Compliance

The Federal Bureau of Investigation says mortgage fraud is "pervasive and growing" and that the incidence of such fraud has nearly doubled in the past three years.The FBI reported that it investigated 818 mortgage fraud cases in fiscal year 2006 (up from 436 in fiscal 2003), resulting in 263 indictments, 204 convictions, and recoveries of $630 million in restitution and fines. Currently pending cases total 1,014. The FBI estimates that 80% of all reported fraud losses involve collaboration or collusion by industry insiders. "The increased reliance by both financial institutions and nonfinancial institution lenders on third-party brokers has created opportunities for organized fraud groups, particularly where mortgage industry professionals are involved," the FBI's annual financial crime report says. Meanwhile, the Mortgage Bankers Association and the FBI have announced a memorandum of agreement to work together to promote the FBI's Mortgage Fraud Warning Notice. The warning states that it is a federal crime for any person to make false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property in an effort to influence the action of a financial institution. The MBA and the FBI said they will foster the use of the notice by making it available to mortgage lenders for posting on their websites.

Fannie Mae and Freddie Mac would be able to expand their mortgage portfolios again under a legislative proposal supported by the Bush administration, according to the administration's point man on GSE reform.James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said a recent compromise on government-sponsored enterprises legislation instructs the new GSE regulator to consider the size and growth of the mortgage market in regulating the portfolios. Once Fannie and Freddie get their houses in order, "it is certainly possible that a mission-focused regulation would allow the portfolios to grow with the mortgage market," the OFHEO director told an America's Community Bankers meeting in Washington. Mr. Lockhart appeared to be responding to concerns expressed by Freddie and some of its allies that the new GSE regulator could order massive portfolio cuts. "Using the legislative guidance focusing on mission, it is unlikely that there would be drastic reductions in those portfolios, but rather a reallocation," Mr. Lockhart said.

A senior member of the Senate Banking Committee believes Congress will place the government-sponsored enterprises under a new, more powerful regulator before the end of the current session, but the Mortgage Bankers Association's chief lobbyist isn't nearly as optimistic.The MBA's Kurt Pfotenhauer told the Midwinter Conference in Park City, Utah, that there's less than a 50-50 chance the House and Senate will see eye to eye on legislation to place Fannie Mae and Freddie Mac under stricter supervision. And he said that if Congress doesn't act this year, there's a strong possibility the next Congress won't, either. However, Sen. Robert Bennett, R-Utah, told the conference that now that Treasury Secretary Henry Paulson has shown an interest in the question of how best to oversee the GSEs, there's a strong chance the two chambers can reach agreement. "With Secretary Paulson in the mix, the discussions have been more fruitful, and I think we'll get a bill," said Sen. Bennett, who is the second-ranking minority member of the banking panel. But Mr. Pfotenhauer, the MBA's senior vice president for government affairs, said that if a bill doesn't pass in the 110th Congress, "the odds are it will never be passed." And once the GSEs get beyond their financial problems, he added, "the whole issue fades away until there is another triggering event."

The Federal Bureau of Investigation's estimate that mortgage fraud costs the lending business $1.2 billion a year is off the mark by more than $3 billion, according to a fraud analyst speaking at the Midwinter Conference in Park City, Utah.And others say the FBI's calculation could be shy by more than that. The FBI's calculation is based on Suspicious Activity Reports that it receives from lenders and others who think they may have been cheated in one way or another. But Arthur Prieston, chairman of the Prieston Group, a California firm that offers integrated fraud protection, loss mitigation, and insurance services, puts fraud losses at $4.4 billion annually. He bases that figure on his firm's claims data for clients represented by its legal services affiliate, the American Mortgage Law Group, which chases down fraudsters. And he says the loss severity is at least 50% greater for lenders that are not insured and don't chase down perpetrators. At the same time, a former fraud detection specialist who asked to remain anonymous because he no longer works in the field said the annual take as a result of mortgage fraud is more like $6 billion and growing. He said "fraud for commission," in which originators will "do anything" to earn a fee, is just as prevalent as fraud for profit. "It's pervasive throughout the industry," the source said. "It's growing because the accountability is not there. If they do it and get away with it, they do it again."

Mortgage brokers would be required to disclose all fees they receive from borrowers and lenders seven days prior to closing under a bill that Rep. Luis Gutierrez, D-Ill., plans to introduce soon.The Mortgage Broker Licensing and Predatory Loan Disclosure Act calls for clearer disclosures on exotic and subprime mortgages. It also establishes liability for brokers that violate the new law. "The legislation will bring accountability, transparency, and stricter standards to this loosely regulated industry," said Rep. Gutierrez, who is a senior member of the House Financial Services Committee. "It will ensure that people understand the hazards of high-risk loans and the subprime market, and it will ensure that mortgage brokers are properly licensed and are operating in good faith." The bill also requires all mortgage brokers to be bonded, and it directs the Department of Housing and Urban Development to establish minimum licensing requirements for mortgage brokers. The National Association of Mortgage Brokers says it supports better and clearer disclosures. However, brokers should be treated like other lenders and not singled out, according to the association. "Everybody should live under the same standards," NAMB president Harry Dinham said.

The principles outlined in the federal government's nontraditional mortgage guidance should apply to subprime hybrid ARMs, says Federal Reserve Board Chairman Ben Bernanke, and the new guidance will be issued "fairly soon."The Fed chairman told the House Financial Services Committee that lenders should use "good underwriting" in making subprime adjustable-rate mortgages. However, regulators are still working on the guidance and have not determined whether 2/28 ARMs should be underwritten to the fully indexed rate, he said. The guidance issued in September requires lenders to qualify borrowers of interest-only and payment-option ARMs at the fully indexed rate. They can no longer underwrite based on the teaser rate.

Up to 70% of mortgage early payment defaults can be linked to fraud, according to a new study by BasePoint Analytics, a Carlsbad, Calif.-based provider of fraud scoring software.The study, aimed at probing the link between fraud and payment trends in the early life of a loan, found that loans with "egregious misrepresentations" on the loan application were up to five times more likely to default in the first six months than other loans. "Many lenders are facing increases in repurchase requests and early payment defaults," said Tim Grace, president and chief executive of BasePoint. "We can demonstrate for lenders and investment banks how they can substantially reduce their EPD losses, and often within a short period of time." The company can be found online at http://www.basepointanalytics.com.

To help attorneys handle a mounting volume of foreclosed properties amid the tangle of state regulations, Bellevue, Wash.-based DepotPoint has introduced "the mortgage industry's first fully integrated intelligent foreclosure regulatory knowledgebase."Leveraging an automatic document-processing system embedded directly into the TrackPoint suite, this newest enhancement is designed to help attorneys remain in compliance with state foreclosure laws and manage processing foreclosure property files more efficiently, DepotPoint said. TrackPoint receives regular electronic communications from each jurisdiction detailing any changes to regulatory guidelines and updates the knowledgebase to reflect these modifications. Privately held DepotPoint was founded by technology veterans from InfoSpace and Microsoft, plus experienced trustees from national foreclosure firms. It can be found online at http://www.depotpoint.com.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., says federal banking regulators need to "step up" and tighten the underwriting of certain subprime mortgage products that he contends are responsible for rising defaults and foreclosures.The committee chairman also said he is "annoyed" that the regulators have not responded to his December letter regarding subprime 2/28 adjustable-rate mortgages. In the letter, six members of the committee, including Sen. Dodd, urged the regulators to extend the protections of the nontraditional mortgage guidance to borrowers of 2/28 ARMs, who are disproportionately black and Hispanic. "It is unacceptable to me that they have gone this long without responding to the letter," Sen. Dodd told reporters after a hearing on subprime lending and foreclosures. Mortgage industry representatives presented evidence that there is nothing unusual about the recent rise in foreclosures. But Sen. Dodd maintains that certain subprime practices and loan products are causing the problem. "This is a problem that you cannot attribute to the kind of shocks that normally cause a spike in foreclosures rates," he said. The banking committee chairman is planning to call the regulators to testify before the committee in a few weeks.

The Bush administration's new budget relents on the issue of portfolio limits for Fannie Mae and Freddie Mac, but calls for greater "clarity" on where the primary mortgage market begins and ends.Released Feb. 5, the 2008 budget says "technological advances" have blurred the line between the primary and secondary markets, arguing that a "new level" of clarity "is required to establish permissible activities" under their charter acts "including the development of intellectual property." Up until last year, the White House had hoped to cap, or even shrink, the $1.4 trillion in on-balance-sheet holdings of the two government-sponsored enterprises. In the face of congressional -- and GSE -- opposition, the budget indicates that the White House will settle for GSE legislation that creates a "world class regulator" with the ability to "mitigate the risks" posed by their retained portfolios. The administration said it believes Fannie and Freddie pose a systemic risk to the U.S. financial system because their combined mortgage-backed securities and debt -- held by an array of financial institutions -- total $5.2 trillion, "higher than the total publicly held debt of the United States."

In addressing predatory lending, Rep. Maxine Waters, D-Calif., says she also wants to make sure that blacks and Hispanics have access to prime mortgages and are not forced into higher-priced subprime loans."I am very much focused on the fact that we continue to get substantial documentation that people of color pay more for loans," the new housing subcommittee chairwoman told the National Association of Affordable Housing Lenders. "We cannot have African-Americans and Latinos, who earn the same amount of money as a Caucasian, pay their bills equally as well, but they are only offered subprime loans and pay more for their mortgages. That has got to stop." Rep. Waters said the new leaders of the House Financial Services Committee recognize the seriousness of this kind of discrimination. "We are going to fix it," she said.

The Federal Deposit Insurance Corp. has extended for one year a moratorium on the acquisition of industrial loan companies by commercial firms, but opened the door to acquisitions by financial services companies.The FDIC's action prevents Wal-Mart from acquiring an FDIC-insured ILC to process payments and credit cards and eventually get into other banking and lending activities. FDIC Chairman Sheila Bair said the growth of commercial ownership of industry loan companies raises public policy questions about the separation of banking and commerce. "The moratorium will provide Congress with an opportunity to address the issue legislatively while the FDIC considers how best to respond to any safety-and-soundness issues surrounding commercial ownership under existing law," she said. House and Senate banking committee leaders, as well as the American Bankers Association and America's Community Bankers, welcomed the FDIC's decision to extend the moratorium.

Wayne Lee, a 15-year veteran of Ameriquest Capital Corp., is suing the company, alleging that it reneged on a $50 million consulting deal, while its owner -- the current ambassador to the Netherlands -- blocked badly needed operational reforms.Filed late last week, the lawsuit alleges that company owner Roland Arnall (currently an ambassador) "blocked" reforms that might have helped the subprime giant stem allegations that it engaged in abusive lending practices. A year ago Ameriquest agreed to pay $325 million to settle claims with 49 states that it engaged in abusive lending practices. Mr. Lee headed Argent Mortgage, an Ameriquest company, until June 2004 when he was promoted to chief executive of ACC Capital Holdings, where he oversaw both Ameriquest Mortgage (Ameriquest's retail arm) and Argent, a wholesaler. (Argent was not a party to the Ameriquest/ACC settlement.) Mr. Lee resigned 11 months later, agreeing to a $20 million lump sum payment and five installments of $6 million a year. He contends that ACC paid the $20 million, but not the first installment that was due in mid-June of last year. In a statement, Ameriquest's attorney Bernard LeSage called Mr. Lee's complaint a "ridiculous work of fiction." (For the full story, see the Feb. 5 issue of National Mortgage News.

The chairman of the House Financial Services Committee, Rep. Barney Frank, D-Mass., is reworking the GSE affordable housing fund so that Fannie Mae and Freddie Mac would make annual contributions to a National Housing Trust Fund, which the National Low-Income Housing Coalition has advocated for several years.Rep. Maxine Waters, D-Calif., told the National Association of Affordable Housing Lenders about the concept and later told reporters that it is "Barney's idea" and she supports it. Annual contributions by the two government-sponsored enterprises would go to the trust fund, which would distribute grants to states, cities, and local nonprofits that put up matching funds to build and preserve affordable rental housing. The GSE contributions, estimated at $500 million a year, would provide a "substantial basis for the trust fund," said Rep. Waters, the new chair of the housing subcommittee. One source indicated that the legislation to create the National Housing Trust Fund would be on a separate track from the GSE bill to strengthen regulatory oversight of Fannie and Freddie.

Treasury Secretary Henry Paulson says efforts to reach a compromise on a GSE regulatory reform bill are progressing but there is still a long way to go."So far the conversations have been very constructive, but we've got a lot further to go," Secretary Paulson told the Senate Banking Committee during a hearing on China's currency policies. The secretary said he was "encouraged" by the progress that was made late last year in negotiations with Rep. Barney Frank, D-Mass., which involved key provisions to strengthen regulation of two government-sponsored enterprises -- Fannie Mae and Freddie Mac. It is understood that Treasury officials and Rep. Frank agreed on a proposal that would allow a new GSE supervisor to regulate the size and growth of Fannie's and Freddie's investment portfolios. The secretary did not comment on the details of the negotiations.

Adoption of a "suitability standard" would reverse long-standing efforts to increase homeownership and fairness in lending and put pressure on lenders to deny credit in order to protect themselves from liability, according to a position paper issued by the Mortgage Bankers Association."A subjective suitability standard, combined with a private right of action, would be a poison pill for the dream of homeownership for all except the most economically secure Americans," said MBA's top lobbyist, Kurt Pfotenhauer. The MBA has issued the 34-page position paper to marshal legal and economic arguments in an effort to warn Congress about the damage that could be done by inserting a suitability standard into a predatory-lending bill. (Under such a standard, brokers and lenders would be required to provide the loan most "suitable" for each borrower's circumstances.) Consumer groups are pushing for a suitability standard, and their efforts have gained traction on Capitol Hill. The position paper also takes issue with the notion that specific loan products, specifically adjustable-rate subprime loans, are driving foreclosures up. The MBA stresses that its data continue to show that job loss, divorce, medical problems, and other personal difficulties are the main reason for rising delinquencies and defaults. The MBA can be found online at http://www.mortgagebankers.org.

Clayton Holdings, Shelton, Conn., has announced the introduction of fraud detection services designed to protect conduits, Wall Street issuers, and holders of mortgage-backed securities from losses due to origination fraud and breaches of representations and warranties.Clayton said the new services draw upon its "extensive" due diligence and credit risk surveillance experience. They include: high-risk loan identification; expanded fraud reviews; put-back reviews; and trend analysis. "We're drawing on the breadth and depth of our data, experience, and technology to spot issues prior to securitization, and we have the analytics and surveillance tools to identify exceptions that, when cured, enhance bond performance," said Keith Johnson, Clayton's president and chief operating officer. "Our new fraud services not only reduce fraud and early payment default exposure, but increase client efficiency and enhance understanding of this problem." The company can be found online at http://www.clayton.com.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., says he is working on legislation to prevent an "unprecedented" wave of subprime foreclosures and to give homeowners a grace period so they can get back on their feet."This is a homeownership crisis of unprecedented proportions," Sen. Dodd told a group of mayors. He is planning to hold hearings soon, possibly in two weeks. The committee chairman indicated that the legislation might include a rescue fund. "That is a possibility, but it would have to be paid back," he told reporters. Sen. Dodd also told reporters that he wants to move quickly on GSE legislation to strengthen regulation of Fannie Mae and Freddie Mac and pass a bill in the next two months. He said the Senate government-sponsored enterprise bill will be a "little different" from the House bill. And he declined to take a position on raising the GSE loan limits. "I have to be careful about jumping into that," Sen. Dodd said after speaking to the mayors. "I want to talk with my colleagues first."

Wolters Kluwer Financial Services, Minneapolis, and Regulatory Counsel Group, an Atlanta-based provider of regulatory compliance services for mortgage lenders, have announced that RCG will resell the Wolters Kluwer StateLink Web-based compliance tool to its customers.The companies said StateLink provides quick online access to regulatory information on various topics relating to first and closed-end second mortgages for all 51 U.S. jurisdictions, updated continually by Wolters Kluwer attorneys and analysts. "After extensive research, RCG chose to offer StateLink based on its succinct and detailed information, easy-to-navigate format, and the responsiveness of the StateLink support team," said RCG president Scott Scher. The companies can be found online at http://www.wolterskluwer.com and http://www.regulatorycounsel.com.

Illinois Gov. Rod R. Blagojevich has directed the Illinois Department of Financial and Professional Regulations to immediately suspend the Illinois Predatory Lending Database Pilot Program, also known as H.B. 4050.Gov. Blagojevich said the law, designed to curb predatory lending practices (especially in areas with high residential foreclosure rates), "has created uncertainty for lenders, limiting their interest in offering products to consumers." The governor said he was halting the program "until we can find a system that effectively fights predatory lending and protects homebuyers." A recent report from the University of Illinois Urbana-Champaign showed that housing sales in the housing bill ZIP codes have dropped by nearly half from the level recorded last fall. Comparable ZIP codes in which the pilot program is not being applied have seen a decline of only 20%. The report also said the pilot program does not offer borrowers additional consumer protections.