Washington Mutual Looks to Diversify Products
MBA (7/18/02) Murray, Michael
Washington Mutual Inc. announced that a subsidiary, WaMu Capital Corp., has become a registered institutional broker-dealer that will distribute mortgage related and fixed income securities as well as whole loan packages in the mortgage market.

The proposed rules contain one section of a series of new regulations expected this week under the USA Patriot Act, passed last October. Officials with the Mortgage Bankers Association said that a broad set of proposed rules dealing with anti-money laundering measures would be out later this week, although such rules would not yet directly affect mortgage companies.

The proposed rules issued yesterday would implement Section 326 of the Patriot Act, which goes into effect October 25. Section 326 directs federal financial regulatory agencies to issue regulations requiring financial institutions to implement procedures for the following:

The financial institutions subject to the proposed rules would be required to establish programs specifying procedures for obtaining identifying information from customers seeking to open new accounts. According to the agencies, identifying information would be essentially the same information currently obtained by most financial institutions and for individual customers generally, including the customer's name, address, date of birth and an identification number (for U.S. persons, a Social Security number and for non-U.S. persons, a similar number from a government-issued document). Customers with signature authority over business accounts would be required to furnish substantially similar information.

President Bush signed the Patriot Act into law October 25, 2001 in the wake of the September 11 terrorist attacks. Title III of the act, International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 ("IMLA Act"), gives federal financial agencies the means to modernize and strengthen the country's anti-money laundering laws by establishing regulations that make it more difficult for terrorists and criminals to launder funds through the U.S. financial system.

The IMLA Act grants authority to the secretary of the Treasury to take "special measures" upon determining that a financial institution, a specific foreign jurisdiction, a foreign financial institution, a class of transactions or a type of account constitutes a "primary money laundering concern." The act augments the Bank Secrecy Act of 1982 by requiring financial institutions to establish anti-money laundering programs and by providing enhanced civil liability immunity for financial institutions that file suspicious activity reports. The act requires each financial institution to develop and institute an anti-money laundering program that must at a minimum include internal policies, procedures and controls; designate a compliance officer; provide employee training; and include an independent audit.

Jonathan McKetney, the MBA’s director of commercial and multifamily services, said that the federal agencies have not yet promulgated rules for mortgage bankers regarding anti-money laundering activities. He said the MBA would send a letter to the agencies this week outlining the MBA’s position.

In a position paper issued in May, the MBA said that rules for mortgage companies should “not be more stringent than banks, as mortgage companies do not usually accept payments made in currency and coin. Payment by personal check and other money instrument issued by a bank or money services business should not be a reportable item by a mortgage company if controls are imposed on the issuers of those instruments pursuant to the Bank Secrecy Act or other legislation or regulation.”

The Index stood at 6.85 in the second quarter, compared to 6.81 in the first quarter and 7.22 a year ago. The index’s 1.00-10.00 scale indicates that an index reading of 6.00 to 8.00 indicates a stable market with few areas of noteworthy strength or softness.

“Though unemployment is higher than it was 12 months ago in most markets, home sales and home prices continue to exhibit strength in all but a handful of single-family markets,” said Neil Siegel, senior market analyst with MGIC.

The House and Senate have passed different versions of bills, the Senate version passing last week. But Oxley and Baker have been critical of the Senate bill, sponsored by Senate Banking Committee Chairman Paul Sarbanes, D-Md., claiming that it is too harsh in setting penalties and giving government agencies power too much power.

"We are holding this hearing to help us separate the facts from the myths surrounding the recent dramatic rise in mold claims and its reported catastrophic effects," said Rep. Sue Kelly, R-NY., co-chairwoman of the House Financial Services Housing and Oversight subcommittees. "While many Americans are unaware of potential dangers from untreated mold growth in commercial and private properties, the lack of scientific standards and documentation only adds to the confusion we all feel when confronted by potential dangers of substances we grew up to believe were harmless."

Today’s hearing will include testimony from Gerald Howard, executive vice president and chief executive officer of the National Association of Home Builders, as well as Melinda Ballard, president of Policyholders of America, Gordon Stewart, president of the Insurance Information Institute and Thomas Tighe, president of the International Union of Operating Engineers.

The evolution of this issue could have major ramifications for mortgage lenders, who could have to start requiring expensive testing for toxic mold on homes before loan approval. Those tests could add up to as much as $2,000 to the cost of closing a mortgage, according to industry participants.

In addition, builders and property owners have been facing substantial lawsuits from this issue. But the NAHB claims that mold is a moisture issue that, if treated promptly, can avoid or decrease mold claims for insurance companies. Within the past couple of years, a number of homeowner insurance claims and lawsuits have been filed in coastal areas of Texas such as Corpus Christi as well as in California.

Melinda Ballard’s family was awarded a $32.1 million judgment against Farmers Insurance Group, Los Angeles, more than a year ago. A jury agreed with Ballard’s claim that the insurance company acted in bad faith by delaying necessary funds that caused more severe damages until the house needed to be rebuilt. The jury awarded $6.2 million in actual damages to decontaminate, level and rebuild the home. Additionally, the award set aside while $12 million for punitive damages;$5 million for mental anguish to the homeowners and $8.9 million for attorney fees.

Homeowner insurance claims have now doubled in the past year in Texas and insurance companies are in a debate with the Texas Department of Insurance (TDI) as to coverage amounts and protection from mold related damages.

Claims for damage caused by mold have proliferated, according to NAHB officials. They cited California, with nearly 2,000 toxic mold cases pending and in Texas, where claims related to mold damage have risen 60 percent this year.

As a result of the lawsuits, increasing claims and ongoing debate, major insurance companies such as Allstate, State Farm and Farmers Insurance Group have restricted sales and/or coverage of homeowner policies in Texas and California.

Meanwhile, in California insurers continue to push for exclusions for mold, saying that the state is heading down the same path as Texas. The California state government just dropped a bill that would have increased regulations for insurers on mold claims.

Today’s hearing, however, should focus primarily on health concerns with two health-related officials also testifying before the committees. “The need for solid science and appropriate standards is crucial," said Rep. Michael Oxley, R-OH, chairman of the House Committee on Financial Services. "We need to ensure that real mold problems are addressed, but also that consumers are not stuck with the costs of bad science and fraud."

Although the subject of mold is starting to grow on Capitol Hill, the hearing does not cover any proposed legislation. But Rep. John Conyers, Jr., D-Mich., has introduced H.R. 5040, the "United States Toxic Mold Safety and Protection Act of 2002.” The bill includes a requirement for the director of the Federal Emergency Management Agency to establish and carry out a toxic mold insurance program, with priority for one-to-four- family residential properties. It would also establish a National Toxic Mold Hazard Insurance Fund in the treasury.

Two different financings on the deal includes a domestic 10-year, $19 million non-recourse loan with Morgan Stanley, New York at an interest rate “near the floor,” according to Anne Coolidge, executive director of W.P. Carey, and a 65 percent loan to value (LTV) on a purchase price of $27.9 million.

Corporate Property Associates 14 Inc., a member of the W.P. Carey Group of non-traded real estate investment trusts (REITs), purchased the distribution facilities for $16.6 million.

The finalized deal occurred in conjunction with a leveraged buyout (LBO) of Katun Corp. by Banc of America Capital Investors (BACI), San Francisco, and Svoboda, Collins LLC, Chicago. BACI and Svoboda will merge Katun Corp. with PARTS NOW! LLC, Madison, Wis., a portfolio company of the two firms.

“The sale leaseback financing was an important part of our transaction, enabling us to further leverage our equity,” said Sheryl Bartol, partner at BACI.

“This financing will enable Banc of America Capital Investors and Svoboda, Collins to monetize the real estate assets of Katun Corp.,” Coolidge said.

The international loan had an 80 percent loan to value (LTV) for the $16.6 million financed with an undisclosed German mortgage bank. “The spreads are much lower, usually about 100 basis point lower spreads than the U.S.,” Coolidge said. “It’s higher loan to value but it’s typically a more conservative amortization.”

EBS provides ACES Online on an “as-needed” basis with no long-term commitment or licensing fees since it is on the Internet. In addition, it allows mortgage bankers a reduction in the costs for outsourcing, according to EBS officials.

The licensing fees could range anywhere from $47,000 to $144,000 at a one-time cost with additional costs for software maintenance, according to Bellezza. “This changes the mortgage quality control sector dramatically,” he said. “With investors focusing on excessive capital spending, this new solution offers a viable alternative for banking institutions to cut costs, while reducing risk at the same time.”

The quality control software reads over different loans sold to the secondary market and conduct reviews of the mortgage information to prevent fraud and inaccuracies. The system is also able to pull credit reports online into the system so that there is less manual input.

“If there are too many exceptions to the normal underwriting procedures, that makes it a lesser quality loan,” Bellezza said.

The ACES Online project began last year when EBS became certified from the International Computer Security Association (ICSA) as a secure facility. The company then implemented technology to deliver information through the Internet that protects consumer information in according with requirements from the Gramm-Leach-Bliley Act.

According to EBS officials, the process can now save as much as 50 percent of the cost of outsourcing without compromising consumer information.

The product is flexible enough for companies to tailor it to their own needs and in the not too distant future, EBS will implement a security device for biometric identity, or fingerprint authorization, so that only qualified users will be able to use the product, Bellezza said. “Every company has their own security but if we build security into the product, then it is up to the banks to use it properly,” he said.