Compliance

The Department of Housing and Urban Development is investigating payments of "excessive" fees to nonapproved mortgage brokers by Federal Housing Administration lenders.In the past few weeks, HUD officials have noticed that some FHA lenders are charging borrowers points and paying $4,000 to $5,000 to brokers for simply bringing a customer to their office. Brokers that are not approved by the FHA cannot take a loan application or close an FHA loan. HUD rules do allow nonapproved brokers to refer borrowers to FHA lenders. However, FHA Commissioner Brian Montgomery told MortgageWire that a $4,000 fee is a "little excessive" and that his agency has "ramped up an investigation." HUD officials are also reviewing FHA guidelines for nonapproved brokers and talking with department officials that deal with Real Estate Settlement Procedures Act matters. These fees seem to be "beyond what is reasonable and customary," Mr. Montgomery said in an interview.

The North Carolina state treasurer has asked the Securities and Exchange Commission to investigate stock sales by Countrywide Financial Corp. founder, chairman, and chief executive Angelo Mozilo.The letter to SEC Chairman Christopher Cox from North Carolina Treasurer Richard H. Moore says, "I was shocked to learn that CEO Angelo Mozilo apparently manipulated his trading plans to cash in, just as the subprime crisis was heating up and Countrywide's fortunes were cooling off." According to the letter, Mr. Mozilo accelerated his stock selling as the publicly traded lender's fortunes continued to wane. (Over the past few years, Mr. Mozilo has exercised options and sold more than $300 million worth of stock.) North Carolina pension funds own at least 500,000 shares of Countrywide stock. The request to investigate comes as Mr. Mozilo continues to exercise options and sell shares in the ailing lender. (On Oct. 10, Mr. Mozilo exercised options at $9.94 and sold $2.6 million worth of stock.) In about two weeks, Countrywide will release its third-quarter earnings. Morgan Stanley recently said Countrywide could lose at least $2.4 billion in the quarter. At deadline time, Countrywide's spokesman Rick Simon had not returned a telephone call about the North Carolina request.

The Department of Housing and Urban Development is very close to sending a RESPA proposal to the Office of Management and Budget that revamps the good-faith estimate and HUD-1 settlement sheet, according to a high-ranking HUD official.The Real Estate Settlement Procedures Act proposal will be shipped over to the OMB "very soon," HUD Assistant Secretary Brian Montgomery told MortgageWire. The proposal includes a standard GFE form to create more consistency in the initial disclosure that mortgage applicants receive from lenders on the costs of a mortgage transaction. The GFE will be comparable to the HUD-1 settlement sheet, and fees that might change before closing are grouped together. Increases should not exceed certain tolerances, which are also disclosed to consumers. HUD also plans to ask Congress to amend RESPA to require that borrowers receive closing documents sooner and to increase civil monetary penalties.

R&G Financial Corp., San Juan, Puerto Rico, has announced that its status as an approved lender for the Department of Housing and Urban Development has been reinstated.R&G also reported the execution of an agreement with the investors from the company's 2006 financing transaction that will permit it to repurchase certain outstanding warrants for a nominal consideration upon the sale of R-G Crown Bank, R&G's wholly owned Florida thrift subsidiary. Regarding R&G's approved-lender status, the company said HUD's chief administrative law judge had recently ordered the department to reinstate R&G pending the outcome of an appeal, citing HUD's failure to follow its regulations in withdrawing R&G Mortgage Corp.'s approved-lender status. R&G can be found on the Web at http://www.rgonline.com.

First Line Data Inc., a Boulder, Colo.-based provider of business intelligence for mortgage lenders, has announced enhancements to its Counter-Fraud Review reports, including address verification.Called CMRA Checkpoint, the new address feature will indicate whether a submitted address is actually a Certified Mail Receiving Agency. "With mortgage companies downsizing, the potential exists for mortgage brokers to be working out of virtual offices instead of an actual physical location," said Nancy Cowley, First Line Data's vice president of national sales. "CMRA Checkpoint will help lenders determine if their applicant is housed in an actual office." Another enhancement allows HUD NeighborhoodWatch to be included in reports on broker, correspondent, and warehouse line-of-credit applicants. This indicates whether the subject company is listed with the Department of Housing and Urban Development as a lender, and if so, the number of originations, default and claims totals, and Credit Watch status. The company can be found online at http://www.firstlinedata.com.

Mayer Brown, a global law firm based in Chicago, has announced the formation of a Subprime Lending Response Team to help clients deal with issues related to the nosedive in the subprime mortgage market.Noting that the subprime mortgage swoon is "reverberating worldwide," with rising regulatory scrutiny in the United States and Europe, the firm said it has "assembled an interdisciplinary team of lawyers from our offices in the U.S., the U.K., and Germany whose practices include securitization, banking, real estate, securities, and litigation." Mayer Brown touted its expertise in the international securitization and collateralized debt obligation markets, financial services regulation, and financial restructuring and bankruptcy. "The Subprime Lending Response Team will enhance the firm's recognized position as the leading legal adviser in these markets by also offering dispute management and regulatory services to clients facing the increased risks of litigation and regulatory inquiry," the firm declared. The law firm can be found online at http://www.mayerbrown.com.

National banks should have high standards for underwriting residential mortgages even if they are selling the loans to Wall Street conduits or other investors, according to the comptroller of the currency.National banks "simply cannot cede underwriting standards" to third-party purchasers of mortgages, Comptroller John Dugan told the American Bankers Association at its annual convention in San Diego. He warned that examiners expect banks to adhere to regulatory guidance in making subprime and nontraditional mortgages, including loans originated for sale. There can be some deviation, "but only so long as the risk differences are manageable" and there is a "credible prospect of repayment," Mr. Dugan said. The comptroller noted that national banks avoided significant losses on subprime loans because they sold their weaker credits in the secondary market. But he stressed that banks are not "primarily responsible for the worst abuses and losses arising from subprime credit." The ABA can be found on the Web at http://www.aba.com.

Servicers of private-label mortgage-backed securities are concerned that some investors are preparing to sue them for approving loan modifications, according to the Consumer Mortgage Coalition."We are aware of securities holders that have begun scrutinizing the actions of servicers and the ways the servicers' actions have allegedly improperly hurt the interests of the securities holders by insufficient adherence to the [servicing contract's] restrictions on modifications and related actions," CMC says in a letter to Sheila Bair, chairman of the Federal Deposit Insurance Corp. The FDIC chief recently said she is "frustrated" with the slow pace of modifications to help subprime borrowers avoid foreclosure. The CMC letter also points out that "global" remedies, such as forgoing interest rate increases on 2/28s and 3/27s, would violate servicing contracts. "We believe that the 'loan by loan' methods we use are appropriate and allow all the stakeholders -- the borrower, the investor and the servicer -- to reach the correct outcome…," CMC executive director Anne Canfield says in the Oct. 6 letter.

State attorneys general and bank commissioners have initiated an effort to monitor the top 20 subprime mortgage servicers to ensure that borrowers get the loan modifications they need."We feel this is a serious effort to avert a foreclosure avalanche that we potentially face," Iowa AG Tom Miller told MortgageWire. A working group of 11 AGs and three bank commissioners recently met with the top 10 subprime servicers in Chicago to discuss loan modifications. The working group expects the servicers to provide regular reports on their loss mitigation efforts. The state officials also expect to have contact with the servicers on a weekly or even daily basis.

Department of Housing and Urban Development officials are finding that non-FHA-approved mortgage brokers are charging "exorbitant" fees on Federal Housing Administration loans in possible violation of HUD rules."We are seeing exorbitant fees," HUD officer Mark Ross told a Mortgage Bankers Association conference, adding that HUD officials are reviewing the matter. Mr. Ross also reported that some FHA direct-endorsement lenders are soliciting nonapproved broker business with misleading advertisements implying that the broker can take the application or close the loan. "That is not allowed," he said. In addition, HUD has seen a "flurry" of applications for direct lending branches that are supposed to be used as call centers or Internet portals to solicit and take mortgage applications directly from borrowers. But some FHA direct-endorsement lenders are using the direct lending branches to solicit loans from nonapproved brokers throughout country. "That wasn't the intent," Mr. Ross said.

Fannie Mae has already identified 1,800 ZIP codes where house prices have declined, and it expects appraisals to accurately reflect those market realities, according to Fannie vice president Hope Evans."Sadly, we are seeing a lot of these appraisals with no mention whatsoever about the declining market," Ms. Evans told a Mortgage Bankers Association quality assurance conference. Fannie's automated underwriting system flags appraisals in those ZIP codes. "It is very important that you react to this message. Fannie is looking to see if there is additional field work in the file," she said. The Fannie vice president stressed that lenders need to have a "heightened awareness" that house prices declines have become more "pervasive" over the past year and are no longer just in pockets or isolated areas. She also said Fannie Mae is "working very actively on producing" an exclusionary list that identifies fraudsters. Freddie Mac currently has an exclusionary list that it shares with industry partners.

House and Senate Democratic leaders are urging the Bush administration to act more forcefully in addressing the "foreclosure crisis," and they are threatening to pass a measure to temporarily raise the caps on Fannie Mae's and Freddie Mac's portfolios if the administration does not take such action quickly.Fannie and Freddie could provide more liquidity to the mortgage market and help subprime borrowers refinance to save their homes, said Sen. Charles E. Schumer, D-N.Y., adding that he is prepared to press the Senate to pass a bill that would remove the caps on the government-sponsored enterprises for one year. House Financial Services Committee Chairman Barney Frank, D-Mass., said he would support the Schumer bill if it clears the Senate. Democratic leaders are also calling on the administration to appoint a czar to oversee its response to the foreclosure crisis and to press servicers and lenders to modify loans for distressed homeowners.

Baker, Donelson, Bearman, Caldwell & Berkowitz, a law firm based in Memphis, has announced the creation of a Subprime Mortgage Task Force, a multidisciplinary practice group of attorneys from across Baker Donelson's five-state footprint in the Southeast and Washington, D.C.Linda S. Finley, a shareholder in the Atlanta office, and Hank Arnold, a shareholder in the New Orleans office, are leading the firm-wide effort. "We've assembled a team of attorneys who can assist clients with the wide spectrum of matters [relating to the subprime mortgage crisis], whether involving complex litigation defense in class-action suits, providing advice on regulatory compliance, or tracking and advancing financial institution client interests before local, state, and federal legislative bodies," said Ben Adams, Baker Donelson's chairman and chief executive officer. The firm said task force members are experienced in areas such as representing lenders, servicers, and investors in state, federal, and bankruptcy courts; default representation; quality control/quality assurance review of suspect loans; loss mitigation; state and federal regulatory compliance; and capital market activities. The firm can be found online at http://www.bakerdonelson.com.

Two major downpayment assistance providers have sued the Department of Housing and Urban Development to block a final rule that prohibits seller-funded DPA on Federal Housing Administration loans starting Nov. 1.Nehemiah Corporation of America, Sacramento, Calif., and AmeriDream Inc., Gaithersburg, Md., filed separate lawsuits. "HUD's action to move forward with banning privately funded downpayment assistance programs is outrageous, and we have responded by filing a lawsuit in federal court to challenge the merits of HUD's damaging rule and to seek an injunction blocking implementation of this rule," said Nehemiah president and chief executive Scott Syphax. He pointed out that HUD received 15,000 comment letters opposing the DPA rule and that the House has just passed an FHA reform bill that creates new standards for DPA providers. (A Senate FHA reform bill would ban seller-funded downpayments on FHA loans.) Due to a 1998 settlement with HUD, Nehemiah is exempt from the HUD rule for six months and can still provide downpayment assistance on FHA loans until April 1.

The Mortgage Bankers Association has released a policy paper that distinguishes the issue of mortgage fraud from predatory lending and discourages adding to or modifying the "already comprehensive" list of federal fraud statutes.The MBA's policy paper, Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts, recommends that Congress increase the resources available to law enforcement and help facilitate the coordination of federal and state law enforcement of financial crimes. "We do not need more federal laws to combat fraud," said Jonathan L. Kempner, president and chief executive officer of the MBA. "Instead, we need a more coordinated effort and more resources to investigate and prosecute. In addition to being illegal and costly, we know that fraud has also contributed to the recent rise in delinquencies and foreclosures, and the industry and government must step up our anti-fraud efforts to help curtail these related problems." The FBI has estimated that fraud cost mortgage lenders as much as $4.2 billion in 2006. The MBA can be found online at http://www.mortgagebankers.org.

Four former Freddie Mac executives agreed to pay civil fines totaling $515,000 and to forfeit $258,000 in ill-gotten gains as part of a settlement with the Securities and Exchange Commission.The SEC charged Freddie Mac with securities fraud and the former executives with negligent conduct, which they settled without admitting or denying the allegation. Former Freddie president and chief operating officer David Glenn agreed to pay a $250,000 civil penalty and to disgorge $150,000. Former chief financial officer Vaughn Clarke agreed to pay a $125,000 civil penalty and disgorge $29,227. Former senior vice president Nazir Dossani agreed to pay a $75,000 penalty and disgorge $61,663, and ex-SVP Robert Dean agreed to pay a $65,000 penalty and disgorge $34,658. Former Freddie chairman and chief executive Leland Brendsel, who is facing an enforcement action by the Office of Federal Housing Enterprise Oversight that is before an administrative law judge, is not part of the SEC enforcement action.

Freddie Mac has agreed to pay a $50 million civil money penalty to settle government charges that the giant mortgage company engaged in securities fraud from 1998 to 2002.The Securities and Exchange Commission alleged that the publicly traded government-sponsored enterprise manipulated earnings and engaged in transactions to nullify the effects of a new hedge accounting rule. This resulted in the misrepresentation of the company's financial results and forced Freddie to restate its earnings for 2000, 2001, and 2002. "We take these charges seriously, and that's why the Freddie Mac of today is a very different company from the Freddie Mac of the past," said Freddie Mac chairman and chief executive Richard Syron. As part of the settlement, four former Freddie executives settled charges of negligent conduct without admitting or denying the charges (see item below). Freddie Mac can be found online at http://www.freddiemac.com.

Democrats on the House Financial Services Committee have drafted a predatory-lending bill that would sweep more loans into the "high-cost" category and make it very difficult for lenders to provide traditional subprime loans to borrowers facing "life events" such as bankruptcy, job loss, or foreclosure.The draft bill would lower the points-and-fees trigger of the Home Ownership and Equity Protection Act to 5% and include yield-spread premiums in the calculation. It also appears that financing points and fees would be prohibited. If so, it would make it impossible for lenders to help most borrowers facing significant problems, according to attorney Wright Andrews. "Hopefully, this is an issue the committee will address and allow such loans to continue to be made, subject to appropriate safeguards," he said. Mr. Andrews is with the law firm of Butera & Andrews.

Members of the Federal Home Loan Bank of Chicago could see their dividends reduced and stock redemptions delayed or denied under a cease-and-desist order being considered by the Federal Housing Finance Board, the Chicago bank has disclosed in a securities filing.The Chicago bank said it received a draft of the C&D order on Sept. 24 and is in discussions with the Finance Board. The Chicago bank paid a 2.8% dividend in the second quarter. In a letter to members, Chicago FHLBank president Mike Thomas said the C&D order would not affect any services or products. Mr. Thomas also said the "possibility of a merger with the Dallas FHLBank continues," but that an agreement has not been reached.

The long-term issuer default ratings of R&G Mortgage, San Juan, Puerto Rico, and its parent company, R&G Financial Corp., have been downgraded from CCC to BB-minus by Fitch Ratings and placed on Rating Watch Negative.In addition, the long-term IDR of R-G Premier Bank has been downgraded from BB-minus to B and placed on Rating Watch Negative. Fitch pointed to R&G's recent news release "detailing uncertainties regarding relationships with certain government agencies and [government-sponsored enterprises], along with uncertainties related to the near-term renewal of two credit facilities." Moreover, the company "indicated the need to take mortgage impairment charges and provisions for construction loans" in the third quarter, Fitch said. In addition, audited financial statements have still not been released, and "financial metrics" presented in regulatory filings for the first half "compare unfavorably" to those of other financial institutions in the BB rating range, Fitch said.