Compliance

After several false starts, the House Judiciary Committee is slated to mark up a bankruptcy bill on Wednesday that would allow homeowners filing for Chapter 13 relief to get their mortgages restructured.Committee Democrats have agreed to several changes to the bankruptcy bill (H.R. 3609) to secure the support of Rep. Steve Chabot, R-Ohio. As originally introduced by Reps. Brad Miller, D-N.C., and Linda Sanchez, D-Calif, H.R. 3609 would allow bankruptcy judges to reduce interest rates and the principal amount of a mortgage, which mortgage industry groups and several committee Republicans warned would scare off mortgage investors and damage the secondary market. Under the proposed changes, the bill would cover subprime and nontraditional mortgages that were originated after Jan. 1, 2000 up to the date of enactment of the legislation. The compromise also includes new criteria for homeowners who could qualify for bankruptcy relief.

A "tough" predatory lending bill that Sen. Christopher J. Dodd, D-Conn., planned to introduce Tuesday would impose a fiduciary duty on mortgage brokers and address lending, servicing, and appraisal abuses.Sen. Dodd's bill prohibits yield-spread premiums (which are a broker's main form of compensation) on subprime and nontraditional mortgages such as interest-only and payment-option adjustable-rate mortgages. Lenders would be responsible for faulty appraisals and be required to adjust the mortgage where an appraisal exceeds the market value by 10%. Servicers would be required to publicly report their loss mitigation activities under the bill, which also prohibits servicers from "pyramiding" late fees to generate additional income. Mortgage industry groups are expected to raise strong objections to the bill, which creates new lending standards but does not pre-empt state laws. Under the Dodd bill, homeowners with improperly underwritten loans can go directly to the holder of the mortgage (assignee) to seek a cure or rescission of their loan. Their attorneys can also seek $5,000 in statutory damages, but cannot pursue class actions against assignees. State attorneys general also have certain enforcement powers.

The Federal Reserve Board will issue long-awaited revisions to its Home Ownership and Equity Protection Act regulations in two weeks to address abusive lending practices, a Fed governor has testified.The proposed HOEPA rule will address prepayment penalties, failure to escrow taxes and insurance, stated-income and low-documentation lending, and ability to repay, Fed Governor Randall Kroszner told a congressional panel. The Fed will also propose changes to its Truth in Lending Act rules to require "earlier disclosures by lenders and to address concerns about misleading mortgage loan advertisements," he testified.

The Federal Bureau of Investigation's Washington field office has opened a mortgage fraud task force that will examine residential appraisals and loan practices in the greater Washington, D.C.-Virginia-Maryland metropolitan area.Over the past five years the Washington area has experienced tremendous home price appreciation with some properties doubling in value. A spokesman for the FBI said that on Thursday the agency was hosting a meeting of federal prosecutors that work in the area as well as agents from the Department of Housing and Urban Development and the Internal Revenue Service. The FBI has opened more than 1,200 mortgage-related investigations this year.

Two senior members of the Senate Judiciary Committee support the Bush administration's effort to get lenders and servicers to freeze the interest rate resets on adjustable-rate subprime mortgages, but they still want to craft legislation that would allow the bankruptcy courts to provide relief for distressed homeowners.Sens. Richard Durbin, D-Ill., and Arlen Specter, R-Pa., said they support Treasury Secretary Henry Paulson's plan to increase loan modifications. "It can be done promptly and help people," Sen. Specter told reporters. He noted that it is difficult to pass legislation in the Senate. "We don't do anything fast around here," he said. Secretary Paulson's plan to freeze the interest rate on subprime mortgages will reduce defaults and rising foreclosures, Sen. Durbin said. But allowing bankruptcy judges to reduce the principal amount and interest rate on residential mortgages would provide more relief, he said, and encourage more loan modifications. Efforts to pass a similar bill in the House have stalled. The Illinois senator said he plans to redouble his efforts in working out a compromise with his Republican colleague. Sen. Specter said their talks so far have not produced much progress.

The Bush administration's plan to freeze resets on subprime adjustable-rate mortgages is flawed because it will not provide any relief for borrowers with credit scores above 660, according to the chairman of the House Financial Services Committee.Rep. Barney Frank, D-Mass., the committee chairman, said he welcomes the administration's effort to freeze ARM resets for five years. However, it is a "grave error that there is a cutoff at a 660 FICO score," he said. Rep. Frank argued that a credit score is not a good proxy for income and means that people who were careful with their credit may not qualify for relief. "I think it is a great mistake morally and politically," Rep. Frank said. Senate Majority Leader Harry Reid, D-Nev., called the administration's plan a "positive step" that could help about 200,000 people -- but said more needs to be done. Sen. Reid urged Republican senators to stop blocking a vote on a Federal Housing Administration reform bill that could provide refinancing options for troubled subprime borrowers.

The housing counseling organization NeighborWorks America is urging its colleagues in the Hope Now Alliance to endorse a five-year freeze on resets of adjustable-rate subprime mortgages."We are hoping for at least five years," said Marietta Rodriguez, who serves as NeighborWorks' liaison with the lenders and servicers in the Hope Now alliance. "Three is probably not going to be enough." Treasury Department officials and alliance members are expected to agree on a plan this week to prevent the wave of resets from becoming a wave of foreclosures. The nonprofit organization, which receives federal funding, provides housing counseling services to troubled borrowers who call the Hope toll-free hotline through its network of 245 community originations. NeighborWorks is conducting its own outreach efforts to increase public awareness of the hotline. Ms. Rodriguez noted in an interview with MortgageWire that servicers are responding to the crisis by increasing their capacity to respond to thousands of calls a day from housing counselors and borrowers in distress. But some servicers are "rushing to catch up," she said.

A study by the National Training and Information Centers shows that subprime mortgage defaults nearly doubled in Chicago during the first half of this year compared with the levels recorded in the same period of last year.The Chicago-based organization, which serves as a resource center for community organizations, reported that subprime defaults (loans 90 days or more past due or in foreclosure) jumped to 3,005 in first half of this year from 1,541 last year. "If these families ultimately lose their homes…'for sale' properties will flood the market," the NTIC study says. Defaults on prime loans totaled 2,429 in the first half, up 16% from last year's level. The NTIC study also shows that defaults on "young" subprime loans seasoned less than 24 months doubled to 2,538. Defaults on young loans are "often caused by fraud or abusive lending practices at origination," the study says.

As part of an ever-expanding probe into the mortgage crisis, New York Attorney General Andrew Cuomo has subpoenaed loan underwriting records from a handful of Wall Street firms, according to industry sources.Wednesday morning The Wall Street Journal identified three firms that reportedly received subpoenas: Bear Stearns, Deutsche Bank, and Merrill Lynch. The AG's office has already subpoenaed records from contract underwriting firms, including The Bohan Group, San Francisco, and Clayton Holdings, Shelton, Conn. One executive close to the matter told MortgageWire that "The Street is trying to blame the contractors they used." At deadline time, a spokesman for the AG's office had not commented. Bear Stearns, Deutsche Bank, and Merrill Lynch had not released any statements on the matter.

Top Bush administration officials are urging Congress to pass Federal Housing Administration reform legislation before the end of the year, and they appear ready to compromise on a risk-based premium structure for FHA mortgages."We are working with the leadership in Congress to resolve differences on this issue," a Department of Housing and Urban Development spokesman said. A few weeks ago, it appeared that HUD was ready to move ahead administratively with a risk-based premium structure despite congressional opposition. But now HUD does not want to antagonize Congress while there is still a chance the Senate could act on FHA reforms in the next few weeks, which would increase refinancing options for troubled subprime borrowers. "It has been sitting in the Senate for too long," HUD Secretary Alphonso Jackson told an Office of Thrift Supervision housing forum. "Each day of delay unnecessarily places thousands of families at risk of foreclosure."

Sen. Hillary Rodham Clinton, D-N.Y., is urging the Bush administration to impose a 90-day moratorium on subprime foreclosures so that at-risk borrowers are not harmed before lenders and servicers are able to implement a freeze on interest rates.The presidential candidate said she is "encouraged" by news that Treasury officials are working with the mortgage industry to curb foreclosures and freeze interest rates on adjustable-rate subprime mortgages. A freeze of at least five years or until the mortgage is converted to an affordable fixed-rate mortgage will "give the housing market time to stabilize," Sen. Clinton says in a letter to Treasury Secretary Henry Paulson. In March, Sen. Clinton called for "foreclosure timeout," which the Bush administration dismissed as unnecessary. "While you and others in the administration misdiagnosed the problem, over 1 million additional foreclosure notices were sent out," the New York Democrat said.

The FBI's Mortgage Fraud Report indicates that up to 70% of early payment defaults may be linked to borrower misrepresentations on mortgage loan applications, according to Rapid Reporting, a Fort Worth, Texas-based provider of fraud prevention products and services.The study found that mortgage defaults were largely concentrated in adjustable-rate loans, but occurred among other types as well. The report also revealed that seven of the 10 states with the highest concentration of mortgage fraud were also among the top 10 states for foreclosures: California, Florida, Georgia, Indiana, Michigan, Ohio, and Texas. "While it would be naïve to assume that we could narrow the cause of every foreclosure down to one single factor, this FBI information clearly indicates that borrower fraud plays a significant role in the record number of defaults and foreclosures we've been seeing over the past couple of years," said Jay Meadows, chief executive officer for Rapid Reporting. He said lenders can "significantly reduce" defaulted and foreclosed loans by implementing a good fraud prevention program. Rapid Reporting can be found online at http://www.rapidreporting.com.

Mortgage servicers are going to face many challenges in processing loan modifications of subprime adjustable-rate mortgages, including the capacity of their systems to deal with the loan impairment requirements of Financial Accounting Standard 114.Mortgage servicers are concerned that "they don't have the systems infrastructure in place today" to manage loan modifications in compliance with FAS 114, Steve Davies of PricewaterhouseCoopers told a meeting of the American Institute of Certified Public Accountants on Nov. 30. Once a loan is modified, it has to be evaluated for impairment on an individual basis to determine the loss. Servicers generally evaluate groups of mortgages segmented into loan types. Industry groups are expected to ask the Financial Accounting Standards Board for some relief.

Treasury officials and mortgage servicers agree on the need to expedite loan modifications for certain subprime borrowers but have yet to reach a consensus on the specifics of a plan that could lead to a massive restructuring of ARMs that will reset in 2008 and 2009.As one veteran mortgage banker put it: "Who's going to pay for this plan?" The plan centers on identifying borrowers who cannot afford a reset and freezing the interest rate for at least three (and maybe five) years to prevent a default. Several servicers are already allowing borrowers to remain at the starter rate for five years. Treasury Secretary Henry Paulson wants a commitment from large servicers to take an aggressive approach and expedite such loan modifications. However, there are concerns about litigation risk and restrictions in servicing contracts, as well as the losses that lenders, investors, and servicers might take. At a Washington forum scheduled for Dec. 3, Secretary Paulson is expected to discuss the status of the loan modification talks he has held with servicers, including Bank of America, Countrywide Home Loans, Washington Mutual, and Wells Fargo.

Lax underwriting and fraud may account for as much as 25% of the underperformance of the 2006 vintage of subprime residential mortgage-backed securities transactions, according to Fitch Ratings.Fitch said the high delinquency and default rates of recent-vintage subprime RMBS have many causes, including declining home prices and "the prevalence of high-risk mortgage products" such as stated-income loans and those with combined loan-to-value ratios of 100%. "In the absence of effective underwriting, products such as 'no-money-down' and 'stated-income' mortgages appear to have become vehicles for misrepresentation or fraud by participants throughout the origination process," said Fitch managing director Diane Pendley. "During the rapidly rising home price environment of the past few years, the ability of the borrower to refinance or quickly resell the property prior to the loan defaulting masked the true risk of these products and the presence of misrepresentation and fraud." The rating agency can be found online at http://www.fitchratings.com.

CBC Cos., a provider of credit and risk management solutions based in Columbus, Ohio, has merged with DataVerify, a provider of mortgage risk assessment and fraud prevention systems based in Chesterfield, Mo.CBC said it will leverage DataVerify's fraud and data integrity analytics, rules, and scoring to help solve mortgage risk problems faced by financial markets and institutions. DataVerify's solutions automate most of the data validation steps in the lending process. According to CBC, the resulting benefits to DataVerify and CBC customers include: increased loan production and revenues; mitigation of financial and reputational risks; conformity with regulations; and lower operational costs. The companies can be found on the Web at http://www.cbcinnovis.com and http://www.dataverify.com.

The Federal Housing Administration is willing to refinance certain delinquent borrowers with interest-only and payment-option adjustable-rate mortgages under the FHASecure program, which is designed to rescue subprime borrowers.However, the delinquency on an IO or option ARM must be the result of an interest rate reset or the full amortization of the mortgage, according to the Department of Housing and Urban Development. Shortly after HUD launched FHASecure on Sept. 5, lenders began asking whether IO and option ARMs would be eligible. HUD finally provided the answer in a newly revised "FHASecure Frequently Asked Questions" on the FHA website. Mortgage industry consultant Bud Carter pointed out the revision. "FHA will refinance almost any loan, except a conventional fixed-rate mortgage that is delinquent," he said. Mr. Carter is with Potomac Partners in Washington. The FHA can be found online at http://www.fha.gov.

The title insurance industry will not show significant improvement until 2009 at the earliest, a report from Fitch Ratings, New York, said."Fortunately, industry participants took advantage of prosperous years between 2002 and 2005 to strengthen balance sheets and should weather the current down cycle," the rating agency said in its "Review and Outlook 2007-2008: Title Insurance Industry." Fitch noted that for the six publicly traded title insurance underwriters, the average combined ratio worsened by 350 basis points to 101.8% at the end of the third quarter. The report claims "the real story" behind the problems with title insurers is the decline in operating margins, from 6.6% in 2006 to 2.3% this year. Where the subprime crisis affects the title insurance business is in fraud situations, where a default is more likely to result in a claim against a title insurer, Fitch said. Because title insurer resources were stretched thin during the refinance boom, the likelihood that thorough underwriting procedures for policies were not followed increased, it noted.

The Mortgage Bankers Association, the American Land and Title Association, and the American Escrow Association have announced the development of uniform mortgage closing instructions.The instructions, which are being proposed to members for comment, are designed to improve efficiencies and lower costs by replacing numerous instructions with two standard sets, and to help stem mortgage fraud and facilitate automated mortgage originations, the associations said. When finalized, they will not be required to be used by lenders but are likely to be widely accepted, the groups said. "The instructions promise to save money and increase efficiency across the lending and settlement industries, which will ultimately help borrowers reduce their closing costs," said Ken Markison, the MBA's senior director and regulatory counsel. "It's critical that companies across the industry understand the instructions and provide useful comments so that MBA, ALTA, and AEA can move forward to finalize the instructions for industry use."

The Office of Federal Housing Enterprise Oversight has spent over $16 million, or 25% of its budget, on litigation expenses as it pursues administrative charges against former Fannie Mae and Freddie Mac executives.OFHEO receives $66.1 million in funding in fiscal year 2007, including a $6.1 million supplemental appropriation to cover litigation expenses. Former Freddie chairman and chief executive Leland Brendsel recently agreed to a $16.4 million settlement, and four other former Freddie executives agreed to pay civil fines totaling $515,000 and to forfeit $258,000 in ill-gotten gains. OFHEO Director James Lockhart says he expects Congress to provide his agency with only $60 million for the current fiscal year even though the agency's litigation expenses will remain high. An administrative court judge is set to hear OFHEO's charges against former Fannie chairman and CEO Franklin Raines in 2008. Mr. Lockhart noted that litigation expenses and the appropriations process make it difficult to plan for and fill 40 positions. OFHEO currently has 235 full-time employees. OFHEO can be found on the Web at http://www.ofheo.gov.