New York Investigates Banks? Role in Fiscal Crisis

The New York attorney general has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses.

CNBC.com Credit Crisis

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cnbc_comboQuoteMove('popup_ms_ID0ENJAC15839609');[MS  24.1601    0.2801  (+1.17%)   ]

It is unclear which parts of the byzantine securitization process Mr. Schneiderman is focusing on. His spokesman said the attorney general would not comment on the investigation, which is in its early stages.

Several civil suits have been filed by federal and state regulators since the financial crisis erupted in 2008, some of which have generated settlements and fines, most prominently a $550 million deal between Goldman Sachs and the Securities and Exchange Commission.

But even more questions have been raised in private lawsuits filed against the banks by investors and others who say they were victimized by questionable securitization practices. Some litigants have contended, for example, that the banks dumped loans they knew to be troubled into securities and then misled investors about the quality of those underlying mortgages when selling the investments.

The possibility has also been raised that the banks did not disclose to mortgage insurers the risks in the instruments they were agreeing to insure against default. Another potential area of inquiry — the billions of dollars in credit extended by Wall Street to aggressive mortgage lenders that allowed them to continue making questionable loans far longer than they otherwise could have done.

“Part of what prosecutors have the advantage of doing right now, here as elsewhere, is watching the civil suits play out as different parties fight over who bears the loss,” said Daniel C. Richman, a professor of law at Columbia. “That’s a very productive source of information.”

Officials at Bank of America and Goldman Sachs declined to comment about the investigation; Morgan Stanley did not respond to a request for comment.

During the mortgage boom, Wall Street firms bundled hundreds of billions of dollars in home loans into securities that they sold profitably to investors. After the real estate bubble burst, the perception took hold that the securitization process as performed by the major investment banks contributed to the losses generated in the crisis.

Critics contend that Wall Street’s securitization machine masked the existence of risky home loans and encouraged reckless lending because pooling the loans and selling them off allowed many participants to avoid responsibility for the losses that followed.

The requests for information by Mr. Schneiderman’s office also seem to confirm that the New York attorney general is operating independently of peers from other states who are negotiating a broad settlement with large banks over foreclosure practices.

By opening a new inquiry into bank practices, Mr. Schneiderman has indicated his unwillingness to accept one of the settlement’s terms proposed by financial institutions — that is, a broad agreement by regulators not to conduct additional investigations into the banks’ activities during the mortgage crisis. Mr. Schneiderman has said in recent weeks that signing such a release was unacceptable.

It is unclear whether Mr. Schneiderman’s investigation will be pursued as a criminal or civil matter. In the last few months, the office’s staff has been expanding. In March, Marc B. Minor, former head of the securities division for the New Jersey attorney general, was named bureau chief of the investor protection unit in the New York attorney general’s office.

Early in the financial crisis, Andrew M. Cuomo, the governor of New York who preceded Mr. Schneiderman as attorney general, began investigating Wall Street’s role in the debacle. But those inquiries did not result in any cases filed against the major banks. Nevertheless, some material turned over to Mr. Cuomo’s investigators may turn out to be helpful to Mr. Schneiderman’s inquiry.

New York Investigates Banks? Role in Fiscal Crisis

The New York attorney general has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses.

CNBC.com Credit Crisis

cnbc_comboQuoteMove('popup_bac_ID0ECH15839609');[BAC  11.91    0.05  (+0.42%)   ]

cnbc_comboQuoteMove('popup_gs_ID0EIEAC15839609');[GS  140.538    -0.062  (-0.04%)   ]

cnbc_comboQuoteMove('popup_ms_ID0ENJAC15839609');[MS  24.1601    0.2801  (+1.17%)   ]

It is unclear which parts of the byzantine securitization process Mr. Schneiderman is focusing on. His spokesman said the attorney general would not comment on the investigation, which is in its early stages.

Several civil suits have been filed by federal and state regulators since the financial crisis erupted in 2008, some of which have generated settlements and fines, most prominently a $550 million deal between Goldman Sachs and the Securities and Exchange Commission.

But even more questions have been raised in private lawsuits filed against the banks by investors and others who say they were victimized by questionable securitization practices. Some litigants have contended, for example, that the banks dumped loans they knew to be troubled into securities and then misled investors about the quality of those underlying mortgages when selling the investments.

The possibility has also been raised that the banks did not disclose to mortgage insurers the risks in the instruments they were agreeing to insure against default. Another potential area of inquiry — the billions of dollars in credit extended by Wall Street to aggressive mortgage lenders that allowed them to continue making questionable loans far longer than they otherwise could have done.

“Part of what prosecutors have the advantage of doing right now, here as elsewhere, is watching the civil suits play out as different parties fight over who bears the loss,” said Daniel C. Richman, a professor of law at Columbia. “That’s a very productive source of information.”

Officials at Bank of America and Goldman Sachs declined to comment about the investigation; Morgan Stanley did not respond to a request for comment.

During the mortgage boom, Wall Street firms bundled hundreds of billions of dollars in home loans into securities that they sold profitably to investors. After the real estate bubble burst, the perception took hold that the securitization process as performed by the major investment banks contributed to the losses generated in the crisis.

Critics contend that Wall Street’s securitization machine masked the existence of risky home loans and encouraged reckless lending because pooling the loans and selling them off allowed many participants to avoid responsibility for the losses that followed.

The requests for information by Mr. Schneiderman’s office also seem to confirm that the New York attorney general is operating independently of peers from other states who are negotiating a broad settlement with large banks over foreclosure practices.

By opening a new inquiry into bank practices, Mr. Schneiderman has indicated his unwillingness to accept one of the settlement’s terms proposed by financial institutions — that is, a broad agreement by regulators not to conduct additional investigations into the banks’ activities during the mortgage crisis. Mr. Schneiderman has said in recent weeks that signing such a release was unacceptable.

It is unclear whether Mr. Schneiderman’s investigation will be pursued as a criminal or civil matter. In the last few months, the office’s staff has been expanding. In March, Marc B. Minor, former head of the securities division for the New Jersey attorney general, was named bureau chief of the investor protection unit in the New York attorney general’s office.

Early in the financial crisis, Andrew M. Cuomo, the governor of New York who preceded Mr. Schneiderman as attorney general, began investigating Wall Street’s role in the debacle. But those inquiries did not result in any cases filed against the major banks. Nevertheless, some material turned over to Mr. Cuomo’s investigators may turn out to be helpful to Mr. Schneiderman’s inquiry.

Fraud, Collusion and Racketeering: Big Banks at Their Best

Talk about dirty laundry!

What’s now coming to light about how big banks roped tied and branded the U.S. economy and the developed world with their egregious money-making schemes may be too much for them to whitewash through their usual spin cycles.

How’s this for a quote, “Our investigation found a financial snake pit rife with greed, conflicts of interest, and wrongdoing.”  (I know what you’re saying: “That’s news?”)

You can find that quote in two places. It’s posted on Senator Carl Levin’s website  , and in the United States Senate Permanent Subcommittee On Investigations’ report titled, WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse. The just-released two-year bipartisan investigation is being pushed center-stage by Levin (D: MI) the Subcommittee’s chairman, and Senator Tom Coburn (R: OK), ranking minority member on the Investigations Subcommittee.

The 635-page report with more than “700 new documents totaling over 5,800 pages” is not a quick read.  But, the truth is, it’s so juicy I’m trying to secure the movie rights.

You already know the storyline. The script “catalogs conflicts of interest, heedless risk-taking and failures of federal oversight that helped push the country into the deepest recession since the Great Depression.”

Of course there are lots of twists and turns in the plot, I mean report. And the cast of characters is a who’s who of Great Recession actors, including Moody’s Corporation, Standard & Poor’s, The Office of Thrift Supervision (OTS), Merrill Lynch, Deutsche Bank, Citigroup, and of course the star of the show,  Goldman Sachs.

Here’s one of the nicer things the report says about Goldman, “At the same time the firm was betting against the mortgage market as a whole, Goldman assembled and aggressively marketed to its clients poor quality CDOs that it actively bet against by taking large short positions in those transactions.” (Again you say, “That’s news?”)

We already know that last year Goldman, without admitting or denying civil fraud allegations, paid a record $550 million fine to settle charges it defrauded clients in a single CDO deal known as Abacus 2007-AC1. But what the report brings to light is that, not surprisingly, Goldman had many other such deals with names like Hudson, Anderson and Timberwolf that were similarly constructed.

While trumpeting the report, Senator Levin announced, “We will be referring this matter to the Justice Department and to the SEC.”

Meanwhile, in case you haven’t heard, the Justice Department is already investigating whether big banks schemed to manipulate pricing on hundreds of trillions of dollars (I’m not exaggerating) of loans.

Back in October of 2008 I wrote a piece claiming banks were cheating on a global basis. What I pointed to is what Justice is now investigating.  What could they be charged with? How about collusion and possibly racketeering.

Don’t know what it is I’m talking about? I’ll lay out the dirty details on Wednesday. Stay tuned.

The heads of Fannie Mae and Freddie Mac were paid a total of $17.1 million during the past two years

BLOG VIEW: At what point did the Federal Housing Finance Agency (FHFA) make the transition from being merely inefficient to being blatantly incompetent? And will it be possible to stop the FHFA before it makes the transition from being blatantly incompetent to being a complete catastrophe?

In all fairness, the FHFA may be a mess, but at least it is a transparent mess: It recently openly acknowledged that the heads of Fannie Mae and Freddie Mac were paid a total of $17.1 million during the past two years. Even worse, the top six executives at the government-sponsored enterprises (GSEs) were paid a total of $35.4 million over the past two years.

And in case you forgot how much profit Fannie Mae and Freddie Mac generated since they've been in conservatorship, I will remind you: zero dollars.

In comparison to the GSE chiefs, President Obama has an annual salary of $400,000. If you are wondering why the leadership of Fannie Mae and Freddie Mac are receiving higher salaries than our nation's head of state, it is because the FHFA never bothered to create written procedures to evaluate annual executive compensation levels.

One might imagine that someone in the FHFA could have taken a few minutes to at least create a rough draft of these procedures. After all, the GSEs have been under federal control since fall 2008. However, there are other financial matters that preoccupied the FHFA's accounts-payable department - most notably, paying the legal bills for the former GSE executives who are the subject of multiple lawsuits.

In January, Rep. Randy Neugebauer, R-Texas, chairman of the oversight subcommittee of the House Financial Services Committee, publicized the sorry fact that $410.7 million in taxpayer money was spent on legal expenses incurred by Fannie Mae and Freddie Mac since they were put into conservatorship. This figure includes $162.4 million spent on securities-related lawsuits and indemnification agreements for former executives of Fannie Mae and Freddie Mac.

Okay, now why is the FHFA footing the legal fees for the former executives who were responsible for running the GSEs off the road? Edward J. DeMarco, acting director of the FHFA, told The New York Times that he felt that "the advancement of such fees is in the best interest of the conservatorship."

For the record, an "acting" director has overseen FHFA operations since August 2009. President Obama never got around to nominating a genuine director until November 2010, but his choice - North Carolina Commissioner of the Banks Joseph A. Smith Jr.- never received Senate confirmation and withdrew his candidacy in January. Three months after the Smith departure, the director's chair is still vacant and there is no signal that a replacement will be named in the immediate future.

With all of the talk in Washington about cutting federally funded waste, it would seem that the FHFA is ripe for the chopping block. Clearly, the FHFA is continuing the example of its predecessor agency, the Office of Federal Housing Enterprise Oversight, in being completely incapable of getting a handle on the Fannie and Freddie fiasco.

My advice is fairly simple: Shut down the FHFA immediately and transfer the regulatory oversight of Fannie Mae and Freddie Mac to the Office of the Comptroller of the Currency (OCC). This is not being suggested as a tribute to the OCC's history of perspicacity and hands-on leadership - for starters, an "acting" director is also overseeing that agency. But until such time that the fate of Fannie and Freddie is determined, I have more confidence in the OCC at the helm than I have in the FHFA.

As for the other GSE that is under the FHFA's watch, the Federal Home Loan Banks, I would transfer the regulatory responsibility over to the Federal Reserve - if only to spare the OCC from having too much work (it also inherited the workload of another failed regulator, the Office of Thrift Supervision).

And while these changes are going on, I would urge Congress to put Fannie Mae and Freddie Mac back into the federal budget, which would enable proper oversight of their funding and operations.

As an aside, I find it fascinating that the Consumer Financial Protection Bureau's Elizabeth Warren has yet to raise a peep about this situation. After all, U.S. taxpayers are being ripped off by a broken housing finance system that is running up billions in losses while enriching the bank accounts of a select few. Or does Warren feel that corruption is excusable when it occurs outside of the private sector?

- Phil Hall, editor, Secondary Marketing Executive

Is Rep. Barney Frank The Most Destructive Force in Congress?

on Monday 04 April 2011 by MortgageOrb.com in News > Residential Mortgage> comments: 1

MortgageOrb.com (Monday 04 April 2011)')"> Rep. Barney Frank, D-Mass., has openly challenged comments made last week by former Federal Reserve Chairman Alan Greenspan in a Financial Times op-ed article in which he states that the Dodd-Frank Act reforms were doomed to fail. Frank, also writing an op-ed article for the Financial Times, slammed Greenspan's assertions that the financial markets would be able to correct themselves in the aftermath of the September 2008 economic meltdown. "His rosy view overlooks a monumental crisis that threatened the foundations of the American economy [and] led to soaring unemployment, a continuing foreclosure crisis and weakened economies in the U.S. and Europe," Frank writes. "It would have been a grave mistake not to address problems of inadequate regulation and lax oversight. Indeed, both his predecessor and successor as chairman of the Federal Reserve called for substantial changes and helped to shape the new rules." Frank further challenged Greenspan's claim that regulators can never get "more than a glimpse" of how the financial system operates, saying there was a difference between a lack of comprehension and a lack of action. "Economist Mark Zandi notes that one of the mistakes leading to the crisis was that, despite having authority to set mortgage lending standards, the Fed 'just never acted on it. That was a clear policy decision,'" he continues. "When technology can track billions of transactions in real time, a failure to pierce the opaqueness of the system is mostly a question of will, not capacity." Frank also notes that the Dodd-Frank Act will enable regulators to keep track of the derivatives market. "Where once this market was opaque, it will soon be transparent," he adds. "New stress tests, the registration of hedge funds (and other private pools of capital), and supervision of previously unregulated non-bank financial companies - all will ensure that there will no longer be any place to hide. The law also increases transparency through a new office of financial research, to give regulators access to information about the entire financial system." SOURCE: Financial Times

Reverse Mortgage Troubles

BLOG VIEW: There is no nice way around it - last month was disastrous for the reverse mortgage sector, thanks to tumultuous upheaval by the leading originators and a skein of atrocious publicity. It will be nothing short of miraculous if the sector can bounce back without any long-term injuries.

How bad are things? For starters, Wells Fargo shut down its wholesale reverse market channel last month, while Bank of America and OneWest Bank (which operates Financial Freedom) pulled the plugs on their respective reverse mortgage businesses. Having one major player exit the sector is problematic, but three leaving in a row is a significant vote of no confidence.

If that's not enough of a headache, there is also a highly publicized lawsuit being spearheaded by AARP against the U.S. Department of Housing and Urban Development (HUD). AARP is representing three surviving spouses of reverse mortgage borrowers, and the organization alleges that HUD had abandoned its long-established rules and violated protections for surviving spouses of reverse mortgage borrowers, which resulted in the three individuals finding themselves facing imminent foreclosure and eviction from their homes. This, of course, contradicts the core concept of reverse mortgage - the product is supposed to help seniors stay in their homes.

Things got even worse for the sector last week during a highly publicized press conference conducted by Joe Hynes, district attorney for Brooklyn, N.Y. Hines announced the arrest of 17 people involved in a number of mortgage fraud schemes - with reverse mortgage scams topping the list. Reverse mortgage scams were also a hot topic last week at Call to Action 2011, which was billed by its organizers as "a national summit on the growing crime of elder financial abuse." Ouch!

More negative attention came from the popular financial planning expert Suze Orman, who used her March 9 column on CNBC.com to highlight the risks and rewards of the product. Orman seemed to pay much more attention to the risks, stating that the product represents "a potentially dangerous step for many retirees." And if you need a cherry on this cake, consider this sentence from a March 2 blog posting on the website AccountingDegree.com: "While it is possible to get a legit reverse mortgage, it's much more likely that you'll be falling into a scam."

All of this piles on top of a rough business environment for the reverse mortgage sector. Since the September 2008 meltdown, the sector has seen declining volume and decreasing secondary marketing opportunities. The continued drop in property values and a too-weak economy has agitated seniors that might have otherwise considered reverse mortgages as a wise investment.

But that's not to say that everyone is abandoning the sector. The National Council on Aging (NCOA) is now offering free counseling for seniors through its Reverse Mortgage Counseling Services Network. NCOA used to charge a $125 counseling fee, but that was jettisoned in view of the current economy. The Financial Security Initiative at Boston College is also acknowledging reverse mortgages as a viable strategy in its "Target Your Retirement" online calculator. And kudos are in order for the sector's trade group, the National Reverse Mortgage Lenders Association, which has an established track record of maintaining high standards among originators while educating the public on the product.

And, at the risk of being flippant, at least the sector does not have Elizabeth Warren breathing down its back. Incredibly, the Consumer Financial Protection Bureau has not come out against reverse mortgages - and let's hope I don't jinx things by mentioning that oversight!

Nonetheless, the near-term future looks bleak for the reverse mortgage sector. A continuation of the stagnant economy and the absence of aggressive new originators to market the product will work against any chance of a sector turnaround. Whatever progress was being made before the September 2008 crash is being pushed back with gusto.

While it is not likely that reverse mortgages will disappear completely, there is the possibility that they will retreat back to the fringe product concept that they occupied in the 1980s and 1990s. Considering the problems in creating new products in the current business environment, the notion of watching a promising product shrink from view is a lose-lose situation for mortgage banking.

- Phil Hall, editor, Secondary Marketing Executive

The FED Killing Competitive Forces In Favor of Big Banks

Think Big Work Small Video:

http://tbwsdailyshow.com/2011/03/22/the-lo-compensation-fed-rule-scandal/

Good Management Built Fannie and Freddie, Poor Management Killing Them

provided by

A Miami home last month. If Freddie Mac and Fannie Mae were closed, homeownership in America could change greatly. (Joe Raedle/Getty Images)

How might home buying change if the federal government shuts down the housing finance giants Fannie Mae and Freddie Mac?

The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.

Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs.

Lenders could charge fees for popular features now taken for granted, like the ability to "lock in" an interest rate weeks or months before taking out a loan.

Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.

The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government's support to enrich shareholders and executives by backing millions of shoddy loans. Taxpayers so far have spent more than $135 billion on the cleanup.

The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans.

[Click here to check home loan rates in your area.]

Douglas J. Elliott, a financial policy fellow at the Brookings Institution, said Congress was being forced for the first time in decades to grapple with the cost of subsidizing middle-class mortgages. The collapse of Fannie and Freddie took with it the pretense that the government could do so at no risk to taxpayers, he said.

"The politicians would like something that provides a deep and wide subsidy for housing that doesn't show up on the budget as costing anything. That's what we had" with Fannie and Freddie, Mr. Elliott said. "But going forward there is going to be more honest accounting."

Some Republicans and Democrats say the price is too high. They want the government to pull back, letting the market dictate price, terms and availability.

"A purely private mortgage finance market is a very serious and very achievable goal," Representative Scott Garrett, the New Jersey Republican who oversees the subcommittee that oversees Fannie and Freddie, said at a hearing this week. "No one serious in this debate believes our housing market will return to the 1930s."

Still, powerful interests in both parties want the government instead to construct a system that would preserve many of the same benefits, with changes intended to minimize the risk of future bailouts. They say the recent crisis showed that the market could not stand on its own.

"The kind of backstop that we have now, if it didn't exist, we would have had a much more severe recession and a much sharper fall in home values," said Michael D. Berman, chairman of the Mortgage Bankers Association, which represents the lending industry.

Hanging in the balance are the basic features of a mortgage loan: the interest rate and repayment period.

Fannie and Freddie allow people to borrow at lower rates because investors are so eager to pump money into the two companies that they accept relatively modest returns. The key to that success is the guarantee that investors will be repaid even if borrowers default -- a promise ultimately backed by taxpayers.

A long line of studies has found that the benefit to borrowers is relatively modest, less than one percentage point. But that was before the flood. Fannie, Freddie and other federal programs now support roughly 90 percent of new mortgage loans because lenders cannot raise money for mortgages that do not carry government guarantees.

One prominent investor, William H. Gross, the co-head of Pimco, the major bond investment firm, has estimated that he would demand a premium of three percentage points to buy such loans -- a cost that would be passed on to the borrower.

[How to Ruin a Real Estate Listing]

Proponents of a private market want the government gradually to withdraw its support, allowing investors to regain confidence. They argue that interest rates would eventually settle into roughly the same patterns that held before the financial crisis.

Some supporters of government backing also like the idea, believing that it will demonstrate the need for a backstop.

"I myself am eager to see whether there needs to be a guarantee," said Representative Barney Frank of Massachusetts, a crucial Democratic voice on housing issues.

Fannie and Freddie also make ownership more affordable by allowing borrowers to repay loans with fixed-interest rates over an unusually long period. A person who borrows $100,000 at 6 percent interest will pay $600 each month for 30 years, compared to $716 each month for 20 years.

The 30-year loan first became broadly available by an act of Congress in 1954 and, from then until now, the vast majority of such loans have been issued only with government support. Most investors are simply not willing to make such a long-term bet. They prefer loans with adjustable rates.

Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago, said such loans would remain available in the absence of a federal guarantee, but they might be harder to find. And lenders might demand a larger down payment. Or a better credit score.

That would be a very good thing, said Mr. Pollock, now a fellow at the American Enterprise Institute.

Longer terms make ownership affordable only by increasing the total cost of the loan, because the borrower pays interest for a longer period. Moreover, Mr. Pollock noted that over the last several years, borrowers with adjustable-rate loans paid less as interest rates fell, while those with fixed rates kept paying the same amount for devalued homes.

"One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage," he said, noting that such loans are not available in most countries. "For many people, it's not at all clear that that's the best product."

[Where You Can Find Houses For Under $150K]

Fannie and Freddie also allow a wide swath of the American public to borrow money at the same interest rates and on the same terms. Borrowers who did not meet their standards were forced to pay higher interest rates to subprime lenders, but the companies essentially persuaded investors to treat a vast number American families as if they were interchangeable.

They took messy bunches of loans, with risks as variable as snowflakes, and created securities of uniform quality, easy to buy and sell. The result was one of the most popular investment products ever created.

And in its absence, experts on housing finance say that fewer borrowers would qualify for the best interest rates.

Susan M. Wachter, a real estate professor at the University of Pennsylvania, said a new government guarantee was needed to preserve a homogenous market.

"There needs to be a systematic way of preventing" fragmentation, said Professor Wachter. "That's what we need a bulwark against. Because if there isn't, it will occur."

The government seems least likely to maintain a final set of benefits -- leniencies in loan terms that taxpayers effectively have subsidized for borrowers.

Fannie and Freddie slashed the requirements for down payments in recent years, saying that they were helping people with minimal savings become homeowners. Two-thirds of the borrowers whose loans were guaranteed by the companies from 1997 to 2005 made a down payment of less than 10 percent. But borrowers who invest less default more often. The Obama administration has said that it wants the companies to demand a minimum down payment of 10 percent.

A quirkier example is the ability to "lock in" an interest rate. Fannie and Freddie permitted lenders to make such promises at no risk because the companies had already obtained commitments from investors. In the companies' absence, borrowers seeking rate locks may need to pay for them.

Industry Trade Groups Join NAMB to Express Their Concern About LO Compensation Rules

Industry Trade Groups Join NAMB to Express Their Concern About LO Compensation Rules

Fri, 2011-03-04 14:50 — NationalMortgag...

The National Association of Mortgage Brokers (NAMB) and six other industry groups have written a letter to Ben S. Bernanke, chairman and Sandra F. Braunstein, director of the Consumer and Community Affairs Division for the Board of Governors of the Federal Reserve System, voicing further their concern over the terms “affiliate” and “third-party charges” used in the Board’s final rule regarding loan originator (LO) compensation practices, scheduled to take effect April 1, 2011. The collective group is asking the Federal Reserve Board (FRB) to review their interpretation of these terms to avoid, as the letter states, "irreparable injury to the various members of our associations, to competition in the marketplace, and to consumers if they are adopted."

Others joining NAMB in their request to the FRB to further clarify the rule include the Community Mortgage Banking Project (CMBP), Consumer Mortgage Coalition (CMC), National Association of Homebuilders (NAHB), National Association of Realtors (NAR), Real Estate Services Providers Council Inc. (RESPRO) and The Realty Alliance.

The FRB's LO compensation rule contains two key prohibitions: It prohibits payment to originators based on loan terms or conditions or proxies for them, and it prohibits what has been deemed "dual compensation of loan originators" by consumers and other parties, including those who often pay compensation (or at least ensure that brokers obtain some form of compensation) for brokering loans to them.

The LO compensation rule, officially known as "Regulation Z; Docket No. R-1366, Truth-in-Lending," was originally published in the Federal Register on Sept. 24, 2010, and has come under fire from a number of organizations for being too vague, including the Small Business Administration's Office of Advocacy. SBA Advocacy wrote a letter in January to the FRB stating that a compliance manual was never issued by the Federal Reserve on their rule and asked for additional time for businesses to comply with the changes to Regulation Z due to the fact that the compliance guide was not available at the time of publication of the rule. SBA Advocacy followed up with a second letter in February again seeking a delay in the April 1st implementation of the rule.

In the latest letter to the FRB, the collective group suggests two solutions to rectify the issue:

?For the FRB to continue to define an “affiliate” as one person, but to interpret the term “third-party” to include affiliates so that the fees of third-party title companies, appraisal companies, real estate brokers, etc. (whether affiliated with the originator or not) may be exempted from loan originator compensation so long as they are bona fide and reasonable.

?To limit the definition of “affiliate” to include mortgage lending and mortgage brokering businesses as specifically stated in the rule but not to include non-mortgage providers in that definition.

Realtors Being Tracked by Wells Fargo, Bank of America and Chase

Fraud is still a concern for banks, some reports claim that it is up 35% since the financial crisis. Truly surprising considering all the new underwriting safeguards. Yet, incidents of real estate collusion and fraud are showing up quicker and often.

If a real estate professional commits fraud but the housing prices rise, odds are they are going to keep getting away with it. However, when prices, like they have recently, stagnate or drop, these incidents of fraud are going to be exposed quickly.

Lending institutions such as Wells Fargo, Bank of America and Chase are now more actively tracking parties involved in transactions they fund. This includes Realtors, appraisers and mortgage originators. Lenders have been hard on appraisers and loan officers for the last two years but what's new is that they are starting to now target Realtors.

If your transaction is declined, it may not be solely due to your loan qualifications but may also be due to the Realtor you are working with. Regional lending operations centers are starting to utilize blacklists to curb fraud and deny loans. 

The Treasury Department’s Financial Crimes Enforcement Network, known as FinCen, released a report on fraud. The agency undertook the review after seeing a significant rise in so-called suspicious activity reports it received from U.S. banks concerning fraud. As a result, Fannie Mae, Freddie Mac and the large multi State lenders have incorporated additional security measures to detect fraudulent patterns and that also means tracking real estate agents.

The FED to Regulate Loan Officer Compensation. Banks Back Move. Will Reduce Competition.

National Association of Mortgage Brokers (NAMB) Government Affairs Committee Chair Mike Anderson, CRMS has praised the House Financial Service Committee for including an examination of the impact the Federal Reserve Board's recent regulation controlling employee pay will have on loan originators in its Oversight Plan.

In the House Financial Services Committee's Oversight Plan released today, the Committee will examine the implementation of proposed rules issued by the Federal Reserve governing mortgage origination compensation, which are scheduled to become effective April 1, 2011.

The committee release outlines: “[T]he Committee is concerned that the rules may have an adverse impact on the ability of small businesses that originate mortgages to remain in business.”

The Committee added: “[T]he Committee will also review the interaction of existing real estate settlement rules with rules mandated by the Dodd-Frank Act.”

In a separate activity, the Office of Advocacy of the Small Business Administration (SBA) has sent two letters to the Federal Reserve Board asking for more guidance for small business compliance regarding loan officer compensation.

Click here to view the entire Oversight Plan of the Committee on Financial Services for the 112th Congress.

For more information, visit NAMB.org.

Quicken Advert Claims High Customer Satisfaction... Really?

Top 10 Reasons For a Home Loan Denial

Few things are more disappointing then a declined mortgage. Not being able to secure financing can make all the plans that you had seem to go right down the drain. But knowing the common reasons for loan denial can go a long way to help avoid a loan decline.

Common Reason For Loan Denial

1. High debt to income ratios: Home loans are getting harder than ever to try to close nowadays with all of the changes going on in the mortgage industry. During the years of 2002-2007 everybody could get approved on some kind of loan for the most part. Buyers could always fall back on a no income no asset loan (NINA) to close their loan. This loan was considered a sub-prime loan and came with higher interest rates but at least it could close. NO MORE. Those days are gone, and now all loans require an extensive amount of verification. If you have problems with your income or hidden debts, they will come to the surface.

2. Poor preapproval: All home loans should come with a thorough preapproval. Most of the time if your home loan application gets sent to the underwriters and it gets denied its because the mortgage banker is inexperienced and does not know what they are doing.

3. Appraisal: With the way home prices have been dropping lately around the country, many mortgage companies cannot do anything because of the appraisal issue. Your Realtor needs to have comparable sales to make sure the property you are buying will appraisal for the contract price.

4. Debt Load: Your total monthly debt to monthly gross income ratio (DTI) should be lower than 45%. American's are spoiled, they think they can have two car loans, three big screens and a mcmansion. Some still haven't gotten "it" yet and expect that if they want to buy someone should sell to them.

5. False Income and Banking Information: This is when you have to be honest with the person asking you questions. If you send them back pay stubs or bank statments that do not represent what you really make or have then your loan will get denied the second it hits the underwriters desk. DON"T LIE EVER. Help your Loan Officer make a good case for you.

6. Lack of Verifiable Savings: 1 month short for reserves will be all it takes to get denied. If you are getting money from sources other than payroll you will have problems. Many self-employed people are paid in "cash"- that's a big NO NO. All assets must be verified so that the bankers don't think you are selling illegal drugs on the side.

7. Hidden Property Defects: Many properties these days have been abused by the prior owner. In most instances the buyer and Realtor know about the defects but fail to inform the lender. The lender finds out through an appraisal which results in a declined loan.  

8. Poor Credit Scores: Its seems with each passing month, credit score requirements continue to go up. borrowers must have a 700 credit score to obtain private mortgage insurance for conventional loans.

 9. Self-Employed Borrowers: Starting in 2009, almost 85% of self-employed borrowers were turned down for home loans. The government now requires all applicants to verify income. Most self-employed persons reinvest their income into their business and write off a lot of expenses. This is a double edged sword: Invest in my business or take home money to show more on my tax returns. Many can afford a house payment if they pulled back on business reinvestment but this choice isn't practical when growing your business. Pulling two years of invesment dollars out of the business in order to qualify for a home loan seems impractical. It hurts the economy and ties up cash that could be used to grow the business.  

10. Changes After The Loan Application Has Been Approved: Some borrowers dare to increase debt or credit just before the loan closes and just after they have been approved for the loan. They think that just becaue they are approved, the loan is guaranteed. Some borrowers even switch jobs during the loan process. Counseling your home buyers to not make any changes to their credit, income or asset picture is important.

The Bilking of the American Taxpayer

Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud.

CNBC

The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress.

The bulk of those expenditures — $132 million — went to defend Fannie Mae cnbc_comboQuoteMove('popup_fnm_ID0EUH15839609');[FNM  0.491    -0.002  (-0.41%)   ] cnbc_quoteComponent_init_getData("fnm","WSODQ_COMPONENT_FNM_ID0EUH15839609","WSODQ","true","ID0EUH15839609","off","false","inLineQuote"); and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted. The legal payments show no sign of abating.

Documents reviewed by The New York Times indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie’s former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller.

Late last year, Randy Neugebauer, Republican of Texas and now chairman of the oversight subcommittee of the House Financial Services Committee, requested the figures from the Federal Housing Finance Agency. It is the regulator charged with overseeing the mortgage finance companies and acts as their conservator, trying to preserve the company’s assets on behalf of taxpayers.

“One of the things I feel very strongly about is we need to be doing everything we can to minimize any further exposure to the taxpayers associated with these companies,” Mr. Neugebauer said in an interview last week.

It is typical for corporations to cover such fees unless an executive is found to be at fault. In this case, if the former executives are found liable, the government can try to recoup the costs, but that could prove challenging.

Since Fannie Mae and Freddie Mac cnbc_comboQuoteMove('popup_fre_ID0EAFAC15839609');[FRE  3.25    0.02  (+0.62%)   ] cnbc_quoteComponent_init_getData("fre","WSODQ_COMPONENT_FRE_ID0EAFAC15839609","WSODQ","true","ID0EAFAC15839609","off","false","inLineQuote"); were taken over by the government in September 2008, their losses stemming from bad loans have mounted, totaling about $150 billion in a recent reckoning. Because the financial regulatory overhaul passed last summer did not address how to resolve Fannie and Freddie, Congress is expected to take up that complex matter this year.

RELATED LINKS

Current DateTime: 07:45:25 24 Jan 2011
LinksList Documentid: 41233070

• What Raines Thinks About Foreclosure Moratoriums
• Why Getting Rid of Useless Regulations May Not Be Easy
• Insane Bankers Lobbying For Power to Grant Government Guarantees

 

In the coming weeks, the Treasury Department is expected to publish a report outlining the administration’s recommendations regarding the future of the companies.

Well before the credit crisis compelled the government to rescue Fannie and Freddie, accounting irregularities had engulfed both companies. Shareholders of Fannie and Freddie sued to recover stock losses incurred after the improprieties came to light.

Freddie’s problems arose in 2003 when it disclosed that it had understated its income from 2000 to 2002; the company revised its results by an additional $5 billion. In 2004, Fannie was found to have overstated its results for the preceding six years; conceding that its accounting was improper, it reduced its past earnings by $6.3 billion.

Mr. Raines retired in December 2004 and Mr. Howard resigned at the same time. Ms. Spencer left her position as controller in early 2005. The following year, the Office of Federal Housing Enterprise Oversight, then the company’s regulator, published an in-depth report on the company’s accounting practices, accusing Fannie’s top executives of taking actions to manipulate profits and generate $115 million in improper bonuses.

The office sued Mr. Raines, Mr. Howard and Ms. Spencer in 2006, seeking $100 million in fines and $115 million in restitution. In 2008, the three former executives settled with the regulator, returning $31.4 million in compensation. Without admitting or denying the regulator’s allegations, Mr. Raines paid $24.7 million and Mr. Howard paid $6.4 million; Ms. Spencer returned $275,000.

Getty Images Franklin Raines

Fannie Mae also settled a fraud suit brought by the Securities and Exchange Commission without admitting or denying the allegations; the company paid $400 million in penalties.

Lawyers for the three former Fannie executives did not respond to requests for comment. A company spokeswoman did not return a phone call or e-mail seeking comment.

In addition to the $160 million in taxpayer money, Fannie and Freddie themselves spent millions of dollars to defend former executives and directors before the government takeover. Freddie Mac had spent a total of $27.8 million. The expenses are significantly larger at Fannie Mae.

Legal costs incurred by Mr. Raines, Mr. Howard and Ms. Spencer in the roughly four and a half years prior to the government takeover totaled almost $63 million. The total incurred before the bailout by other high-level executives and board members was around $12 million, while an additional $18 million covered fees for lawyers for Fannie Mae officials below the level of executive vice president. Many of these individuals are provided lawyers because they are witnesses in the matters.

Employment contracts and company by-laws usually protect, or indemnify, executives and directors against liabilities, including legal fees associated with defending against such suits.

After the government moved to back Fannie and Freddie, the Federal Housing Finance Agency agreed to continue paying to defend the executives, with the taxpayers covering the costs.

CONTINUED: Payback?

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Bank of America Settles on $3 Billion for Countrywide Fraud

Bank of America Resolves Countrywide Dispute With GSEs to the Tune of $3 Billion

Mon, 2011-01-03 11:09 — NationalMortgag...

Bank of America has agreed to pay out nearly $3 billion total to both Fannie Mae and Freddie Mac for a repurchase claims dispute over housing loans sold to them by Countrywide Financial Corporation. Bank of America agreed, among other things, to a resolution amount of approximately $1.52 billion, consisting of a cash payment of $1.34 billion made by Bank of America on Dec. 31, 2010, and credits for payments recently made or to be made by them. 

The agreement resolves outstanding repurchase requests on 12,045 loans sold to Bank of America by Countrywide, addresses 5,760 other loans sold to Bank of America by Countrywide and permits Bank of America to bring claims for any additional breaches of its representations and warranties that are identified with respect to those loans. Fannie Mae continues to work with Bank of America to resolve repurchase requests that remain outstanding, including requests relating to loans delivered to the company by Bank of America.

Fannie Mae pursues repurchase requests to protect the interests of the company and to prudently manage the resources that Bank of America has been provided. This agreement with Bank of America addresses approximately 44 percent of the $7.7 billion in repurchase requests (measured by unpaid principal balance) that the company had outstanding with all of its seller-servicers as of Sept. 30, 2010.

For more information, visit www.bankofamerica.com.