Compliance

Training of employees is one of the keys to preventing mortgage fraud, and companies need to hold internal presentations to arm them with information, according to an expert on the topic who addressed the SourceMedia Mortgage Fraud Conference.Matt Holland, assistant vice president and residential mortgage fraud manager for Sovereign Bank, added that people need to attend such seminars and take information back to their companies to "share the knowledge." This, he said, helps to "contain a problem that is out of control." Lenders need to talk with their brokers and correspondents and tell them that policies to deter fraud are being implemented. This at least puts them on notice, or might even deter them from committing fraud, Mr. Holland said. It is also important, he said, to talk with other industry professionals and share the names of those committing fraud.

Lenders must band together to bar fake loans from coming in their doors, an admitted rookie to the mortgage business said at the SourceMedia Mortgage Fraud Conference in Las Vegas.Mark Nelson, who became senior vice president of risk management at JPMorgan Chase Bank less than a year ago, said lenders should follow the lead of the credit card and deposit industries by sharing data with each other. "If we put our collaborative brains together, we could put a big dent in what's happening to the industry," he said. While stressing that he's not a lawyer, Mr. Nelson said the perception among lenders that they cannot share data is wrong. Gramm-Leach-Bliley specifically allows data sharing as long as certain controls are put in place, he said, urging lenders to join industry coalitions aimed at fighting what by all accounts is a massive and growing billion-dollar-a-year problem. According to Jeffery Taylor, managing director of Digital Risk, Dallas, the number of mortgage fraud reports has jumped six-fold in the last five years, from 3,500 in 2000 to 27,000 in 2005. And that's just what's been reported, he emphasized, noting that much of what's taking place is slipping under lenders' radar screens. Mr. Taylor also pointed to another sobering statistic: That according to the FBI, roughly 80% of the losses attributed to fraud involve either collaboration or collusion by industry insiders. "If that's true," he commented, "it doesn't speak well for what we have in place to combat the problem."

The FBI says it feels the pain of every good mortgage business citizen who has ever turned suspicious activities into the agency for investigation and received no response, even months later."We share your frustration," G-man Bill Stern said at SourceMedia's Mortgage Fraud Conference in Las Vegas. "Agents who devote hundreds of hours investigating cases that aren't prosecuted are frustrated, too." Mr. Stern's mournful statement was in answer to a participant who wanted to know why he never heard back from the FBI after his company had spent hundreds of thousands of dollars to investigate possible corruption. A supervisory special agent who is the mortgage fraud point man in Washington that decides how the FBI's 56 field offices can best focus their limited resources, Mr. Stern didn't have a direct answer for the questioner, who asked what it takes to get the agency to investigate a possible crime. The man said that while his company lost $6.2 million, the state was able to gain six felony plea agreements with the perpetrators. Mr. Stern responded that the amount of the loss seemed sizable enough to warrant the FBI's interest. But he said he wasn't familiar with the case and couldn't provide a more specific answer, other than to note that "all cases can't be prosecuted."

The latest statistics from the Federal Bureau of Investigation confirm that mortgage fraud is on the upswing."We can't find a chart that doesn't show up in a big way," Special Agent Bill Stern said at SourceMedia's Mortgage Fraud Conference in Las Vegas. In even worse news, the FBI's mortgage fraud coordinator in Washington said the trend is moving away from rogue individuals who pull off the scams and toward members of organized crime. "Mortgage fraud is now a criminal enterprise that puts dollars in the hands of people who also are involved in such other crimes as drugs, murders, and gangs," he told the conference. As of early December, the number of suspicious activity reports concerning mortgage fraud is up 62%, from 21,994 to 35,617. Also up are the number of pending cases, the number of charges and convictions, and the amount of cases in which losses against financial institutions, the government and individuals exceed $1 million, "We are now prosecuting new cases at the rate of one a day," the G-man told the conference. As of the first week of December, he reported, 54% of the losses attributed to mortgage fraud were more than $1 million. Noting that the FBI must focus on these larger cases because it doesn't have the resources to pursue every suspect, Mr. Stern called on the mortgage business to work hand-in-hand with law enforcement officials at the state and federal levels "so we can leverage off your expertise."

First American Title Insurance has completed its one-millionth order for FACT, the company's accelerated title and settlement product that protects home equity lenders against losses resulting from undisclosed liens, poor legal descriptions, fraud, and forgery.Introduced in 2003, FACT helps lenders complete same-day closings while also mitigating their risk. Because a pre-closing title search is not required, "FACT speeds the origination process," said Paul Dorman, equity division director at First Am Title's Lenders Advantage. With mortgage fraud on the rise, FACT's insuring provisions are particularly useful for lenders operating highly automated, "low-touch" origination channels, Mr. Dorman said. A recent enhancement includes fraud prevention notification prior to closing. First American Title is a subsidiary of First American Corp., which can be found on the Web at http://www.firstam.com.

Countrywide Home Loans has agreed to improve its pricing on mortgage loans to blacks and Hispanics as a result of an investigation by New York Attorney General Eliot Spitzer into the giant lender's Home Mortgage Disclosure Act data."This agreement should serve as a model for other lenders who, like Countrywide, seek to eradicate racial and ethnic disparities in mortgage lending," Mr. Spitzer said. Based on an outside analysis of Countrywide's pricing, the New York attorney general concluded that black and Latino borrowers paid more than whites on average, especially for loans generated by mortgage brokers. Countrywide has agreed to compensate minorities who "improperly" received subprime and alternative-A loans in 2004 and to implement a $3 million consumer education program in New York. Countrywide disputed the AG's findings and conclusions but cooperated with the inquiry. "Countrywide and Attorney General Spitzer share a common goal: to assure that all individuals who apply for a mortgage loan receive equal treatment, and any pricing differences should be based on credit, property, and other risk factors," Countrywide senior managing director Rick Wentz said.

Fannie Mae and Freddie Mac may face restrictions on purchases of interest-only and payment-option mortgages if the Office of Federal Housing Enterprise Oversight decides to move ahead and issue nontraditional mortgage guidance for the two government-sponsored enterprises."We are looking at putting out a guidance similar to [that of] the other bank regulators," OFHEO Director James Lockhart said -- referring to nontraditional mortgage guidance recently issued by federal banking regulators. The guidance is expected to cover GSE purchases of private-label securities with underlying nontraditional mortgages and whole loans. But OFHEO officials declined to provide any specifics about the guidance. "OFHEO's NTM guidance for the GSEs will have sweeping market impact, although the extent of this impact will vary depending how aggressive OFHEO is in its guidance," according to Federal Financial Analytics, a Washington consulting firm. Mr. Lockhart revealed his nontraditional mortgage initiative in responding to a question about the GSEs' purchasing subprime mortgage securities that could have abusive or predatory features. "I agree, we have to be careful that they are not exploitative," the GSE regulator said at a Women in Housing and Finance symposium.

Treasury Department officials and key House members have reached an agreement on regulating the size and growth of Fannie Mae's and Freddie Mac's giant mortgage portfolios, and the House may vote on the new portfolio language during the lame-duck session, sources say.The agreement does not call for a reduction of the $700 billion portfolios, which has been the cornerstone of the Bush administration's push for government-sponsored enterprise reform. However, the new GSE regulator would "establish standards by which the portfolio holdings, or rate of growth … will be deemed to be consistent with mission and safe and sound operations," the compromise language says. The House passed a GSE regulatory reform bill (H.R. 4161) by a 331-90 vote in October 2005, and the Treasury still has objections to several provisions, including an increase in GSE loan limits. Nevertheless, House Financial Services Committee leaders are trying to arrange for another vote on H.R. 4161 with the new portfolio language later this week. Treasury officials are meeting with key senators to line up support. However, passage of H.R. 4161 by the Senate is very unlikely, sources say, since one senator can block consideration. But the Treasury/House agreement improves the chances of passing a GSE reform bill next year.

The anti-predatory lending ordinance of Montgomery County, Md., has been declared unconstitutional by a state court and permanently enjoined from enforcement.In American Financial Services Ass'n v. Montgomery County, Circuit Court Judge Michael Mason said the Maryland Constitution vests the power to enact laws principally in the state legislature. "No matter how noble the purpose, a 'general' law is beyond the authority of the county to enact and is unconstitutional," the judge wrote. The ruling is good news for current and prospective homeowners, the AFSA said in response to the judge's decision. "It resolves uncertainty that has surrounded Montgomery County's mortgage market since last year and preserves borrowers' access to mortgage credit." The AFSA, along with a group of lenders, filed suit in February seeking injunctive relief. The plaintiffs argued that the bill was beyond the county's authority to enact and said the state has pre-empted the authority of the county to enact legislation that affects lending. They said the bill was vague and violated the lenders' rights to due process. According to the AFSA, courts have consistently ruled that regulatory authority for mortgage lending lies at the state level.

The next chairman of the House Financial Services Committee wants to restructure a Federal Housing Administration reform bill so that riskier borrowers don't have to pay higher mortgage insurance payments.Rep. Barney Frank, D-Mass, who is virtually certain to be the next chairman of the panel, said he is working on a bill that raises the FHA loan limit to the median house price in high-cost areas and allows the FHA to serve riskier subprime borrowers. Rep. Frank estimated that the FHA, by serving richer communities, will generate more revenues that can be recycled to cover the higher loan-loss rates associated with subprime lending. As a result, the FHA borrowers won't have to pay risk-based premiums. It would make money for the FHA or be a "wash," Rep. Frank told a Women in Housing and Finance symposium. He also told reporters that the FHA loan limit would be similar to a proposal in a House-passed government-sponsored enterprise reform bill that raises the Fannie Mae and Freddie Mac loan limit to the median house price in high-cost areas. The GSE bill caps this increase at 150% of the current conforming loan limit.

Doral Financial Corp., a mortgage lender based in San Juan, Puerto Rico, has announced the selection of Bear Stearns and JPMorgan to assist the company in evaluating options for refinancing its $625 million floating-rate senior notes that mature in July 2007.In September, Doral announced an agreement with the Securities and Exchange Commission under which it will pay a $25 million civil penalty in connection with the SEC's probe of Doral's restatement of financial results for 2000-2004. Doral's restatement slashed $694.4 million from its retained earnings through the end of 2004 to correct the accounting for certain mortgage loan sales and the valuation of its interest-only strips. Doral can be found online at http://www.doralfinancial.com.

The Federal Deposit Insurance Corp. has concluded that two banks engaged in discriminatory mortgage lending practices, and the agency has referred their cases to the Department of Justice for further action.In the fall of 2005, the FDIC targeted special examinations of 47 banks whose Home Mortgage Disclosure Act showed the largest loan pricing disparities. The agency has completed 33 of the HMDA "outliers" examinations, and two other institutions face possible referrals to the DOJ, according to an FDIC official. A DOJ official recently said the Civil Rights Division has received HMDA-related referrals from federal banking regulators. But he declined to say how many, or what agencies made the referrals. Skadden Arps attorney Andrew Sandler told a Consumer Bankers Association fair-lending conference that all federal banking regulators have ongoing HMDA-related investigations, but that the FDIC has been the most aggressive.

Three "housing hot spots" in Ohio are among the five U.S. markets deemed most at risk for increased levels of mortgage fraud over the next 18 months, according to CoreLogic, a Sacramento, Calif.-based provider of fraud prevention technology and services to the mortgage industry.The five major metropolitan statistical areas most at risk, according to the Core Mortgage Risk Monitor, are Akron, Ohio; Dayton, Ohio; Detroit-Livonia-Dearborn, Mich.; Memphis, Tenn.-Miss.-Ark.; and Cleveland-Elyria-Mentor, Ohio. Although mortgage risk levels "remain relatively high," CoreLogic's chief economist, Mark Fleming, said the company is "seeing a stabilizing housing market characterized by decreasing house price appreciation and a slower increase in the risk index." The index measures collateral risk, which is risk related to the accuracy of a residential property valuation and "the sustainability of that valuation over the life of the mortgage due to the unique characteristics of the property, market, and mortgage contract participants," CoreLogic said. The company can be found on the Web at http://www.corelogic.com.

Federal banking regulators are discussing ways to supplement their nontraditional mortgage guidance so that the underwriting standards apply to 2/28 adjustable-rate mortgages, which also carry the risk of payment shock after the initial two-year rate expires.Sheila Bair, chairman of the Federal Deposit Insurance Corp., said 2/28 ARMs are "technically" not covered by the guidance issued in September by federal regulators. "We have been thinking in terms of maybe doing some kind of an advisory to complement the guidance," she told a Women in Housing and Finance luncheon in Washington. The Center for Responsible Lending, Durham, N.C., calls 2/28s "exploding ARMs." The consumer group has urged the regulators to act because 2/28s are generally underwritten based on teaser rates, and many borrowers cannot afford the fully indexed rate. Similar issues with interest-only and payment-option ARMs prompted the regulators to issue the nontraditional mortgage guidance. "We are very concerned about the increased reliance in the subprime market on loans that have a built-in payment shock," said CRL vice president Josh Nassar.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators are issuing nontraditional mortgage guidance for state-licensed mortgage bankers and brokers that is consistent with federal guidelines on originating interest-only and payment-option ARMs."At this stage of the game, it is very important to provide consistent guidance to all providers in the industry," said CSBS vice president Michael Stevens. Individual state regulators are planning to issue the guidance as best practices or regulatory bulletins to get it out quickly. Later the guidance will be translated into regulations or statutes, depending on the state. The state regulators pledged to work with their federal colleagues on improving the guidance if additional consumer protections are needed down the road. "We will do that together in cooperation with federal regulators," Mr. Stevens told reporters. Federal regulators issued guidance on nontraditional mortgages that applies to all federally insured banks and thrifts on Sept. 29.

The National Association of Mortgage Brokers is calling on federal banking regulators to delay implementation of their underwriting guidance on nontraditional mortgage products until state regulators are ready to implement similar guidance.NAMB president Harry Dinham said the guidance will be "ineffective" unless it applies to all mortgage originators. "Uneven or uncoordinated implementation of the federal guidance will simply create consumer confusion and marketplace inefficiencies," according to a resolution adopted by the NAMB's board of directors. State regulators are working on nontraditional mortgage guidance for state-licensed mortgage bankers and brokers that is similar to federal guidance on interest-only and payment-option adjustable-rate mortgages. The state guidance is expected to be issued very soon. Under the federal guidance, banks and thrifts are required to monitor broker originations and take corrective action if a broker does not follow the federal guidance.

Federal banking regulators are seeking more information about nontraditional mortgage products, and all banks will be required to report their holdings of one- to four-family loans with negative amortization features starting with the first-quarter 2007 call report.The regulators are also proposing additional reporting requirement for banks with large exposures. They might have to report the total maximum remaining amount of negative amortization contractually permitted on interest-only and payment-option ARMs and the total amount of negative amortization that is included in the carrying amount of these loans. The additional reporting requirements would be phased in, and the regulators are seeking comments on the appropriate reporting thresholds. "The banking agencies request comment on the specific dollar amount and percentage of loans that should be used in setting the size threshold," says the joint notice and request for comments.

Democrats have won control of the House, which will allow Rep. Barney Frank, D-Mass., to chair the Financial Services Committee and press for new housing production programs and predatory-lending legislation.In the Senate, the Democrats may have won a one-seat majority, depending on the outcome of a probable recount in Virginia. Despite the uncertainty, Senate Democrats will probably act as if they have won control when Congress returns for a lame-duck session next week to complete unfinished business, such as appropriation bills and regulatory reform for the housing government-sponsored enterprises. Floyd Stoner, the top lobbyist of the American Bankers Association, said it is difficult to tell what the lawmakers will do after the "shock" of the election results wear off. However, GSE reform is an issue where both the House and the Senate have acted, and it is "pretty clear where a resolution would be," he said. "But even with all that, getting anything done will be difficult." The election results boosted Fannie Mae's and Freddie Mac's stock prices as investors realized that the Republicans have lost their chance to scale back the GSEs' mortgage portfolios.

Class-action lawyers are ready to pounce on payment-option adjustable-rate mortgage lenders once resets and delinquencies start to pile up in the second quarter of next year, according to an industry litigation attorney."This is going to be an absolute nightmare for the industry," attorney Andrew Sandler told a Consumer Bankers Association fair-lending conference. The partner at Skadden Arps reported that the class-action bar is counting on property value declines and rate resets that will triple monthly payments for homeowners who have relied on the minimum-payment option. The class-action attorneys will contend that lenders did not properly warn homebuyers about the risks associated with negative amortization and the potential for payment shock, Mr. Sandler said. And they will point to recent underwriting guidance issued by federal banking regulators to show that lenders placed their clients in unsuitable loans.

Fidelity National Information Services Inc., Jacksonville, Fla., has announced the acquisition of Watterson Prime LLC, a Bellevue, Wash.-based provider of due diligence services to financial institutions that invest in and securitize mortgage loans.The terms of the transaction were not disclosed. Fidelity said the due diligence services will be integrated with service offerings such as the FIS Hansen Quality HQ Score, a collateral risk score designed to protect clients against property valuation fraud and overvaluation risk. "This acquisition expands our product breadth and our ability to assess risk and certify the quality of mortgage portfolios," said Eric Swenson, president of the FIS Mortgage Information Services Division. "It also enables us to develop innovative products and provides us with a competitive advantage in the marketplace." The companies can be found online at http://www.fidelityinfoservices.com and http://www.wprime.com.