Fraud


Brokers Expect REOs to Trigger More Legal Disputes

Nearly 60 percent of real estate professionals say they believe REO-related disputes will increase over the next two years. What’s more, 76 percent said they believe it will be among the top three issues they will face in real estate, according to the National Association of REALTORS®‘ newly released 2011 Legal Scan: Legal Issues Facing Real-Estate Professional.

In the survey of real estate agents, brokers, attorneys, and educators, survey respondents said disclosure in these transactions remain a main culprit to problems, pointing to banks and listing brokers who sometimes fail to disclose known material defects about a property.

Overall, according to the 2011 Legal Scan, the top three issues that cause the most disputes in a real estate transaction are dual agency, disclosure, and breach of fiduciary duty.

Short sales, in particular, are causing more disputes in some of these areas, the survey found. Short sales are more commonly being listed in “as-is” condition, which has “resulted in a decline of quality of seller disclosures,” the survey notes. Another disclosure problem reported is the failure of listing agents to report that the property is or will soon be in a short sale situation.

Source: “Brokers Foresee an Increasing Number of Lawsuits Related to Short Sales,” Realty Times (July 26, 2011)

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A Dodd-Frank report card

By Kelli Galippo • Jun 28th, 2011 • Category: real estate newsflash

The one-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is swiftly approaching, and government officials, lawyers and media outlets are all anxiously tracking the progress of regulations being formulated to implement the required changes.

So far, 28 deadlines for the drafting of new regulations have been missed. Of the 385 new rules to be written, only 24 have been completed.

It has become undeniable that many on Wall Street (and in Congress) are using highly-paid, aggressive lobbyists to resist the changes demanded by Dodd-Frank. As a result of the delays, most of the new safeguards may not become effective until after the next election — giving newly-elected officials (supported by lenders) an opportunity to stop them altogether.

Regulators overseeing the transition process of the overhaul are struggling to discern whether the requests to slow the process down are genuinely in the interest of the consumer or just excuses for delay conjured up by those with only an interest in their own pocketbooks.

first tuesday take: Dodd-Frank is going to take longer to implement than expected. We anticipated lenders (and choice members of Congress) would do whatever they could to slow or kill the process. For them, lending is all about how much money can be taken from the consumer. Lenders are part of the rentier society that makes money simply by having money, versus the American homeowners who must contribute their skills to society and “rent” the money they need from the rentiers.

Among the many changes, (Dodd-Frank) strictly defines a qualified residential mortgage (QRM) as a Real Estate Settlement Procedures Act (RESPA)-controlled loan (for personal purposes, not business-related) which is not a Section 32, high-cost RESPA loan typical of equity loans and private money non-business loans. Tighter parameters will be placed on a borrower’s ability to obtain a mortgage not in the QRM category. [For more information regarding the Dodd-Frank changes, see the October 2010 first tuesday Legislative Watch, TILA circa 2010; consumer protection enhancement; for more information about the QRM, see the May 2011 first tuesday article, How much medicine can the sick housing market stomach?]

These tighter lending standards and increased consumer protection measures mean less business for lenders who made a killing during the Millennium Boom originating subprime loans and adjustable rate mortgages (ARMs).

Furthermore, the legislation prevents mortgage loan brokers (MLBs) from being compensated through yield spread premiums, or undisclosed kickbacks in an effort to remove MLB incentives for originating mortgages homebuyers can’t afford to repay. This is a good thing, which many MLBs remaining in the business acknowledge. Those who participated in the carnage have mostly lost their licenses or let them expire. [For more information regarding kickbacks, see the October 2010 first tuesday article, How to make money as an endorsed, registered, law-abiding RESPA mortgage loan broker.]

It is crucial for regulators to remember the purpose of these changes is to protect the mortgage borrowers. Further delay of the changes leaves homeowners and homebuyers vulnerable to the game played and (thus far) always won by lenders.

Re: “Financial overhaul is mired in detail and dissent” from the NY Times

American mortgages

Not quite settled

Bank of America’s settlement will worry other lenders

Jun 30th 2011 | NEW YORK | from the print edition

  • NOT for the first time, the tough talk was merely a prelude to a hefty settlement. Brian Moynihan, Bank of America’s boss, had vowed to engage in “hand to hand combat” with investors suing to recover losses on mortgage-backed securities (MBSs) peddled before the housing market collapsed. He had even likened them, none too diplomatically, to buyers of a Chevy who wanted it to be a Mercedes. In the end, though, BofA rolled over surprisingly quickly in order to relieve the worst of its housing-related headaches, a product of its ill-advised purchase of Countrywide, a gung-ho mortgage lender.

The bank will pay $8.5 billion to investors in more than 500 Countrywide-linked securitisations who had claimed the loans breached basic underwriting standards. The deal is backed by the loans’ trustee, Bank of New York Mellon, and 22 of the biggest out-of-pocket money managers, including BlackRock and PIMCO.

The forceful involvement of these big investors—lucrative BofA clients in a host of areas—was an incentive for the bank to agree terms. So was the fact that the Federal Reserve Bank of New York was a plaintiff, thanks to securities inherited in the rescue of AIG. And for all his combative rhetoric, Mr Moynihan has been keen to draw a line under BofA’s problems since taking over from the hapless Ken Lewis 18 months ago. He has shoved dodgy loans into a “bad bank” and restructured key businesses, while completing the integration of Merrill Lynch, an investment bank acquired during the crisis. Analysts saw MBS lawsuits as the biggest of the legacy risks dragging the bank’s share price below its book value.

Some dangers remain. The settlement deals with much of the Countrywide dross but it doesn’t cover loans handled by other BofA units or those securitised after being sold to third parties. Merrill faces $11 billion of residential-mortgage claims, reckons Christopher Whalen of Institutional Risk Analytics, a ratings firm.

BofA still has lots of haggling to do with Fannie Mae and Freddie Mac, the housing-finance agencies that guaranteed piles of duff loans, and with private bond insurers. The final bill will be far higher than the cheque written this week. The bank plans to set aside a further $12 billion for mortgage-related charges and thinks another $5 billion may be needed on top of that, though given the waywardness of BofA’s past estimates, it could be more. The prices paid at the time for Countrywide and Merrill were, it turns out, just deposits.

The capitulation will worry other large banks even though they are less exposed than BofA, which services one in five American mortgages. The two most vulnerable are Wells Fargo and JPMorgan Chase—again, largely thanks to crisis-era acquisitions (of Wachovia and Bear Stearns, respectively). Bear Stearns alone faces $18 billion in securities-fraud claims out of an industry total of roughly $200 billion, calculates Mr Whalen.

Worse, new legal challenges are emerging all the time, the latest from the federal agency that oversees credit unions, some of which were felled by bad mortgage investments. Mortgage servicers are also bracing for combined fines of between $5 billion and $20 billion as part of a settlement with state attorneys-general over foreclosure practices (remember robosigning?). And that’s to say nothing of further loan losses as house prices fall.

Mr Moynihan deserves praise for biting the bullet on MBSs. He is determined to end talk of his firm having replaced Citigroup as America’s clumsiest bank. Still, it will be quite some time before BofA itself looks more like a gleaming S-Class than a lumbering old banger.

‘Mastermind’ of $2.9B Scam Gets 30 Years

Lee B. Farkas, who federal prosecutors have considered the “mastermind” behind one of the largest bank fraud schemes in history, was sentenced on Thursday to 30 years in prison.

Farkas, the former chairman of the mortgage firm Taylor, Bean & Whitaker, is the single largest prosecution from the financial crisis, The New York Times reports.

Prosecutors say the $2.9 billion scheme, which began in 2002, led to the collapse of Colonial Bank and cheated investors and the government out of billions of dollars. Prosecutors claimed that TBW executives secretly overdrew the mortgage lending company’s accounts with Colonial Bank and to cover up the overdrafts, sold Colonial about $1.5 billion in “fake” and “worthless” mortgages, some of which already had been purchased by other investors. Ultimately, Colonial filed for bankruptcy in August 2009, making it one of the largest bank failures in history.

The government, in wanting to send a warning to the financial industry, had originally asked for a 385-year prison sentence for Farkas.

Source: “Former Chairman of Mortgage Firm Sentenced to 30 Years in Bank Fraud,” The New York Times (July 1, 2011)

Where Is Mortgage Fraud Most Common?

Reports of mortgage fraud are on the rise: A government agency reported this week a 31 percent jump in mortgage fraud cases for the first quarter of this year, largely attributed to additional reviews from banks of loans issued several years ago that now have gone bad.

California cities dominated the rankings for the highest incidences of mortgage fraud in the nation occupying six of the top 10 spots, according to the report issued by The Financial Crimes Enforcement Network.

The following is a list of the top 11 metro areas with the highest reports of mortgage fraud in the first quarter of this year, according to the Financial Crimes Enforcement Network.

1. San Jose-Sunnyvale-Santa Clara, Calif.
2. San Francisco-Oakland-Fremont, Calif.
3. Los Angeles-Long Beach-Santa Ana, Calif.
4. Riverside-San Bernardino-Ontario, Calif.
5. Sacramento-Arden-Arcade-Roseville, Calif.
6. Miami-Fort Lauderdale-Pompano Beach, Fla.
7. San Diego-Carlsbad-San Marcos, Calif.
8. Las Vegas-Paradise, Nev.
9. Atlanta-Sandy Springs-Marietta, Ga.
10. Salt Lake City, Utah
11. Chicago-Naperville-Joliet, Ill.

Source: “Top 20 Metros for Mortgage Fraud,” Inman News (June 29, 2011) [Log-in required]