SEC Director of Enforcement Robert Khuzami said investors in the once publicly traded New Century “took a double-hit: The company’s mortgage assets and business performance became increasingly impaired, and management manipulated its numbers and concealed its deteriorating performance.”

At one time, New Century’s shares traded for $50, New Century was a top-ranked subprime lender and at one point management was considering selling the company to Merrill Lynch. Then New Century filed for bankruptcy protection in April 2007.

Now the Securities and Exchange Commission has charged three former executives of now-defunct subprime mortgage giant New Century Financial with fraud for misleading investors as their business was “collapsing” in 2006.

Former top managers accused of fraud include Brad Morrice (Vice Chairman/President), Patti Dodge (EVP) and David Kenneally (SVP).

The complaint, filed in federal court in the Central District of California, seeks civil penalties and from Morrice and Dodge reimbursement of bonuses and other incentive or equity-based compensation. The agency is seeking a severe personal penalty against the three: a bar against ever again serving as officers or directors of a publicly traded company.

Josh Epstein, a spokesman for Proskauer, the law firm representing Mr. Morrice, told reporters that the SEC’s charges against the former executive are “flatly false.” He said, “Brad did all he could to save the company and to accurately report the company’s numerous challenges to its shareholders. While his efforts failed, there was no fraud.”

Morrice remained a large shareholder until the end, losing millions of dollars when New Century filed for bankruptcy in April 2007, Mr. Epstein said.

John Vandevelde, an attorney for Mr. Kenneally, said the former executive was never a top executive there but a new accountant who lost “every penny he ever invested” in the company he believed in. “Kenneally never signed any financial statements and relied on the outside auditors for accounting treatment now under question by the SEC,” his lawyer said.

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The House Financial Services Committee completed action on the reform package yesterday when it approved a bill to set up a resolution process for “too big to fail” institutions.

The “systemic risk” bill also gives regulators the discretion to set risk retention requirements as high as 5% on Federal Housing Administration, Fannie Mae and Freddie Mac loans. The regulatory reform package also includes bills that create a Consumer Finance Protection Agency, regulates the trading of derivatives, and a bill (H.R. 1728) the House passed in May that curbs subprime lending practices.

The mortgage industry prefers the risk retention provisions in H.R. 1728, which totally exempts lenders and securitizers from retaining a portion of the credit risk on FHA and GSE loans.

Some industry lobbyists have been wondering how committee chairman Barney Frank, D-Mass., would deal with the different risk retention provisions. Rep. Frank told reporters he would drop the original provision in H.R. 1728. “The risk retention section of the subprime bill will conform to what we did in the systemic risk bill,” the chairman said.

The House of Representatives is slated to debate and vote on a massive regulatory reform package next week that includes several bills addressing abusive mortgage lending practices and risk retention on sales and securitizations of mortgages.

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Starting Today, Treasury/Fannie teams will visit the eight largest servicers for three days to monitor their Home Affordable Modification Program efforts and troubleshoot any problems.

One-third of the 375,000 borrowers have submitted all the necessary documentation to qualify for a permanent loan modification and they “deserve” a timely decision from their servicer, said Treasury Assistance Secretary Michael Barr to reporters. Meanwhile, 37% of the borrowers have submitted some documentation and more 20% have not submitted anything.

“Borrowers need to submit the necessary information or they could lose their eligibility for a permanent affordable modification,” said Phyllis Caldwell, who joined Treasury in November to oversee the conversion campaign.

“We are also working with 300 outreach partners — including state, local and community officials as well as homeownership counselors and advocacy groups,” Ms. Caldwell said. Several years ago she headed community development banking for Bank of America.

Servicers are expected to continue their outreach efforts while Treasury engages in a “robust” communications and outreach campaign to reach those borrowers.

In addition, each HAMP participating servicer will report to Treasury twice a day on their conversion progress during the month of December, according to Mr. Barr.

In a month-long campaign to convert 375,000 borrowers in payment trials into permanent loan modifications, Treasury Department and Fannie Mae staffers will be hounding servicers on a daily basis to achieve the highest conversion rate.

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Commercial Loan Compliance | Multifamily Origination Drops 40%

Over the past year multifamily loan defaults have been on the rise even though housing analysts believe there will be more renters because of a weak job market.

The origination of commercial mortgages backed by apartment buildings fell 40% in 2008 to $88 billion with a small cadre of lenders dominating the market, according to an analysis released by the Mortgage Bankers Association.

The trade group said 2,877 different lenders funded multifamily loans during the year with PNC Real Estate, Wachovia (now part of Wells Fargo), Wells Fargo, Capmark Financial and Deutsche Bank Commercial Real Estate having the largest market shares. (Capmark recently filed for bankruptcy protection.)

The Mortgage Bankers Association found that 26% of lenders that funded Multi-Family loans made just one mortgage on these properties in 2008. And two-third of originators made five or less.

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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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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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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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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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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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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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