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DealBook: U.S. Suit Says Loan Giants’ Executives Misled Market

December 17, 2011 by NewsMaker Leave a Comment

Win McNamee/Getty ImagesRobert Khuzami of the S.E.C. announcing the lawsuits against six former top executives of Fannie Mae and Freddie Mac.

9:30 p.m. | Updated

Regulators have accused the former chief executives of the mortgage giants Fannie Mae and Freddie Mac of misleading investors about their firms’ exposure to risky mortgages, one of the most significant federal actions taken against those at the center of the housing bust.

The lawsuits filed Friday against the two chief executives and four other top executives are an aggressive move by the Securities and Exchange Commission, and come after a three-year investigation.

The agency has come under fire for not pursuing top Wall Street and mortgage industry executives who contributed to the financial crisis. In cases contending the deceptive marketing of securities tied to mortgages, the S.E.C. has been criticized for citing only midlevel bankers while settling with the Wall Street firms themselves. Recently, the agency drew criticism from a federal judge after allowing Citigroup to settle a fraud case without conceding wrongdoing.

On Friday, S.E.C. officials trumpeted their actions in the Fannie and Freddie case as part of a renewed effort to crack down on wrongdoing at the highest levels of Wall Street and corporate America.

“All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors,” said Robert S. Khuzami, the agency’s enforcement chief. “Investors were robbed of the opportunity to make informed investment decisions.”

He noted that the agency had now filed 38 separate actions stemming from the 2008 financial crisis.

The former Fannie Mae and Freddie Mac executives have vowed to challenge the government, saying that the companies repeatedly disclosed the breakdowns of their loan portfolios.

As companies that fed both the housing bubble and Wall Street’s appetite for risk, Fannie Mae and Freddie Mac came under investigation quickly by federal agencies amid the financial crisis in 2008. But Freddie Mac disclosed this summer that the Justice Department’s inquiry into the company had ended without any charges. And the S.E.C stopped short of bringing actions against the two companies.

Instead, agreements with Fannie and Freddie will allow the now government-controlled companies to evade prosecution and fines so long as they cooperate with authorities. The deal does not require approval from a federal court, unlike the proposed settlement with Citigroup.

The case against the former executives, including Daniel H. Mudd, the former chief executive of Fannie Mae, and Richard F. Syron, the former chief of Freddie Mac, centers on a series of disclosures the firms made to investors at the height of the mortgage boom. The government contends that the firms played down the extent of their exposure to subprime mortgages, loans doled out to the riskiest of borrowers.

One S.E.C. complaint contends that Freddie Mac executives falsely proclaimed that the company had virtually no exposure to ultra-risky loans, despite internal warnings admonishing against such claims.

A separate complaint contends that Fannie Mae executives described subprime loans as those made to individuals “with weaker credit histories” while only reporting one-tenth of the loans that met that criteria in 2007. Both complaints were filed in the United States District Court in Manhattan.

Mr. Mudd, who was chief executive of Fannie Mae from 2005 until the government took control of the company in 2008, said that there had been no deception.

“The government reviewed and approved the company’s disclosures during my tenure, and through the present,” he said in a statement. “Now it appears that the government has negotiated a deal to hold the government, and government-appointed executives who have signed the same disclosures since my departure, blameless — so that it can sue individuals it fired years ago.”

The S.E.C.’s commitment to the long-running investigation — more than 100 depositions were produced over its course — highlights the major roles that Fannie Mae and Freddie Mac played in the financial crisis and subsequent government bailout. The Bush administration took over the teetering mortgage giants in September 2008, and taxpayers have since pumped more than $150 billion into the two companies. The Obama administration has vowed to wind them down, although the timeline remains unclear.

The case against the former mortgage executives resembles an earlier action against one of the nation’s biggest lenders to risky, or subprime, borrowers. Angelo Mozilo, the former chief executive and founder of Countrywide Financial, agreed to pay $22.5 million to settle federal charges along the same lines. The settlement was the largest ever levied against a senior executive of a public company, though Mr. Mozilo, who also agreed to forfeit $45 million in gains, neither admitted to nor denied wrongdoing.

Success for the S.E.C. in the Fannie and Freddie case will largely hinge on the meaning of the word subprime, which the government itself has never fully defined. While the term often refers to borrowers with low credit scores, Fannie and Freddie decided to classify loans as prime or subprime based on the lender type, not the borrower’s credit score. A Wall Street bank, for instance, was usually considered a prime lender, despite extending subprime loans.

But the government’s complaint contends that this kind of disclosure masked risk. Loans not considered subprime often defaulted at higher rates than those classified as subprime.

The government contends that the executives were less than forthcoming about that extra layer of risk. Mr. Syron told an investor conference in May 2007 that the company had “basically no subprime business.”

But a lower-level executive at the firm, who reviewed Mr. Syron’s speech in advance, warned that such a statement could be misleading.

“We need to be careful how we word this. Certainly our portfolio includes loans that under some definitions would be considered subprime,” the employee said, according to the complaint. “We should reconsider making as sweeping a statement.”

Mr. Mudd, meanwhile, testifying before Congress in April 2007, broadly defined subprime as “the description of a borrower who doesn’t have perfect credit.” But at the same hearing, he told lawmakers that “less than 2.5 percent of our book of business can be defined as subprime,” which the complaint says greatly understated the firm’s exposure based on his definition that day. Mr. Mudd’s estimate omitted some $50 billion in subprimelike loans, according to the complaint.

Lawyers for the executives, however, plan to argue that the firms did in fact disclose minute details of their loan portfolios, suggesting a potential weakness in the case. During the period under scrutiny, the companies produced “monster charts” breaking down their loan portfolios by borrowers’ credit scores and how much equity they had in their homes, among other information.

Lawyers for Mr. Syron called the S.E.C.’s case “fatally flawed” and “without merit.”

“Simply stated, there was no shortage of meaningful disclosures, all of which permitted the reader to assess the degree of risk in Freddie Mac’s guaranteed portfolio,” Thomas C. Green and Mark D. Hopson, partners at Sidley Austin, said in the statement.

The lawyers note that even the federal government never settled on a definitive meaning for subprime. Indeed, in a 2007 document, multiple federal agencies declined to define it.

Lawyers for two of the other executives named in the suit have also promised to fight the allegations.

The complaints also name Fannie’s former risk officer, Enrico Dallavecchia; an executive vice president for Fannie, Thomas A. Lund; Patricia L. Cook, Freddie’s former chief business officer; and its executive vice president, Donald J. Bisenius.

Still, Mr. Mudd and Mr. Syron are the two most prominent subjects of the complaint.

Since August 2009, Mr. Mudd has been chief executive of the Fortress Investment Group, the large publicly traded private equity and hedge fund company.

Mr. Syron is a former president of the American Stock Exchange and currently an adjunct professor and trustee at Boston College.

Article source: http://feeds.nytimes.com/click.phdo?i=bf9883ed2fef5a99a98d85d406156d75

Filed Under: Business News Tagged With: chief executives, corporate america, freddie mac

U.S. May Back Mortgage Refinancing for Millions

August 25, 2011 by NewsMaker Leave a Comment

One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.

A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.

Administration officials said on Wednesday that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further along — the administration requested ideas for execution from the private sector earlier this month.

But refinancing could have far greater breadth, saving homeowners, by one estimate, $85 billion a year. Despite record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.

Exactly how a refinancing plan might work is still under discussion. It is unclear, for example, whether people who are delinquent on their mortgages would be eligible or whether lenders would administer it. Federal officials have consistently overestimated the number of households that would be helped by their various housing assistance programs.

A working group of housing experts across several federal agencies could recommend one or both proposals, or come up with new ones. Or it might decide to do nothing.

Investors may suspect a plan is in the works. Fannie and Freddie mortgage bonds had been trading well above their face value because so few people were refinancing, keeping returns on the bonds high. But those bond prices dropped sharply this week.

Administration discussions about housing proposals have taken on added urgency this summer because the housing market is continuing to deteriorate. On Wednesday, the government said that prices of homes with government-backed mortgages fell 5.9 percent in the second quarter from a year earlier, the biggest decline since 2009. More than one in five homeowners with mortgages owe more than their homes are worth. Some analysts are now predicting waves of foreclosures and a continuing slide in home prices.

There is not much time to help the market before the 2012 election, and given Congressional resistance to other types of stimulus, housing may be the only economic fix in reach. Federal programs to assist homeowners have been regarded as ineffective so far, and they are complex.

“We are looking at trying to encourage more participation in all of the programs, including those that help with refinancing,” said Phyllis Caldwell, who oversees housing policy at the Treasury Department.

Some economists say that with housing prices and interest rates at affordable levels, only fear is keeping consumers out of the market. Frank E. Nothaft, the chief economist at Freddie Mac, said the federal action could instill confidence.

“It almost seems to me you want to have some type of announcement or policy, program or something from the federal government that provides that clear signal that we are here supporting the housing market and this is indeed a good time to really consider buying,” Mr. Nothaft said.

The refinancing idea has been around since at least 2008, but proponents say the recent drop in interest rates to below 4 percent may breathe new life into the plan.

“This is the best stimulus out there because it doesn’t increase the deficit, it accomplishes monetary policy, and it reduces defaults in housing,” said Christopher J. Mayer, an economist at the Columbia Business School. “So I think this is low-hanging fruit.” Mr. Mayer and a colleague, Glenn Hubbard, who was chairman of the Council of Economic Advisers under President George W. Bush, proposed an early version of the plan.

The idea is appealing because it would not necessarily require Congressional action. It also would not tap any of the $45.6 billion in Troubled Asset Relief Funds that was set aside to help struggling homeowners. Only $22.9 billion of that pool has been spent or pledged so far, and fewer than 1.7 million loans have been modified under federal programs. But Andrea Risotto, a Treasury spokeswoman, said whatever was left would be used to reduce the federal deficit.

Article source: http://www.nytimes.com/2011/08/25/business/economy/us-may-back-mortgage-refinancing-for-millions.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: freddie mac, mortgage bills, mortgage bonds

Stocks Slump in First U.S. Trading Since Downgrade

August 8, 2011 by NewsMaker Leave a Comment

Following on from a dismal showing in European and Asian markets, the broader United States market as measured by the Standard Poor’s 500-stock index was down 31.33 points, or 2.61 percent. The Dow Jones industrial average was down 230.8 points, or 2.02 percent, and the Nasdaq was down 69.06 points, or 2.73 percent.

Within the first two hours of trading, the S.P. 500 was down about 14 percent over the last 11 sessions, one analyst noted, bringing back echoes of the last financial crisis. Last week represented the worst five-day trading period since November 2008.

“The rapidity of the decline and its force now rivals almost anything we’ve seen in the post-war era,” said Dan Greenhaus, the chief global strategist for BTIG. “We have fallen so far and so quickly that we are up there with the most vicious sell-offs.”

The decision late Friday by the ratings agency Standard Poor’s to downgrade the United States’s debt rating one level to AA+ from AAA has global implications, said Alessandro Giansanti, a credit market strategist at ING in Amsterdam.

“We can see that this may force the U.S. to move more aggressively to cut spending,” he said, something that could drive the already weak economy into recession and weigh on the economies of all of its trading partners. “That’s the main driver” of the stock market declines, he said.

The market took a sharper turn downward less than an hour into New York trading, as Standard Poor’s, the ratings agency, announced additional downgrades, including the debt of the housing giants Fannie Mae and Freddie Mac.

Gold topped $1,700 for the first time, and the dollar continued to weaken against most major currencies. The Treasury’s benchmark 10-year note yield was down to 2.37 percent from 2.56 percent on Friday.

Guy LeBas, chief fixed-income strategist for Janney Montgomery Scott, said higher prices for bonds were “a testament to the fact that global investors view U.S. bonds as the safe-haven asset choice.”

While the debt downgrade was likely to continue to reverberate, investors are also concerned about the weak United States economy and Europe’s debt problems.

Some investors are turning their attention to a meeting of the Federal Reserve this week and whether there will be any new measures to stimulate the economy.

Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company, said the Federal Open Markets Committee was not likely to take action on interest rates, but would most likely discuss what policies would give support to the market.

“The rest of the conversations should happen in Washington,” Mr. Giddis said in a research note. “This country has an economic problem, which can only be fixed with jobs, not governmental liquidity, and that is the one that worries me the most.”

The interest rates on Spanish and Italian bonds plummeted after the European Central Bank expanded its purchases of government debt to support those countries for the first time. The yield on 10-year Spanish bonds dropped by 88 basis points, while comparable Italian yields fell 80 basis points. News agencies cited traders as saying the E.C.B. was intervening in the secondary market to buy the securities.

The E.C.B. declined to comment Monday. But in a statement issued late Sunday after an emergency conference call, the central bank said it would “actively implement” its bond-buying program to address “dysfunctional market segments.” It did not specify which bonds it would buy, but hinted it would be Spain and Italy by welcoming their efforts to restructure their economies and cut spending.

Previously the bond buying had been limited to bonds from Greece, Portugal and Ireland — the three euro-zone countries that have already received international bailouts. Fears that the bloc’s sovereign debt crisis would spread to the much bigger economies of Italy and Spain had contributed greatly to recent market losses.

Christine Hauser reported from New York and David Jolly from Paris. Bettina Wassener contributed reporting from Hong Kong, Jack Ewing from Frankfurt and Hiroko Tabuchi from Tokyo.

Article source: http://feeds.nytimes.com/click.phdo?i=3eced2c36687d19ced55c6955f95933d

Filed Under: Business News Tagged With: dow jones industrial average, downgrades, freddie mac

Mortgages: Changes in Refinancing

June 12, 2011 by NewsMaker Leave a Comment

Two-thirds of mortgages being written these days are refi’s, according to the Mortgage Bankers Association. Assuming your credit scores are strong, deciding whether to jump in as well may be a matter of numbers; there are plenty of Web calculators to test the what-ifs, like the ones at HSH.com. Interest rates are teasing new lows, at 4.49 percent, on average, as of Thursday for a 30-year fixed-rate loan, according to Freddie Mac.

If you grabbed a record-low rate late last year, or almost-as-low rates in mid-2009, you may decide to sit this one out. Otherwise, the average outstanding home loan still carries an interest rate of about 6 percent, according to Frank Nothaft, the chief economist at Freddie Mac. “It continues to be an attractive time for people to refinance if they haven’t taken advantage of it already,” he said.

Market changes are especially striking for those borrowers with loans taken out before the 2008 financial crisis. “They’re shocked at how much less the house is worth; they’re shocked at how much documentation we have to get; and they’re shocked at how much they have to sign,” said Matt Hackett, the underwriting manager at Equity Now.

First, don’t assume you’re going to take cash out. In the first three months of 2011, just a quarter of refi borrowers did so, according to Freddie Mac. On average, 62 percent of refi’s over the last 25 years involved getting cash out.

About half of borrowers now keep their loan balance about the same, and 21 percent cut that balance. Some want to cut debt, but others are putting in cash because the dwindling value of their home means they don’t have 20 percent equity, and the extra cash increases equity, the way a bigger down payment does.

Others want to get their loan below $417,000 to take advantage of the lowest rates, according to Philip Merola, an executive vice president of Mountain Mortgage Corporation, a lender in Union, N.J.

People still do take cash out for things like college tuition, Mr. Merola said. But the equity has to be there — don’t expect a loan for more than 80 percent of the current appraised value.

And if you don’t have equity? If your loan is insured by the Federal Housing Administration, consider an F.H.A. Streamlined Refinance, which may not require a new appraisal. There’s also the government-backed Home Affordable Refinance Program, designed for loans that have little or negative equity.

Also bear in mind that you’ll need more documentation. Expect to document all income, assets and debts. In fact, you can expect the lender to go beyond the application, said Michael Moskowitz, the president of Equity Now. Borrowers sign an Internal Revenue Service Form 4506, which allows a lender to get tax returns.

In the past, lenders used returns for quality control after closing, if they looked at them at all, Mr. Moskowitz said. But now his company reviews all tax returns. For instance, he said, a money-losing side business will show up, thus reducing the borrower’s income.

Finally, remember that disclosure forms have changed. As of last year, lenders were required to provide a revised Good Faith Estimate form aimed at making terms more transparent. One key update: In the past, some closing-cost estimates were fairy tales. The new form specifies fees that can’t change between estimate and closing, fees with changes capped at 10 percent, and others that can grow more.

Mr. Hackett warned that some lenders, when they haven’t technically accepted a loan application, fudge on estimates with informal “initial fees worksheets” they provide. Some people think they have a good-faith estimate in such cases, he said. But fees aren’t capped.

One thing that hasn’t changed, said Mr. Nothaft: “It will still come across as a thick wad of paper with a lot of forms to sign.”

Article source: http://feeds.nytimes.com/click.phdo?i=f9daedf0b662807727c826844efbdb5c

Filed Under: Your Money Tagged With: borrowers, chief economist, freddie mac

U.S. Sues Deutsche Bank Over Mortgage Practices

May 3, 2011 by NewsMaker 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

Filed Under: Global Business Tagged With: finance giants, financial incentives, freddie mac

Economix: What Happens if the Debt Ceiling Isn’t Raised

April 27, 2011 by NewsMaker Leave a Comment

April 25, 2011

The Honorable Timothy Geithner
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Dear Mr. Secretary:

As Chairman of the Treasury Borrowing Advisory Committee, I am writing to express my concerns regarding the urgent need to increase the statutory debt limit. A considerable degree of uncertainty already exists among market participants given the severe and long-lasting impact that even a technical default would have on the U.S. economy.

Any delay in making an interest or principal payment by Treasury even for a very short period of time would put the U.S. Treasury and overall financial markets in uncharted territory, and could trigger another catastrophic financial crisis. It is impossible to know the full impact of such a crisis on overall economic growth and on Treasury’s financing costs. However, the lessons from the recent crisis suggest that several damaging consequences will likely result, ultimately raising Treasury’s long-term funding costs and increasing the burden on the American taxpayer. These consequences stem from five developments that could likely occur if Treasury were to default on its obligations as a result of a failure to raise the debt limit in a timely manner.

First, foreign investors, who hold nearly half of outstanding Treasury debt, could reduce their purchases of Treasuries on a permanent basis, and potentially even sell some of their existing holdings. A worrisome precedent is the sharp decline in foreign sponsorship of [government-sponsored enterprise, or G.S.E.] debt since Fannie Mae and Freddie Mac were placed under conservatorship. Despite assurances from Treasury officials regarding the U.S. commitment to these institutions, foreign sponsorship has yet to return to pre-conservatorship levels. If foreigners began curtailing their investment in Treasuries as a result of a default, Treasury rates, and thus Treasury’s borrowing costs, would undoubtedly rise. A sustained 50 basis point increase in Treasury rates would eventually cost U.S. taxpayers an additional $75 billion each year.

Second, a default by the U.S. Treasury, or even an extended delay in raising the debt ceiling, could lead to a downgrade of the U.S. sovereign credit rating. Indeed, Standard and Poor’s decision to change the U.S. ratings outlook from stable to negative this week indicates a one-in-three chance that Standard and Poor’s will downgrade the U.S. rating within the next two years. One reason cited for the change in the outlook is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges. It is possible that a default, or even a delay in acting on the debt ceiling, will be perceived as an increased indication of the political inability to forge a compromise on essential long-term fiscal reforms. The consequences of a ratings downgrade would be significant, with the potential for Treasury rates to rise by a full percentage point for each one-notch downgrade.

Third, the financial crisis you warned of in your April 4th Letter to Congress could trigger a run on money market funds, as was the case in September 2008 after the Lehman failure. In the event of a Treasury default, I think it is likely that at least one fund would be forced to halt redemptions or conceivably “break the buck.” Since money fund investors are primarily focused on overnight liquidity, even a single fund halting redemptions would likely cause a broader run on money funds. Such a run would spark a severe crisis, disrupting markets and ultimately necessitating the same kind of backstops that Treasury and the Federal Reserve initiated in the aftermath of the 2008 crisis. Such further increases in Treasury’s off-balance-sheet commitments are likely to be viewed negatively by investors and ratings agencies, which will potentially put further downgrade pressure on U.S. sovereign ratings.

Fourth, a Treasury default could severely disrupt the $4 trillion Treasury financing market, which could sharply raise borrowing rates for some market participants and possibly lead to another acute deleveraging event. Because Treasuries have historically been viewed as the world’s safest asset, they are the most widely-used collateral in the world and underpin large parts of the financing markets. A default could trigger a wave of margin calls and a widening of haircuts on collateral, which in turn could lead to deleveraging and a sharp drop in lending.

Fifth, the rise in borrowing costs and contraction of credit that would occur as a result of this deleveraging event would have damaging consequences for the still-fragile recovery of our economy. In 2008, placing the GSEs in conservatorship combined with a tightening of credit standards caused mortgage spreads to widen by 1.5 percent, ultimately raising mortgage rates for consumers. A similar rise in mortgage and Treasury rates would adversely impact economic growth, potentially pushing the U.S. economy back into recession.

Finally, I would emphasize that because the long-term risks from a default are so large, a prolonged delay in raising the debt ceiling may negatively impact markets well before a default actually occurs. This is because investors will likely undertake risk-management actions in preparation for a potential default. For example, borrowers who rely on short-term funding markets, including the GSEs, may attempt to pre-fund themselves or hold excess liquidity through July, distorting money market rates. Additional effects could include large auction concessions, especially if Treasury were forced to delay auctions for cash management purposes. I would also expect to see weaker demand for Treasury securities as uncertainty increases on whether the debt limit will be raised. Both of these effects would negatively impact Treasury’s borrowing costs.

Given the magnitude of the adverse consequences a default would have on Treasury borrowing costs and the health of the broader economy, action is urgently needed to increase the statutory debt limit. Swift action would also help ease the existing uncertainty in financial markets that could begin translating into real market impacts well before Treasury exhausts extraordinary actions at its disposal to postpone a default. Notwithstanding your significant efforts to date, your continued attention to this important issue is greatly appreciated.

Sincerely,

Matthew E. Zames
Chairman
Treasury Borrowing Advisory Committee

Article source: http://feeds.nytimes.com/click.phdo?i=2dbc825e750db9a442af1ce0e4be0162

Filed Under: Economy News Tagged With: financial markets, freddie mac, treasur

DealBook: Bank of America Profit Drops Nearly 36%

April 15, 2011 by NewsMaker Leave a Comment

Bank of America reported a nearly 36 percent drop in first-quarter earnings on Friday, as the nation’s biggest bank continued to battle the legacy of the mortgage crisis and legal problems linked to the ill-fated acquisition of Countrywide Financial.

Although Bank of America’s loan portfolio showed some improvement in recent months, the bank lost $2.4 billion in its consumer real estate group, compared with a $2 billion loss the previous year. The poor results in home lending were partially offset by a $2.2 billion release of reserves and strong earnings from the bank’s credit card business.

After another disappointing quarter, the bank decided to shake up its management team on Friday and create a new position focused on legal and regulatory problems.

Bank of America, facing a prolonged reckoning in its mortgage business, has yet to shake the wide-ranging legal woes surrounding Countrywide, the former subprime lending giant. The bank put aside another $1 billion in the first quarter to cover claims from scorned investors who want the firm to repurchase billions of dollars in bad Countrywide mortgages. The bank also reported a spike in repurchase requests from Fannie Mae and Freddie Mac, the government controlled mortgage companies that already received some $3 billion from the bank last year.

The bank did take a step toward resolving complaints from mortgage-bond insurers, announcing on Friday a $1.6 billion agreement with Assured Guaranty, which guaranteed several mortgage-bond deals backed by Countrywide loans.

Bank of America in the first quarter also recorded some bright spots on its balance sheet. The bank’s credit card business saw income rise by 77 percent to $1.7 billion. Commercial banking reported a profit of $923 million, compared with $703 million in the same period of 2010. The investment banking operation reported strong results, as well, on the back of improved sales and trading revenue.

With overall earnings of $2 billion, or 17 cents a share, the bank still missed analysts’ estimates of 27 cents a share. Bank of America earned $3.2 billion, or 28 cents a share, in the same period a year earlier.

Total revenue dropped, too, to $27 billion from $32 billion, a decline partly attributable to the weak economic recovery. As consumers cling to their cash amid uncertain times, mortgage lending has stalled at Bank of America and other giant lenders. The bank, facing new government regulations, also missed out on millions of dollars in overdraft fees and other charges once levied on consumers.

The bank’s shares were down more than 1 percent in Friday morning trading.

Still, the quarterly profit can be seen as an encouraging sign for the bank after it recorded two straight quarterly losses totaling $8.5 billion.

“Strong growth in deposit balances and positive contributions from five of our six businesses reflect the steady improvement in the broader economy,” the bank’s chief executive, Brian T. Moynihan, said in a statement. “Our customer-focused strategy is working well, and we also benefited from improved credit quality.”

Bank of America is the second big financial firm to unveil first-quarter figures this week. JPMorgan Chase reported a record $5.6 billion quarterly profit on Wednesday, with the bank facing similar problems in its home lending unit. Other industry giants like Citigroup, Goldman Sachs and Wells Fargo are set to report earnings next week.

Bank of America’s report comes at a crucial time for the company, which is hoping regulators will approve a plan to increase the bank’s token 1 cent dividend. In March, the Federal Reserve nixed the bank’s proposal to raise its shareholder payouts in the second half of 2011. The bank said on Friday that it would try again, although it would not say when and analysts are skeptical of its chances.

“I think, eventually, the bank will have to back off,” said Marty Mosby, an analyst at Guggenheim Securities, a brokerage firm.

As the bank seeks to shed the legacy of the financial crisis, a nagging problem stands in the way: Countrywide. Bank of America bought the subprime lender for $4 billion, or roughly $4.25 a share, in July 2008.

Now, Countrywide has opened the bank’s giant mortgage business to attacks on multiple fronts.

Institutional investors want Bank of America to repurchase billions of dollars in soured mortgage securities sold by Countrywide at the height of the crisis.

The biggest spike came from Fannie Mae and Freddie Mac, the government-run firms that squeezed some $3 billion from the bank last year to cover claims that Countrywide’s underlying mortgages did not meet underwriting standards.

That settlement apparently did not satisfy Fannie and Freddie, whose outstanding claims recently rose to $5.3 billion, up from $2.8 billion in the fourth quarter of 2010 — reflecting “new claims” that were “not covered” by the previous agreements, the company said.

As a result, the bank’s potential hit on the claims increased, too. Bank of America’s liability increased by $800 million in the first quarter, bringing the total amount to $6.2 billion. That’s up from $3.3 billion in the same period of 2010.

The bank has previously said it could spend anywhere from $7 billion to $10 billion buying back troubled loans.

Bank of America also is among several firms ensnared in state and federal investigations into fraudulent foreclosure practices. The bank and 13 other firms signed an agreement with federal banking regulators on Wednesday to overhaul their foreclosure operations and adopt new oversight procedures.

But the bank and its peers still face demands from state attorneys general to make additional concessions and approve a multibillion-dollar settlement. The various investigations “could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs,” Bank of America said in its 2010 annual report.

JPMorgan and other Wall Street titans face similar liabilities, although Bank of America’s mortgage woes set it apart. The bank, for instance, compared with its competitors, has many more loans on its books that have soured, according to a recent report by Oppenheimer Company. It also is unclear just how much legal liability the bank ultimately will face, an uncertainty that continues to plague its bottom line.

“With Bank of America, you’ve got this special asterisk: There’s no precedent to judge their exposure,” said Chris Kotowski, an analyst at Oppenheimer. “If not for that, I would be recommending the stock.”

Bank of America announced on Friday that it hired Gary Lynch, formerly of Morgan Stanley, to be its first chief of legal, compliance, and regulatory relations. The bank also said that its chief financial officer, Charles Noski, will leave his post after only a year to tend to “a serious illness of a close family member.” Mr. Noski, who will be replaced by the bank’s current chief risk officer, will remain at the company as vice chairman.

The bank last quarter had some trouble generating new loans, as revenue decreased to $2.2 billion this year from $3.6 billion in the first quarter of 2010. JPMorgan’s loan numbers were down, too, as banks tightened their underwriting standards and consumer tightened their belts.

“While loan growth tends to be seasonally weak in the first quarter, this quarter is tracking worse than seasonality would suggest,” a Barclays Capital analyst, Jason Goldberg, said in a recent report.

In the face of its mortgage woes, the bank did report some encouraging news about its loan portfolio. The bank’s net charge-offs for the quarter came in at $6 billion, compared with $10.8 billion a year ago. There was also a modest drop in nonperforming loans, which fell 14 percent to $31.6 billion.

The bank’s merger with Merrill Lynch, another marriage forged amid the financial crisis, has fared far better than its takeover of Countrywide. The global wealth management group, which includes Merrill, reported record revenue of $4.5 billion, versus $4 billion a year ago. Earnings rose more than 22 percent.

“There’s a nice feel to how Merrill is coming in,” Mr. Mosby said.

Article source: http://dealbook.nytimes.com/2011/04/15/bank-of-america-profit-drops-nearly-36/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: freddie mac, real estate group, regulatory problems

New Worries for Buyers Seeking Mortgages

March 30, 2011 by NewsMaker Leave a Comment

After months of having her hopes dashed as swiftly as they were raised, viewing nearly 40 apartments and cycling through three different brokers, Deborah Herman finally found the perfect New York City home.

The moment she stepped into the two-bedroom apartment at 59th Street and First Avenue, with its oversized windows and sweeping views of the Queensboro Bridge, she just knew.

“We made an offer, and we got it,” she said.

That was in August. But it was only in February, nearly six months later, that she finally closed on the $1.15 million apartment.

In the intervening months, as she battled through a computer glitch and reams of documentation, Ms. Herman underwent a crash course in the complexities of navigating the mortgage market — which itself continues to undergo profound change.

The dread of not finding a lender after the market collapsed in 2009 has been replaced by uncertainty, confusion and frustration. According to brokers and lenders, the list of demands that stand between finding a place to buy and signing on the dotted line simply never stops morphing.

Changes proposed by the Obama administration to limit the role of the federal government in the mortgage market could further alter the rules of the road, for borrowers and lenders alike.

In New York City, there is particular concern about the federal government’s lowering the limit on the loans it will buy through the Federal National Mortgage Association, known as Fannie Mae, and the other housing finance giant, Freddie Mac.

Lower-income buyers could also be affected as the federal government seeks to limit the size of loans eligible to be bought by the Federal Housing Administration and Department of Veterans Affairs.

And let’s not forget the federal government’s proposal to eliminate the mortgage interest tax deduction for high-income earners; the changes in the way brokers will be compensated because of new regulations; and the fact that banks — despite recent profits — are still leery of lending. Taken together, all these elements create a situation that can paralyze potential buyers.

“Confusion and uncertainty can have the same impact as fear, unfortunately,” said David S. Marinoff, a mortgage broker and managing director of the Guard Hill Financial Corporation.

Jonathan J. Miller, the president of the appraisal firm Miller Samuel and a market analyst for Prudential Douglas Elliman, said that even though affordability was at an all-time high, the usual equation involving interest rates, housing prices and personal income was almost irrelevant, if shoppers were unable to get mortgages to buy properties now tantalizingly within reach.

Private banks have swung too far in overcorrecting for the excesses of the credit boom from 2003 to 2008, he said, and are actively looking for ways not to lend.

“Housing does not truly recover until lending does,” Mr. Miller said. “It is currently dysfunctional.”

At the moment, the federal government, through Fannie and Freddie, is supporting about 90 percent of new mortgage loans, because banks are reluctant to make loans without government guarantees.

Currently, Fannie will buy loans of up to $729,750.

In September that limit will fall to $625,500 if no action is taken by Congress. Considering that the average Manhattan apartment in the last quarter of 2010 sold for $845,000, according to Mr. Miller, the change could affect a wide swath of the market.

For instance, even if a buyer put 20 percent down — which would be $169,000 for the $845,000 home — the total loan needed, $676,000, would still be above the new limit. The buyer would have to come up with $50,500 more to avoid paying the likely higher interest rates that a lender would charge on a “jumbo” mortgage, assuming that the buyer could qualify for a loan at all.

Yet many politicians have been calling for the federal government to lessen the role it plays in the mortgage market, even if the first steps prove painful. There are also plans, several years down the road, for ending Fannie Mae and Freddie Mac altogether.

Before the credit crisis in 2008, the limit on loans that Fannie would buy was $417,000. But when private lending all but disappeared and the government seized control of Fannie, the agency raised the limit of loans it would buy to $729,750 in more expensive cities like New York, Boston and San Francisco.

Banks simply weren’t lending at that time, Mr. Marinoff said.

Real estate brokers and private mortgage lenders say that although 2010 was not as bleak as 2009, tighter credit has affected nearly every sector of the market in New York City.

For lower-income families, mainly outside Manhattan, the collapse in subprime lending to borrowers with a problematic credit history or low incomes has led to a boom in the number of loans backed by the F.H.A. and Veterans Affairs.

In 2005, fewer than 1 percent of all the loans issued in the city were backed by these agencies. In 2009, 16 percent of loans in the city were made possible by these federal programs, according to a recent report by the Furman Center for Real Estate and Urban Policy at New York University.

But another change being proposed by the Obama administration — shrinking the size of loans eligible to be bought by the F.H.A. and V.A. — could mean that less affluent buyers would need to come up with larger down payments as well. The government also said it would raise fees on F.H.A. borrowers for the third straight year.

Article source: http://feeds.nytimes.com/click.phdo?i=13165a26b2462cca325c5185dfbed121

Filed Under: Your Money Tagged With: federal national mortgage association, freddie mac, queensboro bridge