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F.H.A., Short Billions, May Need Rescue by Taxpayers

November 16, 2012 by Leave a Comment

WASHINGTON — The Federal Housing Administration, a government agency that insures mortgages, is on the verge of requiring taxpayer financing for the first time in its eight-decade history.

An independent audit to be released on Friday projects that the administration will not have the cash reserves to pay all of its obligations, with the total shortfall amounting to about $16.3 billion.

“This does not mean F.H.A. has insufficient cash to pay insurance claims, a current operating deficit or will need to immediately draw funds from the Treasury,” the report stressed.

But it does make a taxpayer bailout likely. Reserves at the administration, which insures more than $1 trillion in mortgages, fell to below $3 billion last year. And the report cites a number of weaknesses on the agency’s books.

“We will continue to take aggressive steps to protect F.H.A.’s financial health while ensuring that F.H.A. continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times,” said Carol J. Galante, its acting commissioner, in a statement.

The F.H.A. “has weathered the storm of the recent economic and housing crisis by taking the most aggressive and sweeping actions in its history to reform risk management, credit policy, lender enforcement and consumer protections,” Shaun Donovan, the secretary of housing and urban development, said in a statement.

Politicians in Washington, particularly Republicans, have voiced concerns that the agency could become a drain on the taxpayer, much like Fannie Mae and Freddie Mac. Those two mortgage finance giants have not required additional taxpayer funding in recent quarters, as the housing market has stabilized. But they have nevertheless received about $190 billion in federal financing in the last four years.

An agency release cites three reasons for its deteriorating financial position. Home prices have not risen as quickly as the administration’s actuaries expected. Low interest rates have weakened its books. The agency’s independent actuary used a “refined methodology this year to more precisely predict” its losses.

More broadly, the agency is still struggling from the burst of the real estate bubble. By many measures, housing prices have only recently started to stabilize and increase. The rate of foreclosures remains high.

The agency’s books are improving, a release said. But it noted that its portfolio of loans insured between 2007 and 2009 — after the housing bubble started to collapse — were placing a “significant” strain on its finances. The independent actuaries project more than $70 billion in losses on those loans.

Article source: http://www.nytimes.com/2012/11/16/business/fha-short-billions-may-need-rescue-by-taxpayers.html?partner=rss&emc=rss

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DealBook: Embattled Fortress Chief Takes Leave of Absence

December 21, 2011 by Leave a Comment

Daniel H. Mudd, the former head of Fannie Mae, before a House panel in 2007.Mark Wilson/Getty ImagesDaniel H. Mudd testifying before a House panel in 2007, when he was head of Fannie Mae.

Daniel H. Mudd, who faces accusations that he misled investors while he was the top executive of Fannie Mae, is taking a leave of absence from his role as chief executive of the Fortress Investment Group, the company announced on Wednesday.

Last week, the Securities and Exchange Commission sued Mr. Mudd and five other former executives at Fannie Mae and Freddie Mac, the two mortgage-finance giants brought low by the housing bubble. In one of the most significant federal actions taken against crucial players in the mortgage crisis, the S.E.C. accused Mr. Mudd of playing down Fannie Mae’s exposure to risky loans.

Mr. Mudd and the other executives have vowed to challenge the accusations, noting that Fannie and Freddie routinely disclosed their exposure to risky loans in regulatory filings. Mr. Mudd has said that the suit is driven by politics, not substance.

But while he fights the S.E.C., Mr. Mudd has decided to step away from Fortress. It is unknown how long his leave of absence will last.

“I have requested a leave of absence from my position as chief executive officer to ensure that any time or attention I need to focus on matters outside of Fortress will not affect the business or operations of the company,” Mr. Mudd said in a statement.

Mr. Mudd started at Fortress in July 2009, after the government pushed him out of his role as the chief executive of Fannie Mae.

While Mr. Mudd has helped revive Fortress after its shares suffered a sharp decline, certain businesses have continued to struggle and the stock is trading at about $3.30. The firm has about $44 billion in assets under management in a variety of hedge funds, private equity funds and mutual funds.

He will be succeeded, at least temporarily, by Randal A. Nardone, who co-founded Fortress. Prior to starting Fortress, Mr. Nardone worked at UBS and BlackRock Financial. While Mr. Nardone does not have the public profile of Mr. Mudd, he is known for his deep knowledge of the private equity business, which is one Fortress’s main focuses.

“We are grateful to Dan for his service and leadership over the past two and a half years and support his decision to take a leave of absence at this point in time,” Mr. Nardone said in a statement. “We look forward to Dan’s return in the hope that matters are resolved favorably and expeditiously.”

Article source: http://feeds.nytimes.com/click.phdo?i=ba15c49f72d7d93465f02f5e214a1381

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DealBook: Fannie and Freddie Near Settlement With Regulators

September 9, 2011 by Leave a Comment

Robert Khuzami, the S.E.C. enforcement chief, is said to have met this summer with lawyers for ex-chiefs of Freddie and Fannie.Daniel Rosenbaum for The New York TimesRobert Khuzami, the S.E.C. enforcement director, is said to have met with lawyers for ex-chief executives of Freddie and Fannie.

Regulators are nearing a settlement with Fannie Mae and Freddie Mac over whether the mortgage finance giants adequately disclosed their exposure to risky subprime loans, bringing to a close a three-year investigation.

The proposed agreement with the Securities and Exchange Commission, under the terms being discussed, would include no monetary penalty or admission of fraud, according to several people briefed on the case. But a settlement would represent the most significant acknowledgement yet by the mortgage companies that they played a central role in the housing boom and bust.

And the action, however limited, may help refurbish the S.E.C.’s reputation as an aggressive regulator, particularly as the country struggles with the after-effects of the financial crisis that the housing bubble fueled.

But the potential settlement — even it if it is little more than a rebuke — comes at an awkward time for Fannie Mae and Freddie Mac. Last week, the government overseer of the two companies sued 17 large financial firms, blaming them for luring the mortgage giants into buying troubled loans. That is a similar accusation to the one the S.E.C. is leveling at Fannie and Freddie — that the two entities misled their own investors. The case against the financial firms could be complicated should Fannie and Freddie sound a note of contrition for their own role in the implosion of the mortgage market in settling with the S.E.C.

The agency abandoned hopes of assessing a fine because of the precarious financial positions of the two companies, according to the people briefed on the case, who spoke on condition of anonymity because the deal was not yet final. The government has already propped up Fannie Mae and Freddie Mac with more than $100 billion since taking control of them in 2008. Any fee levied against them would simply wind up on the taxpayers’ tab.

The negotiations have been going on since at least early summer, and a deal may not materialize until later this year, these people cautioned. Fannie Mae, Freddie Mac and the S.E.C. all declined to comment.

The sprawling investigation into Fannie Mae and Freddie Mac once encompassed both civil and criminal elements, making headlines as one of the most significant cases to stem from the financial crisis. The case also threatened to ensnare some of Fannie and Freddie’s former top officials. Earlier this year, recent chief executives at both companies received so-called Wells notices from the S.E.C., an indication that the agency was considering a civil enforcement action against them.

But three years on, the civil settlement would be the only government action against the companies.

The criminal inquiry has sputtered to a halt. The Justice Department has concluded its inquiry, at least at Freddie Mac, according to a securities filing in August by the company. No charges have been filed against either company.

At the S.E.C., regulators have zeroed in on the fine print of Fannie’s and Freddie’s disclosures, according to those who have been briefed on it. The agency is specifically looking at the way the companies reported their subprime mortgage portfolios and concentrations of loans extended to borrowers who offered little documentation.

While Fannie and Freddie do not offer home loans, they buy up thousands of mortgages from lenders and resell them in packages to investors. The S.E.C.’s case hinges on whether the companies misled the public and regulators by lowballing the number of high-risk mortgages on their books.

One potential weakness of the case is that it hinges on the definition of subprime, which the government itself has struggled to nail down. The term often references loans to borrowers with low credit scores and spotty payment records. But Fannie and Freddie categorized loans as prime or subprime based on the lender rather than on the loan itself.

The path to the current settlement talks at Fannie Mae and Freddie Mac has been a delicate one. While internally, the two companies did not view the government’s case as particularly strong, they said they moved to settle to spare time and precious resources, according to one person close to the talks. In addition, the companies asked that whatever the settlement, it not include a fine or accusations of fraud in the hopes of protecting an already battered morale and an empty purse at the institutions.

In particular, a fraud accusation could cause an exodus of the employees best equipped to dig the institutions out of their current morass, people close to the talks said. A settlement with the mortgage companies would be a first step in wrapping up the S.E.C.’s broader examination. The agency is still pursuing potential claims against at least four former executives at Fannie and Freddie.

This summer, lawyers for Richard Syron, the former chief of Freddie Mac, and Daniel H. Mudd, his counterpart at Fannie Mae, met directly with the S.E.C.’s enforcement chief, Robert Khuzami, according to some of the people briefed on the case.

The S.E.C. has sent Wells notices to Mr. Syron; Mr. Mudd; the former chief financial officer at Freddie Mac, Anthony J. Piszel; and Donald J. Bisenius, executive vice president at Freddie until his recent departure.

None of the individuals have been accused of any wrongdoing.

Mr. Mudd and Mr. Syron are the two most prominent executives swept up in the case. Mr. Mudd is now chief executive of the public traded hedge fund and private equity firm the Fortress Investment Group. Mr. Syron, a former president of the American Stock Exchange, is an adjunct professor at Boston College and serves on its board of trustees.

Through their lawyers, Mr. Mudd and Mr. Syron declined to comment. The S.E.C. could yet decide not to sue the former executives.

Ultimately, the two mortgage companies have larger worries to confront than the potential citations: chief among them is their continuing viability.

Earlier this year, the Obama administration announced plans to wind down the two companies, leaving the fates of the companies unresolved and the future of government-backed housing finance in doubt.

Article source: http://feeds.nytimes.com/click.phdo?i=c7aa5b29abb0c46e8833a73bb4e833fa

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Uncertain Leadership Strains Financial Overhaul

May 13, 2011 by Leave a Comment

The Obama administration has not announced nominees for several positions that Congress created last summer, nor has it nominated new heads for three agencies, including for an imminent vacancy at the Federal Deposit Insurance Corporation.

As a result, temporary leaders tapped by the president increasingly are responsible for the vast overhaul of financial regulations, raising concerns that their decisions will prove more vulnerable to political pressure than permanent leaders insulated by Senate confirmation to a fixed term.

“I look back on my last five years and all the tough decisions I had to make, and if I’d been in an acting capacity, it would have been very inhibiting to me in making some of the tough decisions I had to do,” Sheila C. Bair, who in early June will complete her term as chairwoman of the F.D.I.C., told the Senate Banking Committee on Thursday.

The vacancies have accumulated in part because Senate Republicans have blocked votes on nominees for a wide range of positions. The White House, in turn, has not rushed to add names to the list. In one case, it has temporarily circumvented the Senate by giving the Harvard professor Elizabeth Warren acting responsibility for a new agency focused on consumer financial protection.

The White House also appointed an acting director for the Federal Housing Finance Agency, which oversees the mortgage finance giants Fannie Mae and Freddie Mac. The agency has operated without a permanent head since August 2009. And since August, 2010, an acting director also has run the Office of the Comptroller of the Currency, which oversees most of the nation’s largest banks.

A new position on the Federal Reserve Board, vice chairman for supervision, has remained vacant since it was created last summer. So has a seat on the council of regulators designated for someone with insurance expertise.

Amy Brundage, a White House spokeswoman, said that President Obama would announce nominees for the positions “as soon as possible.”

“The president is looking for strong, well-qualified candidates who can lead these institutions to protect American consumers and taxpayers, while ensuring the stability of an American economy emerging from the worst recession since the Great Depression,” she said.

The White House soon plans to nominate a replacement for Ms. Bair at the F.D.I.C., according to people familiar with the matter who spoke on condition of anonymity because no plans had been publicly announced. The front-runner is Martin J. Gruenberg, currently the agency’s vice chairman, who worked for years as a Democratic staff member on the Senate Banking Committee.

A decision also is close on a nominee for comptroller of the currency, those people said.

The lack of permanent leadership is a significant handicap, according to current and former regulators. It is fairly easy to keep doing the same things, but much harder to navigate unexpected difficulties or to consider new ideas.

And agencies are being asked to do both of those things as perhaps never before.

The sweeping overhaul of financial regulations passed into law last year requires agencies to write hundreds of rules, an unprecedented task, even as they grapple with the unfamiliar financial landscape left by the crisis.

John Walsh, the acting comptroller of the currency, said that Treasury Secretary Timothy F. Geithner had encouraged him to do the job as if it were, indeed, his job.

“But the fact is that I have said to him and have said repeatedly that I do think it’s very important for independent supervisory agencies to have nominated and confirmed heads in place,” Mr. Walsh said Thursday at the same Senate hearing. “It’s important for independence and for the perception of independence.”

Senator Sherrod Brown, an Ohio Democrat, said Thursday that the absence of leadership was complicating the work of identifying “systemically important” financial firms that could pose a threat to the broader economy.

“We need strong nominees who will not be afraid to take bold steps to prevent a new financial crisis,” Mr. Brown said. Senators from both parties urged regulators at a hearing Thursday to offer more detailed criteria for designating such firms, which will be subject to stricter regulation.

Bank holding companies with more than $50 billion in assets automatically fall under the designation, according to the Dodd-Frank law approved last year. But there is no clear standard for selecting other kinds of financial firms like insurance companies, hedge funds and investment managers.

Edward Wyatt contributed reporting from Washington.

Article source: http://feeds.nytimes.com/click.phdo?i=ecbe091b07a408b72555ecdfcb38a582

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U.S. Sues Deutsche Bank Over Mortgage Practices

May 3, 2011 by Leave a Comment

In a complaint filed in Federal District Court in New York, the government accused a Deutsche Bank unit, known as MortgageIT, of “knowingly, wantonly and recklessly” failing to adequately scrutinize borrowers, and then lying to federal officials who pointed out shortcomings.

As a result, the federal government has made insurance payments of $386 million on bad loans, and expects to make payments of hundreds of millions more, the lawsuit said. The government is seeking triple damages as well as punitive damages.

The suit involves Deutsche Bank’s involvement with the Federal Housing Administration, an arm of the government that guarantees mortgages made to borrowers who are less qualified than those who have loans backed by the mortgage finance giants Fannie Mae or Freddie Mac.

MortgageIT was qualified to issue F.H.A.-backed loans, and from 1999 to 2009 the bank sponsored more than 39,000 F.H.A. loans, worth more than $5 billion, according to the complaint. The bank knowingly used the government guarantee on unqualified, risky loans, the complaint says, because it was able to then quickly sell the loans to investors.

The bank had “powerful financial incentives to invest resources into generating as many F.H.A.-insured mortgages as quickly as possible,” the complaint says.

Deutsche Bank acquired MortgageIT, a real estate investment trust, in the summer of 2006, as the bank sought to expand its presence in the American mortgage market. The complaint involves actions at MortgageIT before and after the Deutsche acquisition.

The F.H.A. was long a sleepy arm of the government, backing only a small portion of home loans made. But as trouble hit the mortgage market, the F.H.A. began guaranteeing far more loans. By 2009, officials had grown concerned that the agency had backed many loans that would fail, possibly costing taxpayers billions of dollars.

One way the F.H.A. tried to make sure the loans remained sound was to require banks to qualify as so-called “direct endorsement lenders.” The housing agency, which is part of the Department of Housing and Urban Development, made such lenders report their standards on a regular basis.

The complaint says that Deutsche “regularly lied to HUD to obtain and maintain MortgageIT’s Direct Endorsement Lender status.” In particular, the complaint said Deutsche did not monitor how often homeowners were defaulting on their mortgages immediately after receiving the loans.

In one case, for example, MortgageIT endorsed an application by a Colorado borrower who had no credit history, a violation of federal rules. Six months later the mortgage went into default, costing the federal government $191,000 in insurance claims.

As of this year, HUD has paid more than $386 million to cover losses on Deutsche’s F.H.A.-backed loans. Many of the losses, the complaint says, were caused by false statements the bank made to HUD to obtain the government guarantee.

The government has filed relatively few cases against big banks related to the financial crisis.

The Justice Department’s case on Tuesday was a civil case, not a criminal case, and it did not name any individual executives or workers. Deutsche Bank was one of the largest players in the American mortgage market, bundling up billions of dollars of mortgages into bonds it sold to investors.

The United States attorney for the Southern District of New York, Preet Bharara, will hold a news conference to discuss the case on Tuesday afternoon.

Jack Ewing reported from Frankfurt and Louise Story from New York.

Article source: http://www.nytimes.com/2011/05/04/business/04mortgage.html?partner=rss&emc=rss

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