HVCC's Sun is Setting, Sort Of; Mega-Refinancing Rumors Dying Down; Loan Fraud Penalties

"The economy is so bad, California and the US is outsourcing Border Patrol to Mexico." So wrote a few folks Friday. In spite of that, our equity markets continue to do well, much to the surprise of many. Some believe that it is because that given the alternative investment opportunities around the world, our stock markets look pretty good. Others believe that with our rates so low (with little reason for them to move higher at the present time), stocks still look attractive.  Regardless, an improving - or at least stable - stock market helps the public's psychology.

With the slow days of summer, and mortgage volumes gradually slowing for many companies, talk continues about the huge, mega-refinancing rumors. Most of the talk about Freddie and Fannie refinancing their entire portfolio into lower rates seems to be coming from Wall Street and not the agencies or Congress (which apparently is on a break anyway). And the economic stimulus aspect of this is contested. READ MORE

Concept Capital, a Washington research group, noted that although making it would make the loans more affordable and to provide a stimulus for the economy, Fannie and Freddie are not preparing for any massive new programs. And, for better or worse, HARP allows pretty much the same thing. (Concept Capital also mentioned another rumor, which is Congress may roll out a new homebuyer tax credit to replace the credit that expired on April 30. Given that the House members are on their 6-week summer vacation, and then comes back to grapple with the budget before the election, this is highly unlikely.

Although the Financial Reform Bill "sunsets" the HVCC in November, one can expect that many lenders will still route their appraisals through some type of appraisal management company (AMC) or vendor since a) the intention is good, and b) large investors may continue to require it. The rules and regulations, and interpretation of them, will take months, but it appears that the firewall in the ordering process between the lender and appraiser will stand. It does have a provision, however, that specifically states the Bill does not prohibit anyone with an interest in a real estate transaction (broker and banker, for example) from asking an appraiser to consider additional information, to provide further support, or to correct errors found in the report. Loan production staff will still be barred from ordering appraisals, but at least they will be able to communicate with the appraiser about the report. As one broker wrote me, opining, "I hate paying the AMC's for doing nothing but placing appraisers on a list and pushing paper around. Why should consumers be forced to pay for what is often a poor quality, inferior appraisal? It is good to stop collusion - how about putting more firewalls in place between Congress and lobbyists?"

The fact of the matter is that the appraisal process is just one part of evaluating collateral. Lenders must also use fraud prevention and quality assurance measures. There was a good article in Mortgage Banking Magazine by Adam Calvery discussing these components. A broker wrote to me and said, "If Fannie and Freddie really wanted to make a difference on the valuation side, they'd adopt something like FHA's appraisal policy. All appraisers would be Fannie/Freddie approved and a national database (like FHA's case ID) would be put in place.  The nonsense of using third party, licensed appraisers to receive a value - only to have Fannie/Freddie or the MI's send out a "retrospective" appraiser to magically go back in time and opine as to what the value "should have been" is one of the most intellectually dishonest things ever.  If we really want the second guessing to end - let's set up ONE system of valuation and let the GSE's govern it.  One would think THEY would benefit the most by establishing valuation credibility at a national level - rather than relying on the rep and warrant model which is beyond broken."

And appraisals are still a concern for investors. Beginning today, ING will require receipt of the Purchase Agreement on purchase transactions before your request to order an appraisal can be processed. And for loans delivered for purchase on September 1, and beyond, Franklin American Mortgage Company will require that all conventional and FHA loan files contain an executed Appraisal Certification document which confirms that each appraisal has been obtained via a compliant appraisal ordering process.

Of course, many companies have been created to help mortgage originators with HVCC and basically create their own AMC. For example, Mercury Network offers an online appraisal Vendor Management Platform (VMP), allowing lenders to manage the entire appraisal workflow from any web browser, while remaining in full compliance with federal and state regulations. (Mercury states, for example, that "You do not lose your existing appraisers and you keep appraisal fees lower for your cash strapped borrowers." If interested, contact Marty Richardson at MartyRichardson@sbcglobal.net) Of the many companies that exist, they are all positioning themselves for the future with HVCC going away at Thanksgiving.

Goldman Sachs settled with the Federal Government a few weeks ago for $550 million, which many viewed as "paltry". Citi agreed to pay $75 million to settle SEC civil charges that its officials vastly understated Citi's exposure to subprime loans. The SEC had charged Citigroup with civil fraud for misleading investors by failing to disclose $40 billion in risky mortgage assets that produced losses that eventually sent the bank to the brink of failure. Citi eventually lost more than $30 billion on the assets, and a year later required more government support than any other bank to stay afloat. The SEC also charged two executives who played key roles in the preparation of Citi's quarterly earnings statements, former chief financial officer Gary Crittenden and former investor-relations chief Arthur Tildesley Jr., who agreed to pay $100,000 and $80,000 respectively to settle the charges. Somehow that doesn't seem like much.

Meanwhile, a Nevada company president was sentenced to six years in prison for a mortgage fraud scheme involving two properties on Oahu. John Gilbert Mendoza, convicted of conspiracy, mail and wire fraud, loan fraud, money laundering, and failure to file tax returns also was sentenced to five years of supervised release and ordered to pay a special assessment of $1,875 and $881k restitution to three victims. He befriended Hawaii homeowners who were facing foreclosure, told them that he had a plan for stopping the foreclosure proceedings and for allowing them to keep title to their homes, organized the sale of the homes to third party straw buyers who took out fraudulent loans in their name, and then Mendoza deposited the proceeds into his own accounts.

Everyone remembers New Century Financial, which went under in April 2007. Thirteen former officers and directors of New Century agreed to pay more than $90 million to settle all civil claims in a series of federal and private lawsuits stemming from its collapse. The agreement settles class-action lawsuits brought by investors, a suit by a private equity firm, a claim filed by the trustee in New Century's bankruptcy case and a lawsuit brought by the Securities and Exchange Commission against three former New Century executives. None of the defendants admitted any wrongdoing. Named were New Century co-founder Brad Morrice, Patti M. Dodge (CFO), David N. Kenneally (Controller), co-founder Robert K. Cole, the estate of co-founder Edward Gotschall, Fredrick J. Forster, Michael M. Sachs, Harold A. Black, Donald E. Lange, Terrence P. Sandvik, Richard A. Zona, Marilyn A. Alexander, David Einhorn and William J. Popejoy.

Countrywide's group could be next - its trial is scheduled to begin in mid-October.

Anyone involved in the USDA Rural Home Loan Program received some encouraging news last week. HERE IT IS

They say that FDIC employees never sleep... they wait. Friday we had the now-usual batch of bank closures and takeovers (108 for 2010) in various states around the US. Home Bancshares (Arkansas) purchased, through its Centennial Bank unit, Florida-based lenders Bayside Savings Bank and Coastal Community Bank. Heritage Financial took over Cowlitz Bank (WA), and Home Federal Bancorp paid the FDIC a premium to purchase the deposits of LibertyBank (OR). Several of LibertyBank's branches went to Home Federal (ID). State banking regulators also closed NorthWest Bank and Trust (GA), which was sold to State Bank & Trust (GA).

At least for now, mortgage pricing continues to be good - and many see mortgage rates continuing lower. Friday was no exception. The bond market went back to "Buy" mode again, sending rates lower across a flattening yield curve. (Why would a borrower look for an ARM loan when 30-yr. rates are so low? Well, if the borrower is going to be in the house for a short term, some intermediate ARM programs have pretty attractive rates.) On Friday we had a so-so GDP report, mild weakness in stocks, and the realization that even the Fed is concerned about the strength and durability of the recovery. A weak job market does not help any recovery, and will help to keep rates low. Certainly the GDP report wasn't enough to change anyone's mind on growth, inflation, the Fed, or another round of credit / liquidity crisis. 

A woman accompanied her husband to the doctor's office.

After his checkup, the doctor called the wife into his office alone. He said, "Your husband is suffering from a very severe disease, combined with horrible stress. If you don't do the following, your husband will surely die.

"Each morning, fix him a healthy breakfast. Try to be pleasant in general, and make sure he stays in a good mood. For lunch make him a nutritious meal. For dinner prepare something nice and healthy again. Don't burden him with chores, as he probably had a hard day. Don't discuss your problems with him; it will only make his stress worse. And most importantly, freely and frequently, express your love for him and satisfy his every whim.

"If you can do this for the next 1 to 2 months, I think your husband will regain his health completely."

On the way home, the husband asked his wife, "What did the doctor say?"

"I'm sorry - he said you're going to die," she replied.