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OFHEO Tweaks Mortgage Fraud Reporting, Considers Jumbo Purchases

The Office of Federal Housing Enterprise Oversight announced yesterday that it is changing the way Fannie Mae and Freddie Mac must identify and report mortgage fraud in an effort to minimize the ongoing problem.

Specifically, the new policy guidance was altered to require that both companies “immediately” report “insider fraud”, which is defined as knowledge that “a board member, officer, employee, or contractor engaged by the enterprise has or may have engaged in mortgage fraud or possible mortgage fraud”.

The enhanced rules also require the two mortgage financiers to report any pattern of conduct or behavior that is “interpreted as mortgage fraud or possible mortgage fraud”.

In a statement released yesterday, OFHEO director James Lockhart noted that it was important to update the guidance of fraud reporting to help protect consumers and the government sponsored entities.

“Mortgage fraud can pose tremendous risks for consumers,” said Lockhart. “This guidance reflects the ongoing work of both OFHEO and the Enterprises in the development and improvement of mortgage fraud detection and reporting,” he added.

Per the OFHEO, the new policy guidance:

– Permits the Enterprises to designate scenarios that rise to a “pattern” of reportable cases of mortgage fraud or possible mortgage fraud further enhancing their reporting to OFHEO;

– Expands the immediate notification requirements to OFHEO to include situations involving insider fraud;

– Revises the time frame and format of reporting to follow the Department of the Treasury’s Financial Crimes Enforcement Network requirements; and,

– Adds clarifications to the definition of mortgage fraud, which continues to be defined as any material misstatement, misrepresentation, or omission such as, but not limited to, false information contained in identification and employment documents, false mortgagee or mortgagor identity, fraudulent appraisals, theft of custodial funds, non-remitted payoff funds, misrepresentations of borrower funds, and property flipping where designed to falsely inflate property value.

Jumbo Loans

According to an OFHEO report just released, assuming Congress decides to raise the conforming loan limit, Fannie and Freddie would likely only purchase low-risk jumbo loans.

These include fixed-rate mortgages and fully amortizing mortgages, which made up only 30% of jumbo loan originations in the first half of 2007, according to the report.

If a proposed bill were to be enacted, the new conforming loan limit for Los Angeles and Orange County could range from $568,000 to $588,400, and be as high as $625,500 in the Bay area.

But the OFHEO has found a number of drawbacks to raising the conforming limit, including greater credit risk which could have a negative impact on both the GSE’s and the common borrower.

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