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DealBook: A Mortgage Agency Pick Is Likely to Cause Conflict

May 1, 2013 by Leave a Comment

President Obama nominated Representative Melvin Watt, left, on Wednesday to lead the Federal Housing Finance Agency. At right is Tom Wheeler, nominated by the president to head the Federal Communications Commission.Christopher Gregory/The New York TimesPresident Obama nominated Representative Melvin Watt, left, on Wednesday to lead the Federal Housing Finance Agency. At right is Tom Wheeler, nominated by the president to head the Federal Communications Commission.

President Obama’s overhaul of the mortgage market has been a long time coming.

But he took a significant step forward on Wednesday, announcing his intention to nominate a new director for an agency that plays a crucial role in the housing market.

The president tapped Representative Melvin L. Watt, a Democrat of North Carolina, to become the new director of the Federal Housing Finance Agency. Mr. Watt has advocated for strong measures to provide relief to struggling homeowners, including reducing how much borrowers owe on their mortgages.

“Mel understands as well as anybody what caused the housing crisis,” President Obama said on Wednesday. “He knows what it’s going to take to help responsible homeowners fully recover.”

Still, Mr. Watt’s nomination will most likely inflame long-running political battles over how much the government should do to make mortgages available and support homeowners. Most immediately, Republican senators opposed to Mr. Watt’s housing stances might try to hold up his confirmation.

“I could not be more disappointed in this nomination,” Senator Bob Corker, Republican of Tennessee and a member of the Senate Banking Committee, said in a statement.

As director of the housing agency, Mr. Watt would oversee Fannie Mae and Freddie Mac, the two taxpayer-owned mortgage finance giants that have provided enormous support to the housing market since the financial crisis of 2008. They guaranteed two-thirds of all the mortgages made last year.

The Obama administration wants to reduce government involvement but has made almost no big moves in that direction. Some critics question its resolve to scale back the role of Fannie and Freddie, which received one of the biggest bailouts of the financial crisis. They say Mr. Watt’s nomination looks like tactical maneuvering, designed in part to placate progressives in Congress who say the president has done too little to help homeowners.

“It seems like a political move when a substantive one is needed,” said Phillip L. Swagel, a professor at the University of Maryland School of Public Policy. Mark Zandi, an economist at Moody’s Analytics who has focused on housing, was also a candidate to lead the housing agency. Mr. Zandi, “seemed to be a perfect nominee,” said Mr. Swagel, who was an assistant secretary for economic policy under Treasury Secretary Henry M. Paulson Jr.

Consumer advocates are upset that Mr. Obama did not long ago remove Edward DeMarco, the current head of the Federal Housing Finance Agency. He effectively stopped Fannie and Freddie from cutting loan balances for stressed homeowners. Last year, Mr. DeMarco argued that such a program “would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers.”

Reducing mortgage balances could be the issue that draws the most scrutiny for Mr. Watt during the confirmation process.

Given the level of controversy around this policy, some mortgage market analysts questioned on Wednesday why the White House had nominated someone who has identified so closely with it.

But Gene B. Sperling, an assistant to the president on economic policy, said the administration stood behind Mr. Watt’s support for cutting mortgage balances. “That’s our position, and we’re not going to disqualify someone for agreeing with us,” he said.

In an interview, Mr. Watt said that, as director of the agency, he would be obliged to take into account the risk of losses to taxpayers from writing down mortgages.

“My role would be to look at this from all sides, from the homeowner’s perspective and the taxpayer’s perspective,” he said. “There are a lot of things I might have to approach differently as a director of this agency.”

Those in favor of cutting mortgages received some support on Wednesday. The nonpartisan Congressional Budget Office released a study showing that reducing the amounts borrowers owe could actually save taxpayers money by reducing the chance underwater homeowners would default and end up in foreclosure, thus causing losses to Fannie and Freddie, which own or guarantee more than half of all residential mortgages. But other analyses suggest that the approach is not a silver bullet. About one-third of borrowers who had their mortgage balances reduced by more than 20 percent went back into default within two years, according to a study by Fitch Ratings.

Despite the mortgage relief questions, Mr. Watt may still gain support in the Senate for his nomination. He is well known in Congress and sits on the powerful House Financial Services Committee. Some Republicans may vote for him.

“Having served with Mel, I know of his commitment to sustainable federal housing programs and am confident he will work hard to protect taxpayers from future exposure to Fannie Mae and Freddie Mac,” Senator Richard Burr, Republican of North Carolina, said in a statement.

While Mr. Watt is known for promoting lending to low-income and minority borrowers, he is not considered unfriendly to banks. Financial firms and insurers are among his biggest donors, in no small part because Charlotte, part of which is in Mr. Watt’s district, is a banking center.

Still, many members of Congress and analysts are eager to reduce the government’s role in housing, and feel Mr. Watt may not push hard enough to curtail the activities of Fannie and Freddie.

“It’s coming up on five years and nothing has happened,” said Edward Pinto, a resident fellow at the American Enterprise Institute.

But Mr. Watt says he’s firmly behind the administration’s plans to have the government largely withdraw from the housing market.

“I’ve indicated in committee that I am committed to finding a new model, and that model includes winding down Fannie and Freddie,” he said. As director of the housing agency, “I’d be ideally situated to facilitate that.”

Should Mr. Watt fail to win Senate confirmation, the White House could name him as a recess appointment.

Article source: http://dealbook.nytimes.com/2013/05/01/a-mortgage-agency-pick-is-likely-to-cause-conflict/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Fannie Mae Ignored Foreclosure Misdeeds, Report Says

October 4, 2011 by Leave a Comment

Only after news reports in mid-2010 began to describe the dubious practices, like the routine filing of false pleadings in bankruptcy courts, did Fannie Mae’s overseer start to scrutinize the conduct. The report was critical of that overseer, the Federal Housing Finance Agency, and was prepared by the agency’s inspector general.

In one notable lapse, even after the agency reported problems to Fannie Mae in late 2010 about some of the approved law firms, it did not request a response from the company, the report said.

“American homeowners have been struggling with the effects of the housing finance crisis for several years, and they shouldn’t have to worry whether they will be victims of foreclosure abuse,” said Steve Linick, inspector general of the finance agency. “Increased oversight by F.H.F.A. could help to prevent these abuses.”

The report is the second in two weeks in which the inspector general has outlined lapses at both the Federal Housing Finance Agency and the companies it oversees — Fannie Mae and Freddie Mac. The agency has acted as conservator for the companies since they were taken over by the government in 2008. Its duty is to ensure that their operations do not pose additional risk to the taxpayers who now own them. The companies have tapped the taxpayers to cover mortgage losses totaling about $160 billion.

Elijah E. Cummings, the Maryland Democrat who is the ranking member of the House Committee on Oversight and Government Reform and who requested the inspector general’s report, said in a statement, “As a member of Congress and an attorney, I find the systemic failures by F.H.F.A. and Fannie Mae to adequately oversee these foreclosure law firms to be a breach of the public trust and an assault on the integrity of our justice system.”

The new report from the inspector general tracks Fannie Mae’s dealings with the law firms handling its foreclosures from 1997, when the company created its so-called retained attorney network. At the time, Fannie Mae was a highly profitable and powerful institution, and it devised the legal network to ensure that borrower defaults would be resolved with efficiency and speed.

The law firms in the network agreed to a flat-rate fee structure and pricing model based on the volume of foreclosures they completed. The companies that serviced the loans for Fannie Mae, were supposed to monitor the law firms’ performance and practices, the report noted.

After receiving information from a shareholder in 2003 about foreclosure abuses by its law firms, Fannie Mae assigned its outside counsel to investigate, according to the report. That law firm concluded in a 2006 analysis that “foreclosure attorneys in Florida are routinely filing false pleadings and affidavits,” and that the practice could be occurring elsewhere. “It is axiomatic that the practice is improper and should be stopped,” the law firm said.

The inspector general’s report said that it could not be determined whether Fannie Mae had alerted its regulator, then the Office of Federal Housing Enterprise Oversight, to the legal improprieties identified by its internal investigation.

Amy Bonitatibus, a Fannie Mae spokeswoman, declined to comment on the inspector general’s report, but said that the 2006 legal analysis identified a specific issue with the practice of filing lost-note affidavits, which the company immediately addressed.

The inspector general said that both Fannie Mae and its regulator appear to have ignored other signs of problems in their foreclosure operations. For example, the Federal Housing Finance Agency did not respond to borrower complaints about improper actions taken by law firms in foreclosures received as early as August 2009, even though foreclosure abuse poses operational and financial risks to Fannie Mae.

The report cited a media report from early 2008 detailing foreclosure abuses by law firms doing work for Fannie Mae.

Nevertheless, a few months later and just before its takeover by the government, Fannie Mae began requiring the banks that serviced its loans to use only those law firms that were in its network. By then, 140 law firms in 31 jurisdictions were in the group. Among the largest firms in the network was the David J. Stern firm in Plantation, Fla., which was handling more than 75,000 foreclosure actions a year before Fannie Mae terminated it because of vast problems with its legal work.

Finally last fall, after an outcry over apparently forged foreclosure documents and other improprieties, the Federal Housing Finance Agency began investigating the company’s process. In a report issued early this year, it determined that Fannie Mae’s management of its network of lawyers did not meet safety and soundness standards. Among the reasons: the company’s controls to prevent or detect foreclosure abuses were inadequate, as was the company’s monitoring of the law firms. “If a law firm self-reported no issues as it processed cases,” the inspector general said, “then Fannie Mae presumed the firm was doing a good job.”

The agency is still deciding how to handle the lawyer network, the inspector general said.

Mr. Cummings has asked the federal housing agency to consider terminating the program.

Officials at the housing agency agreed, however, with the recommendations in the inspector general’s report. Corinne Russell, a spokeswoman for F.H.F.A. said the agency was concluding its supervisory work in this area and would direct Fannie Mae to take necessary action when the work was completed.

In a response, the agency said that by Sept. 29, 2012, it would review its existing supervisory practices and act to resolve “deficiencies in the management of risks associated with default-related legal services vendors.”

Article source: http://feeds.nytimes.com/click.phdo?i=608afc76369aa7c9f97e177c265f3a74

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Stocks & Bonds: Wall St. Slides After Bleak Jobs Report

September 3, 2011 by Leave a Comment

Many investors had sold stocks ahead of the Labor Department’s jobs report, which analysts in a Bloomberg News survey had forecast would show a gain of 68,000 nonfarm payrolls.

The monthly report showed there was no job growth in the United States in August, and the flat performance had a direct impact on stocks in market-sensitive sectors.

The August jobs figure was down from a revised 85,000 new jobs added in July. The unemployment rate stayed at 9.1 percent in August, the department said.

Philip J. Orlando, chief equity market strategist at Federated Investors, said the jobs report was “very disappointing. It was much weaker than expected. We were thinking that if today’s jobs number was poor, we would start to see a pullback.”

In addition, analysts said financial stocks were hurt during the day by the prospect that a federal agency was set to file lawsuits against more than a dozen big banks over their handling of mortgage securities. Regulators filed the suits on Friday.

The suits by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs, Citigroup and Deutsche Bank, among others.

“This is not good news from the perspective of the banking sector,” Mr. Orlando said.

When the stock market opened, all three major Wall Street indexes slid lower and stayed there. The Dow Jones industrial average closed down 253.31 points, or 2.20 percent, at 11,240.26. The Standard Poor’s 500-stock index was down 30.45 points, or 2.53 percent, at 1,173.97. Both indexes ended the week lower, the Dow by 0.3 percent and the S. P. 500 by 0.2 percent.

The Nasdaq composite index ended the day down by 65.71 points, or 2.58 percent, at 2,480.33. But it managed to squeeze out a 0.2 percent gain for the week.

The Treasury’s benchmark 10-year note rose 1 8/32, to 101 6/32, and the yield fell to 1.99 percent from 2.13 percent late Thursday.

Kate Warne, investment strategist at Edward Jones, said the jobs report raised fresh concerns about whether the economy might be headed for a new recession.

“Clearly, stocks are responding to the very disappointing jobs report,” Ms. Warne said. “It is one more piece of bad news that is really leading to a reassessment of the possibility of even slower economic growth.”

Though she said she did not believe there would ultimately be a double-dip recession, “the risks probably have risen.”

Financial stocks were affected by the jobs report because of its implications for the real estate market, retailing and consumer lending. The financial sector slid by 4 percent, dragging down the broader market, with the five most actively traded banks in the sector each down by 4 percent or more. Bank of America was more than 8 percent lower at $7.25. Wells Fargo was down 4 percent at $24.20 and JPMorgan was down more than 4 percent at $34.63.

Ms. Warne said that the impending lawsuits meant the banks would face additional legal troubles from lending that took place before the last recession. “There are not just concerns about weak growth, but increased worries that those problems are not behind them,” she said.

Industrial shares fell more than 3 percent. General Electric was down by 2.7 percent at $15.76. CSX was down 4.5 percent at $20.56.

Lower market results in the United States came after declines in Asia and Europe. The Euro Stoxx 50 index closed down by 3.69 percent. The DAX in Germany lost 3.36 percent and the CAC 40 in France fell 3.59 percent, while the F.T.S.E. in Britain was down by 2.34 percent. In Asia, the Shanghai, the Nikkei and the Hang Seng indexes each closed down by more than 1 percent.

“The latest fall follows a highly volatile August period which saw global markets take substantial hits over political uncertainty over the U.S. debt ceiling and subsequent credit downgrade,” John Douthwaite, chief executive of SimplyStockbroking, said in a research note.

In August, all three indexes in the United States turned in their worst monthly performance since 2001. Shares took a beating for reasons that included fears of an economic slowdown and fiscal problems in the United States as well as continuing concerns over debt issues in Europe.

Mr. Douthwaite said market turbulence would probably continue in September because of weak economic data from the United States and Europe.

The worse-than-expected jobs report led some economists to predict new action by the Federal Reserve at its meeting on Sept. 20-21.

Economists from Goldman Sachs said that the Fed was more likely to lengthen the average maturity of its balance sheet, with sales of relatively short-dated Treasuries and purchases of relatively long-dated Treasuries. Mr. Orlando said the central bank could also cut the premium on banking reserves to encourage banks to lend more.

Oil futures in New York for October delivery fell 2.8 percent to about $86.45. Energy related stocks declined by more than 2.5 percent.

Gold rose 2.6 percent to $1,873.70.

Shaila Dewan and Nelson D. Schwartz contributed reporting.

Article source: http://www.nytimes.com/2011/09/03/business/daily-stock-market-activity.html?partner=rss&emc=rss

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U.S. Said to Be Ready to Sue Banks Over Mortgages

September 2, 2011 by Leave a Comment

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.

Private holders of mortgage securities are already trying to force the big banks to buy back tens of billions in soured mortgage-backed bonds, but this federal effort is a new chapter in a huge legal fight that has alarmed investors in bank shares. In this case, rather than demanding that the banks buy back the original loans, the finance agency is seeking reimbursement for losses on the securities held by Fannie and Freddie.

The impending litigation underscores how almost exactly three years after the collapse of Lehman Brothers and the beginning of a financial crisis caused in large part by subprime lending, the legal fallout is mounting.

Besides the angry investors, 50 state attorneys general are in the final stages of negotiating a settlement to address abuses by the largest mortgage servicers, including Bank of America, JPMorgan and Citigroup. The attorneys general, as well as federal officials, are pressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure.

And last month, the insurance giant American International Group filed a $10 billion suit against Bank of America, accusing the bank and its Countrywide Financial and Merrill Lynch units of misrepresenting the quality of mortgages that backed the securities A.I.G. bought.

Bank of America, Goldman Sachs and JPMorgan all declined to comment. Frank Kelly, a spokesman for Deutsche Bank, said, “We can’t comment on a suit that we haven’t seen and hasn’t been filed yet.”

But privately, financial service industry executives argue that the losses on the mortgage-backed securities were caused by a broader downturn in the economy and the housing market, not by how the mortgages were originated or packaged into securities. In addition, they contend that investors like A.I.G. as well as Fannie and Freddie were sophisticated and knew the securities were not without risk.

Investors fear that if banks are forced to pay out billions of dollars for mortgages that later defaulted, it could sap earnings for years and contribute to further losses across the financial services industry, which has only recently regained its footing.

Bank officials also counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy. Other experts warned that a series of adverse settlements costing the banks billions raises other risks, even if suits have legal merit.

The housing finance agency was created in 2008 and assigned to oversee the hemorrhaging government-backed mortgage companies, a process known as conservatorship.

“While I believe that F.H.F.A. is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again,” said Tim Rood, who worked at Fannie Mae until 2006 and is now a partner at the Collingwood Group, which advises banks and servicers on housing-related issues.

Article source: http://www.nytimes.com/2011/09/02/business/us-is-set-to-sue-dozen-big-banks-over-mortgages.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,