The unfolding foreclosure fraud crisis isn’t easy to understand, but here it is boiled down. Banks need proper documentation to repossess a home from a family. They need documents about everything from the family’s financial situation to its history of missed payments to its assets. And they need to verify that the information in those documents is correct. But they didn’t. They hired individuals to sign thousands of mortgage papers — legal affidavits, swearing to a judge that they had personal knowledge of the information within — without checking a thing.

Only 23 states require a judge to sign off on a foreclosure, but some banks are now stopping foreclosures in all 50 states. Moreover, they are halting the sale of foreclosed properties to new homeowners.

So who stands to gain? And who stands to lose? Let’s go through the possible impacts on major players and markets, one by one.

The winners:

* Homeowners undergoing foreclosure. Borrowers undergoing foreclosure might benefit from the various state moratoriums: The process is stalled for now, meaning some might have a few more months in their homes, and they know they will not be evicted without due process. States and federal agencies might also work with banks to provide principal write-downs and right-to-rent to ameliorate the foreclosure crisis in the meantime.

The losers:

* Recent purchasers of foreclosed homes. A nightmare scenario: Banks probably foreclosed on and evicted families without proper mortgage documentation. It is unclear whether or how courts might overturn those foreclosures. (One expert I spoke with said it would be more likely that the bank would have to offer some sort of restitution to the evicted family, but nobody really knows.) What if you recently bought one of those houses? There’s a whole lot of uncertainty for you, right now.
* The housing market. The fraud crisis looks certain to prolong the foreclosure crisis — dragging out how long families undergoing foreclosure will remain in limbo, and preventing banks from clearing properties off of their books. It seems possible that the foreclosure fraud crisis will weaken an already-weak housing market.
* The banks and investors. This could be a complete catastrophe. For a detailed but clear explanation of the various liabilities, see Mike Konczal’s description of who owns what and who stands to lose — and an explanation of why this might create a new too-big-to-fail scenario. Rep. Brad Miller (D-N.C.) also provided a clear explanation to The Washington Post yesterday:

There is massive potential liability for the securitizers, which are mostly the biggest banks. The contract was that if mortgages didn’t meet certain requirements, then the securitizer would buy them back. The mortgage servicers and trustees have exclusive control over the paperwork. Both the investors, the people who own the mortgage-backed securities, and the homeowners, really depend on them. There’s been lots of litigation where investors try to get securitizers to buy back the bad mortgages because they were flawed, but that litigation has been stymied by procedural objections. If the private investors can break through that defense and require the mortgages that don’t meet the requirements to be bought back, the liabilities for the biggest banks will be enormous.

A little of each:

* Communities with concentrations of homes in foreclosure. Good news and bad news. On the one hand, families should be able to stay in their homes until the banks and Washington work out the foreclosure fraud crisis. That will benefit communities with lots of families undergoing foreclosure. On the other hand, neighborhoods with high concentrations of bank-owned properties for sale will see a lot of homes remain vacant, pulled off of the market.
* The courts. State attorney generals — Beau Biden in Delaware, Richard Cordray in Ohio, Tom Miller in Iowa and many others — are going hard after the banks. This looks to be just the first wave of what might be thousands of cases for judges to handle. Many housing advocates argue that judges should have had a more prominent role in foreclosure decisions before, anyway — and this might give new life to cramdown legislation in Washington. But the scandal certainly has the potential to swamp courts and cost billions in legal fees. In that sense, lawyers might be the clearest winner from the whole thing thus far.

By Annie Lowrey

Speaking to reporters by phone during this morning’s White House Press Briefing, White House spokeswoman Dana Perino said President Bush is now prepared to sign the American Housing Rescue & Foreclosure Prevention Act, H.R. 3221, which is expected to receive full Congressional approval by this time tomorrow. According the legislation, H.R. 3221 will help families facing foreclosure keep their homes, help other families avoid foreclosures in the future, and help the recovery of communities harmed by empty homes caught in the foreclosure process.

To shore up the housing market and ensure the availability of affordable home loans, H.R. 3221 would put a new, independent regulator in charge of housing Government Sponsored Enterprises (i.e., GSEs — Fannie Mae, Freddie Mac, and the Federal Home Loan banks), which is said to be vital to both the financial markets and homeowners. The new regulator is expected to be far better prepared than the current system is to quickly and effectively respond to issues affecting the safe and sound operation of Fannie Mae, Freddie Mac, and Federal Home Loan banks.

The centerpiece of the bill provides assistance to a large number of homeowners now in danger of losing their homes. Lower-cost government-insured mortgages–which Congressional leaders say come at no cost to the American taxpayer–will be offered if President Bush signs the Bill into law, but according to the Congressional Budget Office estimates, the plan could cost taxpayers around $25 billion.

Specifically, the American Housing Rescue & Foreclosure Prevention Act, H.R. 3221, includes the following provisions:

FHA Housing Stabilization and Homeownership Retention Act

1. Provides mortgage refinancing assistance to keep at least 400,000 families from losing their homes, to protect neighboring home values, and to help stabilize the housing market at no cost to American taxpayers.
2. Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government-insured mortgages they can afford to repay.
3. Protects taxpayers by requiring lenders and homeowners to take responsibility. This is not a bailout, legislators say; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal.
4. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.
5. Contains critical protections for taxpayers’ dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.
6. Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.
7. Provides $180 million for financial counseling and legal assistance to help families stay in their homes.

Strengthening Regulations of the GSEs

1. Puts an independent regulator in place with what are said to be significant responsibilities and powers so that Fannie Mae and Freddie Mac can safely and soundly work to provide families with affordable housing.
2. The new regulator will have enhanced authority to raise capital standards, set strict prudential standards, including internal controls, audits, and to enforce these new standards and promptly take corrective action.
3. The new regulator will oversee, and can directly restrict, executive compensation at Fannie Mae and Freddie Mac.
4. Raises the GSE loan limits for single family homes to create more affordable mortgage loans for moderately priced homes by allowing GSE loans up to 115% of the local area median home price, and to make GSE loans effective in high cost areas by raising the permanent loan limit from $417,000 to $625,500.
5. Creates a new permanent affordable housing trust fund–financed by the GSEs and not by taxpayers–to fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families nationwide in both rural and urban areas.

Backstopping Fannie Mae and Freddie Mac To Shore Up the Housing Market

1. Gives the Secretary of the Treasury the authority to increase the already existing line of credit to Freddie and Fannie for the next 18 months, as well as giving the Treasury Department standby authority to buy stock in those companies to provide confidence in the GSEs and stabilize housing finance markets.
2. Includes taxpayer protections directing the Treasury Department to take the following into account, when using these authorities: A) Taxpayers should be first in line for being paid back, before other shareholders; and, B) There should be restrictions on dividends for shareholders and on compensation for the executives of the GSE’s until taxpayers are fully reimbursed.
3. Strengthens oversight by requiring the Federal Reserve and Treasury to consult with the new regulator on issues concerning the safety and soundness of the GSEs and use of the standby authority.

Stabilizing Neighborhoods Hurt by the Foreclosure Crisis

1. Provides $4 billion in emergency assistance (CDBG Funds) to communities hardest hit by the foreclosure and subprime crisis to purchase foreclosed homes, at a discount, and rehabilitate or redevelop the homes to stabilize neighborhoods and stem the significant losses in home values of neighboring homes.
2. Foreclosed and rehabilitated homes would be sold or rented to moderate-income individuals and families–those whose incomes do not exceed 120% of the area median income. At least 25% of the funds would be targeted to house low-income and very low-income persons and families–those whose incomes do not exceed 50% of area median income.
3. Any profit from the sale, rental, rehabilitation or redevelopment of these properties must be reinvested in affordable housing and neighborhood stabilization.
4. Provides $180 million for pre-foreclosure counseling, to be distributed in grants by the Neighborhood Reinvestment Cooperation (NeighborWorks), with 15% targeted for low-income and minority homeowners and neighborhoods, and $30 million in grants for legal counseling to assist homeowners in foreclosure.

Preventing Future Abuses and Crises

1. Establishes a nationwide loan originator licensing and registration system that will set minimum standards for loan originator licensing substantially improving the oversight of mortgage brokers and bank loan officers.
2. Establishes improved mortgage disclosure requirements that will help ensure that mortgage borrowers understand their mortgage loan terms.

FHA Modernization

1. Expands affordable mortgage loan opportunities for families (many of whom would otherwise turn to subprime lenders) and for seniors through expanded access to reverse mortgages through Federal Housing Administration reform.
2. Raises FHA loan limits to create affordable mortgage loans for moderately priced homes by allowing FHA loans up to 115% of the local area median home price, and to make GSE loans more available in high cost areas by raising the permanent loan limit from $362,790 to $625,500.
3. Expands opportunities for seniors to tap into equity in their home through FHA reverse mortgage loans, by increasing the loan limit for the program, reducing and capping lender fees for such loans, and strengthening consumer protections limiting the sale of other financial products in conjunction with FHA reverse mortgage loans.
4. Prevents HUD from raising single family loan fees on lower and middle-income borrowers, and from raising loan fees on FHA rental housing loans.

Preserving the American Dream for Our Nation’s Veterans

1. Increases VA Home Loan limit, as was done in the stimulus package, for high-cost housing areas so that veterans have more homeownership opportunities.
2. Helps returning soldiers avoid foreclosure and stay in their home by lengthening the time a lender must wait before starting foreclosure, from three months to nine months after a soldier returns from service and providing returning soldiers with one-year relief from increases in mortgage interest rates.
3. Requires the Department of Defense to establish a counseling program for veterans and active service members facing financial difficulties and provides a moving benefit to servicemen and women who are forced to move out because their rental housing was foreclosed on.
4. Increases benefits paid to veterans with disabilities, such as blindness, to adapt their housing and allows the Veterans Administration to provide for improvements to homes of veterans with service-connected disabilities.

Tax Provisions to Expand Refinancing Opportunities and Spur Home Buying (H.R. 5720)

1. Provides $15 billion in tax benefits, including tax credits to first-time homebuyers, a real property tax deduction for non-itemizers, an additional $11 billion in mortgage revenue bonds for states, and improves access to low-income housing.
2. Gives first-time homebuyers a refundable tax credit that works like an interest-free loan of up to $7,500 (to be paid back over 15 years) to spur home buying and stabilize the market. The credit will begin to phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return).
3. Provides taxpayers that claim the standard deduction with up to an additional $500 ($1,000 for a joint return) standard deduction for property taxes in 2008.
4. Temporary increase in mortgage revenue bond authority to allow for the issuance of an additional $11 billion of tax-exempt bonds to refinance subprime loans, provide loans to first-time homebuyers and to finance the construction of low-income rental housing.
5. Temporary increase in low-income housing tax credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.

The Wall Street Journal reports this morning that President Bush’s support of the measure is a “dramatic split” for both Bush and congressional Republicans, many of whom the Journal says are “angrily opposed to the housing legislation, which they call a handout for irresponsible homeowners and unscrupulous lenders.” President Bush had voiced earlier objections to a provision that would give grants for local governments to purchase and refurbish foreclosed properties–a provision the White House feels amounts to nothing more than a bailout. But White House spokeswoman Perino said today that President Bush doesn’t feel this is the right time for a “…prolonged veto fight, but we are confident the President would prevail in one.”

In May of this year, the Mississippi Department of Banking and Consumer Finance notified all of the state’s mortgage license holders that, as of July 1, 2008, the state will be participating in the National Mortgage Licensing System (NMLS) and that participation for all of the state’s mortgage license holders is mandatory.

NMLS officially launched on January 2, 2008, and was the culmination of a four-year effort by state regulators and is just one part of a multi-faceted plan being implemented to enhance consumer protection, improve regulation, increase uniformity of mortgage supervision, and streamline the licensing process. These efforts include coordinated supervision, improved regulatory practices, and consistent standards for testing and training for mortgage originators; and uniform license application, renewals and annual reports. To accomplish this, Mississippi’s Department of Banking and Consumer Finance amended the Mississippi Mortgage Consumer Protection Law during the past regular session of the Legislature to mandate participation in NMLS.

At its core, NMLS is a state-based approach that has the benefits of localized accountability and an on-the-ground regulatory system combined with the efficiencies of a nationwide framework. This type of framework has the potential to create high and consistent regulatory standards without preempting states important role in the development of consumer protections and the enforcement of lending standards.

NMLS’ basic feature is a central database, containing a single record for every state-licensed mortgage lender,
broker, and branch and loan originator, based on the uniform mortgage application forms developed by state
regulatory agencies. It will also drive standardization and coordination among state regulators in areas such as
licensing requirements, background checks, testing and education, enforcement action, examinations and annual
reporting, which is bound to have a positive impact in the fight against real estate and mortgage fraud.

To date, 42 state agencies representing mortgage regulators in 40 states have indicated their intent to be a part of
NMLS. By the end of 2008 there should be 19 state agencies on the system with another 14 participating in 2009.
The remainder of the 42 agencies are expected to come online in 2010 and 2011. Total projected enrollment in NMLS will be more than 500,000 professional licensees. In Mississippi, the Department of Banking and Consumer Finance estimates its enrollment will be approximately 4,000 mortgage professionals.

The Connecticut Department of Banking and the Louisiana Office of Financial Institutions have issued announcements indicating their participation on NMLS starting July 1, 2008, also. Connecticut licensees have until September 30, 2008 and Louisiana licensees have until October 1, 2008 to transition their license(s) onto NMLS. Both agencies will begin accepting submissions through NMLS on July 1.

The director of the Idaho’s Department of Finance said this week that Idaho’s financial institutions are a “beacon of good news,” which is in stark contrast to the nation’s mortgage crisis. The state’s mortgage delinquencies are well within the range established over the last 20 years. In fact, Idaho’s annual delinquency figure was lower than that for 10 of the past 20 years (3.86% of total mortgages, compared with the nationwide number of 6.31%). The percentage of all Idaho mortgage loans reported as foreclosure-started for 2007, at 1.47%, was also within the range of the past 20 years, and is nearly half the 2.84% reported nationwide.

Contrary to the increasing number of news stories about large money center financial institutions (e.g. Bear Stearns) experiencing significant losses connected to mortgage defaults, Idaho’s banks are showing continued strength, with key performance indicators outpacing nationwide numbers. For example, in 2007, Idaho banks out-performed banks nationwide in loan and asset growth rates, and reported significantly smaller percentages for non-current loans and net charge-offs.

Maybe its time the rest of the nation took at how the 43rd state is handling its business. In January, Idaho became only one of seven states requiring that all new applications for mortgage licensure be processed through the new Nationwide Mortgage Licensing System (NMLS) and that existing licensees transition their current license information onto the NMLS by September 1 of this year. The NMLS is streamlining the licensing process for both regulatory agencies and the mortgage industry by providing a centralized and standardized system for mortgage licensing. NMLS is owned and operated by the State Regulatory Registry LLC, a wholly owned subsidiary of the Conference of State Bank Supervisors (CSBS). NMLS is a joint project of CSBS and the American Association of Residential Mortgage Regulators (AARMR) begun several years ago with the goals of improving supervision, streamlining compliance and enhancing consumer protection.

Less than two weeks after a State Senator indicated that he would introduce legislation aimed at curbing real estate and mortgage fraud in Massachusetts, the state’s Division of Banks last Friday announced the implementation of a plan designed to address abuses by rogue mortgage lenders and brokers. Several recent investigations have produced evidence that some Massachusetts mortgage lenders and brokers have purposely steered customers–often those with low incomes or with limited English language ability–into loans they cannot afford by using misleading tactics and, in some cases, committing fraud.

The Division of Banks’ plan combines enforcement and regulatory initiatives along with community and industry partnerships and outreach. On the enforcement side of the equation, the Division’s examiners have launched multiple surprise examinations of mortgage lenders and brokers, focusing on stated income loans and looking for any evidence that borrowers’ incomes are being inflated. Connected to this effort, the Division of Banks issued an industry letter to all licensed mortgage lenders and brokers and financial institutions threatening immediate and severe action should any evidence of inflating borrower income be found. (Click here for a copy of the letter.)

On the regulatory side of things, last Friday the Division of Banks issued emergency amendments to regulations that govern the supervision of mortgage lenders and brokers. These changes significantly expand the number of existing prohibited acts and practices that constitute grounds for the issuance of cease and desist orders and license suspension or revocation.

Effective immediately, in the state of Massachusetts, it is against the law for a mortgage broker or mortgage lender to:

• have a consumer sign a blank or incomplete mortgage loan application or mortgage loan documents.
• sign a mortgage loan application or mortgage loan documents on behalf of a consumer.
• falsify income or asset information on a mortgage loan application or mortgage loan documents.
• make false promises to influence, persuade or induce a consumer to sign a mortgage loan application or mortgage loan documents.
• pressure or coerce a consumer to sign a mortgage loan application or mortgage loan documents by misrepresenting or omitting crucial information about the terms of the mortgage.
• discourage a consumer in a mortgage loan transaction from seeking or obtaining independent legal counsel or legal advice.
• engage in a pattern or practice of failing to make any disclosure to a consumer required by and at the time specified by any applicable state or federal law, regulation or directive.
• fail to disclose the type and number of its license in an advertisement.
• advertise mortgage services without naming the licensee and disclosing the license number of the mortgage broker or mortgage lender under whose license the individual is acting.
• require a consumer to use the real estate services of a particular entity, agent or broker

The Division is also continuing to dedicate significant resources to the development of a nationwide mortgage database of mortgage professionals. The implementation of the database is essential to fill cracks in the existing regulatory framework and reduce fraud. Specifically, the nationwide database would eliminate real estate fraudsters’ ability of to move from state to state by providing a comprehensive listing of enforcement actions taken by all state regulatory agencies.

A Massachusetts State Senator says he will reintroduce a bill next year that would require all loan officers–not just the owners of mortgage companies–to register with the state and take and pass state-enforced exams and background checks. State Senator Brian Joyce says the State of Massachusetts should license all individual brokers. Under the current state rules, while mortgage companies are required to register with the state, only the owners of the brokerages are required to undergo criminal background checks.

From the Boston Globe:

The state’s Division of Banks, which had opposed Joyce’s bill, yesterday said it would be open to changes to the law, provided that companies that hire loan officers maintain responsibility for their actions, according to an agency spokesman.

“Should we be looking at the system?,” said Joseph A. Leonard Jr., general counsel for the Division. “The division continues to consider the merits of licensing individual loan originators just as some other states do.”

Leonard described the problem of licensing for individual brokers as a “nationwide issue.”
“The current framework in Massachusetts is that the company gets licensed and anybody who works for them as an employee is exempted,” he said, adding that under the current system, “we expect a licensee to put anybody who works under their license and reputation through extensive scrutiny.”

Victim advocates say that the current system allows for loan officers who show little understanding of the state laws against predatory lending. Also, brokers sometimes present in English sensitive information, such as the Truth in Lending Statement, which tells buyers exactly how much they will pay per month for mortgages, without providing translation to clients who do not understand financial terms in English — a violation of state regulations.

A recent Boston Globe report revealed a wide variety of abuses by mortgage brokers servicing Lawrence, MA, including overstating incomes so borrowers could qualify for loans, arranging loans that cost hundreds of dollars more per month than borrowers could afford, and, in one case, identity theft, reported the Globe.

The Conference of State Bank Supervisors (CSBS) has entered into an agreement with the National Association of Securities Dealers (NASD) to develop a nationwide licensing system for state residential mortgage regulators. The announcement culminates an 18-month effort involving CSBS, the American Association of Residential Mortgage Regulators (AARMR) and the real estate industry to develop uniform mortgage license applications to be used by each state mortgage regulator.

The national licensing system and repository is expected to enhance state regulator’s ability to protect consumers through an increased ability to hold industry professionals accountable for their actions. Fraud and other illegal or unethical behaviors, such as predatory lending, should decline as states participate in the system.

According to those in the know, companies and professionals will only have to complete one online application when applying for licenses in one or more jurisdictions. Both groups will benefit from access to a national licensing and enforcement repository and similar state regulations that will likely result from the uniform application.

This system is expected to be available over the Internet through a secure web site by January 2008. A total of 30 state agencies have indicated that they will participate in the system. Currently 48 states license or register mortgage lenders or brokers. Some states have multiple agencies that regulate the industry.

2006-03-15 09:45
Here’s some feedback I received related to yesterday’s blog posting about Colorado’s proposed Mortgage Broker Registration Act (HB 1161). I posted the following question on a discussion board over at BrokerOutpost.com:

Late last week, Colorado’s House of Representatives passed a Bill that–if approved by the state’s Senate and Governor–calls for all mortgage brokers to:

1. Register with the State.

2. Submit to a criminal background check.
3. Disclose any relevant administrative discipline that has ever been taken against them.
4. Post a $25,000 bond.

I’m just curious: what does your state require of you, and how do you feel about Colorado’s proposed law (especially the bonding part)?

Here are the responses I’ve received thus far:

1. It’s about time. CO lets anyone be a broker/LO without any regards to their abilities and no regulation. — Scott from Washington

2. This is to be a broker, not just an Loan Officer, right? Stuff like this makes our work more exclusive and helps justify our pay. If you are still in the biz with a law like this, then you’re probably worth your fees. — Andrew from Massachusetts
3. Kentucky requires a $50,000 bond! — Chris from Kentucky
4. For NY Mortgage Bankers… It is just the cost of doing business. — Martin from New York
5. Georgia requires a $50k bond as well. As an AE, it’s relatively handy in signing brokers up b/c a bond acts in lieu of company financials and shows liquidity. For the broker that doesn’t like to open up his books or even print off a balance sheet it makes things simple. — Scott from Georgia
6. Ohio requires a $50k bond also and there has to be some form of regulation in each state in order to improve the industry. — Dave from Ohio
7. In all seriousness, a $75k or higher bond should be required for a shop to open it’s doors, and it should increase with every originator added to the office. Any Loan Officer caught originating WITHOUT the bond in place should bring a fat fine to the office. Maryland is going to begin a more expensive lic’g process for Loan Officers that would have a fee attached, and part of it will have to be paid again, any time an LO moves to another shop. The hurdles to get into the biz are a joke in most cases. — Steve in Maryland
8. A 25K bond does not cost much of anything to buy… just a couple hundred a year. Bad thing is you have to personally guarantee it. — Corey in Missouri
9. West Virginia requires a $50k bond. Virginia requires a $25k bond. Both cost about $350.00 per year. — Natalie in Virginia
10. The idea that Loan Officers at mortgage companies somehow should have been immune from having the same requirements as Loan Officers at brick and mortar local banks was stupid in the first place. I hope to God that Missouri gets some kind of licensing requirements passed. I will be down there taking the exam the first day it’s available, and I’ll be laughing like a maniac at all the fools who can’t pass the exam or don’t meet background check requirements. — Matt in Missouri

It seems like everyone agrees… a $25,000 bond is a small price to pay to play.