The Federal Trade Commission has banned eight mortgage relief and foreclosure prevention marketers from plying their trade and fined them over $23 million for deceptive advertising. The eight individuals involved in three companies – two of them in California — have also been ordered to return over $30 million in fees to fleeced consumers.

The California firms included:

Federal Loan Modification Law Center run by Steven Oscherowitz, which marketed a “federal loan modification program” that charged an upfront fee of $3,000 and promised mortgage mods to distressed homeowners. The settlement order includes a $11.5 million judgment against Oscherowitz, and the FTC continues to pursue five other individuals in connection with this scam.

DirectLender.com aka Loss Mitigation Services, which charged an upfront fee of $5,500 and promised loan modifications. The firm and individuals Dean Shafer, Marion Anthony “Tony” Perry and Bernadette Perry also misrepresented themselves as agents of the consumer’s lending institution. The settlement order imposed a fine of $6.2 million.

A New Jersey company – Hope Now Modifications – and brothers Salvatore and Nicholas Puglia were fined $5.3 million for claims they could provide mortgage modifications and for misrepresenting themselves as affiliated with a free federal homeowner assistance program, the Hope Now Alliance.

To date, the FTC has brought 29 cases against marketers who have falsely promised foreclosure prevention and mortgage modification services.

Complaints from lenders about a new Fannie Mae policy that requires lenders to secure a borrower’s “refreshed” credit report just prior to a home purchase has resulted in the lending giant pulling the new rule from its website.

According to a Washington Post report, Fannie Mae introduced a new policy this summer that “encourages” lenders to retrieve a borrower’s updated credit report just before a loan closes to see if the borrower has taken on extra debt since applying for the loan.

Lenders say the new policy creates logistical nightmares and could trip up home purchases at a time when consumers and investors are showing more confidence in the U.S. housing market.

In response, Fannie Mae says it is reviewing the policy, which it has removed from its website, and will offer additional guidance by the end of July. Fannie said it was never its intent to tell lenders they were required to perform the additional credit check on all loans, just a suggestion on a “tool they could use”.

The Post story noted that until Fannie Mae clarifies its position on “refreshed reports”, lenders are nervous about the potential consequences, including delays that could prove costly to buyers, especially if they are purchasing foreclosures or participating in a short sale. Those types of purchase contracts can carry harsh penalties for late closings.

Deputy Treasury Secretary Neal Wolin told the Securities Industry and Financial Markets Association (SIFMA) conference in New York recently that Treasury will not propose housing finance reform measures until 2011, and will probably do so in conjunction with the agency’s enforcement of the new financial reform law just passed by the Senate and due to be signed by President Obama next week.

However, several conference attendees question whether Treasury can implement housing finance reform at the same time it is implementing the most sweeping changes to the country’s finance system since the 1930s.

Both sides of the political aisle endorse the need for reform, especially for crippled lending giants Fannie Mae and Freddie Mac, but no one has yet developed a workable plan that would not inflict more harm on the still-sagging housing market.

Congress continues to be leery of implementing big changes that could upset the economic recovery since Freddie, Fannie and the FHA provide the majority of funding for American homebuyers.

Deputy Treasury Secretary Neal Wolin’s keynote address to the SIFMA conference can be read here.

As the result of a post-purchase review of mortgage loan files that identified a number of appraisal issues, Fannie Mae has updated its Selling Guide with additional appraisal guidance.

The new policy requirements and clarifications concerning existing lender requirements – which take effect on all mortgage applications dated on or after Sept. 1, 2010 — have been added to a number of appraisal sections of the Selling Guide, including:

• Inclusion of interior photographs in the appraisal report
• Lender changes to the appraised value and guidance on addressing appraisal deficiencies
• Appraiser selection criteria
• Sources of comparable market data
• Selection of comparable sales
• Communication under the HVCC
• Seller concessions
• Treatment of personal property
• Market Conditions Addendum to the Appraisal Report (Form 1004MC)

A copy of the Fannie Mae Selling Guide updates on appraisal policies can be found here.

The National Association of Mortgage Brokers (NAMB) has sent an alert to its members urging them to urge their congressional representatives to oppose the national financial overhaul legislation that is scheduled for a vote in mid-July.

NAMB president Roy DeLoach told his membership that the new legislation would hurt competition in the mortgage market and put smaller mortgage brokers out of business.

The NAMB’s main bones of contention center around the cap on fees and the elimination of yield-spread premiums, which are deal payments mortgage brokers receive for steering borrowers to a certain type of loan product or rate.

Unsurprisingly, NAMB is getting push-back from consumer groups, who blame mortgage brokers in part for the subprime lending mess. However, DeLoach says that brokers are not to blame; in a Wall Street Journal article he noted, “Brokers did not invent these products. We didn’t underwrite these products. And we didn’t fund these products.”

The Mortgage Bankers Association said it is not actively opposing the legislation.

Part of the financial overhaul legislation package requires lenders to retain 5% of the credit risk on loans that carry fees higher than 3% in an effort to make it more difficult for brokers to load up loans with extra fees.

Fannie Mae made an announcement last week that borrowers who walk away from their mortgages – the strategic defaulters – will be unable to secure a Fannie Mae mortgage for seven years following the foreclosure.

And in the states that allow deficiency judgments, Fannie said they’d be taking legal action against those borrowers in an effort to recoup mortgage debt.

Fannie says it is instructing all its mortgage loan servicers to monitor delinquent loans on the verge of foreclosure and recommend cases for Fannie to pursue for deficiency judgments.

An EVP at Fannie said that the agency is taking these steps to “urge” borrowers to work with servicers. (If that’s an urge, we’d hate to see a push.)

Are they going to do the same thing on Commercial Property?

Oh, that’s right – they can’t!

Attorney General Eric Holder, FBI Director Robert Mueller and HUD Inspector General Kenneth Donohue held a news conference on June 17 to announce that the agencies’ three-month “Operation Stolen Dreams” sting has already netted 485 arrests for mortgage fraud nationwide.

They also said that mortgage fraud has resulted in losses of about $2.3 billion to date. More arrests are expected as the FBI pursues more than 3,000 mortgage fraud claims.

According to the FBI’s Mortgage Fraud Report, the most prevalent schemes include:

Loan Origination Schemes

Loan origination fraud schemes involve falsifying a borrower’s financial information—such as income, assets, liabilities, employment, rent, and occupancy status—to qualify the buyer, who otherwise would be ineligible, for a mortgage loan. This is done by supplying fictitious bank statements, W-2 forms, and tax return documents to the borrower’s favor. Perpetrators also employ the use of stolen identities. Specific schemes used to falsify information include asset rental, backwards application, and credit enhancement schemes.

Foreclosure Rescue Schemes—The Use of Bankruptcy Petitions

The use of bankruptcy petitions to stall the foreclosure process continues to be a prevalent threat to delinquent homeowners looking for assistance.⁴⁷ Mortgage fraud perpetrators are exploiting the U.S. bankruptcy system by filing fraudulent bankruptcy petitions to delay the foreclosure process and extract the maximum profit from victims during the commission of advance fee, fractional transfer, and sale-leaseback-repurchase foreclosure rescue schemes. This type of fraudulent activity is increasing as perpetrators seize opportunities created by the current housing crisis and the more than 2.1 million properties in foreclosure.

Flopping, Short Sales, and Broker Price Opinions

Perpetrators are conducting short sale property flipping schemes using distressed properties of homeowners who are unemployed or facing foreclosure. The perpetrators collude with appraisers or real estate agents to undervalue the property using an appraisal or a broker price opinion to further manipulate the price down (the flop) to increase their profit margin when they later flip the property.⁶⁸ They negotiate a short sale with the bank or lender, purchase the property at the reduced price and flip it to a pre-selected buyer at a much higher price.

Commercial Real Estate Loan Fraud

Open sources and FBI analysis indicate that the $6.4 trillion commercial real estate (CRE) market is experiencing a high incidence of loan origination fraud similar to that seen during the last few years in the residential real estate market. Perpetrators, including loan officers, real estate developers, appraisers, and apartment management companies, are increasingly submitting fraudulent documents that misrepresent their assets and property values to qualify for loans to buy or retain property. When the loans are funded, the perpetrators often cease payment of their mortgages, resulting in foreclosure. According to open-source reporting, CRE loans are expected to produce more than $100 billion in losses by the end of 2010.

Preliminary analysis indicates that the commercial markets exhibiting the most significant signs of distress are in areas where there is also a significant mortgage fraud problem. These areas include the New York metropolitan area, Miami, Los Angeles and Orange County, Chicago, Boston, Dallas, Fort Worth, Houston, the District of Columbia, Atlanta, and Baltimore.

In a classic case of “too little, too late”, the U.S. Senate voted to ban “liar loans” as part of the financial regulatory reform bill and require lenders to fully document a borrower’s income before approving a loan.

From a CNNMoney report:

This would effectively end the origination of no-doc or stated-income mortgages, which many call “liar loans” because borrowers did not have to prove their income. Housing experts point to these mortgages as one catalyst for the housing collapse.

The bill would also prohibit lenders from giving brokers incentives for steering customers to loans with higher interest rates or prepayment penalties.

“Deceptive mortgage practices like hidden steering payments directly led to the Wall Street meltdown and resulted in millions of families losing their homes,” said Sen. Jeff Merkley, D-Ore., co-author of the bill.

The provisions build on Federal Reserve regulations that required lenders to verify the income and assets of subprime borrowers. Those rules, which went into effect in October, did not ban incentive payments, called yield-spread premiums.

“This should make the mortgage market a safer place for consumers,” said Julia Gordon, senior policy council for the Center for Responsible Lending.

C.A.R. issued an alert last week, warning consumers of a loophole in California law that allows lenders to sue foreclosed borrowers for the difference between the mortgage and property value.

C.A.R. is also sponsoring legislation to close the loophole (Senate Bill 1178).

From the C.A.R. alert:

California has protected borrowers from so-called “deficiency” liability on their home mortgages since the 1930s, but the evolution of mortgage finance requires that the statute be updated. Essentially, it says that if a homeowner defaults on a mortgage used to purchase his or her home, the homeowner’s liability on the mortgage is limited to the property itself. The law has worked well since the 1930s to protect borrowers, ensure the quality of loan underwriting, and allow borrowers brought down by financial crisis to get back on their feet.

Unfortunately, the original law does not extend the protection to loans that refinance the original purchase debt, even if the refinance only was to gain a lower interest rate. Recent years of low interest rates and aggressive marketing campaigns by lenders have induced tens of thousands to refinance mortgages. Few homeowners realized that by refinancing their mortgage, they were forfeiting their protections and now are personally liable.

“Lenders have a responsibility to ensure that borrowers understand loan terms and can meet them,” Goddard said. “SB 1178 puts in place much-needed consumer protections and deserves swift passage by the California legislature next week.”

A federal grand jury in Sacramento has returned indictments in two separate California mortgage fraud cases.

In the first case, five defendants from Elk Grove and Fair Oaks were charged with 11 counts of mail fraud related to their alleged operation of a mortgage fraud scheme. The men changed their names to Muslim names to obtain new credit, according to a report from California RealEstateRama:

The indictment alleges that Glenn Watkins legally changed his name to “Rasheed Khaleb” to fraudulently purchase two homes. Once those homes fell into foreclosure, he legally changed his name to “Jason Johnson.” Likewise, the indictment alleges that Kevin Watkins changed his name to “Jamal Ali” then to “Calvin Carter.” Their uncle, Frederick Davis, allegedly changed his name to “Ammar Rashad,” to purchase a home, then to “Corey Green” once that home fell into foreclosure. Paul Yearby Jr. legally changed his name to “Malcom Ali” in order to execute the fraud scheme.

In the second case, a Roseville man was charged with making false statements to financial institutions on four mortgage applications for two residential properties in Lincoln and Roseville.

Both cases are the result of an ongoing investigation by the FBI and the IRS.