Compliance

Former Freddie Mac chairman and chief executive Leland Brendsel has agreed to disgorge $10.5 million in salary and bonuses to settle an administrative enforcement action by the Office of Federal Housing Enterprise Oversight.Mr. Brendsel also agreed to pay the U.S. government $2.5 million and waive claims against Freddie for $3.4 million in additional compensation in settling allegations that the government-sponsored enterprise allowed improper earnings management under his leadership. The former CEO was ousted by Freddie Mac's board of directors in 2003 after an internal investigation discovered that the company had understated profits by $5 billions to show steady and increasing earnings. OFHEO charged Mr. Brendsel with operating the GSE in an unsafe and unsound manner.

Late Wednesday night the House Financial Services Committee passed predatory-lending legislation that could put a crimp in yield-spread premiums, a key component of how loan brokers are compensated.The National Association of Mortgage Brokers is concerned that a section of the bill that bans "incentive payments" to brokers also bans all YSPs. Rep. Gary Miller, R-Calif., proposed an amendment to clarify that YSPs are permitted if the broker's fee is disclosed early in the process and if the fee is not changed based on the consumer's decision to finance certain closing costs. Rep. Barney Frank, D-Mass., the committee chairman and sponsor of the bill, said the ban on incentive pay is designed to prevent brokers from steering borrowers into higher-cost loans. Among other things, the bill imposes standards on the origination and securitization of subprime loans. (For full details, see the Nov. 12 issue of National Mortgage News.)

New York Attorney General Andrew Cuomo said Wednesday that his office will subpoena Fannie Mae and Freddie Mac as part of a widening probe of the residential mortgage industry.Among other things, the subpoenas seek information on mortgages purchased by the government-sponsored enterprises from their seller/servicers, including Washington Mutual of Seattle. The GSEs also agreed to a demand by the New York AG that they hire an independent examiner to conduct a review of all WaMu appraisals on mortgages they purchased. In 2006, according to the eMortgage Industry Directory, WaMu sold north of $30 billion in loans to the GSEs. "In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," the attorney general said in a statement. At deadline time, only Fannie had commented on the matter, saying it would fully cooperate.

Forty states are planning to participate in the Nationwide Mortgage Licensing System that will track state-licensed mortgage lenders, loan officers, and brokers, and seven states are ready to go onto the system within 60 days of its launch on Jan. 2."These seven states are creating the initial critical mass necessary for a successful launch of the system," said David Bleicken, president of the American Association of Residential Mortgage Regulators. The states are Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, and Rhode Island. The AARMR and the Conference of State Bank Supervisors have developed the licensing system to track unethical mortgage professionals as they move from state to state and from company to company. At the same time, the House Financial Services Committee is considering a predatory-lending bill (H.R. 3915) that would require federal regulators to create a registry for mortgage originators at federally regulated banks and their subsidiaries. And like state-licensed mortgage lenders, bank loan officers would have to have a "unique identifier."

The Federal Reserve Board is close to proposing that all subprime mortgages should have escrow accounts, according to a Fed governor who is working on updating the Home Ownership and Equity Protection Act regulations.The failure to escrow taxes and insurance can lead to payment shock, Randall Kroszner told a Consumer Bankers Association fair-lending conference. "It is common practice for these payments to be escrowed in prime markets, and I see no reason that escrows should not be standard practice in the subprime markets, too," Mr. Kroszner said. The Fed is expected to issue proposed changes to the HOEPA regulations before the end of the year. Mr. Kroszner said the Fed also plans to issue proposals by the year-end that ban several deceptive advertising practices and require important consumer disclosures earlier in the mortgage process so consumer can shop around and compare loan products.

Fannie Mae has announced that it will file its first-, second-, and third-quarter financial reports with the Securities and Exchange Commission on Nov. 9 and host a conference call to brief investors and analysts."With these filings, the company will become current in its financial reporting requirements," the giant mortgage company said. Fannie Mae has not filed a quarterly report (Form 10-Q) since the second quarter of 2004 after it was discovered that the company manipulated accounting standards and overstated earnings by billions of dollars. The publicly traded company paid a $400 million fine to the SEC and restated earnings for 2001, 2002, 2003, and the first half of 2004. Fannie's regulator currently requires the company to maintain a 30% capital surplus until it returns to timely financial reporting and corrects its internal controls and accounting systems. Analysts will be waiting to hear how much longer the expensive process of rebuilding those systems will take. Fannie Mae can be found online at http://www.fanniemae.com.

New York Attorney General Andrew Cuomo is planning to file more lawsuits related to problems associated with lender pressuring of appraisers, but he is also preparing to take other legal actions that highlight another "systemic, industrywide" problem next week."We will begin other cases that make other points on systemic frauds within the housing arena," Mr. Cuomo said at a news conference in Washington, where he endorsed a bill to reform appraisal and servicing practices. The New York AG recently filed a lawsuit against First American Corp. and its appraisal management company for allegedly succumbing to pressure to change valuations. He stressed that his office pursued the First American case because it provides the "most graphic illustration of this issue" and that it cannot be dismissed as an isolated case. WaMu has said it was "surprised and disappointed by the allegations in the complaint related to [First American's] eAppraiseIT unit" and has suspended its business relationship with eAppraiseIT "until we can further investigate the situation." First American has said it believes the allegations have no basis in fact or law and that the program challenged by the attorney general "has been vetted and approved by the federal regulator responsible for oversight of such programs."

Meanwhile, Washington Mutual has announced the suspension of its relationship with eAppraiseIT until WaMu can investigate the allegations in the lawsuit filed by the New York attorney general.New York AG Andrew Cuomo sued First American Corp. and its eAppraiseIT unit for allegedly colluding with WaMu to use a list of preferred appraisers to inflate mortgage appraisals. The lawsuit said the state attorney general's investigation uncovered a series of e-mails between executives at eAppraiseIT, First American, and WaMu that allegedly show eAppraiseIT officials were willingly violating state and federal appraisal independence regulations to comply with WaMu demands to inflate appraisals. "We are surprised and disappointed by the allegations in the complaint related to eAppraiseIT," WaMu said in a news release. "We have absolutely no incentive to have appraisers inflate home values. In fact, inflated appraisals are contrary to our interests. We use third-party appraisal companies to make sure that appraisals are objective and accurate." WaMu can be found online at http://www.wamu.com.

The lawsuit by New York Attorney General Andrew Cuomo alleging collusion to inflate mortgage appraisals between First American Corp., its subsidiary eAppraiseIT, and Washington Mutual has no basis in fact or law, First American said in a statement issued Nov. 1."We are dismayed by any impact these specious allegations may have on our company, on our many employees, and on our valued customer, Washington Mutual," First American said. "The Attorney General's allegations, largely based on a handful of e-mails that have been taken out of context, or mischaracterized, and an incomplete review of the facts, belie our record of compliance with applicable law." The program challenged by the attorney general "has been vetted and approved by the federal regulator responsible for oversight of such programs," the company said. First American said it will demonstrate to the court "the appropriateness of our appraisal practices in the state of New York, and we will vigorously defend the reputation of Washington Mutual and the reputation we have labored more than 100 years to build." First American can be found online at http://www.firstam.com.

The Office of Thrift Supervision has issued the final Basel II risk-based capital rule, and the other banking regulators are expected to follow soon.The long-awaited capital rule is designed for the largest U.S. banks with international exposure. But large regional banks that want to use an internal ratings-based approach to calculate their RBC requirements can also adopt it. The OTS noted that the regulators are working on the "standardized approach," which is an upgrade of the current Basel I RBC standard, and they expect to issue a notice of proposed rulemaking in the first quarter. The American Bankers Association urged the regulators to act quickly on the standardized RBC approach so that the majority of U.S. banks are not left at a competitive disadvantage to the large Basel II banks. "We look forward to working with the regulators on the prompt development of the standardized approach," ABA executive director Wayne Abernathy said.

Saying that mortgage brokers are facing "extinction," the National Association of Mortgage Brokers is urging its members to learn about pending legislation that would "outlaw" yield-spread premiums and then call their members of Congress to complain.The trade group has set up two conference calls -- one scheduled Nov. 2 -- to inform its members about Rep. Barney Frank's Mortgage Reform and Anti-Predatory Lending Act of 2007, which, among other things, would require all brokers to have a minimum net worth or a bond requirement of $100,000. A Democrat from Massachusetts, Rep. Frank is chairman of the House Financial Services Committee. NAMB government affairs chair Denise Leonard sent an e-mail message to members saying that if the bill passes, "all subprime lending will cease to exist." The association can be found online at http://www.namb.org.

The U.S. District Court for the District of Columbia has issued a preliminary injunction barring the Department of Housing and Urban Development from enforcing its new regulation prohibiting downpayment assistance by charities if any part of the funds came from the real estate seller.The injunction will be in effect until the court decides whether the regulation is valid, the court said. The regulation was to take effect on Oct. 31. "We believe that the findings of the Court underscore the weakness of HUD's actions in developing and implementing its rule in the first place, particularly while Congress is still actively working on the subject, as well as HUD's failure to consider reasonable proposed alternatives," said Scott Syphax, president and chief executive officer of DPA pioneer Nehemiah Corporation of America. The plaintiffs in the case are: AmeriDream Inc., The Genesis Foundation, Home Downpayment Gift Foundation, The Sovereign Grant Alliance, The Future Home Assistance Program, and Partners in Charity Inc.

New York Attorney General Andrew Cuomo has announced that he is suing First American Corp. and its eAppraiseIT unit for allegedly colluding with Washington Mutual Inc. to use a list of preferred appraisers to inflate mortgage appraisals.According to the AG's office, eAppraiseIT -- in a scheme detailed in numerous e-mail messages -- caved in to pressure from WaMu to use a list of preferred "proven appraisers" who provided inflated appraisals on homes. The e-mail also shows that executives at eAppraiseIT knew their behavior was illegal, but intentionally broke the law to secure future business with WaMu. "The blatant actions of First American and eAppraiseIT have contributed to the growing foreclosure crisis and turmoil in the housing market," Mr. Cuomo said. "By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion." Howard Glaser, a mortgage industry consultant based in Washington, says the Cuomo action marks the most significant legal action to date by the state or federal government in the wake of the mortgage meltdown. "The Cuomo suit sheds light on what has been an open secret in the mortgage industry, pressure by banks on appraisers to hit a particular target value in order to close a loan," he said.

House Financial Services Committee Chairman Barney Frank, D-Mass., wants to start the mark-up of his controversial predatory-lending bill on Nov. 6.The Mortgage Reform and Anti-Predatory Lending Act would establish a minimum federal lending standard (but not pre-empt state lending laws) along with a limited form of assignee liability for securitizers of subprime mortgages. The bill (H.R. 3915), co-sponsored by Reps. Brad Miller and Mel Watt, both North Carolina Democrats, also appears to ban the payment of yield-spread premiums to mortgage brokers. The National Association of Mortgage Brokers is seeking a clarification to this anti-steering provision.

Six homebuilders have entered into settlements totaling $1.4 million for alleged violations of the Real Estate Settlement Procedures Act and agreed to stop participating in captive title reinsurance arrangements, according to the Department of Housing and Urban Development.HUD Assistant Secretary Brian Montgomery said there is "no legitimate purpose" for single-family captive title reinsurance. "It is increasingly clear to us that these complicated business arrangements serve no other purpose than to hide referral fees and kickbacks, which are expressly forbidden by law," he said. As part of the settlements with HUD, Pulte Homes Inc. agreed to pay $466,000; KB Home, $456,000; Beazer Homes USA Inc., $261,000; Ryan Group Inc., $84,000; Meritage Homes Corp., $66,000; and Technical Olympic USA Inc., $52,000.

The president-elect of the National Association of Mortgage Brokers says the Department of Housing and Urban Development does "not care about true simplification" of the Real Estate Settlement Procedures Act, and he vowed to vehemently oppose HUD's latest RESPA proposal.The proposal, which had not yet been released officially, includes a four-page good-faith estimate instead of a one-page GFE favored by the NAMB, Marc Savitt told attendees at the Southeast Mortgage Brokers Conference (sponsored by the Georgia Association of Mortgage Brokers) in Savannah, Ga. Mr. Savitt charged that HUD had bowed to pressure from other industry participants, contending that the RESPA proposal is about market share, not simplification. He said the new rule is similar to one HUD proposed back in 2004 but with the packaging provisions removed. Mr. Savitt vowed that the NAMB would "hit them with everything we have." In response to the 2004 rule, a grassroots campaign resulted in 45,000 letters of protest. "That is nothing compared with this time," he predicted. He called on mortgage brokers to contact their customers and have them write letters to HUD. Mr. Savitt told the conferees that the NAMB has attorneys in place ready to file a lawsuit against HUD as soon as the rule is formally published. The association can be found on the Web at http://www.namb.org.

"The fraudsters are the vampires" many homeowners have to fear because they "suck the blood from our communities," says Alicia Shepard, founder of the Georgia Real Estate Fraud Prevention and Awareness Coalition.Speaking in Savannah, Ga., at the Southeast Mortgage Brokers Conference sponsored by the Georgia Association of Mortgage Brokers, Ms. Shepard said legal efforts to prosecute those who commit fraud have had mixed results. In her former neighborhood of Moorings IV in the Atlanta area, while there have been some arrests and convictions, the overall lack of successful prosecutions has destroyed neighborhood morale and unity, she said. Gwinett County authorities told Ms. Shepard and her family that the county could not protect them anymore, and she recounted incidents of abuse to her pets and property. As a result, her family had to leave what she termed their "dream home." Ms. Shepard said even upscale communities in the area, such as Wolf's Creek, while successful in many efforts to combat mortgage fraud, still have scars.

The safe-harbor provisions to protect securitizers from liability in a House predatory-lending bill would create "more stringent" underwriting standards for subprime mortgages than banking regulators currently require, according to the comptroller of the currency.Comptroller John Dugan told a House panel that the bill (H.R. 3915) establishes "brighter and stricter" rules for subprime lending than the federal regulators have issued for banks and would restrict the supply of subprime credit. To qualify for the safe harbor, subprime loans must meet an ability-to-repay standard, income must be documented, debt-to-income ratios cannot exceed 50%, and the loan must be underwritten to the fully indexed rate, including insurance and taxes. The Mortgage Bankers Association is urging House Financial Services Committee Chairman Barney Frank, D-Mass., to provide more flexibility. "We strongly recommend that Congress carefully consider the potential impact of these safe harbors before hard-wiring them into the law," MBA senior vice president Kurt Pfotenhauer testified.

The Department of Housing and Urban Development is preparing to issue an "alert" soon that warns Federal Housing Administration lenders about paying "excessive" fees to non-FHA-approved mortgage brokers."We are concerned [that] consumers are being charged excessive fees," a HUD spokesman said. He said HUD is planning to warn FHA lenders soon that these fees could be "duplicative." While non-approved brokers can refer clients to FHA lenders, they are not allowed to take FHA applications or originate FHA loans. Nevertheless, FHA lenders are soliciting non-approved brokers to bring them customers and loans to process. HUD investigators have found that some lenders are charging borrowers points and paying $4,000 to $5,000 to the brokers. The National Association of Mortgage Brokers said it condemns this practice, which circumvents the FHA's approval process for originators. "This loophole needs to be closed as part of FHA reform" legislation, NAMB president George Hanzimanolis said.

The Department of Housing and Urban Development has given the green light to the recent request by AmeriDream Inc., Gaithersburg, Md., to prolong its ability to provide downpayment assistance until Feb. 29, 2008."We are pleased to reach an amicable agreement with HUD in our common mission to serve low- and moderate-income homebuyers," said AmeriDream president Ann Ashburn. The new deadline does not include other DPA providers, who are required under a HUD rule to stop their seller-funded DPA operations by Oct. 31. "HUD will recognize all applications that have a signed sales contract prior to the effective date, according to its congressional testimony," the DPA reported. Moreover, the affordable housing nonprofit said, "This agreement will facilitate litigation on an orderly schedule and provide the court with ample time to consider the merits of this important dispute." AmeriDream can be found online at http://www.ameridream.org.