Compliance

It is difficult for investors to make a monetary recovery from a fraudulent mortgage loan, according to an attorney at an American Securitization Forum seminar titled "Mortgage Fraud Prevention -- Tools and Resources for Secondary Market Participants."Karen Gelernt of Cadwalader, Wickersham & Taft LLP said unless there is a party with deep pockets (which originators generally don't have), investors will not be made whole if they purchase a fraudulent loan. Usually the secondary market is able to resell the loan in "scratch-and-dent" packages to firms with expertise to resolve the situation, but at a deep discount. A problem with using the judicial system as a remedy, Ms. Gelernt told attendees at the July 18 session in New York, is that the investor has to prove intent, which is difficult. "After-the-fact" legal enforcement provides some satisfaction, she said, but the money is not there to make the investor whole. Another issue, Ms. Gelernt said, is that the secondary market has been willing to accept fewer pieces of paper to document the loan file. This makes it easier to perpetrate fraud, because it makes it tougher to verify that the loan actually exists.

The Office of Federal House Enterprising Oversight is pushing Fannie Mae and Freddie Mac to stop their purchases of private-label mortgage-backed securities if the underlying mortgages don't comply with nontraditional mortgage and subprime guidance."We are working closely with the enterprises so that going forward these rules will apply to mortgages they purchase directly and through private-label MBS," OFHEO Director James Lockhart said in a speech to the Exchequer Club. The guidance issued by the federal banking regulators imposes tough underwriting standards on interest-only, payment-option, and subprime mortgages. Fannie and Freddie have agreed to comply with nontraditional mortgage guidance with respect to purchases of whole loans, and they are expected to adopt the subprime guidance soon. After his speech, Mr. Lockhart indicated to reporters that his discussions with the GSEs about their purchases of private-label MBS are going well. He said the talks are focused mainly on implementation issues.

The deterioration in the credit quality of subprime mortgages could result in losses ranging from $50 billion to $100 billion, Federal Reserve Board chairman Ben Bernanke told Congress July 19.The chairman indicated that delinquencies and foreclosures are rising faster than the Fed anticipated only a few months ago. And these problems "likely will get worse before it gets better," he said. Mr. Bernanke also told the Senate Banking Committee that he expects the Fed to issue new Home Ownership and Equity Protection Act regulations to address certain subprime lending practices, such as prepayment penalties, later this year. When asked about Federal Housing Administration reform, the Fed chairman advised the Senate to act cautiously because FHA single-family loans have high delinquency and default rates. "I would suggest moving with some caution to ensure you don't create another source of problems," Mr. Bernanke testified.

"We have a long way to go" in the subprime mortgage crisis, Countrywide chairman Angelo Mozilo told attendees in keynote remarks July 18 at the 35th Annual Western Secondary Market Conference in San Francisco.Pouring cold water on statements by other mortgage executives, including Countrywide Financial Corp.'s own Todd Dal Porto, Mr. Mozilo said the current subprime collapse is causing a paradigm shift that will bring down an avalanche of regulatory scrutiny. While declining to point blame for the subprime collapse in any particular direction, he said, "The Street stepped up to provide liquidity irrespective of underwriting" as New Century and others "went to the market time after time to get more capital" for exotic loans. The mortgage industry itself will be the real victim, Mr. Mozilo said.

Sen. Charles E. Schumer, D-N.Y., has introduced a stand-alone bill to raise the loan limits on Federal Housing Administration single-family loans and offer homebuyers an alternative to subprime loans."My bill will raise the FHA loan limits so that more homebuyers, especially those living in high-cost areas, will have the opportunity to [get] safe and affordable FHA prime mortgages," Sen. Schumer said during a Senate Banking Committee hearing. The New York senator noted that House Financial Services Committee Chairman Barney Frank, D-Mass., supports his bill. The senator said the bill would raise the FHA single-family loan limit from $362,000 to the $417,000 conforming-loan limit in high-cost areas. A copy of the bill was not available at deadline time, but Sen. Schumer's bill is expected to raise the FHA limit in low-cost areas and set the loan limit at the median house price in other areas. These adjustments to the FHA loan limits are contained in a comprehensive FHA reform bill approved by Rep. Frank's committee. Sen. Schumer noted that the inability to get FHA loans in many areas has exacerbated the subprime crisis.

The federal regulators are targeting a few subprime mortgage subsidiaries of bank and thrift holding companies for special consumer protection compliance reviews in the fourth quarter.The feds plan to coordinate with state regulators so the state-licensed mortgage brokers working with those mortgage subsidiaries also come under scrutiny. "Additionally, the states will conduct coordinated examinations of independent state-licensed subprime lenders and their associated mortgage brokers," the agencies said. The Federal Reserve Board, the Office of Thrift Supervision, and the Federal Trade Commission, along with the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, are participating in the pilot program. The nonbank subsidiaries of holding companies are generally overlooked in the examination process. "At the conclusion of the reviews, the agencies will analyze the results and determine whether the project is to be continued," the regulators said.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators have issued new subprime lending guidance for state-licensed mortgage lenders and brokers that mirrors the guidance recently issued by federal banking regulators.The two state regulatory groups had previously announced their intention to promote uniform application of the subprime guidance, which requires lenders to underwrite subprime adjustable-rate mortgages at the fully indexed rate. So far, 26 state mortgage regulators have said they will expedite adoption of the subprime guidance. To enhance the subprime lending guidance, the state regulators are planning to issue model examination guidelines that will provide a uniform standard for multistate examinations and enforcement actions. The state regulators also plan to offer training problems for examiners that will be open to quality control personnel and internal auditors at mortgage companies. After the examination guidance is issued later this month, "we will be rolling out a training program," CSBS vice president Chuck Cross said. The organizations can be found online at http://www.csbs.org and http://www.aarmr.org.

The Federal Reserve Board should impose tough restrictions on prepayment penalties in the subprime market, according to an FDIC advisory committee, as a way to prevent mortgage brokers from "steering" borrowers into higher interest-rate loans."Lenders will not pay [an excessive] yield spread premium, which is the incentive structure for steering, unless they have a prepayment penalty," Martin Eakes, chief executive of Self-Help Credit Union, told his fellow members on the advisory board. The Federal Deposit Insurance Corp. advisory committee agreed to send a letter to the Fed urging it to restrict prepayment penalties at the end of all-day discussion on subprime lending problems. In the subprime market, prepayment penalties can equal six months' worth of interest payments. Under the recommendation, lenders could only charge a penalty that recovers the administrative costs of setting up a new loan. The Fed is considering changes to its Home Ownership and Equity Protection Act regulations to ban certain subprime lending practices that it deems unfair or deceptive.

Nearly 90 mortgage lenders have formed an alliance to support passage of legislation to "reinvigorate" the Federal Housing Administration so it can provide safe and affordable financing for homebuyers, as well as a lifeline for subprime borrowers who are in trouble."We believe that a greater FHA presence in the mortgage market could have prevented the recent turmoil and that FHA is well-positioned to offer borrowers in trouble a simple and practical solution that will bring much-needed stability to local real estate markets," the FHA Alliance members say in a letter to leaders of the Senate Banking Committee. The House Financial Services Committee has approved a bill that raises the FHA single-family loan limits and allows the FHA to charge risk-based premiums and offer zero-downpayment loans. The Senate Banking Committee is scheduled to hold an FHA hearing on July 18. The formation of the alliance shows that lenders are "very interested" in the FHA reform legislation and view the changes as "very valuable to the housing finance system," said mortgage banking consultant Brian Chappelle. National companies such Bank of America, Countrywide Financial Corp., and SunTrust Mortgage, as well as regional companies such as Mortgage America, are alliance members.

Ginnie Mae has declared R&G Mortgage Corp. in default under its guaranty agreements as a result of the previously announced withdrawal of R&G's status as a HUD/FHA-approved lender by the Department of Housing and Urban Development, according to R&G Financial Corp., the company's San Juan, Puerto Rico-based parent company.The notification by Ginnie Mae said R&G Mortgage will lose its authority to act as a Ginnie Mae issuer and a servicer of Ginnie mortgage pools within 30 days, and that it may not issue additional Ginnie Mae-guaranteed mortgage-backed securities unless approved by Ginnie Mae. (R&G reported recently that it is currently unable 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.) The parent company said R&G Mortgage would file an appeal with HUD, and that its subsidiary R-G Premier Bank would apply to be licensed as a HUD/FHA-approved lender. R&G can be found on the Web at http://www.rgonline.com.

Three major housing trade groups want to stop the Office of Federal Housing Oversight from moving forward with a proposed formula that could trigger a decline in the conforming loan limit in 2009 if house prices decline by 1% or more this year.In a letter to Congress, the Mortgage Bankers Association, the National Association of Home Builders, and the National Association of Realtors warn that a reduction in the $417,000 confirming loan limit could be "detrimental" to the economy, homebuyers, homeowners, and the housing industries. "[W]e respectfully request that you encourage OFHEO to withdraw the proposed guidance," the trade groups say in a letter to the ranking members of the House and Senate banking committees. OFHEO's formula would allow a decline in the conforming loan limit as house prices decline, but with a one-year lag. So a possible decline in house prices this year would not affect Fannie Mae and Freddie Mac mortgage purchases until 2009. The CLL also serves as a benchmark for loan limits on Federal Housing Administration-insured and Department of Veterans Affairs-guaranteed loans.

Fannie Mae and Freddie Mac say they will stop purchasing interest-only and payment-option mortgages on Sept. 13 if the loans do not comply with the nontraditional mortgage guidance issued last fall by federal banking regulators.The mortgage giants are taking this action at the direction of their regulator -- the Office of Federal Housing Enterprise Oversight -- and they issued notices to their sellers about the coming changes. "It is Freddie Mac's expectation that sellers will comply with the guidance, and that regulated sellers will do so in a manner consistent with their regulators' interpretation and application," the government-sponsored enterprise said. Fannie Mae also notified its sellers about the guidance and served noticed that OFHEO expects the GSEs to adopt the subprime guidance next. "Accordingly, we expect to issue a subsequent announcement related to the Subprime Guidance in the near future," Fannie said. The federal banking agencies issued the subprime guidance on June 29. OFHEO Director James Lockhart predicted that Fannie's and Freddie's actions will force unregulated lenders that sell nontraditional and subprime loans to the GSEs to comply with new standards. "This is a significant step," Mr. Lockhart said.

Rep. Spencer Bachus, R-Ala., has introduced a subprime lending reform bill that would establish a national registry for all mortgage originators -- including loan officers at federally insured banks and their wholly owned subsidiaries.The bill "creates a national registration and licensing standard for mortgage originators to enhance accountability and professionalism within the industry," according to a statement issued by Rep. Bachus. The Fair Mortgage Practices Act also restricts prepayment penalties on adjustable-rate 2/28 and 3/27 mortgages and requires escrow accounts on all subprime mortgages. Rep. Bachus worked with several Democrats last year in developing a bipartisan anti-predatory-lending bill, but those talks broke down last fall. House Financial Services Committee Chairman Barney Frank, D-Mass, is currently working on a predatory-lending bill. "I am optimistic we can do a bill this fall," Rep. Frank said.

R&G Financial Corp., San Juan, Puerto Rico, has reported that its status as a HUD/FHA-approved lender has been withdrawn by the Department of Housing and Urban Development because of R&G's failure to submit timely audited financial statements.As a result, R&G said it is currently unable to originate loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. The company said its subsidiary R&G Mortgage will file an appeal with HUD, and its subsidiary R-G Premier Bank will apply to be licensed as a HUD/FHA-approved lender. "As a licensed bank lender, R-G Premier would not be subject to the audited financial statement requirements applicable to R&G Mortgage," R&G said. The company also reported that it has received "notice of non-objection" from the Federal Reserve Bank of New York and the Federal Deposit Insurance Corp. to "engage in what amounts to the last of its 'unwinding' transactions with other Puerto Rican financial institutions resulting from the restatement of its audited consolidated financial statements." R&G can be found on the Web at http://www.rgonline.com.

The Federal Reserve Board is working "expeditiously" on crafting proposals to protect consumers from unfair subprime lending practices, but there is no timetable for the issuance of a Home Ownership and Equity Protection Act rule, according to a Fed governor."I can't give you a timetable," Fed Governor Randall Kroszner told a meeting of the New York Bankers Association in Washington. One of the bankers, New York Federal Home Loan Bank President Alfred DelliBovi, told the Fed governor that he senses a lot of "anger" in Congress about the subprime mortgage situation and rising foreclosures. Mr. Kroszner stressed that the board is "very sensitive" to the plight of subprime borrowers who have lost their homes and others that are facing resets on adjustable-rate mortgages. The Fed is devoting a lot of resources to the issue, he said. On July 11, the House passed a resolution (H. Res. 526) that calls for "government action" to protect homebuyers "from unscrupulous mortgage brokers and lenders."

The Department of Housing and Urban Development is creating a new fair-lending division to handle an increasing number of investigations into discriminatory mortgage lending practices."We have launched a record number of investigations this year," said HUD Assistant Secretary Kim Kendrick. It is understood that HUD is investigating several subprime lenders for pricing disparities based on Home Mortgage Disclosure Act reports. The new fair-lending division will also oversee Fannie Mae and Freddie Mac to ensure that their underwriting policies and practices comply with fair-lending laws.

At the request of Congress, the Department of Housing and Urban Development has extended the comment period on a proposed rule to ban seller-funded downpayment assistance on FHA loans.HUD extended the comment period 30 days, till Aug. 10, at the request of Reps. Maxine Waters, D-Calif., and Gary Miller, R-Calif., who said they are "opposed to an expedited rulemaking process in the absence of further congressional review." The two House Financial Services Committee members also demanded that HUD turn over internal documents related to its efforts to improve the performance of Federal Housing Administration single-family loans with downpayment assistance provided by nonprofit groups. Scott Syphax, president and chief executive of Nehemiah Corp., welcomed the extension. "The additional 30 days ensures Congress will have the necessary time to properly review the role downpayment assistance programs play in providing access to homeownership for tens of thousands of low- and moderate-income borrowers each year," he said.

The Office of Thrift Supervision is in the very early stages of a rulemaking process that could lead to the issuance of a regulation that bans certain "unfair and deceptive" lending practices.An OTS spokesman said agency officials are preparing to solicit industry and consumer groups soon for input on certain abusive practices. After reviewing the responses, the OTS plans to issue a notice of proposed rulemaking for public comment. Federal banking regulators are under pressure from Congress to curb irresponsible subprime lending, and the Federal Reserve Board is considering significant changes to its Home Ownership and Equity Protection Act regulations. But the OTS also has the authority to define "unfair and deceptive" lending practices. One thrift industry official welcomed the agency's initiative, saying that the OTS has the experience to develop a rule that provides consumer protections without unnecessarily curbing the availability of credit.

The 11th Circuit Court of Appeals has reaffirmed its position in a 12-year-old legal battle that lender-paid fees to mortgage brokers are proper unless consumers can prove the amount is excessive."In summary, the borrowers bear the burden of demonstrating, with specific evidence, that the total remuneration that their brokers received was unreasonable … in light of market standards and the subjective facts of their mortgage transactions," the circuit judges ruled in Culpepper v. Irwin Mortgage Corp. The appeals court stressed that the courts should use the Department of Housing and Urban Development's two-part test in evaluating yield-spread premiums, which are paid by the wholesale lender to the broker at closing. This test requires a case-by-case inquiry into each mortgage transaction, the appeals court said in affirming a lower court decision to decertify class action status in the Culpepper case. The 11th Circuit Court had upheld class certification in 2001, and the mortgage industry was afraid it would be engulfed in class action lawsuits. But the appeals court reversed itself after HUD issued a clarification of its YSP test.

The Office of the Comptroller of the Currency is proposing to give national banks more "flexibility" in selecting indices for adjustable-rate mortgages as part of a proposed rule to reduce regulatory burdens and update OCC regulations."Specifically, the amendment permits national banks to use a combination of indices to which changes in the interest rate will be linked, in addition to a single index," the proposed rule says. The agency is also making it easier for national banks to apply to use ARM indices that are not already permissible under OCC rules. The 36-page OCC regulatory relief proposal appeared in the July 3 issue of the Federal Register. It addresses various regulatory areas, including permanent capital, electronic banking, and community development investments. The comment period ends Sept. 4. Separately, the OCC has posted on its website illustrations of consumer information for nontraditional mortgage products in Spanish and English that can be downloaded and printed for easy production. The OCC can be found on the Web at http://www.occ.treas.gov.