Compliance

The risk that mortgage fraud will have an economic impact in vulnerable markets continues to rise at "an unprecedented rate," according to CoreLogic, a Sacramento, Calif.-based provider of mortgage risk assessment and fraud prevention systems.CoreLogic said its recently developed Core Mortgage Risk Monitor, which forecasts the most likely locations of fraud "hot spots" over the next 12 to 18 months, rose by 5% in the second quarter. The five U.S. markets currently most at risk are Detroit-Livonia-Dearborn, Mich.; Memphis; Dayton, Ohio; Akron, Ohio; and Gary, Ind. CoreLogic can be found on the Web at http://www.corelogic.com.

Differences between the House and the Senate on GSE portfolios and creating an affordable housing fund are not "unbridgeable," and an agreement on GSE regulatory reform is possible, according to House Financial Services Committee Chairman Michael Oxley."It would be shame after all our hard work … if we couldn't get the bill to the president's desk," the Ohio Republican told a National Association of Federal Credit Union legislative conference. It is "encouraging" that the Treasury Department and the White House have moved off their insistence on strict portfolio limits, Rep. Oxley told reporters after his NAFCU speech. And he indicated that negotiations between House and Senate banking committee leaders are continuing. Rep. Paul Kanjorski, D-Pa., also expressed optimism that an agreement on a government-sponsored enterprise bill could be worked out by the end of September so that Congress could come back in November and pass it. "It would be almost sinful not to get a new regulatory regime put together," Rep. Kanjorski said.

Office of Thrift Supervision Director John Reich broke ranks with his fellow regulators Sept. 14 over proposed guidance on commercial real estate lending and warned at a congressional hearing that banks and thrifts might view the concentration thresholds as caps and limit their CRE lending.The OTS director testified that he supports issuing guidance to raise awareness that high concentrations of CRE loans need to be effectively managed, but not with the threshold numbers. "I do have a concern that they will view them as limits and caps," Mr. Reich said. Multifamily and commercial property loans (plus land, development, and construction loans) that exceed 300% of equity capital would be considered a high concentration under the proposed guidance. Residential and commercial ADC loans that exceed 100% of equity capital would also be considered a high concentration. The OTS director told the panel that it is "inappropriate" to lump multifamily loans with shopping mall and office building loans in determining high concentrations of CRE loans. FDIC Chairman Sheila Bair testified that the guidance will emphasize that the "stated thresholds are not limits" and will recognize that different property types have different risk characteristics.

Federal banking regulators and mortgage banking professionals will have their say on "exotic" mortgages on Sept. 20 when two Senate Banking subcommittees host a joint hearing on the hot new products.The subcommittees on housing and on economic policy have invited five federal banking regulators to testify, as well as representatives from lending, mortgage insurance, and consumers groups. The hearing comes just as banking regulators are trying to finalize guidance that would strengthen underwriting and improve consumer disclosures on interest-only loans and payment-option adjustable-rate mortgages. Federal regulators are close to agreeing on IO and option ARM guidance, but are hung up on how to treat negative amortization and whether it should be added to the principal amount of an option ARM for purposes of qualifying a borrower. Mortgage lenders originated $83.3 billion in option ARMs in the second quarter, which accounted for almost one in 10 of residential loans funded, according to survey figures compiled by National Mortgage News and the Alternative Products Quarterly Data Report.

Roughly 18% of the mortgage bankers and mortgage brokers in New York state have not yet paid their general assessment and are in immediate suspension, according to a New York Banking Department official who addressed the New York Association of Mortgage Brokers convention in Melville, N.Y.If the bill, plus a $100 late fee, is not paid by Oct. 10, the registration is considered to be expired, and if it is not paid by Dec. 10, the expiration is considered permanent, said Robert A. Mengani, assistant deputy superintendent of banks in the department's mortgage banking division. The department is seeing an increasing number of violations of advertising regulations, which Mr. Mengani attributed to the shrinking mortgage origination market. A particular problem involves materials using the words "United States of America" or having a picture of the Statue of Liberty, which are protected words and images. Violators open themselves up to a $15,000 fine and must send out retraction letters, he said.

After a 20-year wait, a mortgage originator education bill is awaiting the signature of New York Gov. George Pataki, the outgoing president of the New York Association of Mortgage Brokers announced Thursday at the group's annual convention in Melville, N.Y.The NYAMB executive, Don Romano, said the bill also requires that originators who work for any state-regulated entity, including mortgage bankers and state-chartered banks and thrifts, be registered and that the background check be performed by the New York Banking Department. As for specifics, Mr. Romano said there are no rules established for the law, which would go into effect on Jan. 1, 2007, although implementation would be one year later. But among the people who would have to be registered is "anyone with direct contact with the consumer," he said. The law establishes an even playing field among state-regulated entities, and "it is going to be a plus for us" in competing with federally chartered entities, Mr. Romano said. The NYAMB is going to push the idea that, by dealing with a mortgage broker, a consumer is dealing with someone who is regulated by a local authority, he said.

Originations of Federal Housing Administration reverse mortgages are on a tear this year, but lenders are worried that election politics could lead to a shutdown in the first quarter and disrupt the program designed to help seniors tap the equity in their homes.Lenders are expected to bump up against a cap on FHA home equity conversion mortgages by February or March, according to the National Reverse Mortgage Lenders Association. "We are very nervous," said NRMLA president Peter Bell. "Lifting the cap is a do-or-die issue for the HECM business." The House has passed a bill, sponsored by Rep. Michael Fitzpatrick, R-Pa., that eliminates a 250,000-loan cap on the number of HECM loans the FHA can insure. But the Senate has not acted on the Fitzpatrick bill (H.R. 2892) or a similar bill introduced by Sen. Rick Santorum, R-Pa. "We are anxious to see the Senate move before they adjourn before the election," Mr. Bell said. With political control of the House and the Senate up for grabs, "who knows what will happen after the election?" he added.

One week after facing withering congressional criticism, Federal Housing Finance Board Chairman Ronald Rosenfeld dropped several hints at a board meeting that he plans to move ahead and finalize a controversial capital rule that would require the Federal Home Loan Banks to increase their retained earnings.Republican and Democratic members of the House Financial Services Committee urged Mr. Rosenfeld to withdraw the capital rule at a Sept. 7 hearing. But the Finance Board chairman seemed unfazed at the board's meeting this week and commented that a meeting to finalize the capital rule would probably be a very long session due to the number of comment letters the proposal generated. In acknowledging former director Franz Leichter's contributions to the agency and the capital rule, Mr. Rosenfeld said the final rule "will have your fingerprints on it." At the Sept. 13 meeting, the Finance Board approved a final rule to streamline the affordable housing program and establish new rules for FHLBanks to approve and fund out-of-district housing projects. The board also agreed to issue a proposed rule for a 30-day comment period that creates an examiner rating system for FHLBanks. The Finance Board can be found online at http://www.fhfb.gov.

The risk that mortgage fraud will have a harmful economic impact in vulnerable markets is rising at an "unprecedented" rate, according to CoreLogic, a Sacramento, Calif.-based provider of fraud prevention technology and services to the mortgage industry.CoreLogic reported that its Core Mortgage Risk Monitor rose 5% in the second quarter after increasing 6.4% in the first quarter. The five major metropolitan statistical areas most at risk, according to the index, are Detroit-Livonia-Dearborn, Mich.; Memphis, Tenn.-Miss.-Ark.; Dayton, Ohio; Akron, Ohio; and Gary, Ind. The index measures collateral risk, which is "the risk associated with 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.

The first enforcement actions relating to investigations into the pricing of 2004 subprime loans could be announced in the next three to six months, according to industry attorney Andrew Sandler."I would expect over the course of the next three to six months there will be at least several consent decrees or lawsuits by federal enforcement agencies and/or state attorneys general involving mortgage loan pricing that reflect the conclusion of investigations related to 2004 HMDA data," Mr. Sandler told MortgageWire. The release of 2004 Home Mortgage Disclosure Act loan pricing data last year initiated investigations and special exams of nearly 200 banks and mortgage companies for possible discriminatory pricing practices. Investigations by the Department of Justice, the Federal Trade Commission, the Department of Housing and Urban Development, federal banking regulators, and state AGs can take up to two years. Mr. Sandler, a partner in the Washington office of Skadden Arps, indicated that additional enforcement actions are possible. Based on the newly released 2005 HMDA data, the Federal Reserve Board referred 270 lenders to their primary regulators for further fair-lending reviews. A Fed spokeswoman said there is a lot of overlap between lenders on the 2004 list and the 270 lenders on the 2005 list.

The Federal Housing Finance Board is considering changes to its capital proposal that would make it less onerous and difficult for the Federal Home Loan Banks to come into compliance with new retained earnings requirements."Some commentators made valid points [in comment letters]," FHFB Chairman Ronald Rosenfeld told a congressional panel. "There is room for movement on several important issues." Since the 12 FHLBanks are well capitalized, many questioned the need for a 50% dividend payout limit while the FHLBanks raise their retained earnings to meet the proposed minimum requirement of $50 million plus 1% of non-advance assets. "That is a constructive observation, and we should consider a higher dividend payout ratio, which would extend the time for the FHLBanks to reach the retained earnings minimum," Mr. Rosenfeld said. Many members of the House Finance Services Committee urged the FHFB chairman to withdraw the proposed rule, contending that it would harm the FHLBanks and their affordable housing programs. But Mr. Rosenfeld did not give any indication that he would back down.

Federal banking regulators are seeking comment on whether the largest banks in the United States should have the option of adopting a "standardized," or less complex, Basel II risk-based capital standard.During the summer, several banks and their trade groups urged the regulators to give U.S. banks the option of adopting the standardized approach, which is more advanced than the current Basel I standard and includes more risk buckets for mortgages and other assets. The standardized approach also takes into account securitization risks and wholesale lending commitments, and encourages banks to obtain guarantees and derivatives to mitigate credit risk. Comptroller of the Currency John Dugan noted that the largest foreign banks have the option of implementing the standardized approach or the Basel II approach, which is based on internal risk models. "To ensure that all the interested parties have an opportunity to comment on this fundamentally important issue, the agencies added the question to the Basel II preamble," Mr. Dugan told a Federal Deposit Insurance Corp. board meeting. The FDIC board voted 5-0 to issue the Basel II proposal with the standardization question for a 120-day comment period.

The National Association of Realtors is urging the U.S. Supreme Court to stop the Office of the Comptroller of the Currency from blocking the states from regulating the mortgage subsidiaries of national banks.The comptroller's actions are "unlawful" because they pre-empt state authorities from regulating operating subsidiaries that are incorporated under state law, the NAR says in a brief filed with the Supreme Court. The high court is slated to hear arguments this fall in a case (Watters v. Wachovia Bank) in which the Michigan banking commissioner Linda Watters has been blocked by federal courts from regulating and examining Wachovia Mortgage Corp., which operates in Michigan as a subsidiary of Wachovia Bank NA, Charlotte, N.C. The OCC contends that operating subsidiaries can engage in the same activities as the parent national bank and are exempt from state licensing and consumer protection regulations. But the Realtors argue that the OCC has "overstepped its boundaries" to give national banks a competitive advantage over state-licensed lenders. The NAR has been lobbying Congress for several years to keep national banks from entering the real estate brokerage business.

Interthinx, an Agoura Hills, Calif.-based ISO business that provides fraud detection and compliance tools for the mortgage industry, has announced ISO's acquisition of the Domus System, which provides automated compliance services to the affordable housing industry.The terms of the transaction were not disclosed. The Domus System collects, maintains, and reports on resident and property data electronically. "The affordable housing industry has a tremendous need for accurate and timely compliance reporting," said KC West, president of Domus Systems Inc. "Combining the fraud detection capabilities of Interthinx with the electronic data collection services of the Domus System will deliver a more robust automated compliance and reporting tool to our customers." ISO, Jersey City, N.J., is a provider of products and services that help measure, manage, and reduce risk. The companies can be found online at http://www.interthinx.com, http://www.iso.com, and http://www.domussystems.com.

Fannie Mae and Freddie Mac should expect to be the subject of special and targeted exams as the Office of Federal Housing Enterprise Oversight looks for emerging problems and continues to monitor the GSEs' efforts to put their houses in order, according to OFHEO's proposed strategic plan.OFHEO plans to "perform targeted examinations that explore areas of concern in a more-in-depth and focused way, pursuing higher risk issues arising from ongoing examinations," the proposed plan says. The comment period ends Sept. 13. The 24-page strategic plan also puts special emphasis on validating the information OFHEO receives from the two government-sponsored enterprises and developing a meaningful risk-based capital standard -- along with "additional measures of capital adequacy, which may require legislation." OFHEO Director James Lockhart also wants the agency's researchers and analysts to focus on key policy issues, such as the implications of loan-limit changes and GSE market share.

GMAC-RFC has picked LoanIQ from First American Real Estate Solutions as its collateral risk-mitigation tool.LoanIQ deals with collateral fraud, considered the most damaging form because it creates actual dollar losses. Using a predictive model based on actual "bad loan" cases, LoanIQ provides two scores to help GMAC-RFC and other lenders fast-track low-risk loans through the system while flagging high-risk loans for further examination, First American RES said. FBI statistics show that mortgage fraud losses more than doubled in 2005, from $429 million in 2004 to more than $1 billion, the company reported. GMAC-RFC will incorporate LoanIQ into its existing collateral risk-mitigation system. The companies can be found online at http://www.gmacrfc.com and http://www.firstamres.com.

Despite real efforts by servicers of U.S. residential mortgage-backed securities, complying with the minimum servicing requirements of Regulation AB will "remain a challenge" in the first year of the law, according to a report by Fitch Ratings.Each party in the servicing function is required to provide, by March 31, 2007, both an assessment report on its compliance with Reg AB and an attestation report from a public accounting firm to concur with the servicer's assessment. More parties are now subject to reporting on "previously untested" Reg AB servicing criteria, which could cause delays and restatement of noncompliant servicer reports, according to Thomas Crowe, a Fitch director. "Many servicers are still developing the attestation programs for themselves and other relevant parties, and determining additional reporting requirements," Mr. Crowe said, adding that many are still consulting with accounting and law firms on the requirements. Fitch can be found online at website at http://www.fitchratings.com.

House Financial Services Committee Chairman Michael Oxley, R-Ohio, is urging the new Treasury secretary to make a last-ditch effort to secure a compromise that will speed passage of GSE regulatory reform in the Senate.In a letter to Secretary Henry Paulson, the committee chairman stresses that time is quickly running out for legislative action this year and that there has been no news of progress on the Senate side. "I would urge you to continue to seek a strong compromise and Senate action," Rep. Oxley says in the Aug. 30 letter. The House passed a bill to create a new regulatory agency to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks last fall. "It is the strongest reform legislation that will ever pass the House, absent a conference report," Rep. Oxley said, signaling that he is willing to consider changes passed by the Senate. Congress returns Sept. 5 for a short legislative session before the lawmakers adjourn for the mid-term elections.

Tighter underwriting standards on subprime loans could have a greater impact on reducing foreclosures than banning prepayment penalties and balloon loans and other so-called predatory lending practices, according to a study by the Office of the Comptroller of the Currency.OCC researchers discovered a strong correlation between high foreclosures and refinanced loans with no- and low-document features, which they equated with "loose" lending practices. The study of foreclosures in Chicago did not find the same correlation on subprime loans with balloons or prepayment penalties (36 months or longer) or on no- or low-doc purchase loans. The OCC researchers maintain that underwriting practices that ensure borrowers can repay their loan represent a more effective approach to preventing foreclosures than "blanket" prohibitions on certain lending practices. This approach is also consistent with the proposed guidance on interest-only and payment-option mortgages, according to the study. Federal banking regulators are expected to finalize the guidance this fall.

KB Home has been notified by the Los Angeles regional office of the Securities and Exchange Commission that the SEC will conduct an informal inquiry into the Los Angeles-based homebuilder's stock option grants, according to the company.KB Home said it has informed the SEC of the status of an internal review by a committee of its board of directors in conjunction with outside legal counsel. The company said it "intends to cooperate fully" with the inquiry. KB Home also announced that three shareholder derivative suits have been filed in the past two months against the company and certain of its directors and officers. "The suits generally allege breach of fiduciary duty in connection with the company's stock option grants," KB Home reported. The company said it is evaluating the suits and does not intend to comment on them other than through the filing of responses in court. KB Home can be found online at http://www.kbhome.com.