Compliance

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.

To help struggling borrowers with little or no equity in their homes, the Bush administration would support GSE legislation that relaxes the mortgage insurance requirements on the loans Fannie Mae and Freddie Mac purchase, Treasury Secretary Henry Paulson has told Congress.Such a change would significantly increase the credit risk the government-sponsored enterprises take on, the Treasury secretary said, so it should only be done as part of a comprehensive GSE regulatory reform bill. "It would be irresponsible to expand GSEs' business without addressing the fundamental problems of their regulatory structure," Secretary Paulson told the House Financial Services Committee. Currently, the GSEs are required to have private mortgage insurance on loans they purchase with loan-to-value ratios greater than 80%. The secretary also said the administration would support a temporary increase in GSE loan limits to provide more liquidity in the jumbo market. But he emphasized that such an increase should only be implemented once Congress passes comprehensive GSE reform legislation.

The Office of Thrift Supervision is suggesting to Congress that it is time to impose some level of federal supervision over independent mortgage banks and that the OTS has the "expertise" to do it."The OTS has extensive expertise in the oversight and supervision of mortgage banking operations that I believe would benefit the currently unregulated mortgage banking market," OTS Director John Reich told the Exchequer Club in Washington. Imposing federal regulations and minimum lending standards on mortgage banks would create a level playing field with federally chartered banks and thrifts and "reduce the competitive pressures to engage in practices that are misleading and otherwise not consumer-friendly," Mr. Reich said. The Mortgage Bankers Association supports the creation of a uniform national lending standard. But MBA senior vice president Kurt Pfotenhauer said the supervision or regulation of those lending standards will have to be worked out as part of the legislative process. The OTS can be found on the Web at http://www.ots.treas.gov.

Ginnie Mae has granted an extension to R&G Mortgage Corp. allowing it to continue servicing Ginnie mortgage pools until Oct. 9, according to R&G Financial Corp., the San Juan, Puerto Rico-based parent company of R&G Mortgage.However, R&G Mortgage may not issue additional Ginnie Mae-guaranteed mortgage-backed securities. R&G Mortgage has also received notice from Fannie Mae placing conditions and limitations on the company's selling and servicing relationship with Fannie. Fannie Mae also said it will require R&G Mortgage to sell its servicing portfolio to another Fannie-approved servicer if Fannie Mae does not approve an application by R&G Financial's banking subsidiary, R-G Premier Bank of Puerto Rico, to be a Fannie Mae seller/servicer. R&G reported in July that it was no longer able to originate loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs because of the company's failure to submit timely audited financial statements. R&G can be found on the Web at http://www.rgonline.com.

The House Financial Services Committee has unanimously approved a bill that would give all the federal banking regulators the authority to adopt consumer protection rules that prohibit depository institutions from engaging in unfair and deceptive practices.The committee chairman, Rep. Barney Frank, D-Mass., has complained that banking regulators do not have the explicit authority to use their enforcement powers to protect consumers and says his bill corrects that anomaly. He noted that the Federal Reserve Board and the Office of Thrift Supervision already have authority to issue unfair-practices rules, but that only the OTS has taken the initial step of issuing a proposal to spells out specific unfair and deceptive lending practices for public comment. The bill (H.R. 3526) directs all the agencies -- including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. -- to jointly or individually issue unfair-practices rules. "I think it is an important bill that really helps consumers and really helps regulation," said Rep. Carolyn Maloney, D-N.Y. Rep. Frank noted that all the banking agencies and the banking industry support the bill.

The National Association of Hispanic Real Estate Professionals has announced the adoption of En Confianza: The NAHREP Code of Trust, a set of ethical principles that its members are required to abide by.The code sets requirements for four groups of professionals: mortgage originators; licensees and Realtors; builders; and providers of title, escrow, home inspection, and closing services. The principles call for stronger licensing and industry education requirements; quality controls such as net-benefit tests to ensure that all qualifying consumers are offered a prime loan; increased disclosures; development of a bilingual guide; protections against conflicts of interests; and full compliance with all state and federal laws. "Our industry's image is tainted by the actions of a few bad actors," said NAHREP chair Felix DeHerrera. "En Confianza solidifies NAHREP's position as an industry leader, and its members as trustworthy and reliable professionals." The organization said its first steps to enforce the code include joining forces with the Conference of State Bank Regulators and supporting the establishment of a "whistleblower hotline." The group can be found online at http://nahrep.org.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has scheduled a mark-up of a Federal Housing Administration reform bill on Sept. 19, and the House is expected to vote on passage of an FHA bill this week.The FHA reform bill "can be an important component in addressing the tidal wave of foreclosures" and provide troubled homeowners with "safe, affordable home loans," Sen. Dodd said. When the House takes up the FHA bill (H.R. 1852), Financial Services Committee Chairman Barney Frank, D-Mass., will offer a manager's amendment that specifically authorizes the FHA to refinance homeowners who are in default and have mortgages with "adverse terms or rates." Rep. Frank also plans to offer an amendment that boosts FHA loan limits to 125% of the median house price or $730,000 (175% of the conforming loan limit), whichever is lower. The Senate FHA reform bill is expected to raise the FHA loan limit to the $417,000 conforming loan limit in high-cost areas.

The Senate Banking Committee is tentatively scheduled to mark up a Federal Housing Administration reform bill Sept. 19, sources say, but committee members are still trying to reach agreement on key provisions of the bill.The Senate bill is expected to raise the FHA loan limits to $417,000 in high-cost areas and limit the ability of the mortgage insurance agency to charge risk-based premiums based on credit scores. Just before the August recess, it appeared that the senators were near agreement to give the FHA the green light to set premiums based on loan-to-value ratios as well as loan or property type -- but not on credit scores. Separately, the FHA is expected to issue a proposed rule soon to establish an RBP system that the agency plans to implement if Congress does not pass an FHA bill by Jan. 1. In the other chamber of Congress, the House is expected to vote on passage of an FHA reform bill (H.R. 1852) the week of Sept. 16.

The Mortgage Asset Research Institute, a Reston, Va.-based service of ChoicePoint, has announced the release of what it calls the first phase of a series of enhancements to its Mortgage Industry Data Exchange antifraud database.The redesigned MIDEX 2.5 offers new features to assist the mortgage industry in identifying individuals associated with mortgage fraud. "A new user interface has been developed to help users access and categorize information more quickly," MARI said. "Additionally, the search logic has been improved to return results that are most relevant to queries." MARI can be found on the Web at http://www.mari-inc.com.

The Federal Trade Commission has stepped up its surveillance of deceptive mortgage advertising, and it has warned 200 mortgage brokers, lenders, and media outlets to be careful about touting low interest rates without adequate disclosures."Many mortgage advertisers are making potentially deceptive claims about incredibly low rates and payments without telling consumers the whole story -- for example, that these low rates and payments apply for a short period only and can go up substantially after the loan's introductory period," said Lydia Parnes, the FTC's consumer protection director. In June, the FTC conducted a nationwide review of mortgage advertisements that might be deceptive or violate the Truth in Lending Act. Many advertisements touted rates as low as 1% but failed to adequately disclose the actual interest rate on the mortgage or the annual percentage rate, the FTC said.

The Federal Housing Administration would be able to insure $700,000 single-family mortgages in high-cost areas under an amendment the chairman of the House Financial Services Committee wants to attach to an FHA reform bill the House is expected to vote on soon.The FHA reform bill (H.R. 1852) already raises the FHA loan limit in high-cost areas from $362,790 to the $417,000 conforming loan limit, which is the upper limit on the loans Fannie Mae and Freddie Mac can purchase. But the House Financial Services Committee chairman, Rep. Barney Frank, D-Mass., and Reps. Gary Miller, R-Calif., and Dennis Cardoza, D-Calif., have filed an amendment with the House Rules Committee to raise the maximum FHA loan limit to 175% of the conforming loan limit, or $729,750, to address problems in the jumbo loan market. "The amendment modifies FHA loan limits to permit loans up to the lower of (a) 125% of the local media home price, or (b) 175% of the 2007 GSE national conforming loan limit [indexed in subsequent years] -- with additional HUD authority to raise limits by area or unit size by up to $100,000 if market conditions warrant," according to a summary of the Frank-Miller-Cardoza amendment.