Mortgage Loan Compliance | Defaulted Loan Buybacks Surge

Fannie does not disclose buyback information. However, Freddie Mac forced its seller/servicers to buy back $960 million in bad mortgages in third quarter. Ginnie Mae and Federal Housing Administration also require buybacks and indemnifications on bad loans.

In total Banks had to buy back $7.1 billion in defaulted single-family loans in the third quarter to reimburse mortgage investors, up from $1.9 billion in the previous quarter.

Federal Deposit Insurance Corp. Call Report information shows that most of the buyback demands fell on JPMorgan Chase and Bank of America. Chase repurchased $2.7 billion in defaulted loans and Bank of America repurchased $2.3 billion to satisfy investor demands. Both are on the hook for troubled loans they took control of when they purchased ailing mega-thrifts — Countrywide in the case of Bank of America and Washington Mutual by Chase.

The FDIC information also lists buybacks by Citibank $898 million, National City Bank $361.6 million, Wells Fargo Bank $266 million and SunTrust Bank $232.3 million.

Investors like Fannie Mae and Freddie Mac can require lenders to buy back defaulted loans that don't comply with their underwriting requirements.

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Mortgage Loan Compliance | HELOC Lawsuits

JPMorgan Chase had a motion denied by a U.S. District Court judge in California to dismiss a lawsuit that alleges the bank illegally reduced a couple's home equity line of credit.

Chase argued that the plaintiffs, Jeffrey and Jenifer Schulken, are former customers of Washington Mutual and they should sue the Federal Deposit Insurance Corp. - which approved Chase's acquisition of WaMu - not Chase. But the judge sided with the Schulkens.

According to the plaintiffs' attorney Jay Edelson, "Chase's unprecedented position was simple: Chase can harm former WaMu customers with impunity and anyone who suffers damage should sue the FDIC."

Chase acquired the troubled WaMu with the approval of the FDIC in September 2008. The bank moved to reduce the plaintiffs' HELOC in March 2009, claiming their income had declined. Plaintiffs claim their income hasn't changed and sued Chase for violating the Truth in Lending Act.

If the judge certifies the class act lawsuit, the plaintiffs' attorneys want the class to cover all Chase HELOC customers as well as former WaMu customers. A Chase spokeswoman said the bank does not comment on litigation.

Chicago-based Kamber-Edelson LLC also is pursuing class action litigation against two large institutions that are among Chase's peers for suspending and reducing HELOCs. An FDIC spokesman did not have an immediate comment pending a review of the case by the FDIC's legal team.

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Mortgage Loan Compliance | The Health of FHA

Citing FHA's deteriorating financial position, Reps. Spencer Bachus (Ala.) and Shelley Capito (W. Va.) are urging committee chairman Barney Frank, D-Mass., to schedule a hearing as soon as possible.

Republican leaders on the House Financial Services Committee are calling for hearings on the financial health of the ailing Federal Housing Administration reserve fund, which recently reported a sharp drop in its capital ratio to 0.57%.

"If home prices do not recover, the economic value of the Mutual Mortgage Insurance Fund could fall below zero. We are concerned that such a drop could force HUD to request an appropriation from Congress," the two Republican lawmakers say in a letter.

FHA officials maintain that they have taken corrective actions and the insurance fund is in no imminent danger of running out of cash. If necessary, the agency could raise the FHA upfront premium to keep the fund in the black.

However, Reps. Bachus and Capito also have concerns about FHA's technological and management capacity.

"It is incumbent upon our committee to get prompt answers to many of the questions surrounding FHA's risk management practices and finances," the Republicans say in a letter to Rep. Frank.

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Mortgage Loan Compliance | Clarified HOEPA Short-Term Standards

The Federal Reserve Board has clarified its new HOEPA lending standard so that lenders can refinance short-term balloon mortgages on farmhouses and other rural residences.

Rural lenders make nonconforming 3-year and 5-year balloon mortgages that they hold in portfolio. They raised concerns that the Home Ownership and Equity Protection Act regulations that went into effect Oct. 1, 2009 could prohibit such products.

The HOEPA rule requires lenders to evaluate the borrower's ability to repay a loan. On higher-cost balloon mortgages with a term of less than seven years, it appeared the borrower must be able to pay off the mortgage in full at the end of the term.

Sandra Braunstein, Federal Reserve Board Director of Consumer Affairs, said there is "no" such pay off requirement since it would effectively ban short-term balloon loans.

"If the Board had intended to ban such products it would have done so explicitly," she says in a letter to banking trade groups and bank examiners. In making the loan, the lender should "verify that the consumer would likely be able to satisfy the balloon payment obligation by refinancing the loan or through income or assets other than the collateral," Mrs. Braunstein says.

American Bankers Association regulatory counsel Rod Alba said, "most of our members" are satisfied with this clarification. But some are concerned that they may still be open to possible private litigation or borrowers exercising a right of rescission, he said.
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Mortgage Loan Compliance | FHA’s New Condo Rules

The Federal Housing Administration has issued new condominium lending policies that go into effect Dec. 7. But the agency is making several temporary exceptions to the new rules due to the "volatility" in the condo market.

The new FHA lending policies spelled out in Mortgagee Letter 2009-46 B limit the number of condo units in one complex that can be financed with FHA-insured loans at 30%. And 50% of the units must be owner-occupied before FHA financing can be used.

However, Mortgagee Letter 2009-46 A allows exceptions to the FHA concentration and owner-occupancy requirements until Dec. 31, 2010. One exception allows FHA lenders to ignore foreclosed units in calculating the owner-occupancy rate until the end of next year.

The Department of Housing and Urban Development will allow FHA lenders to use a "Spot Loan Approval Process" for condominium units until Feb. 1, 2010.

Spot approvals allow FHA lenders to finance one condominium unit in a building that has not been approved by HUD. The new condo lending policies gives FHA direct endorsement lenders the authority to approve condominium projects for the first time ever.

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Mortgage Loan Compliance | Credit Union Mortgages and Fannie Mae Settlement

Fannie Mae has given more than three-dozen credit unions until next week to accept an offer of pennies on the dollar for some $125 million of their mortgages that defunct U.S. Mortgage/CU National Mortgage fraudulently sold to Fannie.

So far, only two of the credit unions have accepted the offer, detailed in a letter to Fannie Mae's federal regulator from National Credit Union Administration chairman Deborah Matz, who expressed concern at the losses faced by affected credit unions.

"I appreciate Fannie Mae is also a victim of this crime," said Mrs. Matz in a letter to Edward DeMarco, acting director of the Federal Housing Finance Agency. "However, the financial impact of CU National's fraud on these member-owned cooperatives is significant. Indeed, for some of the credit unions, their losses will be so great as to force our agency to take drastic action under the prompt corrective action rules."

Both the credit unions and Fannie were victims of a massive fraud perpetrated by Michael McGrath, the president of U.S. Mortgage and its CU National subsidiary which sold $140 million of mortgages held on behalf of credit unions to the GSE without authorization and kept the money. McGrath has pleaded guilty to the huge fraud, agreeing to forfeit almost $15 million in assets, leaving a $125 million loss for the CUs.

Fannie has given the credit unions until Nov. 16 to accept the offer but so far only two have agreed. Fannie, which has rejected requests to give the mortgages back, has offered to settle with the credit unions for what would amount to less than 20% of the value of the mortgages. If those credit unions realize the 80% of losses it could push several of them into insolvency.

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Mortgage Loan Compliance | Commercial Real Estate Workout Guidance

Federal regulators have issued guidance that encourages banks to refinance or restructure commercial real estate loans despite declines in property values and rents.

A policy statement issued by the Federal Financial Institutions Examination Council provides examples of prudent CRE workouts. It also stresses the importance of the borrower's willingness and capacity to repay the mortgage.

The guidance tells examiners not to adversely classify prudent workouts, even in cases where the borrower is associated with an industry that is facing financial difficulties.

"The financial regulators recognize that prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions," according to the policy statement.

CRE loans that are "renewed or restructured in accordance with prudent underwriting standards should not be adversely classified or criticized unless well-defined weaknesses exist that jeopardize repayment," the guidance says.
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Mortgage Loan Compliance | RESPA Kickback Lawsuit Reinstated

A lawsuit alleging Countrywide Financial Corp. violated the Real Estate Settlement Procedures Act through a mortgage insurance captive reinsurance kickback scheme has been reinstated by a federal appeals court.

Edward W. Ciolko, a partner with Barroway Topaz Kessler Meltzer & Check, the law firm that brought the suit, said "Consumers faced with inherently opaque real estate settlements have the right under RESPA to be compensated if they are subjected to practices such as kickbacks or unearned closing fees. These abusive practices eliminate competition and increase prices over time, and they are what RESPA is specifically intended to address."

The suit, Alston v. Countrywide, was originally filed in December 2006. In 2008, a trial court judge dismissed the suit, ruling there was a lack of jurisdiction. But in a new ruling, Judge Maryanne Trump Barry of the U.S. Court of the Appeals for the Third Circuit, said "What is before us for decision turns on a question of statutory interpretation - does or does not the plain language of RESPA Section 8 indicate that Congress created a private right of action without requiring an overcharge allegation? We conclude that it does."

The decision also states that the "filed rate doctrine" does not apply because those suing are challenging Countrywide's alleged wrong conduct and not the "reasonableness or propriety of the rate that triggered the conduct."

According to the attorneys for the plaintiffs, who are seeking class action status, Countrywide allegedly assigned each loan which lacked a 20% down payment to one of seven private mortgage insurance companies on a rotating referral fee basis. The MI companies allegedly then were required to reinsure the policy with a Countrywide subsidiary, Balboa Reinsurance Co. The plaintiffs claim that between 2000 and 2006, Balboa collected $892 million in reinsurance premiums and paid $0 in claims.

Barroway Topaz said it has brought similar lawsuits against Washington Mutual, GMAC and Wells Fargo that were on hold pending this ruling. A representative of Bank of America, the current owners of Countrywide said "At this point we evaluating the ruling and will respond in court at the appropriate time."

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