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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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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Local, state and national government agencies, nonprofits and other financial institutions gathered in Los Angeles to enter into an alliance that aims to help homeowners protect themselves from loan modification fraud.

“As the foreclosure rate grows more and more homeowners are being deceived by scam artists who prey on their fears,” said the COO of NeighborWorks, Eileen Fitzgerald. “Knowledge is the best defense, which is why the campaign equips homeowners with the tools they need to minimize their risk.”

The “Loan Modification Scam Alert” campaign is the first of a number of other events that will be announced in major cities around the country. Partners include some of the country’s largest organizations.

NeighborWorks will coordinate the efforts with partner organizations such as the Department of Housing and Urban Development, the Federal Trade Commission, the U.S. Department of Treasury, Fannie Mae, Freddie Mac, and the Lawyers’ Committee for Civil Rights Under Law.

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The number of default notices filed against California homeowners fell in the third quarter of 2009 compared with the prior three-month period, the result of lenders’ evolving foreclosure policies and an uptick in the number of mortgages being renegotiated, according to San Diego-based MDA DataQuick, which monitors real estate activity nationwide.

A total of 111,689 default notices were sent out during the July-through-September period. That was down 10.3% from 124,562 for the second quarter, and up 18.5% from 94,240 in third quarter 2008.

 ”It may well be that lenders have intentionally slowed down the pace of formal foreclosure proceedings. If so, it’s not out of the goodness of their hearts. Trying to keep motivated, employed homeowners in their homes might be the most cost-efficient way to stem losses,” said John Walsh, DataQuick president.

The lenders that originated the most loans that went into default in the third quarter were Countrywide (7,583), Washington Mutual (5,146) and Wells Fargo (4,425). Along with Bank of America (1,979) and World Savings (4,237), they were also the most active lenders in the second half of 2006. The quarter’s default rate on loans originated in the second half of 2006 ranged from 1.7% or Bank of America to 11.9% for World Savings.

Smaller subprime lenders had far higher default rates for the period: ResMAE Mortgage was at 73.9%, OwnIt Mortgage 69.5%, BNC Mortgage 61.4%, Argent Mortgage 59.9% and First Franklin 59.4%. While these and most other subprime lenders are long gone, their loans were bundled, resold and now live on as “troubled assets,” Mr. Walsh said.

“There’s a batch of truly nasty loans that were made in mid 2006. There’s another batch made in late 2006. These are worse than the mortgages before and after, and it’s taking a long time to process them.”

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In a joint statement from the U.S. Attorney for the Eastern District of New York, and the HUD Inspector General’s office, the government says Lend America “falsely certified” that borrowers met FHA underwriting requirements. Using the civil courts, the government is seeking injunctive relief from both the company and its chief business strategist Michael Ashley.

Lend America issued a statement saying it was taken by surprise by the complaint and expects to continue doing business. It added that it plans to “respond more completely once all allegations are reviewed.”

The U.S. Attorney and Department of Housing and Urban Development are seeking a court injunction to ban Lend America, Melville, N.Y., from originating FHA loans, accusing the nonbank lender with fraud in regard to $14 million in product.

Lend America services about $850 million in GNMA-backed products and currently ranks 18th nationwide in GNMA MBS issuance. Lend America recently stepped up plans for expansion into correspondent mortgage banking and wholesale that included FHA production.

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From Jan. 1, 2009 to June 30, 2009 filers submitted 32,926 mortgage loan fraud Suspicious Activity Reports (SARs), less than a 1% increase over the 32,660 SARs filed in the same period in 2008.

The Los Angeles and Miami areas saw the most reported fraud for the first half of 2009, according to the Financial Crimes Enforcement Network’s updated Suspicious Activity Report Activity Review.

According to FinCen’s updated SAR report, Los Angeles and Miami each saw 6,300 SAR subjects. Following these, the urban areas with the largest number of mortgage fraud SAR subjects were New York with 4,500, Chicago with 3,200 and the District of Columbia with 2,200.

Ranked by total reported subjects, the top 10 states included California, Florida, New York, Illinois, Georgia, Texas, Arizona, Michigan, Virginia and New Jersey.

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The Obama administration is set to announce a new program to help troubled borrowers whose mortgages are deemed ineligible for modification.

“Maybe this week but certainly next week,” said Laurie Maggiano of the Treasury Department’s Office of Homeownership Preservation. Speaking at the Mortgage Bankers Association’s annual convention, Ms. Maggiano said Treasury would set out the parameters under which servicers can earn financial incentives if they offer borrowers the option of participating in a short sale and deed in lieu of foreclosure.

“We are hoping to set an industry standard so investors will know exactly what they can expect,” she said. “There’s really no magic. We haven’t reinvented the wheel,” Ms. Maggiano told industry executives in San Diego. To cut down on the paperwork, the program will provide a standardized set of forms.

The program will also cap the amount of money that can be paid to subordinate lien holders who agree to waive their interest in a property. The government expects that some second mortgage investors will “walk away” from the program because the compensation being offered will be too little. But Ms. Maggiano, who is director of policy in the preservation office, told a standing room only session that by setting a limit, the White House is hoping to eliminate time consuming back-and-forth negotiations between servicers, borrowers and investors.

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The Treasury Department’s “own projections” show that “fewer than half of the projected foreclosures” will be prevented by the Home Affordable Modification Program, a new Congressional Oversight Panel report says.

Residential servicers using the Obama administration’s loan modification program are ramping up to modify 25,000 to 30,000 a week, but it will not be enough to keep pace with rising foreclosures, according to the Congressional Oversight Panel, which watches over the Troubled Asset Relief Program.

The oversight panel also warns that HAMP is not designed to address defaults associated with negative equity and the coming wave of resets on interest-only and payment-option mortgages. The authors note that negative equity has become a drag on self cure rates.

Historically, “nearly half of all prime defaults would cure on their own,” but now it is only 6.6%. The COP also cites research showing that 77% of payment option ARMs are underwater and 25% are seriously delinquent or in foreclosure. “It increasingly appears that HAMP is targeted at the housing crisis that existed six months ago, rather than as it exists right now,” the report says.

The Interest Only and Pay Option Arms resets will last through 2012.

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“We are absolutely moving forward on RESPA,” HUD assistant secretary David Stevens told MortgageWire. “Jan. 1 is the implementation date.”

The Department of Housing and Urban Department is going ahead with the implementation of a RESPA disclosure rule despite pleas by some industry groups to delay the effective date, according to a top HUD official.

Some industry groups are complaining that the new Real Estate Settlement Procedures Act rule is complex and HUD is still providing guidance on implementation issues. The RESPA rule requires lenders and mortgage brokers to disclose their fees upfront on a standardized good faith estimate. The originator’s fees cannot be increased before closing. The layout of the GFE and the revised HUD-1 settlement sheet also provides a clearer disclosure of the closing costs and how much the consumer will pay.

“I think the new disclosures are going to have a very positive impact on consumers,” Mr. Stevens said.

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