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DealBook: U.S. Suit Says 6 Executives at Loan Giants Misled Market

December 16, 2011 by Leave a Comment

Robert S. Khuzami, the Securities and Exchange Commission's director of enforcement.Jacquelyn Martin/Associated PressRobert S. Khuzami, the Securities and Exchange Commission‘s director of enforcement.

The Securities and Exchange Commission has brought civil actions against six former top executives at the mortgage giants Fannie Mae and Freddie Mac, saying that the executives did not adequately disclose their firms’ exposure to risky mortgages in the run-up to the financial crisis.

The case is one of the most significant federal actions taken against top executives at the center of the housing bust and ensuing financial crisis. Fannie Mae and Freddie Mac have been lightning rods in Washington as symbols of the excessive risk-taking that pushed the country into an economic downturn.

The agency filed complaints on Friday in the United States District Court in Manhattan against three former executives at Fannie Mae – its chief executive, Daniel H. Mudd; chief risk officer, Enrico Dallavecchia; and executive vice president, Thomas A. Lund.

Freddie Mac’s former chief executive, Richard F. Syron; Patricia Cook, its chief business officer; and its executive vice president, Donald J. Bisenius, were also named in a separate complaint.

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” Robert Khuzami, the head of enforcement for the S.E.C., said in a statement. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books. 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.”

As part of its announcement, the S.E.C. said that Fannie Mae and Freddie Mac agreed to settle with regulators and cooperate with its investigation of former executives. The Justice Department has also investigated the two mortgage giants, but no charges have been brought.

The S.E.C.’s cases against the executives will rely heavily on whether the two mortgage companies underreported or misled investors about their ownership of subprime loans and mortgages that required few documents from borrowers in the years leading up to and including the housing bust.

The complaint alleges, for instance, 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. The S.E.C. complaint contends that Freddie Mac executives falsely proclaimed that certain businesses had virtually no exposure to ultra-risky loans.

But Mr. Mudd, who was C.E.O. 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.”

“This is a lawsuit that should never have been brought in the United States of America,” he said.

In its statement, 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 asses 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.

Michael M. Levy, a lawyer for Mr. Lund, said his client did not mislead anyone. “During a period of unprecedented disruption in the housing market, nobody worked more diligently or honestly to serve the best interests of both investors and homeowners,” Mr. Levy said. “When the truth comes out at trial, it will be abundantly clear that Mr. Lund — who did not sell a single share of Fannie Mae stock during this entire period — acted appropriately at all times.”

Still, the S.E.C., which has been maligned for failing to detect the crisis or punish its culprits, took pains Friday to underscore its renewed efforts to crack down on wrongdoing at the highest levels of Wall Street and corporate America.

“They are just the latest in a long line of financial related cases,” Mr. Khuzami said, noting that the agency has now filed 38 separate actions stemming from the crisis.

The case against the mortgage giants mirrors 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 nor denied wrongdoing.

The S.E.C. has spent roughly two years interviewing former and current employees of Fannie Mae and Freddie Mac.

Earlier this year, the agency sent Wells notices, which warn of potential enforcement actions, to a number of top executives at the two firms. At the time, Mr. Syron, Mr. Mudd, Mr. Bisenius and Mr. Piszel all challenged those potential accusations.

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

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

In a statement, Gordon E. Runté of Fortress said: This morning, the S.E.C. filed a civil complaint against Dan Mudd, related to matters associated with his previous employment at Fannie Mae. The complaint does not relate to Fortress, and this matter has not impacted our company or our business operations. We are undertaking a thorough review of the matters addressed in the complaint.”

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

A lawyer for Mr. Dallavecchia did not immediately respond to a request for comment.

Lawyers for Ms. Cook and Mr. Bisenius could not immediately be reached for comment.

Fannie Mae and Freddie Mac were created by Congress to facilitate homeownership. Though they do not loan money to borrowers themselves, they buy mortgages from lenders and resell them in packages to investors, which allows banks and others to issue more loans. By 2005, the two companies began an aggressive push to expand their mandate to include less-fortunate borrowers who were typically excluded, an effort encouraged by lawmakers and lenders. The companies were also looking to reclaim business from Wall Street, which was thriving in the world of subprime mortgages.

But by the middle of 2008, as the housing market was sinking, exposure to subprime and other weak borrowers threatened the two companies. The Bush administration stepped in to rescue the two mortgage giants in September 2008, taking control of them in the process. Since then, the government has loaned the Fannie Mae and Freddie Mac more than $100 billion.

That the settlement with the two companies did not include a fine reflects their financially precarious situation. The Obama administration announced plans earlier this year to wind down the two companies.

S.E.C. v Mudd, Dallavecchia and Lund

S.E.C. v Syron, Cook and Bisenius

Article source: http://dealbook.nytimes.com/2011/12/16/s-e-c-sues-6-former-top-fannie-and-freddie-executives/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: S.E.C. Sues 6 Former Top Fannie and Freddie Executives

December 16, 2011 by Leave a Comment

Robert S. Khuzami, the Securities and Exchange Commission's director of enforcement.Jacquelyn Martin/Associated PressRobert S. Khuzami, the Securities and Exchange Commission’s director of enforcement.

The Securities and Exchange Commission has brought civil actions against six former top executives at the mortgage giants Fannie Mae and Freddie Mac, saying that the executives did not adequately disclose their firms’ exposure to risky mortgages in the run-up to the financial crisis.

The cases represent the first major action by the federal agency in its more than three-year investigation of the government-controlled mortgage giants that were at the center of the housing crisis.

The agency filed complaints against three former executives at Fannie Mae – its chief executive, Daniel H. Mudd; chief risk officer, Enrico Dallavecchia, and executive vice president Thomas A. Lund.

Freddie Mac’s former chief executive, Richard F. Syron; Patricia Cook, its chief business officer, and executive vice president Donald J. Bisenius were also named in a separate complaint.

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” Robert Khuzami, the head of enforcement for the S.E.C., said in a statement. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books. 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.”

As part of its announcement, the S.E.C. said that Fannie Mae and Freddie Mac agreed to settle with regulators and cooperate with its investigation of former executives. The Justice Department has also investigated the two mortgage giants, but no charges have been brought.

The S.E.C.’s cases against executives will rely heavily on whether the two mortgage companies underreported or misled investors about their ownership of subprime loans and mortgages that required few documents from borrowers in the years leading up to and including the housing bust.

The complaint alleges, for instance, 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. The S.E.C. complaint contends that Freddie Mac executives falsely led proclaimed that certain businesses had virtually no exposure to ultra-risky loans.

The S.E.C., which spent roughly two years interviewing former and current employees of the two companies, has been under tremendous pressure to produce cases in the wake of the financial crisis.

Earlier this year, the agency sent Wells notices, which warn of potential enforcement actions, to a number of top executives at the two firms. At the time, Mr. Syron, Mr. Mudd, Mr. Bisenius and Mr. Piszel all challenged those potential accusations.

Mr. Mudd and Mr. Syron are the two most high-profile subjects of the complaint. Mr. Mudd is now chief executive of private equity giant the Fortress Investment Group. Mr. Syron is a former president of the American Stock Exchange and currently an adjunct professor and trustee at Boston College.

Lawyers for Mr. Syron and Mr. Mudd did not immediately respond to requests for comment. Lawyers for Mr. Dallavecchia, Mr. Lund, Ms. Cook and Mr. Bisenius could not immediately be reached for comment.

Fannie Mae and Freddie Mac were created by Congress to help facilitate homeownership. Though they do not loan money to borrowers themselves, they buy up mortgages from lenders and resell them in packages to investors, which allows banks and others to issue more loans. By 2005, the two companies began an aggressive push to expand their mandate to include less fortunate borrowers typically excluded, an effort encouraged by lawmakers and lenders. The companies were also looking to reclaim business from Wall Street, which was thriving in the world of subprime mortgages.

But by the middle of 2008, as the housing market was sinking, exposure to subprime and other weak borrowers threatened the two companies. The Bush administration stepped in to rescue the two mortgage giants in September 2008, taking control of them in the process. Since then, the government has loaned the Fannie Mae and Freddie Mac more than $100 billion.

That the settlement with the two companies did not include a fine reflects their financially precarious situation. The Obama administration announced plans earlier this year to wind down the two companies.

S.E.C. v Mudd, Dallavecchia and Lund

S.E.C. v Syron, Cook and Bisenius

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

Filed Under: Business News Tagged With: , ,

Fair Game: Some Bankers Never Learn

July 30, 2011 by Leave a Comment

YOU’D think the mortgage bust would qualify as a teachable moment.

But some people refuse to learn from mistakes — a list that apparently includes certain mortgage bankers. Their industry is fighting a new rule that might prevent a repeat of the lending binge that helped drive our economy off a cliff.

In case you just arrived from another planet: America’s mortgage mania was fueled by home loans with poisonous features that made them virtually impossible to repay. It was fun while it lasted, at least for the financial types who profited by making dubious loans and selling them to investors.

But the Dodd-Frank financial overhaul last year barred lenders from making home loans before determining that people could probably repay them.

(It’s depressing that we have to legislate common sense, but, hey, that’s the world we live in.)

Dodd-Frank also required regulators to define the characteristics of loans that would most likely be repaid. The idea was to ensure that banks had skin in the game when they bundled risky mortgages into securities.

The proposal was this: If a mortgage security contains only high-quality loans, the banks can sell the entire offering. If the investments included riskier mortgages, the underwriters must keep 5 percent of the issue on their own books.

Basically, Wall Street would have to eat a bit of its own cooking.

Earlier this year, the Federal Reserve, the Federal Deposit Insurance Corporation, the comptroller of the currency, the Securities and Exchange Commission, the Federal Housing Administration, the Federal Housing Finance Agency and the Department of Housing and Urban Development all agreed on what makes a mortgage most likely to perform well. They examined how different types of loans defaulted, and the attributes of the borrowers in question. Then they invited the public to comment on their proposal; that comment period ends tomorrow.

One attribute of safer loans, the regulators found, was that homeowners had made a down payment of at least 20 percent. Another was that their housing debt did not exceed 28 percent of their monthly income, and that their total debts did not exceed 36 percent.

In other words, regulators said, a relatively low-risk mortgage should look an awful lot like the ones that local banks made before the days of securitization on steroids. Regulators also said that the origination costs on low-risk mortgages should no more than 3 percent of the amount borrowed.

THE mortgage industry squawked. It would prefer that we return to the days of high-fee, anything-goes lending. That is not surprising. But what is surprising is that mortgage bankers are leaning on the same tired argument — that saner lending requirements will undermine the goal of expanding homeownership.

In a comment letter filed with regulators last week, David Stevens, the president of the Mortgage Bankers Association, warned that the requirements on down payments and debt-to-income ratios were “unnecessary and not worth the societal costs of excluding far too many qualified borrowers from the most affordable mortgage loans to achieve homeownership.”

Mr. Stevens, who last March left his job as federal housing commissioner at the Department of Housing and Urban Development, didn’t mention the enormous costs associated with reckless lending. We are still tallying the bills, but to date, taxpayers have funneled $154 billion to Fannie Mae and Freddie Mac. Investors have suffered even greater damage.

While we are discussing societal costs, let’s not forget how minority borrowers and first-time homebuyers were the targets of predatory lenders who lured them into toxic loans loaded with fees.

A study issued last week on the widening wealth gap between minorities and white Americans points to the costs of predatory lending. Conducted by the Pew Research Center, a nonpartisan organization, the study noted that housing woes were the principal cause of precipitous declines in household net worth among both Hispanics and blacks from 2005 through 2009. The organization found that, adjusted for inflation, the median wealth of Hispanic households fell by two-thirds during that period. The wealth of black households declined 53 percent. The net worth of white households fell only 16 percent.

And yet, Mr. Stevens noted in his letter that the mortgage bankers were “working in harmony with a very wide coalition of consumer advocates, civil rights groups and other industry associations, to educate policy makers and legislators concerning this rule.”

One wonders how people who have lost their homes because of abusive lending practices feel about their “advocates” forming an alliance with mortgage lenders on this issue.

Mr. Stevens also argues that restricting mortgage fees to 3 percent, as proposed, would hurt borrowers by reducing their access to credit. Noting that his association opposes excessive fees, he wrote that his group “knows of no data evidencing that points and fees have affected borrowers’ ability to repay their loans.”

He told a different story when he was at HUD overseeing the portfolio of loans insured by the F.H.A.

Testifying before Congress in May 2010, Mr. Stevens cited five years of F.H.A. data showing that loans in which the seller of the property helped defray a borrower’s origination costs by more than 3 percent, known as a sellers’ concession, experienced significantly greater default rates.

In 2008, for example, F.H.A.’s insurance claims on loans where sellers covered 3 percent to 6 percent of buyers’ costs were 50 percent higher than claims on loans where concessions from sellers fell below 3 percent.

The higher concessions created “incentives to inflate appraised value,” Mr. Stevens testified. In other words, high costs do have consequences.

Mr. Stevens, through a spokesman, declined to comment.

As the advocate of the mortgage banking industry, Mr. Stevens is entitled to express the industry’s views. But it would be troubling if such arguments gained traction with regulators. In the years leading up to the crisis, the Mortgage Bankers Association and other financial trade groups persuaded regulators to postpone or water down rules that could have reined in subprime lending relatively early. We all know the consequences — and surely do not need to repeat past mistakes.

Article source: http://feeds.nytimes.com/click.phdo?i=4f4fc8debae4079444a34c634fd894ca

Filed Under: Your Money Tagged With: , ,