Compliance

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.

First American Title Insurance Co. has agreed to pay a $5 million fine and shut down 84 affiliated partnerships with real estate agents, mortgage brokers, and builders in Florida as part of a settlement with state regulators and the U.S. Department of Housing and Urban Development."Our joint investigation found these partnerships were created to generate referrals in violation of the Real Estate Settlement Procedures Act and HUD's policies against sham affiliated business arrangements," HUD Assistant Secretary Brian Montgomery said. The Santa Ana, Calif.-based company agreed to abide by HUD rules in operating future affiliated title companies in Florida that are separately capitalized and have full-time employees. First American said it is adjusting its practices to changing regulatory standards. "Homeowners who purchased title insurance through these joint venture companies were charged premiums consistent with the valid, filed rates for title insurance in Florida," the company said. "Rates were not adversely impacted by these business arrangements." First American can be found on the Web at http://www.firstam.com.

A few Republican senators are blocking efforts by Democratic leaders to pass a Federal Housing Administration reform bill just before the Senate leaves for a two-week Thanksgiving break.Senate Majority Leader Harry Reid, D-Nev., urged Republicans to expedite passage by allowing an up-or-down vote on the bill (S. 2338), which would increase the FHA's capacity to refinance struggling subprime borrowers. "These borrowers need better mortgage options, and FHA loans will be a better option with this legislation," Sen. Reid said. But Sen. Tom Coburn, R-Okla., said he would object to such a vote, which caused Sen. Reid to withdraw his request for a vote late Thursday afternoon. The Oklahoma Republican said the Senate needs to take the time to debate and consider changes to the FHA reform bill. And he raised concerns about increasing the FHA loan limit to $417,000 (the conforming loan limit) and lowering the FHA downpayment requirement from 3.0% to 1.5%.

The House has passed a predatory-lending bill by a bipartisan vote of 291-127 that clamps down on abusive lending practices, makes securitizers responsible for loans they package, and lowers the points-and-fees trigger on the Home Ownership and Equity Protection Act to cover more high-cost subprime loans.Mortgage lenders, along with the Bush administration, oppose key provisions of the bill, contending that the lending standards are too subjective and that the assignee liability provisions (along with the HOEPA provisions) will reduce access to mortgage credit. However, Rep. Spencer Bachus, R-Ala., said the bill will "protect consumers from predatory lending practices" and preserve access to credit. "We are dealing with legislation that seeks to prevent a repetition of the events that caused one of the most serious financial crises in recent times," said House Financial Services Committee Chairman Barney Frank, D-Mass. The National Association of Mortgage Brokers succeeded in getting language in the bill (H.R. 3915) clarifying that a broker's fee can be financed into the loan. However, mortgage bankers are concerned that this language might require the disclosure of servicing-released premiums for the first time. Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., said he will introduce a predatory-lending bill soon.

The Rev. Al Sharpton is calling on Senate Democrats to stop the Department of Housing and Urban Development from killing downpayment assistance programs that help Federal Housing Administration homebuyers just as the Democrats are trying to pass an FHA reform bill that also prohibits DPA programs.The civil rights activist said House Democrats have moved to block a HUD rule that would prohibit seller-funded downpayment assistance that Nehemiah Corporation of America and other nonprofits arrange for FHA borrowers. But Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has been "missing in action," the Rev. Sharpton told reporters, when it comes to saving this homeownership program for minorities and low-income families. However, the Senate Banking Committee has approved an FHA reform bill that lowers the FHA downpayment requirement from 3.0% to 1.5% and prohibits seller-funded downpayment assistance on FHA loans. Senate Majority Leader Harry Reid, D-Nev., was trying to get the Senate to vote on an FHA reform bill Thursday. But Senate Republicans are stonewalling the Democrats on several major bills. The FHA reform bill's chances of getting through appear to be slim.

Sen. Robert F. Bennett, R-Utah, says there is a "pretty good" chance the Senate will pass a bill to strengthen regulation of Fannie Mae and Freddie Mac during the first half of next year."It is very clear the GSEs need a robust, well-staffed, well-financed regulator," Sen. Bennett told a Women in Housing and Finance luncheon in Washington. "And they do not have one now." The Senate Banking Committee member noted that the "ideological gap" between the Bush administration and Congress has narrowed and the principals have a more realistic view of what needs to be done to enhance the regulation of the government-sponsored enterprises. He said he expects the committee chairman, Sen. Christopher J. Dodd, D-Conn., to get the ball rolling on GSE reform "fairly early" next year. The House passed a GSE reform bill in May.

General Growth Properties Inc. says it plans to appeal a recent $74 million verdict and $15 million punitive damage award by a California jury in a lawsuit alleging intimidation by the real estate investment trust.A Superior Court jury in Los Angeles awarded the compensatory damages in a suit filed against General Growth Properties by Caruso Affiliated Holdings LLC involving Glendale Galleria, a California mall. The suit alleged that the company intimidated The Cheesecake Factory while it was exploring leasing at The Americana at Brand and interfered with Caruso's business using unfair business practices. General Growth owns the Glendale Galleria adjacent to Caruso's Americana at Brand, a $369 million retail building in downtown Glendale. "The company emphatically disagrees with the jury's verdict and will pursue review and reversal through every available means," General Growth said. The case has been in court for over three years. Rick J. Caruso, chief executive of Caruso Affiliated, said he hopes that "by fighting this case we will have set a precedent throughout the retail industry that the giant REITs can no longer use intimidation to squash competition. They will have to play fair on a level playing field with the rest of us."

Federal Housing Administration Commissioner Brian Montgomery chided the Senate at the National Association of Realtors' convention in Las Vegas for moving too slowly on legislation that would modernize his agency.The Senate Banking Committee cleared its version of FHA reform legislation in mid-September -- a day after the full House approved its bill -- but the committee chairman and presidential candidate, Sen. Christopher J. Dodd, D-Conn., didn't place the measure into the Senate hopper until Nov 13. "The time to move [FHA reform legislation] was last year," Mr. Montgomery said, "but we can still have a profound impact if we act this year." Noting that the Department of Housing and Urban Development has been asking Congress to revamp and revitalize some of the FHA's key programs for nearly two years, the commissioner said lawmakers could have spared a lot of homeowners "a lot of misery" had they already acted to lower FHA downpayment requirements and raise loan limits. The NAR and other advocates of FHA reform are hoping the full Senate will act before Congress quits for the holiday season in early December. And if it does, NAR lobbyists may try to persuade lawmakers to attach a rider that would enhance regulatory oversight of Fannie Mae and Freddie Mac. GSE reform legislation is also stalled in the Senate.

The National Association of Mortgage Brokers has succeeded in getting a clarification on the treatment of yield-spread premiums included in a predatory lending bill that the House is expected to pass on Thursday.Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, and Rep. Spencer Bachus, R-Ala., agreed to insert language in the manager's amendment that allows the financing of the broker's fee, provided that the fee is "fully and clearly disclosed to the consumer early in the application process." The manager's amendment also includes a new "absent" creditor provision, sponsored by Rep. Mel Watt, D-N.C., that would hold securitizers accountable, if the lender or assignee goes out of business, for fixing subprime mortgages that violate the lending standards in the bill. The National Community Reinvestment Coalition board member said holding Wall Street accountable is essential to prevent "irresponsible" lending and investing. Without a strong assignee liability provision, NCRC president John Taylor said, the investment banks will have no incentive to do loan modifications.

The House is on track to pass a Mortgage Reform and Anti-Predatory Lending bill Thursday, and the lawmakers will likely attach a separate bill that addresses escrow, appraisal, and servicing issues.The House Financial Services Committee approved the predatory-lending bill by a 45-19 vote Nov. 6. The next day the committee approved the servicing reform bill (H.R. 3837), sponsored by Rep. Paul Kanjorski, D-Pa., by voice vote. The Kanjorski bill establishes enforceable national appraisal independence standards with tough penalties for lenders who pressure appraisers to inflate property values. The bill also requires escrow accounts for taxes and insurance on most subprime mortgages and creates standards for force-placed insurance. New York Attorney General Andrew Cuomo endorsed the appraisal reforms at a news briefing arranged by Rep. Kanjorski last week. The New York AG has raised issues about major institutions that have allegedly been pressuring appraisers.

The federal regulator of Fannie Mae and Freddie Mac has blasted New York Attorney General Andrew Cuomo for subpoenaing the two GSEs in connection with an appraisal fraud probe, arguing that "they have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals.""I am disappointed that your office did not contact OFHEO before or even after subpoenaing the GSEs and issuing certain threats regarding their future business activities," writes OFHEO Director James Lockhart in a Nov. 8 letter to AG Cuomo. Mr. Lockhart wants an explanation from Mr. Cuomo in regard to his demand that the government-sponsored enterprises cease doing business with Washington Mutual, a large seller of mortgages to the GSEs. Earlier this week the New York AG said his office would subpoena the GSEs as part of a wider probe into mortgage industry practices. OFHEO is the safety-and-soundness regulator of Fannie and Freddie.