homes, similar to the way banks receive Community Reinvestment Act credit for making loans in their communities. However, he criticized proposed changes to bankruptcy laws that would allow courts to "cram down" the amount of a secured mortgage, saying that tampering with the home loan contract will inevitably shrink the pool of capital available for housing finance in the future.

Fast-tracking loan modifications and freezing the interest rate on adjustable-rate subprime mortgages will not jeopardize the accounting and tax status of the mortgage-backed securities, according to an opinion by the Securities and Exchange Commission chief accountant. SEC chief accountant's opinion gives the green light for servicers to implement the fast-track loan modification framework endorsed by the Treasury Department, the Hope Now Alliance, and the American Securitization Forum. ASF deputy executive director Tom Deutsch welcomed the SEC's guidance. "It is imperative for subprime mortgage servicers to have confidence that implementing the fast-track loan modification segment of the ASF framework will not alter the accounting treatment of securitization trusts." SEC chief accountant Conrad Hewitt said in a letter that the vast majority of subprime loan modifications are expected to begin in early 2008. "The Office of Chief Accountant believes this is an appropriate interim step at this time to address this issue given the complexity and lack of specific guidance on the accounting and disclosure for these types of modifications." Mr. Hewitt noted, however, that the letter is not an opinion on the legality of modifying subprime mortgages.

The Community Reinvestment Act may have deterred banks from engaging in the kind of risky mortgage lending that has led to the foreclosure crisis, according to a Traiger & Hinckley LLP study of 2006 loan data. The company said the study indicates that banks making loans in their CRA assessment areas were less likely to make high-cost loans, charged less for the ones they did make, and were "substantially more likely" to avoid the secondary market and retain high-cost loans and other loans in their portfolios. "Without the CRA, the foreclosure crisis might have negatively impacted even more borrowers and neighborhoods," said Warren Traiger, a partner in the law firm. The study is available at http://www.traigerlaw.com.

The Mortgage Bankers Association has changed course and is now backing stand-alone legislation that would allow Fannie Mae and Freddie Mae to purchase jumbo loans of up to $625,000 nationwide on a temporary basis.In a letter to the GSEs' regulator, the MBA contends that liquidity problems in the jumbo market have led to higher interest rates on loans above the conforming loans limit ($417,000) and fewer financing options for borrowers. "The increase should be in effect for no less than 12 months, and up to 24 months if market conditions warrant," the MBA says in a letter to James Lockhart, director of the Office of Federal Housing Enterprise Oversight. The MBA previously opposed a temporary hike in the conforming lending limit unless it was part of a comprehensive bill to strengthen the regulation and supervision of the government-sponsored enterprises. The association can be found online at http://www.mortgagebankers.org.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators launched a Web-based mortgage licensing system on Jan. 2, as promised, with the initial participation of seven states.Four years in the making, the Nationwide Mortgage Licensing System is designed to automate and streamline state licensing of mortgage lenders and brokers. It will also help regulators track and identify bad actors, including originators that move from state to state. "NMLS provides the underpinnings of a regulatory framework to address the weaknesses of our current fragmented and complex system of mortgage origination and supervision," said CSBS executive vice president John Ryan. Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, and Rhode Island are participating in the initial start-up. Forty other states have indicated their intent to transition to the system. The House recently passed a predatory-lending bill (H.R. 3915) that requires the creation of a nationwide mortgage licensing system and registry.

Allegations that Washington Mutual's appraisal practices may have led to inflated property values have prompted the Office of Thrift Supervision to start a review of WaMu and the appraisal practices of other thrifts, according to an OTS spokeswoman."I don't know if it would be fair to say we are singling [WaMu] out," said Barbara Shycoff, the OTS's external affairs director. The OTS decided it is a "good time" to look at WaMu and other thrifts to make sure that "we are comfortable with the practices out there," she said. The Seattle-based thrift maintains that the allegations of pressuring appraisers -- first raised by New York Attorney General Andrew Cuomo in November -- are without merit. "After spending a month and a half investigating these allegations, we can say with confidence that there has been no systematic effort by WaMu to inflate home appraisals," the company said in a recent statement. WaMu also disclosed in the Dec. 21 statement that the Securities and Exchange Commission and the OTS are reviewing its appraisal practices.

The National Ethics Bureau, San Diego, has announced that it is now accepting real estate and mortgage professionals as members.Mortgage brokers who apply must pass a comprehensive seven-year background check for criminal, civil, and business violations, hold a valid mortgage broker license, and meet NEB continuing education requirements. In return, they will be authorized to use NEB branding and communication tools, the organization said. "The real estate industry is under stress due to the market downturn, credit crunch, and subprime crisis," said NEB chairman Steven R. McCarty. "Unfortunately, this has increased unethical sales practices and outright fraud, especially in subprime mortgage applications.... By qualifying for NEB membership, real estate professionals can take a bold step to restore public confidence and lay the groundwork for future growth." The organization can be found online at http://www.ethicscheck.com.

The National Association of Mortgages Brokers contends that the Federal Reserve Board's proposal requiring brokers to disclose their fees up front and in dollars simply places mortgage brokers at a competitive disadvantage to banks.The Fed proposal would hurt thousands of small brokerage shops that sell loans to investors just like banks, NAMB executive vice president Roy DeLoach said. He added that the NAMB is trying to determine whether the Fed complied with the Federal Regulatory Flexibility Act in measuring the impact of the proposal on small businesses. The Fed is issuing its Home Ownership and Equity Protection Act proposal for a 90-day comment period. One Washington mortgage banking consultant said the Fed's treatment of broker fees is similar to that of the Real Estate Settlement Procedures Act proposal expected to be issued for public comment by the Department of Housing and Urban Development in six to eight weeks. Like the HUD rule, the Fed's proposal would stop brokers from making money from interest rate movements. "The Fed is effectively implementing RESPA reform when it comes to yield-spread premiums and mortgage broker compensation," Potomac Partners' Brian Chappelle said. The NAMB can be found online at http://www.namb.org.

The Federal Reserve Board is proposing a "robust set" of rules to clean up subprime lending practices and to address unfair and deceptive practices associated with servicing, mortgage broker fees, and appraisals.On subprime and higher-priced alternative-A mortgages, the Home Ownership and Equity Protection Act proposal would create an ability-to-repay standard, require lenders to verify income and assets to curb stated-income lending, mandate escrow accounts for at least 12 months, and require prepayment penalties to expire 60 days before the first monthly increase in payments. Under pressure from Congress, the Fed was expected to address those subprime practices. However, the Fed decided that it needed to go further to provide a robust and "more comprehensive set of protections" that apply to all mortgages, said Randall Kroszner, a Fed governor. The proposal requires brokers to disclose up front the dollar amount of their fees, including yield-spread premiums, in a written agreement with the borrower. "Creditor payments to a mortgage broker could not exceed the total compensation amount stated in the written agreement," according to the proposal, which is being issued for a 90-day comment period. Servicers could be sued under the Truth in Lending Act for failing to post mortgage payments properly and pyramiding late fees. Lenders and brokers also would be liable for coercing appraisers. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated," Fed Chairman Ben Bernanke said.

Dallas-based MRG Document Technologies, a provider of compliance and documentation services, is supporting modification agreements as part of its loan document library.The modified agreements enable lenders to be in compliance with evolving state and federal regulations and gives them the flexibility to restructure terms and conditions to keep borrowers in their homes. MRG's most common modifications include changes to note and security agreement rates and terms, but they also can include ancillary services that combine disclosures and recording documents. The company can be found on the Web at http://www.mrgdocs.com.

Congress could pass a mortgage tax relief bill this week that encourages loan modifications and ensures that homeowners are not penalized when a lender reduces the principal amount of their mortgage.The bill, passed by the Senate Dec. 14, eliminates tax penalties for three years on mortgage debt forgiven in a loan mortification or foreclosure. Currently, any reduction in mortgage debt by a lender is treated as income for tax purposes. "Homeowners who are already in trouble on the mortgage certainly can't afford a big hit from the tax man, too," said Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee. The House passed a permanent exception back in October. But the House is expected to vote on and pass the Senate version so it can be sent to the president for his signature quickly. House Ways and Means Committee spokesman Matthew Beck said it is important to provide this relief to troubled homeowners as soon as possible. "I believe the House will accept the Senate version," he said. The Senate bill also includes a three-year extension of a tax deduction for mortgage insurance premiums. The House bill called for a seven-year extension.

The Office of Federal Housing Enterprise Oversight is sending its conservatorship regulation for Fannie Mae and Freddie Mac over to the Office of Management and Budget.OFHEO Director James Lockhart told MortgageWire that "[w]e've never had a regulation on the conservatorship process," adding that "this will spell out what our powers are for what we can and can't do." Before the regulation can move forward, the OMB has to approve it, which can take months. In a Thursday speech at the American Enterprise Institute, Mr. Lockhart once again advocated the passage of bank-like regulatory powers that would put OFHEO on par with the Federal Deposit Insurance Corp. and other agencies. Unlike the FDIC, OFHEO cannot file civil lawsuits against the companies/executives it regulates (Fannie and Freddie) and must instead ask the Justice Department to litigate on its behalf.

The House Judiciary Committee approved a narrowly targeted bankruptcy bill by a 17-15 vote Dec. 12 that would give subprime and nontraditional mortgage borrowers facing foreclosure one last chance to get their mortgage restructured so they can stay in their homes.Only homeowners who have received a foreclosure notice could seek a Chapter 13 restructuring under a compromise worked out between committee Democrats and Rep. Steve Chabot, R-Ohio. Under the bill, bankruptcy judges could waive prepayment penalties and reduce the mortgage amount to the fair market value and reduce the interest rate to a conventional rate plus a risk premium. These restructurings would be limited to subprime and nontraditional mortgages originated from 2000 through the date of enactment of the legislation. The Mortgage Bankers Association and the American Bankers Association oppose the bill.

Investigators for the state of Illinois have issued what one official calls "extensive" subpoenas to Countrywide Financial Corp. as part of a far-reaching probe into its origination of subprime and payment-option ARMs.Debra Hagan, chief of the state's consumer protection division, told MortgageWire that investigators are scrutinizing subprime and payment-option adjustable-rate mortgages that Countrywide funded on a retail basis and through loan brokers. "Payment-option ARMs are at the top of our list," she said. Ms. Hagan said the Countrywide probe was sparked, in part, by the state's investigation and subsequent lawsuit against One Source Mortgage, a now-defunct Chicago loan broker accused of misleading consumers about their option ARM teaser rates. Countrywide is cooperating with the investigation, Ms. Hagan said. (See the Dec. 17 issue of National Mortgage News for complete details.)

The Federal Reserve Board will meet Dec. 18 to issue long-awaited revisions to its Home Ownership and Equity Protection Act regulations that address abuses associated with subprime loans.The proposed HOEPA rule will address prepayment penalties, failure to escrow taxes and insurance, stated-income and low-documentation lending, and ability-to-repay standards. In a letter to the Fed, 17 Democrats on the Senate Banking Committee urged the Fed to act "forcefully" to protect consumers. "We appreciate the fact that the Board is moving forward with a rulemaking under HOEPA, and expect the Board to meet the duty Congress entrusted to it to end the abusive practices … that have undermined confidence in the subprime mortgage market and the economy as a whole," the Dec. 7 letter says.

As MortgageWire's deadline approached, the House Judiciary Committee was on track to approve a narrowly targeted bankruptcy bill that would give subprime and nontraditional mortgage borrowers facing foreclosure one last chance to get their mortgage restructured.Only homeowners who have received a foreclosure notice could seek Chapter 13 bankruptcy relief under a compromise worked out by committee Democrats and Rep. Steve Chabot, R-Ohio, who is the only Republican on the committee expected to vote for the bill (H.R. 3609). The Ohio congressman said, however, that he expects more Republicans to support the bill when it comes up for a vote on the House floor next year. Under the bill, bankruptcy judges could waive prepayment penalties and reduce the mortgage amount to the fair market value and reduce the interest rate to a conventional rate plus a risk premium. These restructurings would be limited to subprime and nontraditional mortgages originated from 2000 through 2007 and up to the date of enactment of the legislation. Rep. Brad Sherman, D-Ohio, said the bill exempts prime loans and that he may offer an amendment to exempt prime interest-only mortgages. The Mortgage Bankers Association and American Bankers Association continue to oppose the bill.

Oxford, Miss.-based FNC Inc. has announced the release of Collateral Headquarters as a desktop tool to enable regional and community lenders and appraisal management companies to automate appraisal ordering, assignment, tracking, and review from a single centralized platform.The system captures best practices in a user-configurable out-of-the-box solution that offers to cut turn times, lower costs, address regulatory compliance, and track performance. Collateral Headquarters also gives lenders an administrative dashboard. Users can assign appraisals automatically to their pre-approved list of vendors; manage jobs by vendor, status, or due date; use a time-and-date stamped record that tracks the progress of each loan in production; and immediately verify completed orders. An FNC spokesman said inquiries about the new service have largely come from mortgage industry players eager to head off regulatory scrutiny along the lines of the New York lawsuit alleging that First American's eAppraiseIT unit inflated appraisals on behalf of Washington Mutual. FNC can be found online at http://www.fncinc.com.

When it comes to mortgage fraud, there are not many new ways to separate lenders and homeowners from their money. But there are sometimes new twists to old favorites.In a recent case of equity skimming, federal investigator Herschell Harvell Jr. found a group of 10-12 people who were running a foreclosure rescue scam. In an effort to save his home, and in return for the promise that the "investor gang" would bring his delinquent loan current, the troubled owner put all their names on the title and then paid the group rent while he continued to live in the property. Of course, the group didn't make any payments, but it did collect rent from the owner, Mr. Harvell told SourceMedia's Fraud and Risk Conference in Las Vegas Monday. Each time the lender started foreclosure proceedings, one of the group of con men filed for bankruptcy, according to Mr. Harvell, the assistant special agent in charge in the Department of Housing and Urban Development's Office of the Inspector General. And the day before a foreclosure hearing was scheduled, one con man would file for bankruptcy, delaying the proceedings. Then, the day before a hearing was scheduled, the con man would drop his bankruptcy claim and another one would file a new proceeding. The switch continued time and time again, according to the HUD official, while the owner went blindly along making his "rent" payments to the gang of charlatans. Mr. Harvell, who has successfully investigated numerous white-collar cases during his 11-year career at HUD, told the conference that despite lenders' best efforts to stop fraud, con men "continue to search for weaknesses in the system and take advantage of them."

Suitability standards could open up lenders to a fair-housing can of worms, a compliance expert said Monday at the SourceMedia Fraud and Risk Conference in Las Vegas.According to Gary Lacefield, who spent a decade as a senior civil rights analyst and supervisor of lending investigations at the Department of Housing and Urban Development, lenders will "need to be very cautious" if legislators and regulators impose true suitability standards on the mortgage business. "If we do away with automated underwriting," he asked, "how are we going to protect ourselves from frivolous charges of discrimination?" Mr. Lacefield, who left HUD in 1999 after personally supervising or conducting more than 1,600 investigations, said automated underwriting was created in large measure in the mid-1990s to protect lenders from charges of bias. And it worked. Once computer systems started spitting out loan approvals based solely on lenders' underwriting criteria, without being touched by humans and their inherent biases, they all but wiped out fair-housing cases against lenders, he said. But if suitability standards are imposed as a response to abusive lending practices, Mr. Lacefield, who is now director of compliance at WR Starkey Mortgage, Plano, Texas, said automated underwriting would be little more than an exercise in futility. "If we take out the specificity provided by automated underwriting, we leave ourselves wide open to allegations of discriminatory behavior," he warned.