Mortgage Probe

BANKING


Mortgage Probe Stokes Market, Consumer Uncertainty

by Stacy Kaper

National Journal Daily

Updated: May 18, 2011
6:10 a.m.

May 17, 2011
9:30 p.m.



As a fresh investigation into mortgage deficiencies at three big banks came to light Tuesday, it only served to emphasize the overriding uncertainty gripping the mortgage industry, and illustrates the wall policymakers have hit in trying to remedy the foreclosure crisis, analysts said.



A source said New York Attorney General Eric Schneiderman plans to meet in the next week or so with officials at Bank of America, Goldman Sachs, and Morgan Stanley as part of the New York prosecutor's ongoing probe of mortgage practices.



A broader group of state attorneys general joined by the departments of Justice and Housing and Urban Development, meanwhile, still are struggling to reach a global settlement with mortgage servicers. There is also intense speculation about how aggressive the Consumer Financial Protection Bureau will be once it becomes operational July 21 and can use broad authority to write and enforce mortgage protections. The future of the mortgage finance system remains up in the air.



"There's going to be a significant change to the process going forward with securitization; what is really important to get on the table is how it's all going to work," said Lawrence Kaplan, a banking lawyer with Paul, Hastings, Janofsky, and Walker. "All of this is going to impact bank lending and we have this impediment to banks doing anything in the interim."



Other analysts said the bottom line is that for all of the various state and federal inquiries, there has been little success in bringing relief to struggling homeowners as the foreclosure crisis rolls along and, similarly, there has been little appreciable achievement in holding the industry accountable.



Still the New York investigation combined with the global settlement effort poses a reputational and financial threat to the institutions involved and adds to the lack of confidence in the private mortgage securitization market, which has practically shut itself down.



"Given the just enormous numbers of foreclosures... this potentially could be a really big deal," said Chris Low, the chief economist with First Horizon National Corp.'s FTN Financial. "Our view at this stage is we are not going to have a housing recovery in this economic cycle and this is one more reason to believe that this is going to be the case."



Bankers have so far been able to resist dramatic intervention such as the broader settlement effort led by Iowa Attorney General Tom Miller to reduce the principal debt owed on millions of homes facing foreclosure in the pursuit of a global servicing settlement. Principal write-downs remain a sticking point for bankers who want any financial penalty imposed on them be used to pay for relocating foreclosed homeowners.



Hundreds of thousands of homeowners are stalled in backlogged foreclosure proceedings in states like Florida where judges must individually approve them. The backlog is a drag on the economy as home prices are expected to continue falling. The divided Congress is focused on other things, as is the Obama administration, frustrating consumer advocates who want to see major servicing reforms.



"We don't see anything moving now in Congress, we obviously hope that changes," said Alys Cohen of the National Consumer Law Center. "Homeowners need rules to require mortgage companies to help them when they have a legitimate problem not being able to pay their mortgage."



May 16, 2011 (New York Times)

New York Investigates Banks' Role in Financial Crisis

By GRETCHEN MORGENSON



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.



Officials in Eric T. Schneiderman's office have also requested meetings with representatives from Bank of America, Goldman Sachs and Morgan Stanley, according to people briefed on the matter who were not authorized to speak publicly. The inquiry appears to be quite broad, with the attorney general's requests for information covering many aspects of the banks' loan pooling operations. They bundled thousands of home loans into securities that were then sold to investors such as pension funds, mutual funds and insurance companies.



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.



UPCOMING HEARINGS



May 18, 2011

The State of the Securitization Markets

Senate Banking, Housing and Urban Affairs - Subcommittee on Securities, Insurance, and Investment

Subcommittee Hearing

Securities, Insurance, and Investment Subcommittee (Chairman Reed, D-R.I.) of Senate Banking, Housing and Urban Affairs Committee will hold a hearing titled "The State of the Securitization Markets."

Contact: Stein, Kara - Majority Subcommitte Staff Director at 202-224-4642

________________________________________

Date Wednesday, May 18, 9:30 a.m.

Place 538 Dirksen Bldg.

Witnesses Scheduled Steven L. Schwarcz, professor of law and business, Duke University School of Law

Tom Deutsch, executive director, American Securitization Forum

Martin S. Hughes, president and CEO, Redwood Trust

Lisa Pendergast, president, Commercial Real Estate Finance Council

Ann Elaine Rutledge, founding principal, R&R Consulting

Chris J. Katopis, executive director, Association of Mortgage Investors





May 24, 2011

Future of Housing Finance System

Senate Banking, Housing and Urban Affairs Committee

Full Committee Hearing

Senate Banking, Housing and Urban Affairs Committee (Chairman Johnson, D-S.D.) will hold a hearing on public proposals for the future of the housing finance system.

Contact: Fettig, Dwight - Majority Staff Director at 202-224-7391

________________________________________

Topic Part II (Part I held March 29).

Date Tuesday, May 24, 10 a.m.

Place 538 Dirksen Bldg.

Witnesses Ron Phipps, president, National Association of Realtors

Peter Donovan, chairman, National Multi-Housing Council





May 25, 2011

Government Sponsored Enterprises Overhaul

House Financial Services - Subcommittee on Capital Markets and Government Sponsored Enterprises

Subcommittee Hearing

Capital Markets and Government Sponsored Enterprises Subcommittee (Chairman Garrett, R-N.J.) of House Financial Services Committee will hold a hearing on legislative proposals to overhaul Government Sponsored Enterprises.

Contact: Lavender, Larry - Majority Staff Director at 202-225-7502

________________________________________

Date Wednesday, May 25, 2 p.m.

Place 2128 Rayburn Bldg.





May 25, 2011

Federal Housing Administration and Ginnie Mae Legislative Proposals

House Financial Services - Subcommittee on Insurance, Housing and Community Opportunity

Subcommittee Hearing

Insurance, Housing and Community Opportunity Subcommittee (Chairwoman Biggert, R-Ill.) of House Financial Services Committee will hold a hearing on legislative proposals for the Federal Housing Administration and Ginnie Mae.

Contact: Lavender, Larry - Majority Staff Director at 202-225-7502

________________________________________

Date Wednesday, May 25, 10 a.m.

Place 2128 Rayburn Bldg.

Note Time changed to10 a.m. from 2 p.m. Originally scheduled for April 13.