October 19, 2020

Federal Regulators Sue Big Banks Over Mortgages

Bank of America, Goldman Sachs, JPMorgan Chase, Deutsche Bank, Citigroup, Barclays and Morgan Stanley are among the defendants in the suits, brought by the Federal Housing Finance Agency, which oversees Fannie and Freddie, the government-backed organizations that finance much of the nation’s mortgage market.

The legal action opens a broad front in a rapidly growing attempt to force the banks to pay tens of billions of dollars for helping stoke the housing bubble. It was the collapse of the housing market that helped prompt the financial crisis in 2008, and the hangover is still being felt in the housing sector as well as the broader economy.

The litigation also marks a more intense effort by the federal government to go after the financial services industry for its alleged mortgage misdeeds. The Obama administration as well as regulators like the Federal Reserve have been criticized for going too easy on the banks, which benefited from a $700 billion bailout package shortly after the collapse of Lehman Brothers in the fall of 2008.

Much of that money has been repaid by the banks — but the rescue of Fannie and Freddie has already cost taxpayers $153 billion, and the federal government estimates the effort could cost $363 billion through 2013.

Even though the banks face tens of billions in legal bills from other plaintiffs, including private investors, the suits filed Friday could cost them far more. In the case of Bank of America, for example, the suit alleges that Fannie and Freddie bought more than $50 billion worth of risky mortgage securities from the bank and two companies it subsequently acquired, Merrill Lynch and Countrywide Financial.

The filing does not cite the total losses the government wants to recover, but in a similar case brought this summer against UBS, the government is trying to recover $900 million in losses on $4.5 billion in securities. A similar 20 percent claim against Bank of America could equal a $10 billion hit.

In the suit that identifies 23 securities that Bank of America sold for $6 billion, the company “caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial.”

Other large banks also assembled huge amounts of so-called private-label mortgage-backed securities for Fannie and Freddie that declined sharply in value after the housing bubble burst in 2007. JPMorgan Chase sold $33 billion, while Morgan Stanley sold over $10 billion and Goldman Sachs sold more than $11 billion. A who’s who of foreign banks were also big bundlers and sellers of these securities, such as Deutsche Bank ($14.2 billion), Royal Bank of Scotland ($30.4 billion) and Credit Suisse ($14.1 billion).

In the suit filed against Bank of America, the agency alleges that bank sold securities that “contained materially false or misleading statements and omissions.” The company and several individual bankers named as defendants “falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans,” the suit says. Fannie Mae and Freddie Mac bought $6 billion in securities from the bank between September 2005 and November 2007.

The defendants include the company; several units of the bank, including Banc of America Mortgage Securities; and a dozen individuals, such as the chief executive and directors of the mortgage unit. Each defendant had a role in the process, the suit says, from buying home loans from originators to bundling those loans into securities to marketing and selling those securities to Fannie and Freddie.

The defendants vouched for key criteria behind the loans, ranging from the credit score of a borrower to the ratio of the balance of the loan to the value of the house to whether the borrower lived in the home, the suit says.

It alleges that the defendants “had enormous financial incentives to complete as many offerings as quickly as possible without regard to ensuring the accuracy or completeness (of those assurances) or conducting adequate and reasonable due diligence.”

Article source: http://feeds.nytimes.com/click.phdo?i=b9c1b28bedb6fea4165ef5b83b733413

Fair Game: 2nd Loans, 2nd Wave of Losses

HAVE you heard the good news? Big banks are making more money than we thought.

On Thursday, JPMorgan Chase said it earned $5.4 billion during the second quarter. On Friday, Citigroup said it earned $3.3 billion.

Despite such happy tidings, many banks face a daunting challenge, and one federal regulators want to know more about: the potential costs associated with home loans that banks made during the great credit mania.

Still to be dealt with are potentially large legal bills — and settlements — related to accusations that many banks acted improperly, first in bundling all those loans into mortgage securities, and later in foreclosing on homeowners.

Under pressure from the Securities and Exchange Commission, banks have been estimating the potential damage in their financial filings. Last October, the S.E.C. warned them to be scrupulous in detailing risks associated with demands that they buy back soured loans or securities, as well as about possible defects in securitizations and foreclosures.

But while the S.E.C. has been pressing banks to make comprehensive disclosures about these potential pitfalls, regulators have been quiet on another worry for investors: how banks are valuing their vast holdings of home equity lines of credit, also known as second liens.

Privately, however, the S.E.C. has been pushing banks hard on this issue, according to Meredith Cross, the director of the commission’s corporation finance unit. As regulators review banks’ annual reports, they are asking tough questions about how institutions are valuing their second liens. Ms. Cross expects banks to provide more details about these loans in quarterly reports due next month.

The numbers are significant. Banks held $624 billion of such loans in the first quarter, Federal Deposit Insurance Corporation data show. Millions of these loans are deeply troubled. According to CoreLogic, a real estate data concern, almost 11 million of the nation’s mortgaged properties — nearly 23 percent of the total — were underwater at the end of March. Some 4.5 million of those properties carried home equity loans, according to CoreLogic. The average amount of negative equity shouldered by borrowers across the nation was $65,000.

WHEN first mortgages run into trouble, second liens are at greater peril, even if homeowners manage to keep up with their payments. That is because in a foreclosure, first mortgages are supposed to be paid off before second mortgages.

It is not clear that is happening, however. Banks like the big four — JPMorgan, Citigroup, Bank of America and Wells Fargo — not only hold home equity lines but also service first mortgages held by others on the same properties. Some analysts worry that servicers are able to protect their own holdings of second-lien loans while foreclosing on the first liens.

“The big four are pretending that the second liens are still money good because many are still performing,” said Christopher Whalen, editor of the Institutional Risk Analyst, a research publication. By performing, he means that borrowers are still making payments, if only the minimum. Many home equity lines require only the payment of interest for the first 10 years.

Banks have written off about $500 billion in assets since 2008, Mr. Whalen said. Most of those assets were related to housing, but write-downs on second liens have been pretty sparse so far at the big banks. As of the first quarter of this year, Bank of America carried $136 billion of second liens on its books. During 2010, it wrote down $6.8 billion. Wells Fargo held $108 billion in such loans in the first quarter; it wrote down $4.7 billion last year.

JPMorgan Chase’s exposure to second liens stood at $60 billion at the end of the second quarter. The bank charged off $1.3 billion in the first half of 2011 and $3.44 billion in 2010, said Joseph M. Evangelisti, a spokesman for the bank. As for how Morgan values these assets, he said that since 2010 the bank has routinely reserved for the higher probability of defaults on them, assuming an average loss rate of 60 percent on high-risk second liens.

Citibank’s home equity lines of credit totaled $46 billion last March; $6.2 billion belonged to borrowers with credit scores below 660 — that is, risky — and consisted of loan amounts that were greater than the values of the underlying properties.

Spokeswomen for Wells Fargo and Citigroup declined to comment.

Jerry Dubrowski, a spokesman for Bank of America, says the bank considers whether first mortgages are distressed when valuing home equity loans. If the second liens are performing, the bank doesn’t book a full loss on them. But if foreclosure seems inevitable on a first mortgage, the bank books a 100 percent loss on the second lien, he said.

But Mr. Whalen suspects some values are too high. The trouble in the housing market does not appear to be reflected fully on bank balance sheets yet.

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“If home prices do not stabilize, much less recover, then banks are likely to feel pressure to begin wholesale write-downs of first and second liens,” Mr. Whalen said. “There is probably as much loss prospectively facing the banking industry as a whole on residential real estate exposures as have already been charged off.”

DENIAL in the banking industry — known in the trade as “extend and pretend” — is a powerful thing. But it works for only so long.

Article source: http://feeds.nytimes.com/click.phdo?i=e66c94e971d94c1a4b3af8811599bde6

European Union Unity? Not on Debt Collection

ZARAGOZA, SPAIN — In 2001, an agricultural co-op here was supplying truckloads of wheat to an Italian pasta maker. At first, no one at the Spanish co-op, Arento, was much alarmed when the pasta factory in Milan fell behind in its payments.

The co-op did not cut off the credit until the pasta company owed €1 million, or more than $1.4 million today, never realizing how hard it might be to collect a debt in another country in the European Union. But now, a decade later, having spent years in the courts and tens of thousands of euros on legal bills, Arento has recovered only half of what was owed.

“We came face to face with the Italian legal system,” said Luis Navarro Olivares, Arento’s director general. “The trips to Milan were Kafkaesque. Really, Italy is too far away on a cultural level, a legal level and an administrative level.”

In theory, the European Union is one gigantic economic zone of about 500 million consumers all integrated into the world’s biggest trading bloc. But the ideal is still far ahead of the reality, particularly for businesses that end up trying to collect debts across the Union’s many borders. There are still 27 different national legal systems at work in the bloc, each with its own procedures for handling claims, property attachment and bankruptcies.

European officials say at least €55 billion a year in debt is simply being written off, much of it because businesses find it too daunting to press expensive, confusing lawsuits in foreign countries.

Officials and business leaders say they believe that debt collection problems are a profound deterrent to commerce within the European Union and one of the reasons that job creation and wealth generation falls consistently behind the United States, where pursuing debts across state lines is a comparatively easy task.

With much of Europe still caught in an economic slump and several countries weighing down the bloc’s growth prospects because of huge sovereign debt problems of their own, E.U. officials are starting to circulate proposals for fixing this comparatively simple problem, in hopes of yielding a quick, cost-free stimulus to Europe’s financial health.

Debt collection is just one example of the shortcomings of a market which, for legal, linguistic and cultural issues, rarely functions as a single space. Professional qualifications in one country often are not recognized in another, for example, and local business regulations frequently make it hard for Europeans to set up shop in another E.U. country.

A more effective single market, the Union officials say, could generate €60 billion to €140 billion in additional trade — the equivalent of an additional 0.6 percent to 1.5 percent of the bloc’s gross domestic product.

But individual E.U. countries still jealously guard the right to control many regulations covering business, and to operate independent civil and commercial legal systems.

Valle García de Novales, a lawyer here in Zaragoza who specializes in international commerce, tells her clients that any debt of less than €100,000 is not even worth pursuing in court.

“You let it go because it is just too costly,” she said.

What is worse, many companies have been so discouraged that they have given up on doing business across borders. Meanwhile, fewer than 10 percent of European consumers buy anything from a Web site outside their home country.

In an effort to improve the situation, the European Commission, the bloc’s executive arm in Brussels, is working on a series of proposals to improve the single market. They include 12 priority changes to help reinvigorate the single market, from an agreement to recognize one another’s educational qualifications to an E.U.-wide system for registering patents.

This year, it is expected to propose a standardized Europe-wide system to freeze the amount of money owed to a company in the debtor’s bank account. That would prevent it from being moved to another country — often as easy as a mouse click — while providing an incentive to settle the claim quickly.

Article source: http://www.nytimes.com/2011/04/19/business/global/19debt.html?partner=rss&emc=rss