STOP MY FORECLOSURE HOME

How to Get Rid of a Second Mortgage Without a Loan Modification

Richard Gaudreau

Attorney

Posted: January 3, 2011 06:08 PM

Following the maxim that drastic times call for tepid measures, the banking industry continues to pay "lip service" to loan modifications while doing little. On Dec. 15, the Congressional Oversight Committee admitted the government's HAMP loan modification program has failed to help enough homeowners to stem the tide of foreclosures. The vast majority of loan modification requests fail, in part, experts believe, because banks have balked at offering a reduction in mortgage principal, the most effective way to halt costly foreclosures. Trying to revive HAMP, the administration in December announced new regulations designed to push banks into offering more reductions in principal than they have in the past. Fannie Mae and Freddie Mac immediately proclaimed, however, that they remain opposed to making this option available to struggling homeowners. Protecting the interests of the banking industry over the consumer, the Federal Reserve also blocked new foreclosure regulations that would have reined in foreclosure abuses. Although the economic collapse of 2008 has caused the tide to rush in on everyone, there has been no bailout for the "little guy." Left to fend for themselves, increasing numbers of homeowners are turning to a little-known provision in the federal bankruptcy law, which permits the discharge of a second or even third mortgage in its entirety in a Chapter 13 bankruptcy. The American Bankruptcy Institute recently reported that Chapter 13 bankruptcies have risen by 9 percent in 2010 compared to last year.

Flying under the media radar, the right to discharge a second mortgage in a Chapter 13 bankruptcy provides a glimmer of hope to homeowners stuck with a foreclosure because they own a home they can't afford and can't sell. With one in 10 Americans out of work, while others have suffered a pay cut as a condition of keeping their jobs, the amount of disposable income available to pay a mortgage is not what is used to be. Getting rid of a 2nd mortgage payment can sometimes make the difference between keeping a home and losing it to a foreclosure. How then does a homeowner qualify? Quite simply, when a home is worth less than the balance of a first mortgage, federal bankruptcy law -- at least in most states -- permits a homeowner to treat a second mortgage like an unsecured credit card and discharge it in a Chapter 13 bankruptcy.

Housing prices dipped for the third straight month in October, and hope for a recovery in 2011 has started to fade. According to Corelogic, an industry researcher, 11.8 million homes, or more than one out of five mortgages in the United States are "underwater" -- i.e. the total mortgage debt exceeds the value of the home. The U.S. Department of the Treasury estimates eight to 13 million foreclosures will occur from December 2010 through 2012 unless something intervenes. Ironically, the HAMP requirement that a homeowner generally be at least 60 days behind on a mortgage in order to qualify has led to foreclosures on homes where the mortgage payment had been up to date. In fact, a recent National Consumer Law Center's survey of 96 foreclosure attorneys in the US found that mortgage servicers began foreclosure proceedings against 2,500 of their clients even though a loan modification request was pending. Loan servicers do make more in fees from the foreclosure process than from the loan modification process, so this is not surprising.

Bankruptcy is a business decision, no less for a homeowner than it was for General Motors when it filed a Chapter 11 bankruptcy. This economy has sent clients to my door that I seldom used to see -- attorneys, physical therapists, nurses, college professors, and scores of people dependent on the real estate market for their livelihood. A bankruptcy is usually preceded by a loss of income, a divorce or medical issues, sometimes all three. Bankruptcy is not on anyone's list of fun things to do, and clients only consider it when the alternative, like a foreclosure, is worse. Many have tried to do a short sale or loan modification to no avail and have found that the bank would rather foreclose. In New Hampshire, a homeowner will be responsible for a mortgage deficiency for 20 years. These problems will persist until the powers that be decide to offer more than half-measures to address the foreclosure crisis.

For those facing the loss of their home and wondering whether a Chapter 13 bankruptcy may help get rid of a second mortgage, the following information may be helpful:

(1) It is disingenuous of banks to lull homeowners into a false sense of security by scheduling a foreclosure auction when a loan mod request is pending. If this happens to you, don't be too trusting when your bank tells you not to worry about the foreclosure because they'll continue the auction if there's no answer by the auction date. What they are really saying is if you are denied, the foreclosure will happen. One client told me that Bank of America won't even consider continuing a foreclosure auction due to a loan mod request until it was 72 hours before the auction date. I regularly receive panicked calls from homeowners denied a loan mod just before the auction occurs. While a Chapter 13 stops a foreclosure automatically, given how busy most bankruptcy lawyers are these days, finding one who has time to do a court filing at the last minute may be difficult.

(2) If you decide to see if you can get rid of a second mortgage, ask a broker to give you an opinion in writing of what your house is worth. Brokers will usually do this as a courtesy, figuring if you ever do decide to sell your house, you'll go through them. Make sure you ask for the potential sales price rather than a list price, which may be somewhat inflated. If the estimate is less than the balance of your first mortgage, then removing it in a Chapter 13 bankruptcy is possible.

(3) Even if you can get rid of a second mortgage, however, a Chapter 13 is not for everyone. Removing a second mortgage only works if you have enough income to complete the plan successfully. If the real problem is that you don't have enough monthly cash flow to pay your first mortgage and other expenses, Chapter 13 won't solve that problem.

(4) Chapter 13 will permit strapped homeowners to discharge most or all of their credit card debt. It usually won't discharge certain debt like taxes and student loans.

(5) Before making a decision, you want to be sure you can keep all property. Most states have exemptions sufficient to permit a homeowner to keep a house, vehicles, and other assets, however, some states are more generous than others.

The above is not intended as legal advice for your particular situation. Questions should be addressed to attorneys admitted to practice within your state. Richard Gaudreau is a lawyer admitted to practice in New Hampshire and Massachusetts and may be reached by email at: richard@attorneygaudreau.com or by phone at: 603-893-4300 begin_of_the_skype_highlighting              603-893-4300      end_of_the_skype_highlighting.

How Did a Relatively Small Number of Subprime Loans Cause a Record Crisis?

William K. Black, 01.03.2011

Assoc. Professor, Univ. of Missouri, Kansas City; Sr. regulator during S&L debacle

A number of analyses of the U.S. and global crisis begin by attempting to explain what they assume to be a paradox -- how could so small a market segment (subprime housing and CDOs backed by subprime) have caused (1) the largest financial bubble in history, (2) a U.S. economic crisis, and (3) a nearly global crisis? To these scholars the obvious answer is that subprime lending could not have caused this traumatic trifecta. It follows that the importance of subprime lending must be overstated and there must be other, more powerful causes of the trifecta.

I will show that the focus on subprime loans was excessive and allude briefly to the points I have made in prior columns about the variant causes of the global crisis. The next column will address in more detail how criminologists determine the true incidence of mortgage fraud. Subprime loans were and are a serious problem, but there has been a destructive overemphasis on subprime loans as the core of the U.S. crisis. "Liar's" loans are a far greater problem, and most problem subprime loans are actually liar's loans. While the nonprime mortgage industry's preferred euphemisms were "alt-a" and "stated income" loans, it was the industry that accurately dubbed them liar's loans. It was the industry that created liar's loans and it is liar's loans that made so many officers wealthy.

The industry pitched liar's loans to the regulators on a series of bright shining lie -- that they were equivalent to the risk of prime loans and simply underwritten on an alternative basis because the borrowers were entrepreneurs who could verify their incomes. The further lie was that liar's loans were distinct from subprime loans, which were only made to those with serious credit defects with conventional underwriting. The reality is that there is an easy means for small business owners to verify their income -- by authorizing the IRS to provide information from their tax returns to the lender via IRS Form 4506. There were two groups of borrowers who had acute needs to avoid disclosing their income and wealth -- those engaged in tax fraud evaders and those seeking to deceive their spouses or defraud their prior spouses and children in order to evade alimony and child support payments. (Remember when one of "C's" in lending referred to "character" and we taught loan officers why one should not lend to those of bad character?) People who will cheat their kids are certain to be willing to cheat their lender.

The purpose of liar's loans was to create endemic fraud throughout the mortgage process - from origination to the sale of collateralized debt obligations (CDOs) backed by liar's loans ("cradle to grave" fraud). The lies in liar's loans were so endemic and so egregious that the financial version of "don't ask; don't tell" was essential at every step of the process. Liar's loans were also perfect for the loan origination level variant of "don't ask; don't tell."

Liar's loans were not underwritten. The borrower did ask about income, but only in the sense made famous by Monty Python ("wink, wink; nod, nod"). The lender agreed that it would not verify the borrowers' "stated income" (and often the borrowers' jobs and assets). As I have explained in prior columns, the lenders that specialized in making liar's loans frequently outsourced much of the job of finding the borrowers who would take out the liar's loans to loan brokers. Studies by various state attorney generals, white-collar criminologists, and private and public investigators have confirmed that it is lenders and their agents (loan brokers and loan officers) who overwhelmingly put the lies in liar's loans. There are independent analytical reasons to believe these findings.

1. Doing so maximized the lenders' (and their loan brokers') reported (albeit fictional) income (and their controlling officers' bonuses). The greater the stated income, the more likely the loan would be made, the larger the size of the loan, and the greater the resale value of the loan in the secondary market. Each of these elements drove the agents' and loan officers' compensation up - and by very large amounts.
2. By inflating the borrowers' stated income, the lender and its brokers could make the loan appear to be less risky and sell it for a premium to the secondary market greatly inflating the borrower's stated income. The liar's loan lenders could also make the loan appear to be less risky to the regulators (though unregulated mortgage bankers probably made most of the liar's loans), credit rating agencies, and auditors. These entities typically treated the (fictional, far reduced) "debt-to-income" ratio arising from inflating the borrower's stated income as if it were real. (In reality, this willingness to believe, without real due diligence, the lies that would make these professionals wealthy was another variant of "don't ask; don't tell.") It was not exactly difficult for anyone in the trade to figure out that must never treat as truthful the stated income in something the trade called a "liar's" loan. Indeed, the ability of everyone in the trade to know that they should never treat the loans as honest was made even more simple when the mortgage lending industry's own experts as deserving of that label because such loans were "an open invitation to fraudsters" (MARI 2006) - during what the FBI had termed as early as September 2004 to be an "epidemic" of mortgage fraud. Depressing the real debt-to-income ratio by inflating reported income was a useful lie to everyone with a financial stake in the liar's loan machine - which was most of our largest financial firms in the U.S.
3. Not verifying the borrowers' stated income simultaneously facilitated the lenders' and their brokers' ability to sell fraudulent loans at a premium in the secondary market and minimized risk of the lenders' and their brokers' controlling officers being sanctioned for their frauds essential to their origination and sale of liar's loans. The brokers and lenders obviously, could not verify the fictional incomes that they had inflated. They would have had three choices. They could have honestly sought to verify something they knew to be false - which would have prevented the loans from being made and dramatically reduced their income. They could have claimed that they had verified the income but provided no records of their efforts at verification or the borrowers' true income. That strategy would have added another act of fraud (a false certification of verification) while providing no credible evidence. The other alternative would be for the brokers and officers to forge documents purporting to show that they had conducted due diligence as to the borrowers' true income and attesting to the accuracy of the stated income. This strategy would have made it simple for the Justice Department to convict the loan brokers and officers. The ideal strategy is for the loan brokers and officers to do no underwriting of the stated income and to purport that the borrowers' credit rating (FICO score), in conjunction with the fraudulent LTV and debt-to-income ratios, proves that the loan has risk characteristics equivalent to prime loans. FICO scores, of course, can never demonstrate that the borrower has the capacity to repay a home loan and there are common scams that use someone with a good FICO score as a shill to obtain a loan.

Liar's loans were equally useful in facilitating accounting control fraud by those involved in the CDO process. The secondary market had to rely on "don't ask; don't tell" to be able to securitize and sell CDOs. CDOs were largely backed by liar's loans and fraud was so endemic and so obvious among liar's loans if one engaged in due diligence that it was ideal to claim that liar's loans required no meaningful due diligence and could not be the subject of meaningful due diligence because there were no underwriting files to review because the lender did no real underwriting. Again, consider what would have happened if the securitizers, credit rating agencies, or auditors had actually looked at any reliable sample of the liar's loans for evidence of fraud. They would have reported, as did Fitch in November 2007, that there was evidence of fraud in the nearly every file. If they asked, they could not sell. Their files would show that they knew they were knowingly selling securities backed primarily by fraudulent loans - and claiming the CDOs were "AAA."

Liar's loan borrowers had no leverage to create a "Gresham's" dynamic among appraisers. There is no honest reason why a mortgage lender would inflate the appraised value and the size of the loan. Causing or permitting large numbers of inflated appraisals is a superb "marker" of accounting control fraud by the lender because the senior officers directing an accounting control fraud do maximize short-term reported (fictional) income (and real losses) by inflating appraisals and stated income. As I have noted, and will return to in future columns in more detail, lenders and their agents frequently suborned appraisers by deliberately creating a Gresham's dynamic to try to induce them to inflate market values, leaked the loan amount to the appraisers, drove the appraisal fraud, and made it endemic. As with inflating income in order to minimize the reported debt-to-income ratio, inflating the appraisal allowed everyone with a financial stake in the lies to minimize the reported loan-to-value (LTV) ratio and allow everyone to pretend that the loan was far less risky because it had such a large (but yet again fictional) equity cushion. Given that we know that appraisal fraud was endemic, that endemic appraisal fraud is impossible without being led or permitted by the lenders and their agents, and that no honest lender would permit or cause widespread inflated appraisals, the logical inference is that the lenders and their agents led both the stated income and the appraisal fraud.

Only the lenders and their agents had the inside information and expertise to know how to optimize the deceit in the loan application process. Many of the housing speculators who bought a material number of homes and sought to flip them were industry insiders, and many of them also committed fraud by indicating that they intended to make each of the houses (simultaneously) their principal dwelling. These professionals would have known of the details of the lenders' term sheets and could have picked the debt-to-income and LTV ratios (and sometimes had illegal side deals with appraisals to inflate the appraisals to secure the desired LTV. The great bulk, however, of those that borrowed through liar's loans were not financially sophisticated and had no way of knowing how much they needed to inflate reported income to hit the "sweet spot" that would maximize the loan broker's and the loan officer's fees and bonuses. Loan brokers willing to specialize in making liar's loans had to be able to lead the lies about the borrowers' income that would maximize the loan broker's fees.

The fact that the lenders and their agents specializing in making liar's loans led the stated income frauds does not, of course, mean that the borrowers had no ethical responsibility or culpability. As I will show in future columns, there are millions of cases of mortgage fraud through liar's loans. There are doubtless hundreds of thousands of borrowers who knew that the incomes the brokers and officers told them to report on the loan applications were false.

Yes, it does appear to have been common for the loan brokers and officers to create the false loan applications and even forge the borrowers' signatures. Some of the lenders are reported to have referred to these practices as "Arts and Crafts" weekends. We don't know how common this level of lender fraud was because the regulatory agencies and prosecutors have not publicly reported their investigations. Indeed, there is no public evidence that the regulators or prosecutors are even conducting comprehensive investigations of the endemic accounting control fraud by the lenders that made large amounts of liar's loans.

We now have the analytical basis to begin to explain the supposed paradox as to how such a relatively small number of subprime loans caused an intense global crisis. Here are the central points, which I will flesh out in future columns.

• Many subprime loans were also liar's loans
• Many hybrid loans existed with greatly reduced underwriting
• There were, and are, no official definitions of the loan categories "alt-a", "subprime", or the many hybrid forms
• Because there is no definition and the categories of "subprime" and "liar's" loans are not mutually exclusive, there is inherent uncertainty and a need to use judgment to form useful estimates. Credit Suisse reported (2007) that 49% of new originations in 2006 were "alt-a" loans (i.e., liar's loans). The incidence of fraud among liar's loans found in most independent studies is 80% or above. If the Credit Suisse figure is even close to accurate (and some caution is vital there), then we are suffering from over a million cases of mortgage fraud annually in 2005 and 2005 and the frauds were growing in 2007 until the secondary market collapsed. Data on criminal referrals are, when extrapolated, consistent with that level of fraud incidence. The supposed paradox arises from a factual error. Nonprime loans were common. Liar's loans grew massively and hyper-inflated the financial bubble. The size of the bubble and the fraud losses were enormous relative to bank capital. Indeed, the very lack of reliable data on the true composition of liar's loans (Fannie, Freddie, and Lehman all reported them as "prime" loans for most purposes) in mortgage portfolios and CDOs was itself one of the factors driving systemic risk. Investors, rightly, feared that most large financial institutions had huge exposures to fraudulent loans.
• At law, fraud's defining element is deceit. The fraudster gets the victim to trust him and then betrays that trust. This is why control fraud by our elite financial institutions is such a powerful acid to erode trust. Trust is vital to an effective economy. Markets shut down in the crisis because bankers no longer trusted other bankers' asset valuations.
• Other nations (Iceland and to a far lesser extent Ireland) that have had moderately serious investigations of the causes of their crises have produced reports that provide compelling evidence of accounting control fraud as major drivers in their crises. Spain is notorious for its' banks' accounting abuses, but Spain has not provided any true investigative reports.
• The FDIC and OTS created a data base well after the crisis began. It sought (false) precision at the cost of analytical usefulness. It creates a false dichotomy between "alt-a" and "subprime" based on reported FICO scores (which it implicitly assumes to be real). The result is that one cannot use the data to study loans made without underwriting. That category - the single most important characteristic for studying, measuring, and predicting losses - does not exist in their data. It is vital that researchers understand that the FDIC mortgage data base is unreliable and it is vital that the FDIC create a new, reliable data base.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

This column appeared originally in Benzinga.

Creditor Held Liable in FDCPA Class Action

Creditor Held Liable in FDCPA Class Action
by Mary Beth Guard

Ask any basic banking student and they'll tell you: The Fair Debt Collection Practices Act ("FDCPA") applies only to debt collectors -- not to creditors. As a case decided October 9, 2002 by the U.S. Court of Appeals for the Seventh Circuit shows, however, that statement is not always correct. There are some circumstances where the creditor can be held liable under the FDCPA, as the defendants learned in Nielsen v. Dickerson, et al.

In the Nielsen decision, the court affirmed a decision of the lower court granting summary judgment to the plaintiffs in a class action suit brought against an attorney who sent collection letters and the financial institution on whose behalf he sent them. The plaintiffs successfully argued that the attorney's collection letter falsely suggested that an attorney had become actively involved in the financial institution's debt collection efforts, when in fact the attorney had done little more than lend his name and firm letterhead to the collection effort. The lower court and the 7th Circuit Court of Appeals agreed with the plaintiffs contention that the defendants violated the Fair Debt Collection Practices Act, as explained below.

The Facts
Household Bank (SB), N.A. ("Household") issued GM credit cards and entered into an arrangement with the law firm of David D. Dickerson under which Dickerson agreed to issue a form "past due" letter to delinquent GM Card holders. Household approved Dickerson's form letter and typically sent Dickerson approximately 2,000 accounts per month to send collection letters to. Dickerson was compensated by a flat fee of $2.45 per account. His compensation was not tied to the effect his letters had, and even in cases where the cardholder failed to subsequently make payments, Dickerson's services were not utilized by Household for filing legal proceedings against any of the debtors.

Dickerson was apparently a very experienced attorney, with more than 30 years in practice and more than 25 years working with debt collection activities. When Household contracted with Dickerson, he signed a 9-page agreement under which he agreed to render legal services consistent with applicable laws, including the FDCPA.

The arrangement worked like this:

• Household would send Dickerson a disk containing delinquent account date, including the account number, name, address, account balance, and the amount past due;
  
• Dickerson's firm would reformat the data, then pull it up to check for any obvious gaps or errors;
  
• After eliminating obvious gaps or errors, the firm would transmit the data to a third-party printing and mailing service, which then provided a hard copy back to Dickerson;
  
• The hard copy list would then be subjected to a three-level review by the firm to:
  • ensure duplicate letters were not sent to the same debtor
    
  • flag any instances where there was incomplete or inaccurate debtor information;
    
  • check the data against a database of recent bankruptcy filings so that letters were not be sent to debtors who had declared bankruptcy. The firm also flagged any debtors in one of three "prohibited" states to which Dickerson did not send letters.
    
• Dickerson reviewed nearly all the printouts of pertinent data himself, although the court noted that the time he spent would indicate that he devoted only a few seconds to each account.
  
• After these reviews were completed, the firm would send an acknowledgement report to household listing the debtors to whom a delinquency letter would be sent. After transmitting the information to Household, the firm would wait a minimum of 24 hours before sending a letter to give Household the opportunity to make corrections or strike names from the list.
  
• After the waiting period expired for Household review, the firm would forward the data to the third-party printing firm, which would then print and mail the letters on firm letterhead with a facsimile of the lawyer's signature.
  

Dickerson and the firm did not

• make an individualized assessment of the status or validity of the debt or the propriety of sending delinquency letters to the account debtors referred to him by the bank;
  
• receive a copy of a debtor's file;
  
• have access to Household's account system;
  
• pursue judgment on behalf of Household with respect to any of these debtors.
  

The form letter told debtors that if they did not dispute the debt, they should make payment to the client GM card or call GM Card at GM Card's 800 number to discuss payment arrangements. If the debtor disputed the debt, he was told to "notify us" (meaning the law firm). A payment coupon with GM Card's address was attached to the bottom of each letter.

While Dickerson's firm did receive calls from delinquent debtors, he had no authority to resolve matters on Household's behalf and did not attempt to do so. The firm had six different form transmittal letters that they would send to Household highlighting the nature of the response. Each time a debtor would contact the law firm by phone or letter, the appropriate form letter was selected, signed by Dickerson, and sent to Household, along with a copy to the debtor. Once Dickerson handed the responses over to Household, he took no further action.

One recipient of one of the collection letters was Ann Nielsen, a resident of Chicago. Upon receiving the letter from Dickerson, she noted he was a lawyer and assumed she might be sued on her unpaid debt. She did not respond to the letter, and subsequently filed bankruptcy. Then, she filed suit against Dickerson and Household on behalf of herself and other GM Card holders who had also received delinquency letters from Dickerson. The lower court certified a class that included every GM cardholder residing at an address in Illinois who were sent these letters between certain dates in 1997 to 1999 -- over 3500 individuals. The parties filed cross-motions for summary judgment and the lower court ruled in favor of the plaintiffs on the FDCPA claims.

The Court's Ruling
The District Court ruled

• that Dickerson and Household each qualified as a "debt collector" that could be held liable under the FDCPA for misleading communications with debtors;
  
• although Household would not normally constitute a debt collector under the Act, it qualified as one under what is known as the "false name" exception to this rule. A creditor or an affiliate of a creditor who uses someone else's name so as to suggest to the debtor that a third party is involved in the debt collection process, when in fact that party is not involved, can be treated as a "debt collector" for FDCPA purposes;
  
• Dickerson played no genuine role as an attorney in Household's debt collection efforts;
  
• Dickerson's letter to Nielsen and the other class members was in reality from Household and Household was simply using Dickerson's name to suggest that he and his firm were involved in the attempt to collect the debts;
  
• Household should be treated as a debt collector and held liable to the extent the letter was false or misleading;
  
• in order for the letter not to mislead the recipient as to the nature of the attorney's involvement with the debt, the attorney must have direct and personal involvement in the mailing of the letter -- e.g., by reviewing the file to determine whether the letter should be sent, or by approving the mailing based on recommendations by others;
  
• the firm's "review" was no more than a deceptive "veneer of compliance" with FDCPA.
  

According to the lower court, this type of letter suggests that the attorney is familiar with the facts of the case and is prepared to pursue the case himself, but Dickerson did not have this level of involvement with the debt. His review of the data was superficial and amounted to little more than proofreading. The fact that after the letter was sent Dickerson was not even informed by Household about whether it received a response to the letter and Dickerson had never pursued a judgment on Household's behalf or even been asked to do so was also telling in the Court's view. The court said "We find this lack of litigation activity contradicts the impression given to an unsophisticated consumer; namely, that if she does not pay, the attorney sending her the collection letter will pursue a collection suit against her."

The court went on to say that a key factors is that the letters themselves are objectionable. The lawyer just sent a form letter that was modified to reflect what little information he was furnished by Household. He didn't even personally sign the letters. They were prepared en masse by the printing company who affixed his facsimile signature to them. In a previous 2nd Circuit case the court pointed to, the 2nd Circuit suggested that mass mailings prepared in this manner will frequently be false to the extent that they suggest that an attorney was directly involved in the process by which the letter was prepared and sent.

After the summary judgment ruling on liability, the parties reached a settlement as to damages, but defendants reserved the right to appeal the liability ruling. [In terms of the settlement, the defendants agreed to pay a total of $250,000.]

The appellate court affirmed the ruling on liability. In its opinion, it goes into great detail about Household's liability as a debt collector, the violations of section 1692(e)(3) and (10) and Household's unsuccessful assertion of the "Bona Fide Error defense" under FDCPA. It makes for some interesting reading . . .

In the wake of this decision, all financial institutions would be well-advised to review this decision and the Act to determine what changes, if any, should be made to their debt collection practices in order to avoid potential liability as a debt collector.

First published on BankersOnline.com 10/10/02

Two Bad Loans Don't Equal One Good Loan

Two Bad Loans Don't Equal One Good Loan
Bank Appeals $3 Million Judgment
by BOL Guru Sam Ott

The United States Court of Appeals for the 6th Circuit on April 15, 2002 decided the case of Sallee v. Fort Knox National Bank by holding that the bank was liable to a loan customer for failing to reveal a negative appraisal and inducing the execution of a release of all claims against the bank. The original judgment of $3,009,998.25 was reduced but the Court upheld the award of punitive damages against the holding company of the bank.

The Court was very graphic in its assessment of the actions of the bank and its customers. It described the case as the "unhappy collision between the bank's bad banking practices and the debtors' business naivete and incompetence".

The bank was painted as displaying the "go-go" mentality that infected banking in the mid-1980's. The loan officers were identified as possessing a dangerous combination of inexperience and incompetence. The bank was severely criticized for poorly documenting the loans, loosely collateralizing the loans and making loans with little financial information.

The bank's appraiser was assailed as the author of the worst prepared appraisal the court had reviewed in the last 10 years. It was noted the appraisals disingenuously found real estate had the exact value needed to support whatever loan amount that the loan officer wanted.

Keep in mind these are the comments of a Federal Judge in a legal opinion -- not a Regulator in an examination.

The Facts
The debtors were approached by another customer of the bank who wanted to sell the debtors a laundromat from which the debtors had previously purchase an adjacent convenience store. The bank that had previously financed the purchase of the convenience store for the debtors was contacted regarding the financing of the second transaction. The bank had financed both the convenience store and the laundromat originally and the loans were in default at the time of each sale.

The bank actively encouraged the sale and provided the buyers (the debtors) a pro-forma and site survey that suggested the laundromat would gross between $150,000 and $200,000 per year. In addition, the bank told the debtors it had a current appraisal of the property for $750,000.

The bank did not disclose two earlier appraisals conducted within a 1 and ½ year period showing that the appraised value rose from $469,000 to $647,000 to $726,000 (the actual final appraisal amount). The same appraiser prepared all three appraisals. The bankruptcy court later said it was the worst prepared appraisal that it has had the opportunity to review in its past ten years and the appraisal amount found the real estate in question to have the exact value needed to support whatever loan amount the bank's loan officer wanted. The increases in appraised value occurred even though no improvements were made on the launderomat and the funds generated by the business could not service the debt.

When the debtors were unable to service their loans to the bank, they sought an extension and expressed a desire to refinance their entire loan package. The bank agreed to the extension and implied that a "package loan" would be forthcoming. The extension agreement, which was prepared by the bank, released the bank from "any and all rights, claims or causes of action with respect to the Loan Documents and Collateral."

During the time the debtors were involved in extension discussions with their loan officer, the bank's holding company, upon review of the loan portfolio, stopped all commercial lending by the bank. The loan officer continued with the discussions without informing the debtors of the change in the bank's lending policy. The debtors, in part on the belief that the bank would provide them a "package loan", executed the extension agreement.

The loans went into default and the bank initiated a foreclosure suit regarding the real and personal property including ESOP stock of the debtor that had also been pledged as collateral. The debtors filed a counterclaim against the bank alleging fraud in the inducement relative to the purchase of the laundromat and breach of contract for the financing of the purchase. The debtors then filed a petition for bankruptcy and the court action was removed to the bankruptcy court as an adversary action.

The bank filed a motion for summary judgment alleging that the extension agreement released the bank form liability for all claims. The bankruptcy court disagreed and entered judgment for the debtors. The bankruptcy court held the bank owed the debtors a fiduciary duty and breached that duty by failing to reveal material facts concerning the loan. In addition, the bank defrauded the debtors by misrepresenting the value of the laundromat. The debtors were awarded compensatory damages and punitive damages in the total amount of $3,009,998.25.

The bank appealed to the district court who reversed the measure of damages, ordered a reduction in punitive damages and affirmed the remainder of the bankruptcy court judgment.

Discussion
The bank argued that the courts made five errors:

1. In holding the release in the extension agreement did not preclude the debtors' claims
   
2. In concluding the bank owed a fiduciary duty to the debtors
   
3. The bank is not liable for fraud because the debtors could not prove reasonable reliance
   
4. In calculating damages
   
5. In awarding punitive damages.
   

Fiduciary Relationship
After review of the facts and listening to the arguments of the parties, the Court held that the debtors had failed to show a fiduciary relationship existed with the bank.

The Court noted a fiduciary relationship creates the highest order of duty imposed by law. If a fiduciary relationship exists, the fiduciary cannot profit from the relationship without the knowledge and permission of the principal. A fiduciary relationship requires more than the generalized business obligation of good faith and fair dealing.

The Court stated "except in special circumstances, a bank does not have a fiduciary relationship with its borrowers." Courts traditionally view a relationship between a bank and a depositor to be one of debtor-creditor and do not ordinarily impose a fiduciary duty of disclosure upon the bank. As a matter of business, banks seek to maximize their earnings by charging interest rates or fees as high as the market will allow.

Banks seek as much security for their loans as they can obtain. In contrast, debtors hope to pay the lowest possible interest rate and fee charges and give as little as security as possible. Without a great deal more, a mere confidence that a bank will act fairly does not create a fiduciary relationship obligating the bank to act in the borrower's interest ahead of its own interest.

Fraud Claims
The Court then considered the fraud claims. The bankruptcy court found the bank defrauded the debtors when the bank gave them the misleading pro-forma, site survey and appraisals that the bank officers knew or should have known were inflated. The Court referenced a passage from an English case regarding a banker who received an inquiry about the credit-worthiness of a customer that indicated the banker has three options:

• The banker can decline to give the information;
  
• he can give an answer with a clear qualification that it is given and accepted without any responsibility or is given without reflection or research; or
  
• the banker can give an answer without qualification.

If the banker adopts the third alternative he can be held to have accepted some responsibility for answering carefully or to have accepted a relationship with the inquirer which requires him to exercise such care as circumstances require.

The Court held the record supported the finding of the bankruptcy court. It reasoned that the bank having shown the pro forma, the site survey and one appraisal, could not avoid revealing the other appraisals without making its earlier representations fraudulent.

Extension Agreement Waiver
The bankruptcy court rejected the bank's argument that the debtors had released their fraud claims when they executed the extension agreements due to the finding that the agreement was not broad enough to release or discharge the claims. The waiver language only mentioned claims regarding the loan documents or the collateral. The district court held that the extension agreement was unenforceable because it was obtained through fraudulent misrepresentation and the promise of the "package" loan had fraudulently caused the debtors to execute the extension.

After a review of the actions of the lower courts, the Court found that the bank obtained the extension agreement through fraud and therefore rejected the bank's argument that the extension agreement language prevents the debtors' claims.

Compensatory damages
The bankruptcy court awarded damages to the debtors for the misrepresented value of the laundromat and the lost value for the sale of ESOP stock that was also pledged as collateral and punitive damages. The district court found that the bankruptcy court erred in the calculation of the value of the laundromat and adjusted the amount of damages.

The bank argued that the debtor was not entitled under state law to recover for both fraudulent misrepresentation and fraudulent inducement. The Court held that the debtors made an election to affirm the laundromat loan transaction that allowed them to sue for fraudulent misrepresentation but not for fraudulent inducement. The debtors were therefore precluded from receiving damages regarding the inducement claim.

In addition the Court determined the calculation by the district court was correct and the proper damage award was the difference between the final appraised value of the laundromat and what it was actually worth on the day the debtors purchased it.

Punitive Damages
The bank argued that the punitive award against it should be set aside due to the fact the original bank no longer existed. The original bank was sold by its holding company to a third party. The Court noted that there was a provision in the bank sale contract in which the holding company agreed to pay any damages arising from this case. The bank argued that the bankruptcy court held that the holding company was absolved of all liability in the case. The district court specifically rejected this argument. The Court also agreed that punitive damages should be awarded but the amount should be remanded to the district court for recalculation.

Summary
The Court held that a lender absent special circumstances is not in a fiduciary relationship with its borrowers. A lender however does have any obligation to disclose known facts regarding the appraisal value of real property and may be liable for fraudulent misrepresentation if such disclosures are not made. In addition the existence in an extension agreement of a blanket waiver of all claims against the bank may be held unenforceable if the bank induces the debtor to execute the agreement with the promise of future financing.

First published on BankersOnline.com 4/16/02

Turmoil in Arbitration Empire Upends Credit-Card Disputes

• OCTOBER 15, 2009

Turmoil in Arbitration Empire Upends Credit-Card Disputes

By CARRICK MOLLENKAMP, DIONNE SEARCEY and NATHAN KOPPEL

New York financier J. Michael Cline set out to build a billion-dollar empire in the realm of consumer-debt disputes. His firm would stand at the center of a complex arrangement linking America's biggest arbitrator of consumer credit-card disputes with another business that collects debts in some of those same cases.

Instead, his grand plans have unraveled, turning the world of consumer arbitration on its head.

Amid a congressional investigation, regulatory complaints and lawsuits from consumers, Mr. Cline's woes are prompting a major shift in the way many U.S. consumer-debt disputes are settled.

For more than a decade, most credit-card companies have required customers to use arbitration, rather than the courts, to resolve disputes over unpaid bills. Minneapolis-based NAF has mediated the vast majority of these claims. But both NAF and another arbitrator have stopped hearing arbitrations of consumer-debt cases, and major banks are dropping arbitration requirements.

View Full Image

Panthera

Michael Cline, center, aimed to build a debt-collection empire. He is shown here in 2005 helping during a wildcat-conservation trip.

"I actually think there is a fairly significant change afoot," says Richard Reuben, a law professor and arbitration specialist at the University of Missouri. Banks "don't need the taint that comes with mandatory arbitration."

It's a big comedown for Mr. Cline, who helped found online movie-ticket vendor Fandango and pledged millions of dollars to save Asian tigers from extinction.

In 2006, he and his private-equity firm, Accretive LLC, set out to acquire a stake in the National Arbitration Forum, the nation's largest consumer-debt-arbitration body. An Accretive executive told NAF the organization had the potential to blossom into a billion-dollar business. By expanding beyond credit-card disputes to resolving disagreements between hospitals and patients, NAF had the potential to be "the center of a broad arbitration ecosystem," Mr. Cline's firm said, according to an Accretive presentation to NAF.

At the same time, Mr. Cline was quietly making another big bet on the debt business. Through its funds, Accretive created a separate debt-collecting business. That firm, Axiant LLC, ran call centers and helped collect consumer debt following NAF arbitrations.

In a July complaint, the Minnesota attorney general's office alleged NAF deceived consumers and engaged in false advertising. Consumers didn't realize NAF was financially affiliated with "one of the country's major debt collection enterprises," the complaint alleged. Accretive created Axiant in tandem with employees of Mann Bracken, a debt collector that represented credit-card companies in NAF arbitrations, the complaint alleged. At the same time, Accretive funds and NAF Inc. jointly own the back-office entity for NAF, called Forthright.

This structure, the complaint alleged, obscured Accretive's efforts to dominate both sides of the debt-collection business: arbitration and debt collection. While telling consumers that it was an impartial arbitrator, NAF worked closely with creditors, the regulator claimed, including drafting claims against consumers.

NAF says its arbitration system is fair. It provides "the most inexpensive option for consumers to resolve a dispute," rather than going to court, according to an NAF statement. An Accretive spokesman says that Forthright and Axiant provide information technology and processing for NAF and Mann Bracken, respectively. But Accretive doesn't control either NAF or Mann Bracken.

The 49-year-old Mr. Cline and his firm weren't named defendants in the Minnesota complaint. There is nothing in the complaint alleging Accretive and Mr. Cline condoned improper arbitration methods at NAF and Forthright. Mr. Cline declined requests for comment.

NAF settled the case with Minnesota Attorney General Lori Swanson in July without admitting the charges. It agreed in the settlement to stop arbitrating credit-card cases nationwide.

The case has made waves. Another consumer-debt-arbitration body, the American Arbitration Association, which handled far fewer of the cases than NAF, has also stopped hearing such cases. The AAA said its decision wasn't related to NAF's case, but it decided to stop those arbitrations after an evaluation revealed "weaknesses in the consumer debt collection arbitration process," according to its Web site.

The exit of the nation's two main debt arbitrators is part of a larger shift by banks away from requiring unhappy customers to arbitrate disputes, rather than go to court. In August, Bank of America Corp., which had used NAF to handle disputes, said credit-card holders now are free to go to court rather than being forced into arbitration. J.P. Morgan Chase & Co., citing recent events, ceased filing new arbitration credit-card claims in July and is evaluating whether to continue to include an arbitration clause in consumer contracts.

Arbitration and mediation have existed as ways to resolve disputes in the U.S. for more than 200 years. They became the standard practice in the financial world after 1987, when a Supreme Court decision gave securities firms the go-ahead to require arbitration to resolve brokerage-account disputes.

In a typical case, a bank refers an unpaid credit-card bill to a debt collector. If the collector is unsuccessful at recovering it, it refers the case to an arbitration body. Arbitration bodies, such as NAF and AAA, which generated revenue by charging fees to the parties involved, use retired judges and attorneys as arbitrators who decide the cases. If the arbitrator rules for the creditor, the collector can ask a court for a judgment to collect. Because a debt collector can earn up to a third of the debt outstanding when the ruling is in the bank's favor, it can be in a collector's interest for an arbitrator to rule against the card holder.

Former arbitrators, a congressional subcommittee, consumers and government suits are now alleging that NAF has been systematically ruling against consumers for years. Banks prevail over consumers in 94% of debt-collection arbitrations, an NAF official said in recent testimony to a congressional subcommittee. Arbitration advocates defend those results, citing studies that show debtors lose at a similar rate in court. They say that there is typically a long paper trail proving that customers owe the amounts in dispute.

A congressional subcommittee, which began an investigation last year to study the fairness of mandatory arbitration, concluded in July that the current arbitration system is "ripe for abuse." Arbitration, as "operated by NAF, does not provide protection for those consumers," the committee said.

A sweeping overhaul won't occur unless Congress decides whether to pass laws limiting how arbitration can be used. But arbitration experts now expect that more collection claims will be funneled into the courts.

Mr. Cline, a Harvard MBA and former McKinsey & Co. associate, formed Accretive in 1999. The firm, which counts some high-profile names such as Seagram heir Edgar Bronfman Jr. as general partners, has focused on launching new technology companies and helping spin off the information-technology operations of larger companies.

Accretive has a record of successful ventures. In 2000, it teamed up with General Atlantic, a private-equity firm where Mr. Cline was a general partner for 10 years, and started Fandango, a Los Angeles Web site that sells movie tickets and advertising. Fandango grew into one of the country's largest online movie-ticketing services before it was acquired in 2007 by cable operator Comcast Corp. for an undisclosed sum.

Mr. Cline also developed a passion for wild tigers, having served as a trustee of the Wildlife Conservation Society and a board director of Panthera, where he helped lead the Tigers Forever initiative to conserve the tiger population in Asia. Several years ago, Mr. Cline pledged $5 million to Tigers Forever over a 10-year period.

In 2006, his firm began wooing NAF. Created in 1986, NAF had become the go-to arbitrator for consumer-credit disputes, handling the bulk of such cases in the U.S. in 2006, or 214,000 claims.

Accretive had ambitious plans for NAF, according to documents presented in the Minnesota case. In established markets, such as credit cards, "arbitration should capture at least 50% of the volume currently placed in litigation," Accretive said in a presentation to NAF in August 2006, according to documents in the case. NAF could expand into new lines of business, such as helping hospitals collect bills, the documents added.

"We believe Accretive would be a great partner to help NAF become a billion dollar company," Accretive principal Madhu Tadikonda said in an email to NAF officials following a June 2006 meeting. Mr. Tadikonda, who has since left Accretive, declined to comment.

NAF earned much of its revenues from fees it charged credit-card companies. Filing an arbitration costs companies from $19 to as much as $1,750 for claims of $75,000 or more. Other fees apply to companies and consumers depending on whether an in-person hearing is sought, for instance.

While negotiating with NAF, Accretive also was finalizing the creation of a collection-processing firm in partnership with employees of Mann Bracken. Mann Bracken, a law firm, worked closely with NAF at the time. Along with another firm it would acquire, Mann Bracken filed 58% of the 214,000 consumer-debt arbitration claims sent to the NAF in 2006, according to the Minnesota complaint.

NAF "executives recognized the problems that would arise if Accretive's investment in the [NAF] -- and its ties to the Mann Bracken law firm -- became public," the complaint said.

In fall 2006, Michael Kelly, NAF's chief operating officer, emailed Accretive's Mr. Tadikonda, recommending that any Accretive stake in NAF be acquired through "a new fund as the investment vehicle," according to a copy of the email included as an exhibit in the Minnesota case. There should be "no public information connecting Accretive with the fund that ultimately acquires and holds the minority interest" in NAF.

Mr. Kelly, a former executive for the Minnesota Vikings football team and a lawyer, told Accretive officials that they would need to establish an "on-going Chinese wall between Mann Bracken and the" NAF. "I cannot overstate our concern over the Mann Bracken relationship," Mr. Kelly added in the email.

Mr. Cline had a solution, the Minnesota complaint alleges: forming several entities called Agora, "in order to conceal the conflicts inherent" with the Accretive/NAF transaction.

Mr. Kelly said through a statement from NAF that he addressed concerns about Mann Bracken by taking "very specific" actions, including establishing separate office space with secure key-card access and separate information-technology infrastructure. After taking these actions, Mr. Kelly said, he decided there were no longer any conflicts and proceeded with Accretive. Mann Bracken had no comment.

Accretive and NAF signed a letter of intent on a deal in early 2007, according to the complaint. Several weeks later, Mr. Cline set up four enterprises in Delaware. The general partner of all the entities, Agora Fund I GP LLC, shared the address of Mr. Cline's private-equity firm. The Agora entities then acquired a stake in a new company called Forthright that handled back-office and marketing duties for NAF. That step created a layer hiding Mr. Cline's partnership with NAF, according to the Minnesota complaint.

An Accretive spokesman said documents detailing the partnerships were filed with state authorities and are publicly available. The spokesman said the Delaware partnerships were created for tax-planning purposes.

Since its settlement with the Minnesota attorney general, NAF has focused on other forms of arbitration such as domain-name disputes. It has been hit by numerous complaints alleging it favored its corporate clients in credit-card disputes.

A former part-time NAF arbitrator, Harvard University law professor Elizabeth Bartholet, testified before the Senate Judiciary Committee last year that NAF discontinued sending her cases in 2004 shortly after she ruled in favor of a consumer.

Before that case, she had ruled in favor of credit-card companies 18 consecutive times, she told the committee. She says she finished several pending NAF cases after she ruled for the card holder, but then wasn't given more cases. The official reason the NAF gave for canceling more work was scheduling conflicts. But Ms. Bartholet said in an interview that an NAF manager told her she was likely removed because she ruled for the debtor. "Someone else will fill NAF's vacuum if Congress doesn't reform the [arbitration] system," Ms. Bartholet said.

NAF's Mr. Kelly said Ms. Bartholet has "testified to the fairness of arbitration and arbitrators in subsequent legal depositions."

NAF, which has a database of more than 1,000 attorneys and retired judges whom it hires as arbitrators, says it is unbiased. In Houston, NAF arbitrator James Carmody says he spent up to three hours in cases where consumers decided to fight a debt claim. When consumers didn't fight, the lawyer could clear a case in 15 minutes.

"I have bent over backward to listen to the arguments of the credit-card holder," Mr. Carmody says. Often, consumers didn't respond to the arbitration notice. "I would say in the vast majority of cases the credit-card company wins because in the vast majority of cases, the person ran up the debt on the card."

Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com, Dionne Searcey at dionne.searcey@wsj.com and Nathan Koppel at nathan.koppel@wsj.com

Printed in The Wall Street Journal, page A14

Mortgage Electronic Registration Systems Loses Legal Shield

Mortgage Electronic Registration Systems Loses Legal Shield

By Barry Ritholtz - September 23rd, 2009, 6:47AM

Back in April, we mentioned the The Mortgage Netherworld of MERS — the Mortgage Electronic Registration Systems.

MERS is the firm that (technically) holds 60 million US (securitized) mortgages on behalf of the actual buyers. They were created by a consortium of lenders in part to save money (on paperwork and recording fees) every time a loan changes owners. In the era of securitization, these savings amounted to billions of dollars.

But MERS also acts as a shield, making it all but impossible for many borrowers to deal directly with whoever happens to be holding their mortgage at the moment. As the NYT noted, it has “made life maddeningly difficult for some troubled homeowners.”

Now, the Kansas Court of Appeals has called foul. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. (Other than GlobalResearch.ca, I have yet to see any MSM coverage of the issue). The Court stated that MERS’ relationship is not that of a true party possessing all the rights given a buyer. Hence, the court ruled:

“By statute, assignment of the mortgage carries with it the assignment of the debt. . . . Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” (emphasis added).

What does this mean for the 60 million people — over half of all US mortgages — whose loans have been securitized, sliced and diced, and are now held by MERS?

To start, it potentially gives a powerful weapon to homeowners who are being foreclosed upon. If their mortgage is held by MERS, they certainly have a strong basis for challenging the action on the grounds of standing. (Note that this was a Kansas COURT OF APPEALS decision, and while it is not binding on other states the way a US Supreme court ruling would be, it is likely to be influential).  I also think the Kansas Court of Appeals could also review this case

I don’t quite agree with Ellen Brown, who in an extensive legal analysis of the decision, writes: “The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose.” It may be possible for trustees for the securitized loans to somehow perfect standing, i.e., develop the ability to claim loan ownership (perhaps via a purchase) and then move to foreclose. (Brown also calls it a Kansas Supreme Court decision, but it appears to be the intermediate 3 judge panel of the Court of Appeals that heard the case, not the full Kansas Supreme Court).

But Brown is correct when she states this is a very significant legal development, one that might dramatically impact foreclosure litigation.

This ruling could send the lenders who work with MERS scurrying to resolve this in their favor. Look for a lobbying effort to get some favored congresscritter to pass legislation granting them standing to sue on behalf of loan holders (Congress may be able legislate that legal right, although there are state laws to be contended with).

As foreclosures continue to ramp up, I expect a lot of rhetoric about why we need to stop them (I disagree) and modify mortgages (which have been mostly unsuccessful).

Last, you never know what someother state supreme court might rule. (Any lawyers out there know what is on upcoming dockets involving MERS ?)

Bottom line: It just got a lot harder to foreclose on homes with securitized mortgages in Kansas, and quite probably, the rest of the nation.

>

Previously:
The Mortgage Netherworld (April 2009)
http://www.ritholtz.com/blog/2009/04/the-mortgage-netherworld

Sources:
Landmark National Bank v. Kesler
COURT OF APPEALS OF THE STATE OF KANSAS
No. 98,489
September 12, 2008
http://www.kscourts.org/Cases-and-Opinions/opinions/ctapp/2008/20080912/98489.htm

Landmark Decision: Massive Relief for Homeowners and Trouble for the Banks
Ellen Brown
GlobalResearch.ca, September 23, 2009
http://www.globalresearch.ca/index.php?context=va&aid=15324

See also:
Six Degrees of Separation
Andrew Davidson
August 2007
http://www.securitization.net/pdf/content/ADC_SixDegrees_1Aug07.pdf

S&P Downgrades A 4 Month Old JPM Re-REMIC,

S&P Downgrades A 4 Month Old JPM Re-REMIC,

Submitted by Tyler Durden on 09/23/2009 12:28 -0500

• Ben Bernanke
• Bernanke
• Bubble
• CMSA
• CRE
• Credit
• Debt
• Downgrade
• IPOs
• JP Morgan
• JPM
• Moral Hazard
• Performance
• Re-REMIC
• REAL
• real estate
• Securitization
• TALF

Re-REMICs (re-securitized real estate mortgage investment conduit) recently made a splash as a way to repackage securitizations: the only component of the shadow banking system that no matter how hard Bernanke tries he has so far been unable to restore. In fact Re-REMICs were recently seen as a way to salvage the CRE market even as the TALF has been foundering, so much so that CMSA has been pushing for Re-REMIC inclusion in the TALF program. Nothing like taxpayers guaranteeing the very same leverage-expansive product that was among the key reasons why were are here now.

Amusingly, Re-REMIC, which are supposedly much safer than traditional securitization conduits as they get to pick and choose classes which are presumed to be safer and only those are sold to erudite investors, are starting to go bust. The most recent example: today's downgrade by S&P of a class of a JP Morgan Re-REMIC issued a mere four months ago in May of 2009, the JPMRT 2009-3.

Standard & Poor's Ratings Services today lowered its rating on one class of certificates from JP Morgan Resecuritization Trust Series 2009-3 (JPMRT 2009-3). We lowered the rating on class 2-A-2 to 'B' from 'BBB-'. At the same time, we affirmed our 'AAA' ratings on three other classes.

The reason:

The downgrade reflects the significant deterioration in the performance of the loans backing the underlying certificate. Although this performance deterioration is severe, we affirmed the rating on class 2-A-1, which is within loan group 2, because class 2-A-2 provides credit enhancement to it. In addition, the affirmations on the classes from loan group 1 reflect the performance of the loans and available credit enhancement for the group 1 underlying certificate.

"Significant deterioation" in loans that were expected to be stable in those long ago days of May 2009.

Based on the losses to date, the current pool factor of 0.728 (72.8%), and the pipeline of delinquent loans, our current projected loss for this pool is 2.99%, which exceeds the level of credit enhancement available to cover losses passed through to the class 2-A-2 within the re-REMIC.

That's ok. Investors in the Re-REMIC will promptly brush this off as they prepare for not debt but equity investments in IPOs of companies that invest in just such comparable loan pools. Bernanke's moral hazard bubble is the guiding light as always.

Banks Bite Bullet on Loans Lenders Start to Write Off Some Principal in Modifying Terms for Troubled Mortgages

Banks Bite Bullet on Loans Lenders Start to Write Off Some Principal in Modifying Terms for Troubled Mortgages

By JAMES R. HAGERTY

(See Corrections & Amplifications item below.)

Banks and loan investors are starting to bite the bullet and lower the principal due on home mortgages for some struggling borrowers, a new report from bank regulators shows.

That's good news for some homeowners, but may portend more write-offs over the next few years for banks and other lenders now wading through hundreds of thousands of applications for loan modifications. The tradeoff for banks is that by taking the hit now they can boost their chances of being repaid.

Primary Source

• Read the full OCC report.

Banks and loan servicers modify loans primarily by reducing interest rates or extending the term of the mortgage. These methods can temporarily help borrowers struggling to make payments without requiring lenders to lower the principal owed. Now, in a small but growing number of cases, banks are going further and writing off some of the loan altogether.

Part of this is due to prodding from the Obama administration, which has made saving homeowners from foreclosure a cornerstone of its economic-rescue strategy. The administration in March announced plans aimed at helping as many as nine million households struggling with mortgage debt through loan modifications or refinancings. The plans include financial incentives for mortgage-servicing firms that modify loans.

At the same time, banks now have more flexibility to modify loans because of their success in stabilizing their balance sheets and, in some cases, raising fresh capital. Banks can afford "to take the pain up front," said Kevin Fitzsimmons an analyst at Sandler O'Neill & Partners LP in New York. "If they want a legitimate chance of salvaging something out of the loans, they are better off taking the loss now."

Bloomberg News

Rows of tract houses this month in Las Vegas. The median home price in the area fell 40% to a 10-year low in August amid sales of foreclosures.

The portion of loan modifications in the second quarter that involved reducing the principal jumped to 10% from 3.1% in the first quarter, according to the report released Wednesday by the Office of the Comptroller of the Currency, or OCC, which regulates national banks.

Alejandro Estrella, a mail carrier in Riverside, Calif., said he was surprised when his lender, the Wachovia unit of Wells Fargo & Co., agreed recently to reduce the principal he owed on two mortgages on his home by 18% to about $237,000. That will lower his monthly payments to less than $1,500 from about $2,100. "I wasn't expecting it," said Mr. Estrella, who started out seeking just a reduction in his interest rate and got counseling from Springboard Nonprofit Consumer Credit Management.

Principal reductions are still the exception, though. Tom Kelly, a spokesman for J.P. Morgan Chase & Co., said the lender first tries to make loans affordable by lowering the interest rate for borrowers who qualify for modifications. If that doesn't result in a low enough payment, the bank may extend the term of the loan or defer repayments on part of the principal. That deferred principal would come due if the home is sold or refinanced.

But banks and loan servicers are recognizing that modifications don't always work if the borrowers aren't given a big enough break. Of loans modified in this year's first quarter, 28% were in default again within three months, the OCC said. Among those modified in last year's second quarter, 56% were in default again a year later.

Although the Obama administration programs for averting foreclosures got off to a slow start, they are starting to result in larger numbers of modified loans. The OCC report tallied 439,574 agreements to help troubled borrowers, including loan modifications and other repayment plans, in the second quarter. That was up 75% from a year earlier. Of that total, 142,362 of the agreements were classified as loan modifications, and 10% of those involved reducing the principal.

Beyond Housing, a nonprofit in St. Louis that counsels distressed borrowers, recently won a principal reduction for Evone Lester, a prison employee who had fallen behind on her payments and faced foreclosure. The loan was being serviced by Wells Fargo & Co. but was owned by an investor, Beyond Housing said. The investor agreed to reduce the loan balance to about $48,800 from $72,000, said Chris Krehmeyer, chief executive of Beyond Housing. That helped cut the monthly payment to $761 from $1,039.

In spite of these efforts, foreclosures continue to rise. In a report last week, Amherst Securities Group, a New York research firm, estimated that about seven million homes -- representing 12% of U.S. homes with mortgages -- will end up changing hands in foreclosures or related transactions over the next few years. The company said it doesn't expect that loan-modification efforts will ease the problem significantly, largely because so many people default again.

The OCC's report, which covers about 64% of all U.S. home mortgages outstanding, found that 11.4% of those mortgage loans were at least 30 days overdue or in foreclosure at the end of the second quarter, up from 10.2% three months earlier and 7.4% a year before.

The OCC isn't requiring banks to reduce principal, said Joseph Evers, a deputy controller at the regulatory agency. But, he said, the OCC has told banks they need to make sure modifications are "more sustainable," giving borrowers a real chance to keep up with the new payments.

Separately, the Federal Reserve Board Wednesday released a report on mortgage data from more than 8,000 lenders under the Home Mortgage Disclosure Act, known as HMDA. The report showed that blacks and Hispanic whites were far more likely to be denied last year for refinancing conventional mortgages, those that aren't insured by the federal government.

The denial rate for blacks was 61%, compared with 51% for Hispanic whites and 32% for non-Hispanic whites. That may partly reflect the larger proportion of minority borrowers who got subprime loans during the housing boom and ended up in homes whose values have crashed.

—Dan Fitzpatrick contributed to this article.

Write to James R. Hagerty at bob.hagerty@wsj.com

Corrections & Amplifications:
A report on U.S. mortgage performance in the second quarter came from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. This article fails to mention the OTS.

Printed in The Wall Street Journal, page A3

Wall Street Wizardry Reworks Mortgages Repackaged Investments Are Good for Bankers and Ratings Firms, but the Regulators Scoff

Wall Street Wizardry Reworks Mortgages Repackaged Investments Are Good for Bankers and Ratings Firms, but the Regulators Scoff

By LESLIE SCISM and RANDALL SMITH

A new wave of financial alchemy is emerging on Wall Street as banks and insurers seek to make soured securities look better. Regulators are pushing back, saying the transactions don't have enough substance and stand to benefit bankers and ratings firms.

The deals come as Wall Street firms, buoyed by surging markets, are seeking to profit from the unwinding of the complicated securities that helped fuel the credit crisis. Regulators, meanwhile, are struggling to prevent a recurrence of the crisis.

The popular deals are known as "re-remic," which stands for resecuritization of real-estate mortgage investment conduits. The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.

The net result is financial firms' books look better and they need to hold less capital against those assets, even though they are the same assets they held before the transaction.

Some state insurance regulators worry that current ratings are flawed -- perhaps even too harsh -- for determining the capital that should back up residential-mortgage securities. But they are chafing at the re-remic strategy. That's partly because of the fees and partly because re-remics rely on ratings firms -- faulted for failing early on to identify problems with mortgage-backed bonds -- to rate the new securities.

At hearings Wednesday on Capitol Hill focused on the ratings firms, U.S. Rep. Dennis Kucinich (D-Ohio) raised concerns about the mounting number of re-remics, saying, "The credit-rating agencies could be setting us up for problems all over again."

New York and some other key regulators are considering an alternative to re-remics that doesn't entail insurers paying millions in fees to investment banks and the ratings firms; they also have debated possibly unfavorable accounting treatment for the re-remic deals.

Regulators would like "a lot fewer dollars" paid to Wall Street, as well as "less reliance on the ratings agencies," said Kermitt Brooks, first deputy insurance superintendent in New York. The state is an important voice on financial matters at the National Association of Insurance Commissioners, or NAIC.

The alternative solution, proposed by trade group American Council of Life Insurers, calls for hiring an analytical firm with expertise in residential mortgage-backed securities to help regulators determine the value of deteriorated holdings on insurers' books, bypassing the ratings providers. This firm would help size up potential losses and how much capital the insurers need to hold.

The re-remic accounting treatment, meanwhile, is expected to be taken up at a meeting of NAIC regulators in December.

It is unclear how big a concern this is for banking regulators. Alabama Deputy Banking Superintendent Trabo Reed said he has seen only a few examples of re-remics. His concern is that banks engaging in this practice account for it correctly.

From a Trickle to Flood

Wall Street analysts said activity in re-remics has ramped up this year, from a trickle in January to several billion dollars from March to June, with a big increase in volume in July, partly thanks to reviving credit markets.

Estimates of volume this year range from $30 billion to more than $90 billion. The transactions are typically done as private placements and aren't disclosed publicly.

A hypothetical example cited in research by Barclays Capital said that a $100 million asset that required $2 million in capital at a triple-A rating may require $35 million if downgraded to double-B-minus. At triple-C, the capital requirement might rise to 100%, or $100 million.

In a re-remic, three-fourths of the same asset may regain a triple-A rating, requiring just $1.5 million in capital, Barclays said. The remaining one-quarter may require 100% capital, but the total capital requirement would fall to $26.5 million.

Wall Street bankers and analysts said a minority of re-remics, perhaps as little as 10% to 30%, are aimed at helping firms like insurers manage capital requirements. The general goal, as one banker put it, is to help "create buyers for orphan securities that otherwise would have languished."

"There is $350 billion to $400 billion in market value of securities with no natural buyer due to their rating," Barclays said in a June report. "The re-remic market provides a way out of this gridlock by creating new AAA securities, which are likely to be viewed as attractively priced."

Wall Street firms that have acted as middlemen in re-remics include J.P. Morgan Chase & Co., Credit Suisse Group, Jefferies & Co., Royal Bank of Scotland Group PLC, as well as Barclays PLC, according to a Barclays tally.

Citigroup Inc., meanwhile, is pursuing its own re-remic strategy, to repackage some toxic real-estate securities on its balance sheet, according to people familiar with the bank.

'Not Cheap'

Insurance executives estimate that insurers pay 0.35% or so of a deal's size in investment banking, ratings firm, legal and other costs.

American Equity Investment Life Holding Co. has told analysts that it is considering a re-remic. Recent downgrades of its mortgage bonds overstate their risk by a wide margin, its executives said.

Still, a re-remic is "not cheap," John Matovina, the company's finance chief, said in an interview.

On Sept. 15, an executive at American Financial Group Inc. noted to investors that re-remic transactions there involving about $1.2 billion of mortgage bonds provide "flexibility." And Protective Life Corp. said in August that its re-remics, totaling about $1.4 billion, improve the company's capital standing "in the ballpark" of $75 million.

At an NAIC hearing last week, ratings firms described changes over the past year to improve their analytical, compliance and corporate-governance processes. But they also generally agreed that their ratings weren't ideal as a sole basis for determining insurers' capital levels.

—Dan Fitzpatrick contributed to this article.

Write to Leslie Scism at leslie.scism@wsj.com and Randall Smith at randall.smith@wsj.com

Printed in The Wall Street Journal, page M11

Study: Brokers, Minority Borrowers to Blame for Most Mortgage Delinquencies

Study: Brokers, Minority Borrowers to Blame for Most Mortgage Delinquencies

09/02/2009 By: Adam Weinstein

Residential mortgages originated by brokers at the height of the housing boom, as well as loans given to minority borrowers, are to blame for the lion’s share of delinquencies in the current recession, according to a study released this week by researchers at the Columbia Business School.

The findings were reported in a working paper titled “Liar’s Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency”, assembled by a team of finance and economics experts at the school. In a study of all the 721,767 loans that an unnamed “major national mortgage bank” opened between 2004 and 2008, the researchers found that loans originated by brokers were 50 percent likelier to be in arrears than loans originated by the banks themselves.

The study also found “significantly higher delinquency rates among Hispanic and black borrowers” than among whites. But researchers stopped short of saying discriminatory lending practices by brokers and banks were the cause, instead attributing the discrepancy to “information and experience disparities resulting from a lack of prior home buying experience or exposure to mainstream financial institutions.”

“Our analysis highlights two major agency problems underlying the mortgage crisis,” the report said. Those issues were “an agency problem between the bank and mortgage brokers that results in lower quality broker-originated loans, and an agency problem between banks and borrowers that results in information falsification by borrowers of low-documentation loans-known in the industry as Alt-A or ‘liars’ loans’-especially when originated through a broker.”

The report also compared differences between well-documented borrowers and those who didn’t need to verify their incomes and histories and loan documents. It found that the less-documented borrowers who reported high incomes were far likelier to default than those whose high incomes were verified – suggestion that loans were made on misleading information.

“We provide evidence of borrower information falsification at both individual variable and aggregate levels,” the report said.

An author of the report put it more bluntly.

“Low-doc borrowers had slightly better credit scores, slightly better incomes-slightly better everything,” Wei Jiang, an associate professor at Columbia, told the Wall Street Journal. “But we estimate that low-doc applicants exaggerated their income by about 20 percent on average.”

The unnamed bank itself did not escape scrutiny, however. The Columbia researchers also asked “why this major mortgage bank-as well as other market players-allowed such deterioration in borrower and loan quality to persist before tightening its lending standards.”

The analysts concluded that the securitization of mortgages, and selling of them to investors, essentially left the bank free to originate loans without regard for any true standard of the borrowers’ creditworthiness.

“The expansion of the secondary mortgage market and the ease of loan securitization weakened the bank’s incentive to screen borrowers by allowing the bank to offload risk,” the study said.

Ruling in Tax-Auditing Case Puts Corporations on Edge

Ruling in Tax-Auditing Case Puts Corporations on Edge

By AMIR EFRATI

A little-publicized ruling in a recent case involving the Internal Revenue Service is causing lawyers for big companies some sleepless nights.

Last week, in a widely anticipated ruling, a federal appeals court in Boston said the IRS could gain access to documents created by a defense-contracting firm to determine whether the company's calculation of its tax liabilities would pass muster during a possible IRS audit. The decision in U.S. v. Textron Inc. reversed a January ruling by a smaller panel of judges on the same court.

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Scott Dressel-Martin

Frederick Krebs of the Association of Corporate Counsel fears a troubling precedent in the court ruling.

To some lawyers who represent corporations, the decision signaled an attack by the courts on the "work-product doctrine," the legal rule that shields an individual or business from having to turn over documents created "in anticipation" of litigation. In its ruling, the First Circuit Court of Appeals said the documents at Textron weren't protected under the doctrine because they weren't prepared specifically "for use" in litigation.

The ruling "eviscerates the work-product doctrine," says Frederick Krebs, president of the Association of Corporate Counsel, an organization for in-house corporate lawyers. He says the ruling, which is binding in federal courts in the Northeast where the First Circuit is based but could influence other courts, will embolden the IRS -- as well as plaintiffs' lawyers who bring shareholder lawsuits -- to seek more such documents from public companies. "If the IRS gets access, [it] can immediately figure out where the client thinks it's weak, what it's willing to pay," he says. The IRS praised the ruling in a statement last week but declined further comment.

Thomas Sabatino, general counsel of Schering-Plough Corp., worries the court's decision could transcend the tax arena and make in-house lawyers wary of providing complete assessments of future legal trouble in a variety of areas, from product-liability litigation to patent disputes. "The fear factor for corporate counsel is that...the ruling would say any analysis done by lawyers to ensure the accuracy of financial statements can be exposed," he says. "That makes it much more difficult for lawyers to continue to protect their client."

Some tax experts say the concern is misplaced. Corporate lawyers are "trying to expand the work-product doctrine far beyond its original intent," says Dennis Ventry, a law professor at the University of California, Davis, whose analysis of the Textron case was cited by the court in its opinion. "The IRS operates with significant information deficiencies," he says, "and some companies bury things into a large tax return and try to obscure what they're doing."

The debate is playing out as the IRS in recent years has sought to hunt down illegal tax shelters. As part of that push, the agency increasingly is asking to review documents that show companies' analysis of how much they should set aside in reserves for additional tax payments, should the IRS identify questionable tax accounting. In most instances, the documents, known as tax-accrual papers, include the company lawyers' determination of the likelihood that it will win or lose future tax disputes with the IRS.

Steve Johnson, a law professor at the University of Nevada, Las Vegas, said many companies "were engaged in transactions that pushed the envelope in the tax sense. The game was, 'Could we structure this in a way that the IRS wouldn't be able to figure out what was going on?'"

But corporate lawyers say that because tax law isn't always clear, it isn't fair for the IRS to use a company's evaluations about its own tax decisions against it.

The question at issue in the Textron case was whether tax-accrual documents were protected under the work-product doctrine. The theory, which traces its roots to a 1947 Supreme Court decision, protects material prepared in anticipation of litigation from being revealed to opposing lawyers in a court case. The rationale: seeing those materials gives an opponent the edge by sharing the other side's legal strategy.

The work-product doctrine is different from another rule that also is used to protect sensitive materials, the attorney-client privilege. That privilege is broader, protecting communications between clients and their lawyers, whether or not it deals with anticipated litigation. In this case, Textron, like most other public companies, showed the tax accrual papers to outside accountants, effectively removing attorney-client privilege over these documents.

But Textron said the work-product doctrine applied because the company's lawyers believed there was a chance the IRS would challenge the tax deductions, resulting in litigation. In the end, the court ruled that the documents produced by Textron weren't protected by the doctrine.

Judge Michael Boudin, writing for the majority on the court, said: "Textron apparently thinks it is 'unfair' for the government to have access to its spreadsheets, but tax collection is not a game. Underpaying taxes threatens the essential public interest in revenue collection."

A spokeswoman for Textron, which makes Cessna planes and Bell Helicopters, among other products, said the company is reviewing the decision.

Write to Amir Efrati at amir.efrati@wsj.com

Printed in The Wall Street Journal, page A9

• George Stoya wrote:

The ruling "eviscerates the work-product doctrine," says Frederick Krebs, president of the Association of Corporate Counsel, an organization for in-house corporate lawyers...Really?

As noted by Gary C. Shockley of theTennessee bar, the work-product does not shield underlying facts from discovery, only documents and things prepared in anticipation of litigation. The work-product protection is not absolute. Unlike the attorney-client privilege, the work-product doctrine is a conditional privilege and can be overcome by a showing of substantial need and hardship.

As excerpted from a Shokley news letter addressing a November 2003 decision, In re Grand Jury Subpoena (Mark Torf/Torf Environmental Management), 350 F.3d 1010 (9th Cir. 2003), the U.S. Court of Appeals for the Ninth Circuit addressed these issues in the context of parallel proceedings.

The Ninth Circuit began its discussion with a review of the work product doctrine under Rule 26(b)(3) of the Federal Rules of Civil Procedure, which protects documents and tangible things prepared by a party or a party's representative in anticipation of litigation or for trial from discovery. Such documents are subject to discovery only upon a showing of substantial need by the requesting party and an inability to obtain equivalent materials without undue hardship. Id. at 1015. Under United States v. Nobles, 422 U.S. 225 (1975), the doctrine extends to materials prepared by an investigator working for attorneys and prepared in anticipation of litigation.

Based on these general principles, the Ninth Circuit applied a two-part test: (1) were the materials prepared in anticipation of litigation and (2) by or for a party or a party's representative?

Because the environmental consultant Torf was hired by the attorney McCreedy to help him in assessing the company's potential civil and criminal liability, all documents prepared for this purpose were entitled to protection under the attorney work product doctrine. As to these so-called "single purpose documents," the court had no question that these materials met its two-part work-product test. 350 F.3d at 1015.
Other documents prepared by Torf, however, were prepared both in anticipation of litigation and to assist in the CERCLA cleanup under the EPA consent order.

As to these "dual-purpose documents," the Ninth Circuit found that the appropriate test was whether the documents were prepared "because of the prospect of litigation." Id. at 1015-16 (quoting Charles Alan Wright, Arthur R. Miller, and Richard L. Marcus, 8 Federal Practice & Procedure § 2024 (2d ed. 1994)). Relying on the Second Circuit's decision in United States v. Adlman, 134 F.2d 1194 (2nd Cir. 1998), the court rejected a primary vs. secondary motivation test in favor of an inquiry into whether, under the totality of the circumstances, the document would not have been prepared in the same form but for the prospect of litigation.

Because the threat of litigation drove all of Torf's work, including work done to comply with the EPA information request and consent order, even Torf's dual-purpose documents were entitled to protection under the Adlman "because of" test. 350 F.3d at 1016-17.

Shokely cautions that when considering the factual situation presented here, the compliance and litigation defense motives were so intertwined that work-product protection was required. Because Torf's dual purpose documents were prepared at least in part in anticipation of litigation and under the direction of counsel, they were entitled to protection just as much as the single purpose documents. Id. at 1016-18.

The Ninth Circuit also rejected the government's attempt to come within the need and hardship exception to the work product doctrine. The court found that the information supplied by Ponderosa and Torf in response to the information request, coupled with that otherwise available to government representatives while present at the sites in question, belied the assertion of substantial need and hardship.

My Bad! Woman's House Mistakenly Auctioned by Bank

My Bad! Woman's House Mistakenly Auctioned by Bank

A Homestead woman's home was auctioned to the highest bidder

By TODD WRIGHT

Updated 5:38 PM EDT, Wed, Aug 19, 2009

You know times are tough when people are getting kicked out of their house when it’s not even for sale.

That’s what happened to Anna Ramirez after she found all of her stuff out on the front lawn of her Homestead home last week and a strange man demanding she get out of his newly purchased house.

The eviction came after Ramirez’s home was mistakenly auctioned off to the highest bidder by her bank, Washington Mutual (yes, we know WaMu is now Chase, but we're in denial). Usually, you get a warning before you get the boot. A foreclosure letter. Maybe a sign saying your house is up for sale. Not Ramirez, who found her belongings bashed and battered in the street.

"This came out of nowhere," Ramirez said. "The bank took the house from right under my feet."

The man who bought the house told Ramirez he paid $87,000 for it, which shocked Ramirez, who bought the house for $260,000.

What's worse is her husband, daughter and grand children were also kicked out by Homestead and Miami-Dade police officers, said Martha Taylor, who witnessed the unexpected eviction.

"I have never seen anything like it," Taylor said. "They literally threw all her stuff on the front lawn. I didn't sleep that night and it wasn't even my house."

Ramirez and her family had three hours to get out of the house, police ordered. They had to stash their belongings at multiple locations and shacked up with a friend for the night as cops chained the doors of their home. With Taylor's help, Ramirez appeared before a judge two days later to explain what happened.

"I had all my stuff scattered everywhere," she said. "They did this in front all my neighbors. It was so embarassing."

A mistake in the Miami-Dade Clerk's Office appears to be behind the mishap, which landed Ramirez homeless for more than 24 hours.

The sale was eventually reversed by a Miami-Dade judge, allowing Ramirez to return to her old digs. Ramirez said she wants to sue for the damage to her furniture.

Ramirez has lived in the house for three years and recently refinanced the home with the bank.

"This shouldn't be happening, you know, because we did the right thing," she said. "We went step by step."

First Published: Aug 18, 2009 1:38 PM EDT

5 dumb reasons you can't get mortgage help

5 dumb reasons you can't get mortgage help

The fax machine is first among problems bedeviling the government's modification program.

By Tami Luhby, CNNMoney.com senior writer

Last Updated: August 11, 2009: 5:39 PM ET

NEW YORK (CNNMoney.com) -- What's keeping troubled homeowners from getting mortgage help? Start with the fax machine.

Most loan servicers taking part in the Obama administration's mortgage modification initiative require that borrowers fax in their applications and supporting documents. And because faxes can be problematic, aid can be delayed or denied.

The fax isn't the only source of complications. Borrowers and housing counselors complain of endless waits on hold, lost paperwork and incorrect information from customer service representatives.

Many of the pitfalls stem from how quickly the programs were set up, experts said. Mortgage servicers often have 90 days to set up new programs. In this case, they were only given a few weeks.

"The program has been done somewhat on the fly because it's a crisis situation," said Paul Leonard, vice president for government relations for the Housing Policy Council, which represents mortgage lenders, servicers and insurers.

Only 9% of eligible delinquent borrowers have been put into trial modifications, according to a Treasury Department report released last week. The government is putting increased pressure on servicers to improve their performance as homeowners' complaints mount.

CNNMoney.com looks at five reasons why the loan modification process is so slow.

Reason #1: The fax machine

Having applicants fax their information to servicers has produced a slew of problems. Pages get lost or are cut off at the top or bottom. Servicers provide non-working or incorrect numbers. Applications are routed improperly, leaving files incomplete.

"It seems your stuff goes into a black hole," said Michael van Zalingen, director of homeownership services for Neighborhood Housing Services of Chicago. "It's archaic. Given all the problems we've had with lost faxes, it seems unreasonable to use a fax system."

Servicers acknowledge there is a better way. They'd like to see the government develop a Web portal where borrowers can fill out paperwork and submit documents, Leonard said.

The portal could also enable borrowers and housing counselors to confirm that their applications were received and are complete.

"Homeowners could get a more real-time update on their status and see what else is needed," Leonard said.

Reason #2: Multiple forms

All sides acknowledge that the multitude of forms and documentation requirements is gumming up the works. Servicers have to provide different paperwork depending on whether the borrowers' loan is owned by Freddie Mac (FRE, Fortune 500) or Fannie Mae (FNM, Fortune 500). On top of that, many institutions have also developed their own applications.

The lack of a unified application process makes it tough for distressed borrowers -- and even housing counselors -- to submit everything that's required.

For instance, some servicers want to see the most recent month's bank statements and pay stubs, while others want to see two months' worth. The self-employed may have to send in six months of business records or a year's worth, depending on their servicer.

"It's not understood what needs to be sent in," said Kathy Conley, housing and finance counselor with GreenPath in Farmington Hills, Mich.

Financial institutions would also like to have the process simplified, Leonard said. They are petitioning the administration to create a standard set of documents and requirements for the program.

Reason #3: Outdated documentation

Since it can take weeks for servicers to process applications, documents such as bank statements and pay stubs can become outdated quickly. Servicers then tell applicants to send in more recent proof of income, often sending them back to square one.

"By the time they get back to you, they say it's stale," van Zalingen said.

Conley always tells her clients to keep their pay stubs handy because they'll likely need to update their files.

If the government reduces the amount of documentation that's needed, servicers can process the applications more quickly, said David Sisko, who heads the default management practice at Deloitte & Touche.

"Nothing servicers have is designed to handle this type of volume," he said.

Reason #4: Poorly trained personnel

Servicers are hiring and training staff by the thousands to handle the flood of applications they are receiving. But borrowers and housing counselors complain bitterly that many customer service representatives are not aware of the modification program's details.

"They are not getting the training to be able to give homeowners the right answers," van Zalingen said. "Their ignorance of the program is almost outrageous."

Take Ryan in Minnesota, who wrote to CNNMoney.com. He has been trying to modify his loan for the past several months.

"Initially every time I called in to find out what the lender could do for us, I got a different answer every time except for them constantly telling me they won't do anything if we are not three months behind in payments, which is an absolutely ridiculous suggestion," he said.

Servicers, who are feeling the heat from the Obama administration, have said they are working on improving their customer service operations. They expect to ramp up the review process by the fall.

Reason #5: Unclear modification offers

Some delinquent borrowers are receiving trial modification offers without ever sending in an application. That's because servicers are culling through their portfolios and reaching out to those who likely qualify for help.

The packet, however, is confusing, van Zalingen said. The offer letter doesn't clearly state that it is part of the administration's loan modification program, and the new monthly payment doesn't appear for several pages.

Many homeowners don't know what to make of the offer and simply throw it away, he said.

Leonard said servicers are looking to increase their response rate.

"Companies are experimenting with the best way to reach people and getting them to respond," he said.  

First Published: August 11, 2009: 4:03 AM ET

Big Texas bank on verge of failure

Big Texas bank on verge of failure

Guaranty Bank, which counts Carl Icahn as one if its backers, is teetering on the edge of insolvency. But it may not be easy for regulators to find a buyer.

By Colin Barr, senior writer

Last Updated: July 31, 2009: 1:53 PM ET

NEW YORK (Fortune) -- Guaranty Bank is hardly a household name. But the Austin, Texas-based thrift's looming failure is shaping up as a big headache for bank supervisors -- not to mention a black eye for Carl Icahn and others in the smart money set.

Guaranty (GFG) could be soon seized by the government in what would be the biggest bank failure in a year that has already had 64 of them. Last week, the bank warned investors to expect a federal takeover after regulators forced a writedown of its risky mortgage investments and a bid to raise new capital failed.

Guaranty has $13.4 billion in assets and operates 160 branches in Texas and California -- two of the three best banking markets in the nation, thanks to their size and population growth.

But the bank's capital problems and its smallish, scattered network of branches could detract from Guaranty's appeal, making it tough for regulators to find a buyer quickly -- or without substantial federal subsidies.

"This may not be closed as quickly as you think, since it will require bids and rebids," said Miami banking consultant Ken Thomas.

That means resolving Guaranty's failure is likely to be costly to the FDIC's deposit insurance fund, whose balance is at its lowest point in almost two decades.

The Federal Deposit Insurance Corp. isn't the only one taking its lumps. So have some big investors.

Shares of the bank's parent, Guaranty Financial, have dropped 97% since a group led by billionaire Texas hotel mogul Robert Rowling and Icahn, the renowned New York corporate raider, poured $600 million into the company in June 2008.

Other big Guaranty holders whose stakes stand to be wiped out include hedge fund managers David Einhorn, who was among the most persistent skeptics of Lehman Brothers before its collapse, and Dan Loeb.

"Relatively low franchise value and the fact that two big money investors already got burned on this bank may suggest less interest than with BankUnited," said Thomas, referring to the Florida thrift that failed in May and was bought by a group of private equity investors.

BankUnited had half as many branches and operated in only one state, but had a strong competitive position in the most lucrative counties -- something Guaranty lacks.

Despite BankUnited's relative attractiveness, its sale to investors led by vulture investor Wilbur Ross was hardly a walkover for the FDIC. The deal cost the FDIC insurance fund $4.9 billion.

A big tab on Guaranty would be costly to the deposit fund, whose balance was $13 billion at the end of the first quarter. The FDIC has estimated failure costs on cases since then at $11.2 billion.

A spokesman for the FDIC stresses that it has already set aside an additional $22 billion for failure-related costs in 2009, and adds that congressional action this spring gave the agency access to $500 billion in Treasury credit.

Though Guaranty has been around since 1988, it came public less than two years ago. Guaranty was part of the Temple-Inland (TIN) cardboard-box conglomerate until Icahn pressured the company to split up at the end of 2007. Guaranty shares were then distributed to Temple-Inland holders.

Guaranty's chief executive at the time, Ken Dubuque, assured investors that despite the gale force winds sweeping the financial world, the bank would be safe.

"We're keenly aware of the importance of good credit, disciplines and effective risk management, in good times and in difficult times," he said on the bank's first earnings conference call in February 2008.

But Guaranty's risk management soon was found wanting. The bank aimed to expand beyond lending to the builders of office buildings, shopping centers and houses to new areas such as small business and corporate energy lending.

Because its thrift charter obliges Guaranty to keep 70% of its assets in housing-related investments, the bank matched growth in other areas with expanded investments in housing. That, Dubuque said, is how the bank ended up taking on a giant portfolio of mortgage-backed securities, backed largely by option adjustable-rate mortgages in California and Texas.

0:00 /1:58FDIC wants cushion

"We needed to increase the size of the balance sheet, so that was a relatively risk-free way of doing it," Dubuque told investors in 2008. "We also have liked the returns in that business as well."

But securities backed by option ARMs are anything but risk-free, as investors have learned. Among institutions that dealt most heavily in those were Washington Mutual, the Seattle thrift that collapsed in September with $307 billion in assets, and Wachovia, which was sold to Wells Fargo (WFC, Fortune 500) later in 2008. Other big option ARM users included failed California savings banks Downey Financial and PFF.

Losses built at Guaranty over the past year, and Dubuque quit without explanation in November. In April regulators told Guaranty to raise more capital. When that effort failed, they told Guaranty to write down the value of the mortgage-backed securities by more than $1 billion. That move, announced this month, left the bank with negative capital of $748 million, according to filings.

Despite its many problems, Guaranty is -- for now -- operating as usual.

"We are open for business. We continue to work with our regulators," Guaranty said Friday in an emailed statement. "We are focused on providing the best customer service possible and believe we can avoid any disruptions to our customers."

Lost resorts: The Credit Suisse loan debacle

Lost resorts: The Credit Suisse loan debacle

Eight luxury resorts backed by the bank are either in foreclosure, bankruptcy or liquidation.

By William D. Cohan, contributor

Last Updated: May 29, 2009: 11:39 AM ET

NEW YORK (Fortune) -- Credit Suisse, the large Swiss financial services firm run by the American investment banker Brady Dougan, has sidestepped the worst of the financial crisis. But between 2004 and 2006, the bank was not above making more than $3 billion of senior secured "predatory" (according to one judge) loans to high-end real estate developers operating mostly in the western United States.

Within the last year, at least eight of the real-estate developments that received the Credit Suisse (CS) loans are either operating under bankruptcy court protection, have been liquidated or have been foreclosed upon. In one case, the $7.5 million fee paid to Credit Suisse on a $375 million loan was decided with a coin toss between a Credit Suisse banker and a real estate developer.

The portfolio of loans was the brainchild of David Miller, a Managing Director at Credit Suisse, who was co-head of the U.S. capital markets business within the syndicated loan group. When Credit Suisse made the loans, it got paid millions in fees and then syndicated them all off to investors, who will be fortunate to get back pennies on the dollar during the various bankruptcy proceedings. (Credit Suisse currently has a minimal exposure to the original loans.)

Miller was well aware of the golden goose he had on his hands. In an August 2005 email to a colleague, Miller wrote, "[T]hese are aggressive deals and it is in all of our best interests, that the investors are protected, because if one of them should blow up, you will see these investors pull out of this land development mkt [market] and our gravy train will stop."

A windfall for investors

In making what were known at Credit Suisse as "syndicated term loans," Miller and his team targeted posh resorts and offered their developers the chance to cash out a big chunk of their investments immediately -- often in the form of a dividend. What's more: In general the developers could use the loans virtually any way they wanted and were not bound to use them for the existing projects that secured the new loans. So the developers enriched themselves while saddling the projects with a crushing debt load that -- it quickly became apparent -- the projects could not support. As a result, the resorts were starved of the capital they needed to keep operating properly. The developers walked away with a windfall; the resorts collapsed.

Of course, Credit Suisse was not alone in making these aggressive loans at the top of the market. Other firms, such as Lehman Brothers, Barclays, JPMorganChase (JPM, Fortune 500) and Wachovia made these kinds of master-planned community deals. In sum, industry players estimate some $100 billion of such loans were made.

Posh resorts were the targets

David Miller and his team had successfully marketed the loans to, among other developments, the Tamarack Resort, in Idaho ($250 million); Lake Las Vegas, a 3,592-acre golf community in Nevada ($540 million); Promontory, a 7,200 acre, 10-square-mile, second-home resort outside of Park City, Utah ($275 million); the Turtle Bay Resort, in Hawaii ($400 million); and to four Ginn resorts in Port St. Lucie, Florida, Naples, Florida, Boone, North Carolina and the Bahamas ($675 million.)

One of the more egregious of these loans was made to the infamous Yellowstone Club, the bankrupt private golf and ski resort north of Yellowstone National Park in Montana. The exclusive Yellowstone Club, where the likes of Bill Gates, investment banker Bob Greenhill and former Citigroup (C, Fortune 500) CFO Todd Thomson have multi-million dollar homes, was the brainchild of timber baron Tim Blixseth and his now former wife, Edra. The Blixseths began developing the Yellowstone Club in 1999. (See: Paradise lost).

In December 2004, according to court documents, after years of being the major source of financing of around $155 million for the complex project of creating a private ski area, a golf course, various lodges and homes, Blixseth started receiving emails and calls from Credit Suisse. Miller's team had been trying to contact Blixseth to tell him about Credit Suisse's new loan for developers, such as Blixseth, that he described as akin to a "home equity loan" that broke "new ground...by doing real estate loans in the corporate bank loan market." After speaking to a director in Miller's group, Blixseth invited the Credit Suisse bankers out to the Yellowstone Club to have a look around the impressive resort.

Sealing the deal with a coin toss

Court documents also detail how Blixseth originally wanted a $150 million loan from Credit Suisse but after a few months of negotiation, the size of the loan ballooned to $375 million. Blixseth signed the deal on September 20, 2005. The loan documents allowed Blixseth to take out up to $209 million of the proceeds "for purposes unrelated to the Yellowstone Development," another up to $142 million could be used by "unrestricted subsidiaries" for purposes "unrelated" to Yellowstone, and another $24.2 million or so went to pay off the existing Yellowstone Club debt to a local bank.

To do the deal, Credit Suisse wanted a fee of 3%, or $11.25 million. Blixseth wanted to pay only 2%, or $7.5 million. To resolve the stalemate, Blixseth and Miller decided to flip a coin; Blixseth won.

In the end, Credit Suisse wired $342.1 million to the Yellowstone Club. That same day, Blixseth whisked out $209 million out of the Club's accounts in the form of a loan to another entity controlled solely by him. The windfall was then "disbursed to various personal accounts and payoffs benefiting Tim and Edra Blixseth personally," according to court documents. Blixseth used the money for various purposes including buying trophy resort properties around the world at peak prices to create a time-share development called Yellowstone Club World. He also got himself a Gulfstream jet.

In May 2006, Blixseth created a $209 million unsecured demand note payable to the Yellowstone Club, backdated to September 30, 2005, essentially writing a personal IOU to the Yellowstone Club for the money. Last November, the Yellowstone Club filed for Chapter 11 bankruptcy protection.

The fox in charge of the hen house

On May 12, 2009 Judge Ralph Kirscher, presiding over the Yellowstone Club bankruptcy case, decided to punish Credit Suisse by equitably subordinating its $375 million loan -- moving the bank from the senior secured position in the capital structure where it would get repaid in full before anyone else in the pecking order to the very back of the bus behind all the unsecured creditors.

The Judge's ruling -- in which he called the loan "predatory" -- condemned Credit Suisse noting that numerous entities that received Credit Suisse's syndicated loan product have failed financially, including Tamarack Resort, Promontory, Lake Las Vegas, Turtle Bay and Ginn. He said the loans were "doomed to failure" as soon as they were made while enriching the developers and the bankers along the way. "This program essentially puts the fox in charge of the hen house and was clearly self-serving for Credit Suisse," the Judge wrote. After the Judge's ruling, Credit Suisse said it was "disappointed in the ruling and disagrees with the court's findings."

In a brief filed as part of the trial in the Yellowstone Club bankruptcy, Credit Suisse defended its $375 million loan as "unassailable" and stated that no one could have foreseen "that the greatest economic collapse since the Great Depression would occur, rendering the Debtors unable to pay their debts as they became due." The bank explained further that it bought a $17 million piece of the original loan "long after" it was made and claimed that this would be "strange conduct, indeed" for a firm that "knew the debtors were going to fail." Credit Suisse said the Yellowstone Club stayed current on the loan for three years until it "succumbed to the collapse of the markets and mismanagement."

Sam Byrne gets control of Yellowstone

On May 18, CrossHarbor Capital, a Boston-based hedge fund, submitted a winning $115 million bid to buy the Yellowstone Club out of bankruptcy court, consisting of the issuance of $80 million of new debt to the old creditors and paying $35 million in cash. Sam Byrne, the principal at CrossHarbor and a longtime member of the Yellowstone Club and a developer there, also agreed to invest another $75 million -- and likely closer to $200 million -- of "working capital" into the Club. (A year or so ago, Byrne had made a $456 million bid for the Yellowstone Club -- then lowered it to around $405 million -- that was not accepted.) So in the end, he got control for $341 million less than he initially offered.

"I am happy that the bankruptcy process will soon be behind the Yellowstone Club with the company emerging as a properly capitalized enterprise for its membership," Byrne said in an interview. "Everyone is looking forward to the Club becoming the quiet, extraordinary place that we had all been promised it would be."

For his part, Blixseth, who still owns land at the Club, said he "could have organized a bid" for it "but in the final assessment felt that it is very hard to put Humpty-Dumpty back together again, and decided not to try. I had my role in being the inventor and implementer for 10 years, and it was time for someone who likely looks at the club as just a tool for making money to take it to its final completion." Judge Kirscher will soon rule whether Blixseth must repay to the Yellowstone Club's creditors the $200 million plus he took out of the Club from the original Credit Suisse loan.

And Credit Suisse gets a French chateau

Credit Suisse submitted the only other bid for the Club but withdrew it in exchange for a release from further liability for making the loan in the first place and for a transfer of the ownership to it of Chateau de Farcheville, outside of Paris. The chateau is a sprawling and breathtaking 13th-century, 15-bedroom pile (surrounded by fully reconditioned moat) that Blixseth paid some $28 million for (with the Credit Suisse loan) and now is said to be worth closer to $20 million, assuming a buyer can be found. Duncan King, a Credit Suisse spokesman in New York, had no comment on the outcome of the matter although he confirmed Credit Suisse is no longer making these types of loans.

As for David Miller, he remains at Credit Suisse and was recently promoted to co-head of the firm's U.S. Loan Syndication business. King declined to make Miller available to be questioned about the loan to the Yellowstone Club, the judge's decision in the case or whether the "gravy train" had ended.

William Cohan is the author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, published in March by Doubleday Books, a division of Random House, Inc. 

First Published: May 29, 2009: 10:29 AM ET

Former GMAC Bank under attack

Former GMAC Bank under attack

Ally, the renamed lending arm of GMAC, has benefited from the federal bailout of GMAC. Now a bank lobbying group wants to make Ally pay for 'risky' behavior.

By Colin Barr, senior writer

June 3, 2009: 4:12 AM ET

NEW YORK (Fortune) -- Though its name connotes friendliness, Ally Bank -- the lending unit of troubled financial services giant GMAC -- has found at least one powerful foe in Washington.

The American Bankers Association, the chief lobbyist for U.S. banks, has asked regulators to crack down on Ally's use of above-market interest rates to attract deposits.

Though savers clearly like those rates, the ABA contends Ally's deposit-gathering practices are "risky" and "completely inappropriate." It points to the bank's size, the depleted state of the federal insurance deposit fund and the massive federal investment in recent months at GMAC.

"This aggressive deposit strategy is particularly egregious when it is used by a troubled bank in which the government holds a controlling interest," said ABA president and CEO Edward Yingling in a May 27 letter to Federal Deposit Insurance Corp. chief Sheila Bair. "Such a bank is significantly shielded from investor and market influences that might otherwise act as a brake on risky financial strategies."

GMAC -- the primary lender to customers of bankrupt U.S. carmakers General Motors (GMGMQ) and Chrysler -- has received more than $20 billion in federal aid, counting capital injections under Treasury's Troubled Asset Relief Program and borrowing capacity under a federal debt guarantee program.

Wayne Abernathy, a spokesman for the ABA, said the group wrote the FDIC to make sure that "regulators are ready to enforce discipline" in a case where the government's big stake insulates management from the risk of investor flight.

0:00 /1:58FDIC wants cushion

But Ally Bank's management -- led by former Bank of America financial chief Al de Molina -- rejects the ABA's argument, saying market discipline is exactly what the banks don't like.

"While I find it highly inappropriate that the American Bankers Association would attempt to restrain competition in the banking industry, I am not surprised," de Molina wrote Monday in a scathing response to the ABA. He said Ally is "committed to offering our customers value through products, services and competitive rates."

Ally was known as GMAC Bank until it renamed itself May 15, promising to limit fees in a bid to "make money with customers, not off customers."

Ally's Web site advertises an annual percentage yield of 2.8% on a one-year certificate of deposit -- the top rate in a recent nationwide survey by Bankrate.com. Those rates have drawn in a flood of deposits that Ally can use to support GMAC's auto and home lending businesses.

GMAC said last month that Ally Bank added $2.4 billion of deposits in the first quarter, giving it $22.5 billion in total deposits -- including $15.1 billion in CDs.

Despite its funding success, Ally Bank is in less than pristine shape. The bank lost $133 million in the quarter ended March 31, as its provision for loan losses surged more than sixfold to $280 million.

At the same time, its parent's two main businesses -- lending for cars and houses -- have been in free fall. GMAC's first-quarter car loan volume plunged 74% from a year ago to $3.4 billion, while mortgage loans slid 24% to $13.2 billion in spite of a recent refinancing boom. A spokeswoman said car lending has been "ramping up" in the second quarter, which ends this month.

The ABA's comments come at a time of some anxiety over the state of the banking industry, which swung to a loss last year for the first time since 1990, and the FDIC deposit insurance fund. The FDIC said last week it expects to spend $70 billion over five years cleaning up after bank failures.

Regardless of what anyone might think about Ally's practices, regulators have limited recourse in dealing with banks in good standing that are deemed well-capitalized -- as Ally is.

FDIC spokesman Andrew Gray said the agency doesn't comment on open and operating institutions as a matter of course. He noted that the agency acted last week to restrict the amount of interest banks that are deemed less than well capitalized can pay to their customers.

The ABA, pointing to GMAC's financial troubles, says it believes those rules should be applied to Ally Bank.

GMAC only applied to become a bank holding company late last year in order to be eligible for federal bailout programs. Regulators announced last month that GMAC was required to raise $11.5 billion in new capital as part of the stress tests conducted on the nation's largest 19 banks.

But Ally's de Molina contended that what the banks really object to is competition. He notes that Ally Bank's Tier 1 capitalization leverage ratio -- a measure regulators favor -- is nearly triple the well-capitalized minimum.

"You might want to assist your members in figuring out how they are going to compete in the new market place," he wrote in his letter, "rather than ask regulators to direct Ally Bank to pay its depositors less competitive rates."  

Wells Fargo CEO says California in 'financial ruin'

Thursday, May 28, 2009, 1:09pm PDT

Wells Fargo CEO says California in 'financial ruin'

Sacramento Business Journal - by Mark Calvey San Francisco Business Times

Wells Fargo CEO John Stumpf said Thursday that California’s large budget deficit means state services will have to be cut.

“The state of California is in financial ruin,” Stumpf told those attending a statewide microfinance lenders’ conference at Stanford University. “The budget deficit in California is staggering.”

Stumpf said the recession is taking a toll on some of the loans made to creditworthy borrowers who lost their jobs and fell behind on payments.

“Today we’re charging off loans to people we should have made loans to,” said Stumpf, reiterating that the bank avoided many of the exotic mortgages offered by rivals.

Stumpf’s comments were not intended as guidance on how the San Francisco bank is faring in the second quarter, a bank spokesman said.

The state of California is struggling with a growing budget deficit after tax and financial measures failed at the ballot box this month. Earlier this year, the state delayed tax refunds and other payments due to what State Controller John Chiang called a “cash crisis not seen since the Great Depression.”

The state recently asked the federal government for assistance in guaranteeing California’s short-term borrowings, fearing that it could not raise the money standing on its own credit.

On the national economy, Stumpf said this is his “third rodeo” or downturn. He pointed to the deep recession of the early 1980s when the prime rate hit 21 percent and the struggling economy of the late 1980s that counted most the nation’s largest thrifts and major banks in Texas among its casualties. He says the economic fallout from the dot-com bust and Sept. 11 terrorist attacks was significant but not as harsh as the earlier recessions.

“This one feels different,” Stumpf said. “It feels different in the respect that the whole world is in recession.”

Stumpf said microfinance — typically small loans to individuals to start or grow businesses — could be one tool to help the economy recover. He noted that recent jobs at Bay Area companies with 19 employees or fewer have grown 14 percent while larger companies shed workers.

Wells Fargo has been active in supporting the region’s microfinance lenders and related organizations.

“It doesn’t take a lot of money to help these individuals achieve their dreams,” Stumpf said.

Former Countrywide CEO Angelo Mozilo faces trial

Friday, May 1, 2009

Former Countrywide CEO Angelo Mozilo faces trial

San Francisco Business Times

A federal judge has ruled that Angelo Mozilo, former chairman and chief executive of Countrywide Financial Corp., should be tried in Florida in a civil case targeting deceptive trade practices.

Florida Attorney General Bill McCollum, who filed the civil complaint in June, says in a news release that he plans to aggressively pursue the case.

The lawsuit was filed in Broward County Circuit Court. It addressed Countrywide’s alleged practice of placing consumers in loans they could not afford or with rates that were false or misleading. Countrywide and Mozilo sought to move the case to federal court in Florida, and it subsequently was consolidated in the Southern District of California.

McCollum argued the case should be remanded to state court, so Mozilo would be tried in Florida under the state’s Deceptive and Unfair Trade Practices Act.

On Tuesday, U.S. District Judge Dana Sabraw of the Southern District of California agreed. Sabraw cited McCollum’s position that Mozilo should be held liable for alleged practices associated with the sale and marketing of mortgages and mortgage-backed securities. The judge agreed that Mozilo’s management of the daily activities of Countrywide was sufficient grounds for him to stand trial in Florida.

Related litigation against Countrywide was resolved with a settlement. Litigation against Mozilo will continue in Broward County Court, the attorney general’s office says.

Bank of America Corp. (NYSE:BAC) bought Calabasas-based Countrywide last year for $2.5 billion.

Charlotte Business Journal

Marquette law school to run foreclosure mediation program

Wednesday, May 27, 2009, 5:09pm CDT  |  Modified: Thursday, May 28, 2009, 8:03am

Marquette law school to run foreclosure mediation program

The Marquette University Law School will provide mediation between lenders and residential borrowers facing foreclosure under a program funded with proceeds from a successful lawsuit against mortgage lender Countrywide Financial Corp.

Wisconsin Attorney General J.B. Van Hollen and Marquette Law School dean Joseph Kearney announced Wednesday $310,000 in funding for the school to implement the Milwaukee Foreclosure Mediation Program. Milwaukee Mayor Tom Barrett said the city of Milwaukee is also providing $100,000 for the program.

The Milwaukee Foreclosure Mediation program will be a voluntary, court-based independent mediation option for lenders and borrowers. The program, located at the Milwaukee County Courthouse, will seek to alleviate the current backlog of foreclosure cases in the county court system by offering the option of mediation to residential homeowners who reside in owner-occupied properties.

According to the Law School, in most cases, successful mediation will serve as a venue to work out new loan terms, a short sale or other solution that is mutually agreeable, and execute a final agreement between the parties.

The funding includes proceeds from a settlement with Countrywide, which was accused of misrepresenting the quality and benefits of its products. Under the settlement, announced in February, Countrywide agreed to pay $1.6 million for foreclosure relief benefits. The mortgage lending giant also agreed to waive various loan fees and modify loans for customers that could result in a total settlement value of $41.1 million, according to the Attorney General's office.

Beginning May 28, an informational phone line will be operational for those interested in learning more about the program. Interested parties may call 414-288-4040. Mediation activities will begin after July 1.

REFORMS FOR AMERICAN HOMEOWNERS AND CONSUMERS President Obama Signs the Helping Families Save Their Homes Act and the Fraud Enforcement and Recovery Act

THE WHITE HOUSE

Office of the Press Secretary
_________________________________________________________
FOR IMMEDIATE RELEASE                       May 20, 2009

REFORMS FOR AMERICAN HOMEOWNERS AND CONSUMERS
President Obama Signs the Helping Families Save Their Homes Act and the Fraud Enforcement and Recovery Act

WASHINGTON – Today, President Obama will sign the Helping Families Save Their Homes Act and the Fraud Enforcement and Recovery Act into law.

"These landmark pieces of legislation will protect hardworking Americans, crack down on those who seek to take advantage of them, and ensure that the problems that led us into this crisis never happen again," said President Obama.

The Helping Families Save Their Homes Act is an important step towards stabilizing and reforming our nation’s financial and housing markets – helping American homeowners and increasing the flow of credit during these difficult economic times.  This legislation will strengthen our nation's housing sector and facilitate the goals of the Administration's Making Home Affordable Program by helping millions of American homeowners stay in their homes. 

The Fraud Enforcement and Recovery Act will protect the American people by giving the federal government new tools and resources to prevent fraud.  This reform bill will help the federal government keep markets free and fair, so that American consumers can thrive.

Fact sheets on both pieces of legislation are below.

 

The Helping Families Save Their Homes Act

Expanding Reach of Making Home Affordable to Help More Homeowners
The deep contraction in the economy and in the housing market has created devastating consequences for homeowners and communities throughout the country.  Since January, the Administration has made significant progress in developing and implementing a comprehensive plan for stabilizing our housing market, the centerpiece of which is the Making Home Affordable Program (MHA). By reducing foreclosures around the country, the average homeowner could see their house price bolstered by as much as $6,000 as a result of this plan, and as many as 9 million homeowners may increase the affordability of their mortgages and avoid preventable foreclosures.

Our progress in implementing MHA to date has been substantial. We have introduced detailed guidelines for loan modifications which will establish a new standard practice for affordable modifications in the industry.  Servicers covering more than 75 percent of loans in the country have now begun modifications and refinancings under the Administration’s MHA Program. We have also launched MakingHomeAffordable.gov, a consumer website for the program, which has had more than 17 million page views in less than 2 months, announced details of our Second Lien Program, Home Price Decline Protection Incentives and Foreclosure Alternatives Program, strengthened Hope for Homeowners as a part of the MHA program, and expanded the efforts of the federal government to combat mortgage rescue fraud.
 

• Improvements to Hope for Homeowners The legislative improvements to Hope for Homeowners included in S.896 should significantly improve the ability of borrowers to benefit from the opportunities provided by Hope for Homeowners in the context of the Administration’s housing plan.  On April 28th we announced new details describing how Hope for Homeowners will be strengthened as a part of the Administration’s Making Home Affordable Program.  Incentive payments will be available for successful Hope for Homeowners refinances and servicers will be required to evaluate all applicants for eligibility for Hope for Homeowners as well as the Home Affordable Modification Program.
  
  Hope for Homeowners targets help to underwater borrowers, who often face heightened risks of foreclosure, by requiring principal writedowns to help homeowners increase the equity they own in their homes.  The legislative modifications to the Hope for Homeowners program included in S.896 will ease restrictions on eligibility and enable refinancing of underwater mortgages for a greater number of borrowers. 
  
   
• Modifications to FHA and federally guaranteed farm loans Legislative changes to FHA and federally guaranteed farm loans will facilitate cost-neutral loan modifications for federally guaranteed rural housing loans and FHA loans.  These changes will improve the Administration’s ability to provide assistance to responsible borrowers with federally guaranteed rural housing loans and FHA loans as part of the Making Home Affordable Program. 

Increasing Flow of Credit by Expanding FDIC and NCUA Capabilities
The Helping Families Save Their Homes Act of 2009 contains provisions that will help to restore and support the flow of credit in the US economy.  The act authorizes new important tools to assist in stabilizing the financial system during the current economic downturn.  Together these provisions, described below, should provide additional support for increasing the flow of credit in the US economy.
 

• Extension of temporary increase in deposit insurance Extending the temporary increase in deposit insurance will provide added confidence to depositors.  This will provide depository institutions with a more stable source of funding and enhanced ability to continue making credit available across our economy.
  
   
• Increase in borrowing authority of the FDIC
  Increasing the borrowing authority for the Federal Deposit Insurance Corporation (FDIC) to $100 billion will allow the FDIC to spread out premium increases over time.  This will reduce near-term costs for banks and thrifts, which will enhance their ability to continue making credit available.   As a further tool to protect the financial system, the legislation also includes a process to allow the FDIC to borrow additional amounts through December 31, 2010. 
  
   
• Increase in NCUA borrowing authority and creation of a stabilization fund The legislation will increase the borrowing authority for the National Credit Union Administration (NCUA) to $6 billion and create a Stabilization Fund to address problems in the corporate credit union sector.  This will reduce near-term costs for credit unions, which will enhance their ability to continue making credit available. As a further tool to protect the financial system, the legislation also includes a process to allow the NCUA to borrow additional amounts through December 31, 2010. 

Increasing Consumer Protections Related to Housing
 

• Establishes protections for renters living in foreclosed homes One of the often overlooked problems in the foreclosure crisis has been the eviction of renters in good standing, through no fault of their own, from properties in foreclosure.  To address the problem of these tenants being forced out of their homes with little or no notice, this legislation will require that in the event of foreclosure, existing leases for renters are honored, except in the case of month-to-month leases or owner occupants foreclosing in which cases a minimum of 90 days notice will be required.  Parallel protections are put in place for Section 8 tenants.
  
   
• Establishes right of a homeowner to know who owns their mortgage
  Often mortgage loans are sold and transferred a number of times.  Borrowers often have difficulty determining who owns their loan, and who to contact with questions, problems or complaints about their loan.  This legislation requires that borrowers be informed whenever their loan is sold or transferred, so that they will always know who owns their loan.

Provides Comprehensive New Resources for Homeless Americans
This legislation significantly increases aid to homeless Americans, appropriating $2.2 billion dollars to help solve the crisis of homelessness, and address the enormous costs homelessness can impose on individuals, families, neighborhoods and communities.  In addition, the legislation consolidates homelessness programs to improve effectiveness and streamline administration, and targets assistance to families with children – the fastest growing segment of the homeless population.

 

The Fraud Enforcement and Recovery Act

Strengthening the Capacity to Fight, Prevent, and Deter Fraud
The legislation strengthens the capacity of federal prosecutors and regulators to hold accountable those who have committed fraud.  The amendments expand the Department of Justice’s authority to prosecute crimes involving mortgage fraud, commodities fraud, and fraud involving U.S. government assistance provided during the recent economic crisis. 
 

• Covering private mortgage brokers and other companies Over 50% of sub-prime mortgages issued as recently as 2005 involved private mortgage institutions and similar entities not currently covered under federal bank fraud criminal statutes.  FERA amends the definition of a "financial institution" in the criminal code (18 U.S.C. § 20).  This will extend Federal laws to private mortgage brokers and companies that are not directly regulated or insured by the Federal Government. 
  
  
  • This law will expand the Department of Justice’s authority to prosecute mortgage fraud involving private mortgage institutions under a variety of statutes, including 18 U.S.C. § 215 (financial institution bribery); 18 U.S.C. § 225 (continuing financial crimes enterprise); 18 U.S.C. § 1005 (false statement/entry/record for financial institution); and 18 U.S.C. § 1344 (bank/financial institution fraud).
  • The bill changes the definition of "financial institution" to include private mortgage brokers and other non-bank lenders will enhance our ability to prosecute criminals under the bank fraud statute who commit fraud involving loans from those companies.  
• Prohibiting manipulation of the mortgage lending business
  The new law changes the mortgage applications statute (18 U.S.C. § 1014) to make it a crime to make a materially false statement or to willfully overvalue a property in order to influence any action by a mortgage lending business.  Currently, the offense only applies to federally-regulated institutions.
  
   
• Protecting the Integrity of TARP and the Recovery Act
  The legislation amends the major fraud statute (18 U.S.C. § 1031) to protect funds expended under TARP and the Recovery Act. 
  
   
• Covering commodity futures and options in anti-fraud statutes
  This law amends the Federal securities statute (18 U.S.C. § 1348) to cover fraud schemes involving commodity futures and options.  Currently, the statute does not reach frauds involving options or futures, which include some of the derivatives and other financial products that were part of the financial collapse.
  
   
• Broadening the False Claims Act
  FERA modifies the False Claims Act (FCA) to eliminate the requirement that a false claim be presented to a federal official, or that it directly involve federal funds.  It also amends the FCA reverse false claims provision to ensure that the knowing retention of an overpayment is a violation.     
   

Providing the Resources to Keep Markets Free and Fair
There is no shortcut to effective fraud enforcement and prevention.  FERA will also provide needed resources to help the Department investigate and prosecute those who engage in fraudulent schemes.

 

• Investing in fraud prevention and enforcement
  The legislation authorizes up to $165 million in new resources for FY 2010 and 2011 to hire fraud prosecutors and investigators.
  
   
• Strengthening the federal government’s full regulatory and enforcement capacity
  The legislation authorizes $140 million for the FBI, $50 million for U.S. Attorney’s Offices; $20 million for the Criminal Division, $15 million for the Civil Division, $5 million for the Tax Division, $30 million for the US Postal Inspection Service, $30 million for the Inspector General at the Department of Housing and Urban Development, $20 million for the Secret Service, and $21 million for the Securities and Exchange Commission. 

Addressing the Causes and Consequences of the Crisis
This legislation creates a bipartisan Financial Crisis Inquiry Commission to investigate the financial practices that brought us to this point, so that we make sure it never happens again.

Renewed HOPE for Homeowners

Renewed HOPE for Homeowners

Congress passed a bill amending HOPE for Homeowners that may make the program more useful.

By Les Christie, CNNMoney.com staff writer

Last Updated: May 20, 2009: 5:06 PM ET

NEW YORK (CNNMoney.com) -- One of the biggest disappointments of the foreclosure prevention fight has been HOPE for Homeowners, a plan Congress passed in an attempt to help as many as 400,000 underwater, delinquent borrowers from going into foreclosure.

In its first five months, HOPE for Homeowners helped one family stay in its home.

Congress and the Obama administration are hoping to do a lot better than that.

On Wednesday, President Obama signed into law a bill that attempts to correct the program's problems. The president said the program had many provisions that discouraged servicers from using it.

"This bill removes those hurdles," Obama said.

The original bill, which took effect Oct. 1, was intended to help defaulting homeowners by having banks voluntarily reduce mortgage balances to 90% of a home's current market value. The loan would then be refinanced into a mortgage insured by the Federal Housing Administration (FHA).

The idea was that the lenders take "haircuts" and the government would then bail them out of any future losses by insuring the new loan.

As a result, most of the big lenders didn't offer the program, which was strictly voluntary though heavily encouraged by the Bush and Obama administrations. "The lender basically short-sells the mortgage into the plan, and there's no more chance for upside," said Tom Kelly, a spokesman for JP Morgan Chase (JPM, Fortune 500).

The new version of HOPE sweetens the FHA-refinance option - for lenders. It only requires servicers to reduce balances to 93% of market values instead of 90%. It also pays servicers $1,000 for every Hope-refinanced loan.

For example, borrowers who owed $220,000 on a house valued at $200,000 would need their mortgage balances reduced to $180,000 to qualify for an original HOPE for Homeowners refi. That's a $40,000 writeoff. Under the new plan, lenders would have to forgive $34,000.

But the biggest change is that it authorizes FHA's parent agency, the Department of Housing and Urban Development (HUD), to share future home-price appreciation with investors, up to the appraised value of the property when the existing loan was first issued.

The original bill gave HUD the right to share potential profits 50/50 with homeowners, but now some of HUD's share would go to the original investors.

Also certain to increase servicer utilization of HOPE for Homeowners is a change in Treasury Department policy announced late last month. Treasury will require any servicer that signs up to participate in the Making Home Affordable program, the administration's mortgage modification plan, to evaluate borrower eligibility for Hope for Homeowners as well.

If borrowers don't fit into the Making Home Affordable program but are viable for HOPE, the servicers must offer them this option.

Industry insiders say they hope the changes will spur more lenders to use the plan.

"It's very important that it becomes a better program," said Faith Schwartz, director of Hope Now, a coalition of lenders, servicers, mortgage investors and community advocates. "We need the FHA to provide another outlet for refinancing these problem loans."

The final bill removed a provision that would have authorized bankruptcy court judges to lower mortgage balances to reflect current market values. Supporters of this "cramdown" believed it would pressure lenders into making more affordable modifications for at-risk borrowers. But the Senate removed that from their version of the bill and the House followed suit. 

SEC may charge Countrywide's Mozilo

SEC may charge Countrywide's Mozilo

Agency staff to recommend civil fraud charges against mortgage firm's founder, according to report.

By Tami Luhby, CNNMoney.com senior writer

Last Updated: May 13, 2009: 7:06 PM ET

Countrywide founder Angelo Mozilo

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NEW YORK (CNNMoney.com) -- Staffers at the Securities and Exchange Commission are recommending that the agency file civil fraud charges against Countrywide co-founder Angelo Mozilo, according to a published report.

The agency sent a notice to Mozilo telling him of the potential charges, which include violations of insider-trading laws and failing to disclose information to shareholders, according to the Wall Street Journal, which cited people familiar with the investigation. The agency may ultimately decide not to file charges.

Mozilo's attorney, David Siegel, declined to comment, but told CNNMoney.com that the "persistent innuendo" that Mozilo sold Countrywide shares because he knew of problems within the mortgage lender is "scandalous" and "inconsistent" with the facts.

"We do not believe there is any fair basis for allegations to be made against Mr. Mozilo," Siegel said in an e-mail. "All of Mr. Mozilo's stock sales were made in compliance with properly prepared and approved trading plans and reflected recommendations by his financial advisor over a long period of time."

An SEC spokesman declined to comment.

Mozilo, who founded the company in a New York apartment, built Countrywide into the nation's largest mortage lender. But Countrywide buckled during the housing meltdown and was acquired last year by Bank of America (BAC, Fortune 500).

Mozilo became a poster boy for the subprime crisis. He reportedly stood to collect a windfall of $115 million dollars in the $4 billion sale to Bank of America. But after facing heavy criticism from lawmakers, Mozilo said he would forfeit $37.5 million in payments tied to the deal.  

First Published: May 13, 2009: 6:47 PM ET

DOJ Probing Mortgage Data Processing Firms

DOJ Probing Mortgage Data Processing Firms

Posted on May 12, 2009 by livinglies

DOJ Probing Mortgage Data Processing Firms

By Peg Brickley
Of DOW JONES DAILY BANKRUPTCY REVIEW

The Department of Justice is conducting a nationwide probe of the company whose automated systems handle half the mortgages in the U.S., looking for evidence Lender Processing Services Inc. (LPS) has “improperly directed” the actions of lawyers in bankruptcy court.

The Jacksonville, Fla., company was spun out last year from Fidelity National Information Services Inc. (FIS), a financial technology giant that is also under scrutiny for its role in court actions, according to documents filed with the U.S. Bankruptcy Court in Philadelphia.

Although the companies say they are providers of electronic information services, the U.S. trustee believes LPS and Fidelity play a “much greater” role in court actions where thousands of homes are at risk of foreclosure, according to Bankruptcy Judge Diane Weiss Sigmund.

“The thoughtless mechanical employment of computer-driven models and communications to inexpensively traverse the path to foreclosure offends the integrity of our American bankruptcy system,” Sigmund wrote in a decision released Wednesday, April 15.

A spokeswoman for Fidelity did not respond to requests seeking comment on the investigation by the Office of the U.S. Trustee, an arm of the Department of Justice whose mission includes safeguarding the integrity of the bankruptcy courts.

Michelle Kersch, a spokeswoman for LPS, said the U.S. trustee has “advised outside counsel for LPS that it is seeking to better understand LPS’ role.” In an e-mail, Kersch pointed out that the judge held the lawyers, not LPS, responsible for the problems in the case before her.

The probe of the mortgage technology operation surfaced in a Philadelphia case after Sigmund started asking questions about the source of false court filings that came from HSBC Mortgage Corp. In pursuit of homeowners Niles and Angela Taylor, HSBC filed the wrong mortgage, gave incorrect payment amounts and claimed the Taylors had missed monthly payments. This “was simply not true,” Sigmund wrote in a 58-page decision.

Pressed to produce a loan history for the Taylors, HSBC’s lawyer confessed the system simply wouldn’t give it to him.

HSBC, it turns out, had handed off servicing of the troubled loan to Fidelity, which spun out LPS last year. The processes the company uses to crank out court documents for fast, cheap foreclosures were the culprit, the judge found.

By forcing lawyers to talk to computers rather than to their clients – the lenders – LPS makes it hard for lawyers to do right by the court and discharge their ethical obligations, Sigmund said.

Lawyers at one level spot-check a fraction of the documents that are on their way to foreclosure actions, Sigmund found. But the business is built for profitability rather than reliability, and counts on “lower-cost labor,” according to the judge.

Although LPS’s system “has many features that make a volume business process more efficient, the users may not abandon their responsibility for fairness and accuracy to the seduction of electronic communication,” Sigmund wrote.

She faulted HSBC and some of the lawyers involved in the case for having “sacrificed accuracy and fairness to efficiency and cost-savings,” by relying on LPS’s systems.

Fidelity, later LPS, is the electronic powerhouse behind the foreclosures rolling through much of the country, taking in data and spitting out loan-default notices for 16 of the 20 largest mortgage-loan servicers in the nation. Banks like HSBC and mortgage servicers outsource the handling of their troubled loans to LPS’s default management services business.

Business is booming in the loan default unit, LPS’s financial reports say, with revenue up 68.3% for the fourth quarter of 2008, compared with the same period a year earlier.

Consumer advocates have long complained that Fidelity and LPS are much more than electronic data providers. The companies say which lawyers get the lucrative business of foreclosing on troubled homeowners. Those who move the fastest are rewarded, said O. Max Gardner III, a consumer bankruptcy attorney. Those who pause to ask questions or to investigate whether a loan should be foreclosed, don’t last as LPS network attorneys, Gardner said.

“The Fidelity-LPS system represents a complete outsourcing of the foreclosure and bankruptcy process to a third-party, Fidelity-LPS, who then manages the entire legal process,” Gardner said in an e-mail Thursday, April 16.

Sigmund’s opinion revealed that the Department of Justice is looking at Fidelity, LPS and the law firm that handles HSBC Mortgage Corp.’s troubled loan business nationwide, Moss Codilis LLP.

Moss Codilis did not reply to an e-mail seeking comment on the investigation, which involves a number of bankruptcy cases, according to Philadelphia court documents.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)

-By Peg Brickley, Dow Jones Daily Bankruptcy Review; 302-521-2266; peg.brickley@dowjones.com

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The article references an epic in-depth 58 page opinion written by Pennsylvania US Bankruptcy Judge Sigmund in which she enlightens the world to the practices of these third-party lender processing services, and calls the legal profession to adhere to higher standards of professional responsibility when engaging them. It’s a good read and most timely. It’s an opinion that will surely be controlling across this nation.

Allan
BeMoved@AOL.com

Filed under: CDO, CORRUPTION, Eviction, Investor, MODIFICATION, Mortgage, Servicer, foreclosure, securities fraud | Tagged: fraud, Mortgage, lender, mortgage meltdown, foreclosure defense, Lender Liability, borrower, disclosure, trustee, foreclosure offense, TILA audit

In Their Own Words: Why Dem Senators Screwed Homeowners

In Their Own Words: Why Dem Senators Screwed Homeowners

Ryan Grim

ryan@huffingtonpost.com

Only 45 Senate Democrats voted Thursday to oppose the banking industry and pass legislation aimed at stemming foreclosures. The bill would have allowed bankruptcy judges to allow homeowners who met strict conditions to renegotiate mortgages -- a process known as cramdown. It would have only applied to mortgages entered into before 2009.

Earlier in the week, the measure's lead proponent, Sen. Dick Durbin (D-Ill.), concluded that banks "frankly own the place."

Of course, the 12 Democrats who voted "no" have a more charitable view of their own motivations. So we asked them what their reasoning was. In their own words, here is how (those we could find) explained their vote:

Byron Dorgan (D-N.D.): "A number of things. I thought the 31 percent is an arbitrary number. I think there are a whole lot of folks, are likely folks, out there who have little debt outside their home who could -- I just thought it was an arbitrary number and I didn't like the way it was constructed."

Dorgan is referring to the percentage of a person's income that a judge could determine should be dedicated to paying the monthly mortgage. The figure is roughly in line with what financial analysts agree is appropriate.

Is Durbin right? Do banks own the Senate?

"I don't know who he's speaking about," said Dorgan. "He worked on this for a long, long time. And I wish they would have found a way to reach an agreement that would have allowed the legislation to get through...I don't know the context of which he said that."

Is the bill totally finished? "I don't know. I think I wish they had found some middle ground by which they could have moved a piece of legislation. They didn't do that. And you know, this legislation went well beyond subprime, as you know."

Ben Nelson (D-Neb.): "I've not supported the cramdown for a variety of reasons, not the least of which is that I hate to see that authority to determine what the future contract is ceded to the court."

Evan Bayh (D-Ind.), who ultimately voted yes: "My concern about this is that in our appropriate zeal to help the four or five percent of Americans who might be faced with bankruptcy, we don't unduly raise the costs of homeownership on the 95 percent who never will."

Tom Carper (D-Del.): "One of the reasons why usually mortgage rates are cheaper for primary homes is that the markets have the certainty that the judge won't be invited to come in and change the terms of the mortgage."

Of course, the Senate package only included mortgages pre-2009, so interest rates on future mortgages would be unaffected. So what would it take to get Carper's vote?

"We talked earlier about limiting the range of the mortgages that can be modified from those originated, say, in 2003 to maybe through 2007. That would've been very helpful. The other thing is, the House has a provision that says if a mortgage is modified on behalf of a homeowner and later on that homeowner sells the house and realizes the profit--the House has a provision that if the lender participates, the first year [the lender recoups] 90 percent [of that profit], second year is 70 percent, third year is 50 percent, fourth year, 30 percent. I thought that was a better formula for participation. So those two points would have done it for me. Not that that would have made the bill perfect, but it would have done it for me. And it's unfortunate we didn't have a chance, given the nature of the agreement, announced by Senator Reid, that we wouldn't have a chance to offer any amendments."

Is Durbin right about who owns the Senate?

"The banks sure don't think so. My guess is they don't feel like they have much [power] at all. Let me just say, I don't that's true. Not even close. But we could have had this provision--could have passed something close to what was on the floor--could have passed if we'd had, maybe on the floor, a chance to perfect it."

Could it come back again?

"My guess is we're not going to see this again."

Really?

"I don't think we're going to see this again."

Jon Tester (D-Mont.): "I just think a deal's a deal. I have a lot of empathy for folks who tend to get led astray, but I just think it's going to create some problems -- pretty obvious, actually. I don't have to list them. I'm generally opposed. I don't think it works well."

Mary Landrieu (D-La.): "My community bankers are really opposed to it and I think it's important for people to realize there is a big difference right now in the country between the health of these large international financial institutions and our local community banks...I think we gotta be careful about adopting processes and procedures that would really hurt our community banks."

The Huffington Post asked a few Republicans, too, since they still do, after all, vote.

Mel Martinez (R-Fla.): "We're working through this crisis. It's not quite as impending an issue as it may have been four months ago, because I think we're beginning to ease -- the crisis is sort of working its way through."

George Voinovich (R-Ohio): "I evaluated it and it harms more than it helps. It's the precedent that it sets in terms of a lot of people who are out there quite frankly very responsible. Our credit unions were giving money to people who were responsible. You've got some people who were being very responsible and doing their job and come to you and say if this happens we're going to have to change the interest rate, recalculate. I mean, I want to encourage those people. I don't want to discourage them."

Susan Collins (R-Maine), on how her vote will play at home: "I think it'll play just fine, because I view it as increasing the costs for homeowners, so it just wasn't the right approach."

A yes vote, John Kerry (D-Mass.), also weighed in: "They don't own me and I'm in the Senate. I think it's unfortunate. I don't know what the rationale is behind people's votes. I don't know what motivates -- some senators don't like changing of a contract. Some senators don't like to have courts have the power. There are different reasons."

Millions of different reasons, perhaps.

Ryan Grim is the author of the forthcoming book This Is Your Country On Drugs: The Secret History of Getting High in America

Are Courts in California Truly Limited by Non-Judicial Foreclosure Statutes?

Are Courts in California Truly Limited by Non-Judicial Foreclosure Statutes?

By Michael Doan on May 2, 2009 in Foreclosure Defense, Foreclosure News

Recently, many California Courts have been dismissing lawsuits filed to stop non-judicial foreclosures, ruling that the non-judicial foreclosure statutes occupy the field and are exclusive as long as they are complied with.  Thus, in the case where a notice of default is recorded and a lawsuit then filed in response to stop the foreclosure since the foreclosing party does not possess the underlying note, all too often the Court will simply dismiss the case and claim “2924 has no requirement to produce the note.”

Thus, these Courts view the statutes that regulate non-judicial foreclosures as all inclusive of all the requirements and remedies in foreclosure proceedings.  Indeed, California Civil Code sections 2924 through 2924k provide a comprehensive framework for the regulation of a nonjudicial foreclosure sale pursuant to a power of sale contained in a deed of trust. This comprehensive statutory scheme has three purposes: ‘“(1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor; (2) to protect the debtor/trustor from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.” [Citations.]’ [Citation.]” (Melendrez v. D & I Investment, Inc. (2005) 127 Cal.App.4th 1238, 1249–1250 [26 Cal. Rptr. 3d 413].)

Notwithstanding, the foreclosure statutes are not exclusive.  If someone commits murder during an auction taking place under Civil Code 2924, that does not automatically mean they are immune from criminal and civil liability.  Perhaps this is where some of these courts are “missing the boat.”

For example, in Alliance Mortgage Co. v. Rothwell (1995) 10 Cal. 4th 1226, 1231 [44 Cal. Rptr. 2d 352, 900 P.2d 601], the California Supreme Court concluded that a lender who obtained the property with a full credit bid at a foreclosure sale was not precluded from suing a third party who had fraudulently induced it to make the loan. The court concluded that “ ‘the antideficiency laws were not intended to immunize wrongdoers from the consequences of their fraudulent acts’ ” and that, if the court applies a proper measure of damages, “ ‘fraud suits do not frustrate the antideficiency policies because there should be no double recovery for the beneficiary.’ ” (Id. at p. 1238.)

Likewise, in South Bay Building Enterprises, Inc. v. Riviera Lend-Lease, Inc. [*1071]  (1999) 72 Cal.App.4th 1111, 1121 [85 Cal. Rptr. 2d 647], the court held that a junior lienor retains the right to recover damages from the trustee and the beneficiary of the foreclosing lien if there have been material irregularities in the conduct of the foreclosure sale. (See also Melendrez v. D & I Investment, Inc., supra, 127 Cal.App.4th at pp. 1257–1258; Lo v. Jensen (2001) 88 Cal.App.4th 1093, 1095 [106 Cal. Rptr. 2d 443] [a trustee's sale tainted by fraud may be set aside].)

In looking past the comprehensive statutory framework,  these other Courts also considered the policies advanced by the statutory scheme, and whether those policies would be frustrated by other laws.  Recently, in the case of California Golf, L.L.C. v. Cooper, 163 Cal. App. 4th 1053, 78 Cal. Rptr. 3d 153, 2008 Cal. App. LEXIS 850 (Cal. App. 2d Dist. 2008), the Appellate Court held that the remedies of 2924h were not exclusive.  Of greater importance is that the Appellate Court reversed the lower court and specifically held that provisions in UCC Article 3 were allowed in the foreclosure context:

Considering the policy interests advanced by the statutory scheme governing nonjudicial foreclosure sales, and the policy interests advanced by Commercial Code section 3312, it is clear that allowing a remedy under the latter does not undermine the former. Indeed, the two remedies are complementary and advance the same goals. The first two goals of the nonjudicial foreclosure statutes: (1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor and (2) to protect the debtor/trustor from a wrongful loss of the property, are not impacted by the decision that we reach. This case most certainly, however, involves the third policy interest: to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.

This is very significant since it provides further support to lawsuits brought against foreclosing parties lacking the ability to enforce the underlying note, since those laws also arise under Article 3.  Under California Commercial Code 3301, a note may only be enforced if one has actual possession of the note as a holder, or has possession of the note not as a non-holder but with holder rights.  

Just like in California Golf, enforcing 3301 operates to protect the debtor/trustor from a wrongful loss of the property.  To the extent that a foreclosing party might argue that such lawsuits disrupt a quick, inexpensive, and efficient remedy against a defaulting debtor/trustor, the response is that “since there is no enforceable obligation,  the foreclosing entity is not a party/creditor/beneficiary entitled to a quick, inexpensive, and efficient remedy,” but simply a declarant that recorded false documents.

This is primarily because being entitled to foreclose non-judicially under 2924 can only take place “after a breach of the obligation for which that mortgage or transfer is a security.”   Thus, 2924 by its own terms, looks outside of the statute to the actual obligation to see if there was a breach, and if the note is unenforceable under Article 3, there can simply be no breach.  End of story.

Accordingly, if there is no possession of the note or possession was not obtained until after the notice of sale was recorded, it is impossible to trigger 2924, and simple compliance with the notice requirements in 2924 does not suddenly bless the felony of grand theft of the unknown foreclosing entity.  To hold otherwise would create absurd results since it would allow any person or company the right to take another persons’ home by simply recording a false notice of default and notice of sale.  

Indeed, such absurdity would allow you to foreclose on your own home again to get it back should you simply record the same false documents.  Thus it is obvious that these courts improperly assume the allegations contained in the notice of default and notice of sale are truthful.   Perhaps these courts simply can not or choose not to believe such frauds are taking place due to the magnitude and volume of foreclosures in this Country at this time.  One can only image the chaos that would ensue in America if the truth is known that millions of foreclosures took place unlawfully and millions more are now on hold as a result of not having the ability to enforce the underlying obligation pursuant to Article 3.

So if you are in litigation to stop a foreclosure, you can probably expect the Court will want to immediately dismiss your case.  These Courts just can not understand how the law would allow someone to stay in a home without paying.  Notwithstanding, laws can not be broken, and Courts are not allowed to join with the foreclosing parties in breaking laws simply because “not paying doesn’t seem right.”

Accordingly, at least for appeal purposes, be sure to argue that 2924 was never triggered since there was never any “breach of the obligation” and that Appellate Courts throughout California have routinely held that other laws do in fact apply in the non-judicial foreclosure process since the policies advanced by the statutory non-judicial foreclosure scheme are not frustrated by these other laws.

Written by Michael G. Doan

Billions More in Mortgage Subsidies May Be on the Way

Billions More in Mortgage Subsidies May Be on the Way

By: Reuters | 21 Apr 2009 | 02:39 PM ET

Topics:Economy (Global) | Economy (U.S.) | TARP | Real Estate | Mortgages | Housing

The U.S. Treasury Department is considering giving banks and investors billions of dollars in fresh incentives to modify troubled mortgages and save homeowners from foreclosure, sources familiar with official deliberations said.

AP

Under one scenario, investors in second liens would receive a cash payment if they agree to ease the terms of troubled loans and accept a smaller return on their mortgage investment, the sources said.

During the height of the housing boom, some borrowers were able to buy a home with no downpayment by adding a second lien and many of those loans are now failing as the economy and housing market struggle.

Officials also envision giving fresh subsidies to encourage 'short sales' in which the lender accepts a payment that does not cover the entire loan amount, according to the sources, who requested anonymity because they are not authorized to disclose details.

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Fannie Mae and Freddie Mac, the mortgage finance companies, would administer the new program to resolve problems with second-liens under one plan being considered, they said.

A senior administration official declined to comment on Tuesday, but said the Treasury expected to unveil further details of its homeowner-aid program "soon."

The official said the Treasury Department is also considering ways it could resolve problems in the mortgage insurance industry battered by mounting foreclosure losses.

"We are aware of the difficulties in the industry and we are analyzing different options to deal with" those difficulties, the official said.

Bank bailout may hurt taxpayers, be open to fraud

Bank bailout may hurt taxpayers, be open to fraud

Inspector general cites potential flaws in bank bailout, urges Treasury to adopt safeguards

• Jim Kuhnhenn, Associated Press Writer
• Tuesday April 21, 2009, 12:27 am EDT

WASHINGTON (AP) -- Taxpayers are increasingly exposed to losses and the government is more vulnerable to fraud under Obama administration initiatives that have created a federal bank bailout program of "unprecedented scope," a government report finds.

Related Quotes

Symbol	Price	Change
FNM	0.85	+0.10

{"s" : "fnm","k" : "c10,l10,p20,t10","o" : "","j" : ""}

In a 250-page quarterly report to Congress, the rescue program's special inspector general concludes that a private-public partnership designed to rid financial institutions of their "toxic assets" is tilted in favor of private investors and creates "potential unfairness to the taxpayer."

The report, which examines the six-month old, $700 billion Troubled Asset Relief Program, is scheduled for release Tuesday.

Using blunt language, Inspector General Neil Barofksy offers a series of recommendations to protect the public and takes the Treasury to task for not implementing previous advice. The report also commends Treasury and the Federal Reserve for creating some safeguards.

The report's warnings about the public-private plan's potential for losses echoes alarms raised by some lawmakers and economists, but Barofksy has significant credibility in Congress and his views are likely to carry ample weight.

Overall, the report says the public-private partnership -- using Treasury, Federal Reserve and private investor money -- could total $2 trillion. The financial markets responded positively to the program when the Obama administration announced it last month, but the administration is still putting final touches on its implementation.

"The sheer size of the program ... is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives," the report states.

In particular, the report cited the private-public partnership that would purchase troubled real estate-related securities from financial institutions. Under plans unveiled by Treasury, for every $1 of private investment, Treasury would invest $1 and could provide another dollar in a nonrecourse loan. That money could then leverage a loan from another government fund backed mostly by the Federal Reserve, a step that Barofsky says would dilute the incentive for private fund managers to exercise due diligence.

Barofsky recommends that Treasury not allow the use of Fed loans "unless significant mitigating measures are included to address these dangers."

Treasury officials maintain that the public-private program is the best response to the troubled loans and securities clogging the system. They say that if government did nothing, the financial crisis could linger for years, and that if government intervened alone by closing troubled banks and taking over their bad assets, taxpayers would be at greater risk.

They argue that private investors and taxpayers would share profits equally and that investors would be the first to lose if the asset purchase ends up losing money.

Among Barofsky's recommendations:

--Treasury should set tough conflict of interest rules on public-private fund managers to prevent investment decisions that benefit them at taxpayer expense.

--Treasury should disclose the owners of all private equity stakes in a public-private fund.

--Fund mangers should have "investor-screening" procedures to prevent asset purchase transactions from being used for money laundering.

The report lands as the bailout plan comes under new leadership at Treasury. Last week, the White House announced it had nominated Herbert Allison, the president and CEO of mortgage behemoth Fannie Mae, to replace Neel Kashkari, an assistant Treasury secretary and a holdover from the Bush administration.

In a response to Barofsky's report dated last week, Kashkari acknowledged that "there are risks associated with investing in or lending against legacy assets, which is in part why markets for them are currently frozen." Kashkari said Treasury was considering Barofsky's recommendations.

The report also comes as lawmakers demand evidence that the government's role is unclogging credit and banks are being held accountable. Despite the infusion of government money, bank lending has declined and some banks have began to bristle at the oversight and the restrictions attached to acceptance of federal assistance.

With a sharp rebuke, Barofsky's report notes that the Treasury Department has refused to adopt the inspector general's recommendation that all recipients of TARP money account for the use of their government money.

"In light of the fact that the American taxpayer has been asked to fund this extraordinary effort to stabilize the financial system, it is not unreasonable that the public be told how those funds have been used by TARP recipients," the report states.

Though the report says Treasury is not requiring such information under a new capital assistance program for banks, Treasury informed lawmakers last week that recipients of that money must provide monthly reports that show the volume of new loans. The capital assistance plan would provide additional infusions to financial institutions or convert past loans to those banks into common shares of stock.

"Over the last two months, we've significantly increased the amount of transparency into the programs, including actively measuring lending and requiring banks under the new capital program to report on how every dollar of government resources goes toward increasing lending to consumers and businesses," Treasury spokesman Andrew Williams said.

Pssst - wanna buy a toxic asset?

Pssst - wanna buy a toxic asset?

Federal officials are considering ways to open up to retail investors its programs to clean up bad loans. Some investment managers are intrigued by the idea.

By Jennifer Liberto, CNNMoney.com senior writer

Last Updated: April 15, 2009: 4:21 PM ET

WASHINGTON (CNNMoney.com) -- Consumers take heed: You too might be able to buy a piece of a government subsidized toxic bank asset. Whether you should is another question.

In their quest to woo investors and clean up the banks, top federal officials are discussing ways to extend a key federal bailout program beyond Wall Street firms and hedge funds to average Joes.

"For retail investors, we want to make sure whatever participation they would have would be suitable," Federal Deposit Insurance Corp. Chairman Sheila Bair said last week on a conference call with investors.

Experts say the government wouldn't allow consumers to, say, plunk down retirement savings directly on a piece of a devalued mortgage. Instead, investors would be given the chance to buy shares of special funds that contain the assets.

0:00 /5:30Private sector help needed

Several top institutional investment management firms, including BlackRock (BLK, Fortune 500) and Pimco, are in the planning stages of such funds, according to consultants working on deals. Spokesmen for both companies declined to comment. Another firm, Eaton Vance Managed Investments, is also evaluating whether to offer such special funds, a spokeswoman said.

Allowing retail investors to buy into the bad assets could counter the perception that the government is only looking out for Wall Street. If the effort succeeds, consumers could share in the profits. But the program is risky: The investments could tank and consumers could lose money.

For its part, the Treasury Department isn't saying whether funds targeted at retail investors will get a final nod. "We want broad participation and we will be evaluating all applications," Treasury spokesman Andrew Williams said.

Challenges to setting up funds

Treasury is still working with other agencies to hammer out the final details of how to enact the Public-Private Investment Program. Tim Geithner, the treasury secretary, revealed the basic structure last month.

Under the program, the government will team up with investors, with each putting up half the equity to purchase a legacy loan or security. The government would also guarantee cheap financing to pay for the rest of the asset.

Funds for retail investors would have to first clear some regulatory hurdles, say lawyers who represent financial firms.

For example, regulations restrict open-end funds, like the kind investors buy through mutual fund companies, from investing more than 15% in "illiquid" assets - those not easily and quickly converted into cash. And the legacy loans and securities at the center of the Treasury program are about as illiquid as things get, said investment management attorney Bruce Leto of Stradley Ronon.

So investment firms are talking mostly about creating closed-end funds that invest in toxic assets.

Closed-end funds, like public companies, sell shares that are traded on an exchange. Under the PPIP, an investment firm would create a portfolio of investments in toxic assets and sell a limited number of shares. Buyers who later want to get out would need to find someone else to buy their shares. Like stocks, the value of the portfolios would depend on their market performance.

But purchasing toxic assets through closed-end funds could be tricky. It's unclear whether regulators would sign off on the idea of exclusively investing closed-end funds in toxic assets, according to banking lawyers.

"It's highly unusual, even without a limit on liquidity, to invest 100% in these kinds of things," Leto said.

How to value the assets?

No matter how a retail fund was structured, the biggest sticking point is the value of the legacy assets, which remains a key unknown for potential Wall Street and retail investors. While auctions would set the price for each one, critics have warned that the cheap financing could persuade investors to bid too high and inflate the prices.

Inflated prices would mean investors could lose everything they put in and that the government is on the hook for even more.

"For a retail investor, it's a highly risky option, because these are not a structure that has any kind of history that allows you to evaluate the advantages and the disadvantages," said Mercer Bullard, an assistant law professor at the University of Mississippi.

CNNMoney.com reached out to 13 retail members of the American Association of Individual Investors, and nine said they would consider buying toxic assets if offered through a fund. Several cited fortunes made during the savings and loan crisis 20 years ago.

"Individual investors are starved for products," said retail investor Al Blomquist of Allendale, N.J., a retiree who dabbles in investment managing.

Blomquist said a lot of his older clients whose retirement savings have declined are looking for financial products to give them better yields and make up for recent losses. "I hate to say it, but most of my clients only care about their profit."

Have you found a job recently? We want to hear from you. Send us an email and attach a photo. Tell us where you got hired and how you landed the job and you could be profiled in an upcoming story on CNNMoney.com. For the CNNMoney.com Comment Policy, click here. 

First Published: April 15, 2009: 1:45 PM ET

CNNMoney.com's bailout tracker

CNNMoney.com's bailout tracker

The government is engaged in a far-reaching - and expensive - effort to rescue the economy. Here's how you can keep tabs on the bailouts.

By David Goldman, CNNMoney.com staff writer

CNNMoney.com is tracking developments in the economic rescue as they happen. Click the links to the right or scroll down to find out how much the government is putting on the line.

Chart Links

• Troubled Asset Relief Program
• Federal Reserve rescue efforts
• Federal stimulus programs
• American International Group
• FDIC bank takeovers
• Other financial initiatives
• Other housing initiatives

• List of bailed out banks
• List of failed banks
• Glossary of terms

Troubled ASSET RELIEF PROGRAM

Financial rescue plan aimed at restoring liquidity to the financial markets

Program	Commited	Invested	Description
American International Group Common stock investment Preferred stock investment * See complete AIG bailout below	$70 billion $40 billion $30 billion	$40 billion $40 billion $0	$40 billion in common stock. $30 billion in preferred shares for up to 5 years, in return for a 10% dividend. AIG: Where your money is going
Asset Guarantee Program Citigroup Bank of America	$12.5 billion $5 billion $7.5 billion	$5 billion $5 billion $0	Funds set aside to backstop potential losses to government from Citigroup and Bank of America loans.
Auto Supplier Support Program	$5 billion	$5 billion	Program to help stabilize auto suppliers by guaranteeing debt owed to them for shipped products, and providing financing to continue operations. Parts makers get $5B
Automotive Industry Financing Program General Motors Chrysler GMAC Chrysler Financial	$24.9 billion $13.4 billion $4 billion $6 billion $1.5 billion	$24.8 billion $13.4 billion $4 billion $5.9 billion $1.5 billion	Program that provides capital on a case-by-case basis to systemically significant auto and auto-financing companies that are at substantial risk of failure. Restructure or else
Capital Purchase Program * See full list of bailed-out banks	$218 billion	$198.8 billion	Preferred investments in banks to prop up capital reserves and encourage lending, in return for dividend payments and stricter executive compensation requirements. Counting to $700 billion
Consumer and Business Lending Initiative TALF investment Small business loan program TALF loss provisions	$70 billion $20 billion $15 billion $35 billion	$20 billion $20 billion $0 $0	Programs to support private lending purchases of toxic assets and backing SBA loans. Also sets aside funds to backstop potential losses to government from purchases of mortgage-backed securities and other securities backed by consumer loans.
Making Home Affordable	$50 billion	$0	Multipronged foreclosure prevention plan to help as many as 9 million borrowers by modifying or refinancing loans. Obama housing fix
Public-Private Investment Program	$100 billion	$0	Taxpayer funds used in partnership with private investment that will buy up at least $500 billion of toxic assets from financial institutions. Treasury unveils 'bad asset' plan
Targeted Investment Program Citigroup Bank of America	$40 billion $20 billion $20 billion	$40 billion $20 billion $20 billion	Emergency funding, in addition to previous $25 billion capital investments, for Citigroup and Bank of America BofA: $20B bailout Citi dodges bullet
New initiatives	$134.6 billion	n/a
Estimated payback	($25 billion)	$442.3 million	Estimate of how much banks participating in Capital Purchase Program will return to Treasury.
TARP total	$700 billion	$334 billion

FEDERAL RESERVE RESCUE EFFORTS

Financial rescue plan aimed at restoring liquidity to the financial markets.

Program	Commited	Invested	Description
Bank of America loan-loss backstop	$97 billion	$0	Funds set aside to insure against bank's potential losses from Merrill Lynch merger.
Citigroup loan-loss backstop	$245 billion	$0	Funds set aside to insure against bank's potential losses from mortgage-backed securities investments.
Commercial Paper Funding Facility	$1.4 trillion	$251.2 billion	Purchases of short-term corporate debt aimed at boosting the struggling market and providing critical three-month financing to businesses. Businesses find alternatives
Foreign exchange dollar swaps	Unlimited	$313.4 billion	Exchange of dollars to 13 foreign central banks for collateral. Aim is to provide liquidity to foreign financial institutions. Fed pumps out more dollars
GSE debt purchases	$200 billion	$56.3 billion	Program to buy debt issued by Fannie Mae and Freddie Mac. Aim is to reduce rates on home loans. Fed bets on consumers
GSE mortgage-backed securities purchases	$1.25 trillion	$236.7 billion	Program to buy mortgage-backed securities held by Fannie Mae and Freddie Mac. Aim is to reduce rates on home loans.
Money Market Investor Funding Facility	$540 billion	$0	Programs to help money market funds by lending to funds directly.
Primary Dealer Credit Facility	n/a	$13.4 billion	Long-time lending facility for commercial banks that was opened to investment banks for first time in March 2008.
Term Asset-Backed Securities Loan Facility	$1 trillion	$4.7 billion	Program to buy consumer loan-backed securities. Aim is to revive the securitization market for consumer loans like credit cards and auto loans. To TALF, or not to TALF
Term Auction Facility	$600 billion	$467.3 billion	Lending program that allows commercial banks to unload hard-to-sell assets, including mortgage-backed securities: Fed takes assets as collateral and banks get cash. Why bailout might not work
Term Securities Lending Facility	$200 billion	$59.7 billion	Federal Reserve facility that loans Treasurys to banks against hard-to-sell collateral like mortgage-backed securities.
U.S. government bond purchases	$300 billion	$36.5 billion	Federal Reserve will buy up to $300 billion of U.S. debt to support Treasury market and help keep interest rates down for consumer loans.
Fed total	$6.2 trillion	$1.4 trillion

Federal stimulus programs

Programs designed to save or create jobs and jumpstart the economy from recession.

Program	Commited	Invested	Description
Economic Stimulus Act of 2008	$168 billion	$168 billion	Tax rebates of up to $600 for individual filers and $1,200 for couples in effort to boost the economy. Businesses received more than $60 billion in tax breaks. Senate OKs rebates
Unemployment benefit extension	$8 billion	$8 billion	Federal funds to extend benefits for the unemployed. Unemployed? More help for you
Student loan guarantees	$130 billion	$9 billion	Program to purchase federal student loans from private lenders. Aim is to provide financing to companies that provide student loans.
American Recovery and Reinvestment Act Tax cuts for individuals and businesses Direct spending Appropriations spending	$787.2 billion $212 billion   $267 billion $308.3 billion	n/a n/a   n/a n/a	Infrastructure spending, funding for states, help for the needy and tax cuts for individuals and businesses to stimulate the economy. Stimulus: Now for the hard part
Stimulus total	$1.1 trillion	$185 billion

American International Group

Multifaceted bailout to help insurer through restructuring, minimize the need to post collateral and get rid of toxic assets

Program	Commited	Invested	Description
Asset purchases Collateralized debt obligation purchases Mortgage-backed securities purchases	$52.5 billion $30 billion   $22.5 billion	$45.6 billion $27.4 billion   $18.2 billion	$30 billion from New York Fed for purchasing clients’ collateralized debt obligations and $22.5 billion for purchasing clients’ mortgage-backed securities.
Bridge loan	$25 billion	$45.1 billion	Loan to be reduced from $60 billion to $25 billion as government takes shares in AIG subsidiaries and receives cash flows from life insurance policies. AIG must pay 3% plus 3-month Libor rate to government in interest on the 5-year loan.
Government stakes in subsidiaries	$26 billion	$0	Government to hold preferred interest in entities holding all the common stock of American Life Insurance Company and American International Assurance Company, two life insurance holding company subsidiaries of AIG.
TARP investment Common stock investment Preferred stock investment	$70 billion $40 billion $30 billion	$40 billion $40 billion $0	$40 billion in common stock. $30 billion in preferred shares for up to 5 years, in return for a 10% dividend.
Other	$8.5 billion	$0	Government giving AIG $8.5 billion and, in exchange, is receiving cash streams from the premiums of blocks of life insurance policies.
AIG total	$182 billion	$130.7 billion

FDIC bank takeovers

Cost to FDIC fund that insures losses depositors suffer when a bank fails.

Program	Cost to fund
2008 FDIC bank takeovers	$17.6 billion
2009 FDIC bank takeovers * See full list of bank failures	$3.1 billion
FDIC total	$20.7 billion

Other financial initiatives

Other programs designed to rescue the financial sector

Program	Commited	Invested	Description
Bear Stearns bailout	$29 billion	$26.4 billion	Program to guarantee potential losses on Bear Stearns' portfolio; smoothed the way for JPMorgan Chase to buy the failed investment bank. JPMorgan scoops up Bear
Credit union deposit insurance guarantees	$80 billion	$0	Temporary guarantee of all corporate credit union deposits above former $250,000 limit.
Money market guarantee program	$50 billion	$0	Treasury program to help money market funds by insuring against losses. Run ends on funds
U.S. Central Federal Credit Union investment	$1 billion	$1 billion	Funds to help troubled credit union to cover anticipated losses on asset-backed securities.
Temporary Liquidity Guarantee Program	$1.5 trillion	$297.1 billion	Guarantees on newly issued bank bonds backed with assets on company balance sheets with maturities of more up to ten years. Aim is to restore liquidity to the corporate bond market and provide long-term financing to banks. FDIC encourages banks to lend
Other financial total	$1.7 trillion	$324.5 billion

Other housing initiatives

Other programs designed to rescue the housing market and prevent foreclosures

Program	Commited	Invested	Description
Fannie Mae and Freddie Mac bailout	$400 billion	$59.8 billion	Cost to the government of taking the mortgage finance companies into conservatorship. U.S. seizes Fannie and Freddie
FHA housing rescue	$320 billion	$20 billion	Funding set aside for insurance of new 30-year fixed-rate mortgages for at-risk borrowers, tax credits for first-time home buyers and assistance to states and municipalities. The other housing rescue
Making Home Affordable investment	$25 billion	$0	$20 billion from GSEs and $5 billion from HUD to help Treasury launch its $75 billion multipronged foreclosure prevention plan.
Other housing total	$745 billion	$79.8 billion

Total

$10.5 trillion

$2.5 trillion

Sources: Federal Reserve, Treasury, FDIC, CBO
Note: Figures as of April 13, 2009

Obama launches mortgage rescue plan

Obama launches mortgage rescue plan

First participants in the Treasury Department's program to help homeowners avoid foreclosure include some of the nation's largest banks.

By Tami Luhby, CNNMoney.com senior writer

Last Updated: April 16, 2009: 10:15 AM ET

NEW YORK (CNNMoney.com) -- The Obama administration's loan modification program is finally underway.

The Treasury Department announced Wednesday the first six participants to sign up for President Obama's plan. They include three of the nation's largest banks: JPMorgan Chase (JPM, Fortune 500), which will get up to $3.6 billion in subsidy and incentive payments; Wells Fargo (WFC, Fortune 500), $2.9 billion; and Citigroup (C, Fortune 500), $2 billion. The others are GMAC Mortgage, $633 million; Saxon Mortgage Services, $407 million; and Select Portfolio Servicing, $376 million.

Additional loan servicers will be added to the list over time, a Treasury spokesman said.

Several major servicers, including JPMorgan Chase and Wells Fargo, said they began modifying loans under the government initiative earlier this month. CitiMortgage signed up for the program on Monday and will start processing applications soon.

"We view this modification program as yet another incremental opportunity for thousands of homeowners to preserve and maintain the dream of homeownership," Wells Fargo said in a statement.

Distressed homeowners and housing counselors have been eagerly awaiting the program's launch since Obama first announced it on Feb. 18. However, it took weeks for the government to clarify the terms and for the financial institutions to update their systems and start accepting applications, frustrating many of those in trouble.

Billed as helping up to 9 million borrowers stay in their homes, the two-part plan calls for servicers to reduce monthly payments to no more than 31% of eligible borrowers' pre-tax income or to refinance eligible mortgages even if the homeowner has little or no equity. The government is allocating $75 billion to subsidize part of payment reduction, as well as provide thousands of dollars in incentives for servicers and borrowers to participate.

The Treasury Department said Wednesday it is capping the payments to servicers to allow more companies to participate. It is allocating $50 billion to the program, with Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and the Department of Housing and Urban Development providing the rest.

The modification plan calls for the servicer to reduce interest rates so that the monthly obligation is no more than 38% of a borrower's pre-tax income, and then the government would kick in money to bring payments down to 31% of income. Servicers can also reduce the loan balance to achieve these affordability levels. The government will share in the cost, up to the amount the servicer would have received if it had reduced the interest rates.

Only loans where the cost of the foreclosure would be higher than the cost of modification would qualify. Also, Treasury will not provide subsidies to reduce rates to levels below 2%.

It was not immediately clear whether the servicers must pay the incentives to homeowners and investors out of their funding share.

In addition to subsidizing the interest rates, servicers will use the Treasury funding to pay for incentives for themselves, homeowners and investors. The program gives servicers $1,000 for each modification and another $1,000 a year for three years if the borrower stays current. It will also give $500 to servicers and $1,500 to mortgage holders if they modify at-risk loans before the borrower falls behind.

Homeowners, meanwhile, will get up to $1,000 a year for five years if they keep up with payments. The funds will be used to reduce their loan principals.

The Treasury Department set the caps based on public data about the mortgages the servicers handle. Though the program mandates that servicers modify all loans that meet the requirements, the department feels the servicers will have sufficient funds to cover all troubled borrowers' applications.

"We're confident we'll have enough money," said Treasury spokesman Andrew Williams.

Separately, major servicers also recently started accepting applications under the refinance portion of the program. 

First Published: April 15, 2009: 7:30 PM ET

Banks Ramp Up Foreclosures Increase Poses Threat to Home Prices; Delinquent Borrowers Face New Scrutiny

• REAL ESTATE
• APRIL 15, 2009

Banks Ramp Up Foreclosures

Increase Poses Threat to Home Prices; Delinquent Borrowers Face New Scrutiny

By RUTH SIMON

Some of the nation's largest mortgage companies are stepping up foreclosures on delinquent homeowners. That will likely lead to more Americans losing their homes just as the Obama administration's housing-rescue plan gets into gear.

J.P. Morgan Chase & Co., Wells Fargo & Co., Fannie Mae and Freddie Mac all say they have increased foreclosure activity in recent weeks. Those companies say they have lifted internal moratoriums which temporarily halted foreclosures.

Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama administration's housing-rescue plan, announced in February, which provides incentives for mortgage companies and investors to reduce borrowers' payments to affordable levels. Others had temporarily halted foreclosures while they put their own programs in place, or in response to changes in state laws.

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Bloomberg News

A foreclosure-auction sign in front of a home in San Jose, Calif., on April 3. Some of the nation's largest mortgage companies have lifted internal moratoriums on foreclosures and have begun determining which troubled borrowers are eligible for federal help and which to foreclosure on.

Now, they have begun to determine which troubled borrowers are candidates for help, and to move the rest through the foreclosure process.

The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off.

Some of the mortgage companies are themselves receiving funds under the government's financial-sector bailout, which could make their actions politically sensitive. But mortgage companies say they are taking steps to keep borrowers in their homes, and are only resorting to foreclosure when there are no other options.

Foreclosure sales had dropped in the second half of 2008 as mortgage companies delayed taking action against delinquent borrowers. But sales have been edging up this year, according to LPS Applied Analytics, which tracks loan performance. Foreclosure-related filings increased by nearly 6% in February from the month earlier, and were up almost 30% from February 2008, according to RealtyTrac. The backlog of seriously delinquent loans has been growing.

In California, notices of trustee sales, which are preludes to foreclosure sales, climbed by more than 80% to 33,178 in March, from February, according to data from ForeclosureRadar.com and the Field Check Group. The increase reflects both the expiration of foreclosure moratoriums and a California law enacted late last year that temporarily delayed default and foreclosure notices, says Mark Hanson, president of the Field Check Group, a research firm.

Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can't meet their loan payments, up from about 1.7 million in 2008, according to Moody's Economy.com.

Mortgage-servicing companies, such as J.P. Morgan Chase and Wells Fargo, collect mortgage payments and work with troubled borrowers, both for loans they own and those held by investors.

J.P. Morgan Chase has increased foreclosure actions since the expiration of a moratorium on new foreclosures that began on Oct. 31, and a later moratorium put in place at President Obama's request. The Oct. 31 moratorium delayed foreclosures on more than $22 billion of Chase-owned mortgages involving more than 80,000 homeowners.

"We had stopped putting additional loans into the foreclosure process so we could be sure that delinquent borrowers would have every opportunity to take advantage of new initiatives that we were putting in place," a Chase spokesman says. Borrowers who are now receiving foreclosure-sale notices, he said, "own vacant properties, have not been in contact with us and/or do not qualify for the modification programs."

Citigroup Inc. says it stopped all foreclosures until March 12, at the Obama administration's request, on loans serviced for Fannie and Freddie. Since then, says a spokesman, it has "reverted to our previous business-as-usual moratorium." Under that policy, it will not initiate a foreclosure sale for any borrower who is working with Citigroup and is a good candidate for a loan modification, provided Citigroup owns the loan or has investor approval. "For borrowers who do not qualify under these criteria and where no other options are available, we will move forward with foreclosures," the spokesman says.

Wells Fargo has also increased foreclosure actions since the expiration of its foreclosure moratorium, put into place while it awaited details on the administration's plan. Wells Fargo "will continue to work with our customers to find solutions up to the actual point of a foreclosure sale," a Wells Fargo spokesman says. "But the expiration of foreclosure moratoriums is having an impact."

Both Fannie and Freddie have stepped up sales of foreclosed properties since their moratoriums ended on March 31. Freddie says it has started to complete some foreclosure sales, such as those involving investment properties or second homes, though it continues to delay foreclosures on loans that may be eligible for modification under the Obama plan.

Fannie has told servicers that "a foreclosure sale may not occur on a Fannie Mae loan until the loan servicer verifies that the borrower is ineligible" for a loan modification under the Obama administration's plan, "and all other foreclosure prevention alternatives have been exhausted," a Fannie spokeswoman says.

GMAC's mortgage division, which had temporarily halted foreclosures while awaiting details of the Obama plan, is now reviewing loans to see which ones will qualify under the program. So far, about 10% of borrowers in some stage of foreclosure appear to be eligible for the federal program, a company spokeswoman says. Although GMAC may be able to work with investors who own these loans to come up with another solution, she says, many borrowers who don't qualify for help under the federal program are likely to wind up in foreclosure.

Mortgage companies are sorting through loan files to determine which borrowers are candidates for help. "At the time a moratorium expires, we have a team of folks who will pore through all of those loans where borrowers have not paid before we will take the next step in the process," says Jim Davis, executive vice president for American Home Mortgage Servicing Inc. "If there is any borrower contact, we will hold off on the foreclosure process until we've exhausted every effort to assist that borrower."

Still, some borrowers who are currently talking to their mortgage companies are also likely to wind up in foreclosure once their files are reviewed. "We are getting so many of these cases where people don't fit the new [Obama] program," says Michael Thompson, director of Iowa Mediation Service, which works with troubled borrowers. Many borrowers are unemployed or underemployed or have credit problems that go well beyond their mortgage troubles, he says.

Many have been "playing for time" while the moratoriums have been in place, he says. But the delays have only increased the amount of interest and fees they owe, making their loans "nonviable in the long run."

Many troubled loans will ultimately wind up in foreclosure because the borrower doesn't have sufficient income to make even a reduced mortgage payment, or doesn't respond to the mortgage company's requests for information. "Certainly half of the loans that would have wound up in foreclosure before the foreclosure moratoriums went in place" will ultimately wind up in foreclosure, says Michael Brauneis, director of regulatory risk consulting at Protiviti Inc., a consulting firm.

While many troubled loans are held by hedge funds, pension funds and other investors, the expiration of foreclosure moratoriums could also put a dent in bank profits, says Frederick Cannon, an analyst with Keefe, Bruyette & Woods. The moratoriums "have to some degree postponed the realization of problems" and "may help bank earnings in the first quarter" by delaying charge-offs of some troubled loans, he says.

Write to Ruth Simon at ruth.simon@wsj.com

Trading the untradable pays off

Trading the untradable pays off

An online platform hopes to profit from the bank relief plan.

By Telis Demos, writer-reporter

Last Updated: April 14, 2009: 4:55 PM ET

(Fortune Magazine) -- Kevin O'Connor lost his job trading auction-rate securities last June when J.P. Morgan shuttered its desk. Within weeks he'd landed a gig trading those same assets alongside ex-traders of mortgage-backed securities, collateralized debt obligations (CDOs), and other toxic stuff.

His new employer? SecondMarket, a fast-growing online trading platform for illiquid assets. Since 2004 the company has been trading everything from bankruptcy claims to restricted stock to shares of Facebook. By creating an exchange for these typically opaque, hard-to-value assets, SecondMarket lets the trading determine their price.

Of course, no assets these days are as opaque and hard to value as the toxic assets clogging up banks' balance sheets. Now SecondMarket's 32-year-old CEO, Barry Silbert, has an ambitious new plan to create a transparent trading platform for the banks' junk.

Earlier this month SecondMarket began listing CDOs, unsecuritized loans, and nonagency mortgage-backed securities - the very assets the government is trying to coax investors into buying. On SecondMarket's platform, those assets are exposed to clear daylight: All the pieces of a CDO, for instance, are spelled out on a single web page, with default rates published alongside each tranche.

Silbert, a former adviser to distressed companies for investment bank Houlihan Lokey, started SecondMarket in 2004. In 2007, FirstMark Capital, the spun-off venture arm of Pequot Capital, bought a 25% stake for $3.8 million. Last year's revenues were $20 million, the company says.

So far, the toxic-trading markets are in their infancy; the bulk of SecondMarket's business is still trading the more benign assets like restricted stock. Its total inventory is tiny, just over $2 billion in securities out of a universe of $52 trillion of illiquid assets. And Silbert is competing with the prime brokerages of the major banks, which can trade those same assets for their big customers.

But Silbert thinks in the current climate customers will flock to the transparent model SecondMarket offers - and may see value in avoiding the banks that created the mess in the first place. "It takes a crisis to snap things into focus," he says.  

First Published: April 14, 2009: 6:19 AM ET

Lawmakers lash out over AIG

Lawmakers lash out over AIG

Geithner and Bernanke say they lacked means to deal with troubled insurer - need power to prevent similar incidents. Lawmakers call bailout botched.

By David Goldman and Jennifer Liberto, CNNMoney.com staff writers

Last Updated: March 24, 2009: 2:27 PM ET

WASHINGTON (CNNMoney.com) -- The officials managing the bailout of AIG, facing an onslaught of questions from angry lawmakers Tuesday, said the government had no choice but to effectively seize control of the troubled insurer last September and asked for more power to prevent a similar collapse in the future.

Treasury Secretary Tim Geithner, Federal Reserve Chairman Ben Bernanke and New York Fed President William Dudley were grilled at a House Financial Services Committee hearing. It marked the second time in a week that a House panel took up the controversial $182 billion government rescue of AIG (AIG, Fortune 500).

"The close to $200 million in bonuses paid out to AIG's employees was merely last week's TARP outrage of the week," said Rep. Jeb Hensarling, R-Texas. "The outrage, however, pales in comparison to the outrage that taxpayers have now seen four different bailouts with no apparent end in sight."

Committee members were furious over the handling of the company's bailout. Regulators said they were frustrated that they had to bail out the company in the first place.

"AIG highlights broad failures of our financial system," Geithner said.

Still, when asked what the alternative to the current rescue plan might look like if AIG's bailout doesn't succeed, Geithner said there was no alternative.

"This plan will work," said Geithner, who said the program is already showing signs of success, including the company's ability to sell off some assets and raise capital.

More regulation needed

To prevent a repeat of the AIG fiasco, the officials called on Congress to grant regulators so-called resolution authority. That would give the government power to reorganize or wind down a non-bank company. Such powers would include selling off assets and subsidiaries, imposing limits on executive compensation and taking action on risky holdings.

"No legal means existed to resolve AIG to the way FDIC resolves a bank," added Geithner. "The government was faced with no good options."

They said that the government could have been better equipped to stem AIG's risky business practices before its failure threatened to bring down the financial system, arguing that such regulatory authority would have lessened the scope of the mess the insurer and the taxpayers find themselves in now.

Accordingly, Committee Chairman Barney Frank, D-Mass., argued that the government needs a regulator to supervise non-bank financial institutions just as the Federal Deposit Insurance Corp. oversees banks.

"When non-bank major financial institutions need to be put out of their misery, we need to give somebody the authority to do what the FDIC can do with banks," said Frank. "It is giving somebody a form of the bankruptcy power given under the Constitution. It allows us to avoid the choice of all or nothing -- nothing in the case of Lehman Brothers, all in the case AIG -- equally unacceptable alternatives."

After the hearing, Frank said that he has received some resolution authority language from the Treasury and said he generally agrees Congress should move forward on that, perhaps even as quickly as next week, but wouldn't say if that power should lie with the Treasury or the FDIC.

Regulators also suggested that the government increase its regulation of derivatives like the collateralized debt obligations, asset-backed securities and credit default swap agreements that brought down AIG. Geithner suggested that these financial products be moved to central clearing houses and open markets to allow better regulation of them.

"It is very important through a mix of law and regulation to bring these markets under an oversight framework," Geithner said. "But we need to get the world to move with us: There is a risk that capital will shift out of the United States otherwise."

The Treasury secretary will again appear before the committee on Thursday to further discuss the administration's proposals for regulatory reform. Geithner is expected to present his regulatory proposals at the upcoming G-20 conference in London beginning on April 2.

Fed wanted to sue over AIG bonuses

Bernanke and Geithner also faced tough questions about the hundreds of millions of dollars of bonuses that went out to executives at AIG's financial products division.

Bernanke testified that he wanted to sue AIG to prevent the payment of millions of dollars of retention bonuses to executives from the division that brought the firm to its knees.

But Bernanke said that he was advised against filing a lawsuit, because the government would have needed to pay "substantial punitive damages" if the Fed lost the case, essentially awarding extra benefits to the executives from the troubled financial products division.

"My reaction upon becoming aware of these specific payments was that ... it was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG's collapse," Bernanke said. "[But] legal action could have [had] the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees."

Several legislators suggested that there was, in fact, a legal ability to change the terms of the contracts without facing possible punitive damages. Bernanke said he believes they explored every possible legal option, but will continue to work to recoup the bonuses that have not been returned.

"I'm hopeful that you're right," Bernanke said. "We'd like to explore every possible action."

Anger about transparency

The regulators -- especially Geithner -- faced intense scrutiny from lawmakers, who scorned the Fed and Treasury for what they believed was a lack of transparency. Lawmakers many times looked for "yes" or "no" answers from their questions, and scolded the officials for attempting to avoid giving a black or white answer.

One such exchange occurred between Rep. Maxine Waters, D-Calif., and Geithner. Waters pressed the Treasury secretary to say whether Goldman Sachs (GS, Fortune 500) is getting preferential treatment, given their connections to the Treasury.

"I think it's deeply unfair [to suggest employees] were making judgments that were in their view were not in the best interest in the American people," Geithner said.

Geithner also had a heated exchange with Rep. Brad Sherman, D-Calif. Sherman asked Geithner to commit to posting the number of executives receiving bonuses in excess of $1 million at bailed out institutions.

When Geithner tried to explain how the Obama administration had similar plans, Sherman interrupted him and accused him of wanting to "hide the ball."

Rep. Donald Manzullo, R-Ill., complained that he couldn't get a yes or no answer. His question: Did AIG bailout money prop up retirement plans at firms that did business with AIG, even as the American public has lost 40% on their investments because of the financial crisis?

"That's because it's a poorly posed question," Bernanke said. "Had we not intervened, they would have lost 70%." 

First Published: March 24, 2009: 8:14 AM ET

Rahm Emanuel's profitable stint at mortgage giant

Text size:

Rahm Emanuel's profitable stint at mortgage giant

Short Freddie Mac stay made him at least $320,000

By Bob Secter and Andrew Zajac |Tribune reporters

3:18 PM CDT, March 26, 2009

The White House Chief of Staff Rahm Emanuel listens as President Barack Obama delivers remarks to open the White House Forum on Health Reform in the East Room of the White House. (Tribune photo by Zbigniew Bzdak / March 5, 2009)

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Before its portfolio of bad loans helped trigger the current housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors by a top federal regulator.

One of those allegedly asleep-at-the-switch board members was Chicago's Rahm Emanuel—now chief of staff to President Barack Obama—who made at least $320,000 for a 14-month stint at Freddie Mac that required little effort.

As gatekeeper to Obama, Emanuel now plays a critical role in addressing the nation's mortgage woes and fulfilling the administration's pledge to impose responsibility on the financial world.

Emanuel's Freddie Mac involvement has been a prominent point on his political résumé, and his healthy payday from the firm has been no secret either. What is less known, however, is how little he apparently did for his money and how he benefited from the kind of cozy ties between Washington and Wall Street that have fueled the nation's current economic mess.

Related links

• Freddie Mac scandals began on Emanuel's watch

• Graphic: Emanuel's rise, time at Freddie Mac

• Rahm Emanuel Photos

• Do you know the real Rahm? Quiz

• From the Tribune archives: The House Rahm Built

Though just 49, Emanuel is a veteran Democratic strategist and fundraiser who served three terms in the U.S. House after helping elect Mayor Richard Daley and former President Bill Clinton. The Freddie Mac money was a small piece of the $16 million he made in a three-year interlude as an investment banker a decade ago.

In business as in politics, Emanuel has cultivated an aggressive, take-charge reputation that made him rich and propelled his rise to the front of the national stage. But buried deep in corporate and government documents on the Freddie Mac scandal is a little-known and very different story involving Emanuel.

He was named to the Freddie Mac board in February 2000 by Clinton, whom Emanuel had served as White House political director and vocal defender during the Whitewater and Monica Lewinsky scandals.

The board met no more than six times a year. Unlike most fellow directors, Emanuel was not assigned to any of the board's working committees, according to company proxy statements. Immediately upon joining the board, Emanuel and other new directors qualified for $380,000 in stock and options plus a $20,000 annual fee, records indicate.

On Emanuel's watch, the board was told by executives of a plan to use accounting tricks to mislead shareholders about outsize profits the government-chartered firm was then reaping from risky investments. The goal was to push earnings onto the books in future years, ensuring that Freddie Mac would appear profitable on paper for years to come and helping maximize annual bonuses for company brass.

The accounting scandal wasn't the only one that brewed during Emanuel's tenure.

During his brief time on the board, the company hatched a plan to enhance its political muscle. That scheme, also reviewed by the board, led to a record $3.8 million fine from the Federal Election Commission for illegally using corporate resources to host fundraisers for politicians. Emanuel was the beneficiary of one of those parties after he left the board and ran in 2002 for a seat in Congress from the North Side of Chicago.

The board was throttled for its acquiescence to the accounting manipulation in a 2003 report by Armando Falcon Jr., head of a federal oversight agency for Freddie Mac. The scandal forced Freddie Mac to restate $5 billion in earnings and pay $585 million in fines and legal settlements. It also foreshadowed even harder times at the firm.

Many of those same risky investment practices tied to the accounting scandal eventually brought the firm to the brink of insolvency and led to its seizure last year by the Bush administration, which pledged to inject up to $100 billion in new capital to keep the firm afloat. The Obama administration has doubled that commitment.

Freddie Mac reported recently that it lost $50 billion in 2008. It so far has tapped $14 billion of the government's guarantee and said it soon will need an additional $30 billion to keep operating.

Like its larger government-chartered cousin Fannie Mae, Freddie Mac was created by Congress to promote home ownership, though both are private corporations with shares traded on the New York Stock Exchange. The two firms hold stakes in half the nation's residential mortgages.

Because of Freddie Mac's federal charter, the board in Emanuel's day was a hybrid of directors elected by shareholders and those appointed by the president.

In his final year in office, Clinton tapped three close pals: Emanuel, Washington lobbyist and golfing partner James Free, and Harold Ickes, a former White House aide instrumental in securing the election of Hillary Clinton to the U.S. Senate. Free's appointment was good for four months, and Ickes' only three months.

Falcon, director of the Office of Federal Housing Enterprise Oversight, found that presidential appointees played no "meaningful role" in overseeing the company and recommended that their positions be eliminated.

John Coffee, a law professor and expert on corporate governance at Columbia University, said the financial crisis at Freddie Mac was years in the making and fueled by chronically weak oversight by the firm's directors. The presence of presidential appointees on the board didn't help, he added.

"You know there was a patronage system and these people were only going to serve a short time," Coffee said. "That's why [they] get the stock upfront."

Financial disclosure statements that are required of U.S. House members show Emanuel made at least $320,000 from his time at Freddie Mac. Two years after leaving the firm, Emanuel reported an additional sale of Freddie Mac stock worth between $100,001 and $250,000. The document did not detail whether he profited from the sale.

Sarah Feinberg, a spokeswoman for Emanuel, said there was no conflict between his stint at Freddie Mac and Obama's vow to restore confidence in financial institutions and the executives who run them. At the same time, Feinberg said Emanuel now agrees that presidential appointees to the Freddie Mac board "are unnecessary and don't have long enough terms to make a difference."

Former President George W. Bush voluntarily stopped making such appointments following Falcon's assessment of their uselessness.

In an interview, Falcon said the Freddie Mac board did most of its work in committees. Yet proxy statements that detailed committee assignments showed none for Emanuel, Free or Ickes during the time they served in 2000 or 2001. Most other directors carried two committee assignments each.

Related links

• Freddie Mac scandals began on Emanuel's watch

• Graphic: Emanuel's rise, time at Freddie Mac

• Rahm Emanuel Photos

• Do you know the real Rahm? Quiz

• From the Tribune archives: The House Rahm Built

Contrary to the proxy statements, Feinberg said she believed that Emanuel served on board committees that oversaw Freddie Mac's investment strategies and mortgage purchase activities. But Feinberg acknowledged she had no official documents to back up that assertion.

The Obama administration rejected a Tribune request under the Freedom of Information Act to review Freddie Mac board minutes and correspondence during Emanuel's time as a director. The documents, obtained by Falcon for his investigation, were "commercial information" exempt from disclosure, according to a lawyer for the Federal Housing Finance Agency.

Emanuel's board term expired in May 2001, and soon after he launched his Democratic congressional bid.

One of Emanuel's fellow directors at Freddie Mac was Neil Hartigan, the former Illinois attorney general. Hartigan said Emanuel's primary contribution was explaining to others on the board how to play the levers of power.

He was respected on the board for his understanding of "the dynamics of the legislative process and the executive branch at senior levels," Hartigan recalled. "I wouldn't say he was outspoken. What he was, was solid."

By the time Emanuel joined Freddie Mac, the company had begun to loosen lending standards and buy riskier sub-prime loans. It was a practice that later blew up and contributed to the current foreclosure crisis.

In his investigation, Falcon concluded that the board of directors on which Emanuel sat was so pliant that Freddie Mac's managers easily were able to massage company ledgers. They manipulated bookkeeping to smooth out volatility, perpetuating Freddie Mac's industry reputation as "Steady Freddie," a reliable producer of earnings growth. Wall Street liked what it saw, Freddie Mac's stock value soared and top executives collected their bonuses.

Another focus of Freddie during Emanuel's day—and one that played to his skill set—was a stepped-up effort to combat congressional demands for more regulation.

During a September 2000 board meeting—midway through Emanuel's 14-month term—Freddie Mac lobbyist R. Mitchell Delk laid out a strategy titled "Political Risk Management" aimed at influencing lawmakers and blunting pressure in Congress for more regulation. Through Delk's initiative, Freddie Mac sponsored more than 80 fundraisers that raised at least $1.7 million for congressional candidates despite a federal law that bans corporations from direct political activity.

Emanuel spokeswoman Sarah Feinberg said Emanuel "can't remember the meeting or topic" but might have been in attendance when Delk outlined his plans. Feinberg downplayed the significance of the fundraiser thrown for Emanuel, which brought in $7,000, stressing that it was but one of many hosted by Delk. The event stood out in at least one respect, however.

The Freddie Mac-linked events were mostly for Republicans, and only a handful benefited Democrats like Emanuel. "Rahm was a good friend of mine. He was on Freddie Mac's board. He was very much supportive of housing," said Delk, who resigned under pressure in 2004.

Then-Freddie Mac CEO Leland Brendsel also hosted a fundraising lunch for Emanuel's 2002 campaign that netted $9,500 from top company executives. Brendsel was later ousted in the accounting scandal.

Federal campaign records show that Emanuel received $25,000 from donors with ties to Freddie Mac in the 2002 campaign cycle, more than twice the amount collected that election by any other candidate for the U.S. House or Senate.

Emanuel joined the House in January 2003 and was named to the Financial Services Committee, where he also sat on the subcommittee that directly oversaw Freddie Mac. A few months later, Freddie Mac Chief Executive Officer Leland Brendsel was forced out, and the committee and subcommittee launched hearings to sort out the mess, spanning more than a year. Emanuel skipped every hearing, congressional records indicate.

Feinberg said Emanuel recused himself "from deliberations related to Freddie Mac to avoid even the appearance of favoritism, impropriety or a conflict of interest."

bsecter@tribune.com

azajac@tribune.com

WaMu: After the fall

WaMu: After the fall

Treasury unveils 'bad asset' plan

Treasury unveils 'bad asset' plan

By partnering with private investors, government hopes it can finally flush out toxic assets from banks' balance sheets.

By David Ellis and Jennifer Liberto, CNNMoney.com staff writers

Last Updated: March 23, 2009: 5:02 PM ET

WASHINGTON (CNNMoney.com) -- The Treasury Department unveiled its long-awaited plan to remove many of the troubled assets from banks' books Monday, representing one of the biggest efforts by the U.S. government so far aimed at tackling the ongoing financial crisis.

Under the new so-called "Public-Private Investment Program," taxpayer funds will be used to seed partnerships with private investors that will buy up toxic assets backed by mortgages and other loans.

The goal is to buy up at least $500 billion of existing assets and loans, such as subprime mortgages that are now in danger of default.

Treasury said the program could potentially expand to $1 trillion over time, but that the hope is that it would not only help cleanse the balance sheets of many of the nation's largest banks, which continue to suffer billions of dollars in losses, but help get credit flowing again.

The government will run auctions between the banks selling the assets and the investors buying them, hoping to effectively create a market for these assets.

To kickstart things, the administration said it will commit $75 billion to $100 billion and would consider how the program is progressing before committing more money.

Even as he acknowledged that the government was taking on risk with this new program, Treasury Secretary Tim Geithner defended it as the best alternative, saying that doing nothing would result in a deeper credit crunch and a "longer, deeper recession."

The plan, which was widely hinted at over the weekend, appeared to be warmly received by Wall Street. The Dow Jones industrial average gained almost 4% in late morning trading Monday, helped by a surge in the financials. Shares of Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) each climbed about 15% on the New York Stock Exchange.

Investors have been waiting expectantly for details since Geithner first announced the framework of a plan last month to address two of the biggest problems in the banking sector: the toxic assets keeping banks from lending and the shortage of capital at major institutions.

But the latest program may very well add to the cost of federal bailouts to date. So far, the government has spent $2.5 trillion of the more than $12 trillion authorized for programs aimed at propping up the nation's financial services industry and the broader U.S. economy.

Will the plan work?

One of the biggest difficulties in getting the program off the ground was how to price the soured assets. If the government paid too little, banks would take the hit. But if the government overpaid, then already-soaked taxpayers would feel the pinch.

One nagging concern, however, is whether the government's involvement will actually spur banks and private investor groups, such as hedge funds, pension plans and insurance companies to participate.

Administration officials indicated Sunday they had gotten support from private investors and banks who have been briefed about the program. But some analysts questioned whether the government's help would be enough to push investors and banks toward figuring out a price.

At the same time, there are fears that investors may be reluctant to participate in light of the fact that Congress has retroactively altered the terms of many of the government rescue programs so far.

Bill Gross, co-chief investment officer of Pimco, one of the world's largest bond investment managers, said those concerns were not enough to deter his firm's interest in the program.

He told CNN that Pimco planned to participate and would also apply to the Treasury for one of the available asset manager positions to help run the program. Asset manager BlackRock (BLK, Fortune 500) said it also planned to apply.

0:00 /2:31Geithner's fix for undue bonuses

Geithner said Monday those asset managers and investors who participate will not have to abide by new caps on executive pay that have been imposed on financial institutions that received bailout money.

"These programs are different programs," Geithner said.

Regulators indicated, however, that they had few other attractive alternatives.

Letting banks continue to hold these assets on their books, for example, would only drag out the crisis and could put the country in a position similar to what happened in Japan during that country's so-called Lost Decade in the 1990s.

But if the government bought all the bad assets on its own, taxpayers would take on all of the risk. By investing with private firms under the current plan, the expectation is that taxpayers would share the risk -- as well as any potential returns.

Much like many of the government rescue efforts so far, the latest plan will rely on cooperation from other top regulators, including the Federal Reserve and the Federal Deposit Insurance Corporation.

The FDIC, the nation's top banking regulator, will conduct an auction for pools of loans banks are looking to sell and would guarantee debt issued by the buyer.

As part of Monday's announcement, the Federal Reserve would also expand its Term Asset-Backed Securities Loan Facility, or TALF, to include lower rated securities backed by residential and commercial mortgages.

The TALF program, which was launched last week, also will help find buyers for issuers of securities backed by other debt, such as auto, credit card, student and small business loans.

President Obama and Geithner have been working for months, even before Obama took office in January, to fashion a comprehensive strategy for rescuing the banks.

Geithner's plans have been weighed down in recent days by congressional and public backlash against retention bonuses paid to employees of American International Group (AIG, Fortune 500), a troubled insurer that is now majority owned by the government.

--CNN's Allan Chernoff contributed to this report 

First Published: March 23, 2009: 8:38 AM ET

FBI Going Undercover at Financial Firms

FBI Going Undercover at Financial Firms

Corporate Fraud Cases Up; 43 Investigations Directly Related to Current Crisis

By JASON RYAN
March 20, 2009

The FBI has gone undercover to flush out corporate and financial fraud as it takes a "proactive" approach to working the growing number of cases, FBI Deputy Director John Pistole told lawmakers on Capitol Hill today.

The FBI is going undercover at financial firms in its corporate and financial fraud investigations, part of a "proactive" approach to working the growing number of cases.

(ABC News Photo Illustration)

"We have more than doubled our resources toward the mortgage fraud, corporate fraud investigations in the last two years trying to address the allegations that have been coming in," Pistole said.

"We have several ongoing undercover operations," he added, "for example, in the corporate fraud and financial fraud area, where we are being proactive about seeking out perpetrators of frauds on a wide-scale basis, not just sitting back waiting for referrals to come in."

Related

Financial Meltdown Cases Flooding the Feds

WATCH: Did AIG Lie to Shareholders?

Did They Lie? Feds Probe Ex-AIG Execs

In the past month, the number of ongoing corporate fraud cases has increased from 530 to 566 open cases, which also includes 43 major investigations into "corporate fraud and financial institution matters directly related to the current financial crisis," Pistole said.

"These corporate and financial institution failure investigations involve financial statement manipulation, accounting fraud and insider trading," Pistole told the committee.

The hearing before the House Financial Services Committee explored ways to propose legislation, increase resources and better coordinate oversight of financial institutions and root out fraud at all levels.

Rita Glavin, acting attorney general of the Justice Department's Criminal Division, told the committee, "The Department of Justice is committed to redoubling our efforts to uncover abuses involving financial fraud schemes, mortgage lending and securitization frauds, foreclosure rescue scams, government program fraud and bankruptcy schemes.

"Where there is evidence of criminal wrongdoing, including criminal activity that may have contributed to the current economic crisis or any attempt to criminally profit from the crisis, the department will prosecute those wrongdoers," Glavin said.

'A Justifiable Level of Anger'

Officials also discussed ways to possibly oversee hedge funds, exotic investments such as collateral debt obligations (debt pools of mortgage backed securities) and credit default swaps, which provided credit risk insurance on collateral debt obligations and other specialized investment vehicles.

Related

Hefty Bonus Tax Faces Uncertain Future

FBI Braces For Spike in Corporate Fraud

Madoff Stays in Jail As Appeal is Denied

U.S. Securities and Exchange Commissioner Elisse Walter said that the SEC does not have oversight on hedge funds except on anti-fraud authority.

"We specifically have no authority with respect to the credit default swap market," she said, "so there are a number of areas in which there are regulatory gaps that should be filled."

House Financial Services Committee Chairman Barney Frank, D-Mass., suggested such holes tie the hands of officials attempting to police financial misdeeds that contributed to the current economic crisis.

"There is, in America today, a justifiable level of anger at the fact that the great majority of Americans are suffering economically because of the mistakes of a relatively small number of people and of a system that was inadequate to the task," Frank said. "We cannot prosecute people for breaking rules when the rules didn't exist."

Members of the House Financial Services and House Judiciary Committees said they were committed to providing more resources to the Federal Reserve, SEC, FBI and Justice Department.

"Every one of you has some law enforcement activity -- both civil and criminal," Frank said. "We have to satisfy the American public that everything is being done that can be done legitimately to hold accountable the people that caused this problem."

Web sites an outlet to vent foreclosure stress

Posted on Fri, Mar. 20, 2009

Web sites an outlet to vent foreclosure stress

ALEX VEIGA

The Associated Press

LOS ANGELES - Searching for more than advice to navigate the foreclosure process, delinquent homeowners are seeking solace in online support groups.

Sites like DailyStrength.org, and the recently launched TheSurvivorsClub.org, for example, offer resources, tools and connect users with others who are going through foreclosure. The portals cater to homeowners looking for more than advice about the financial complexities of losing a home.

"Mostly, people who are struggling with their lenders are looking for support, looking for people who have been through the same process, a shoulder to cry on," says Lars Nilsen, a vice president at Atlanta-based How Stuff Works International Inc., which operates DailyStrength.org.

The DailyStrength.org added the "Mortgages and Foreclosures" support group in October 2007 to provide "free, anonymous support from people just like you."

Like Facebook and similar social networking sites, users can create a personal profile, amass friends, and upload photos and video. The site includes a "Hugbook" feature, where if someone is at a loss for what to say in the way of support, they can send a smiley face, heart or rainbow icon.

Users can post discussion threads and chat with people in real time, although, only a handful of members in the group were signed on during on recent afternoon.

Here, often under the veil of an alias, users unabashedly swap housing horror stories and tales of families torn apart.

In one post from October, a single mother of two explains she is struggling through divorce and trying to get her home refinanced. She reveals she's three months behind on her loan, adding "My stomach is always upset and I could just cry continuously."

Another poster encapsulated her frustration over losing her home with a more primal expression: "AAAAGGHHHHHH!!!"

The value of communal support is partly why Ben Sherwood launched TheSurvivorsClub.org in January. His goal was to bring together people who have lived through everything from cancer to dire financial straits.

"Everybody is struggling with something or knows someone who is," says Sherwood, author of "The Survivors Club: The Secrets and Science that Could Save Your Life. "The concept of The Survivors Club is that there is strength in numbers ... they know some of the secrets and the shortcuts."

Sherwood says hundreds of thousands of people have visited the site, but declined to say how many registered members it has.

On the site's "Foreclosure Support Center," visitors can find information about navigating the foreclosure process and advice. Users can also find links to government housing sites and other portals with foreclosure information.

Like other social networking sites, The Survivors Club lets users register anonymously and form networks of friends with others. In coming months, Sherwood plans to roll out additional social networking features, including discussion forums.

While helpful avenues for many, online foreclosure forums can be fertile ground for lawyers and shady loan modification outfits looking to score some business.

Even when spammers are kept at bay, one can find Google text ads on the margins of the page, as on DailyStrength.org's site, plugging ways to just "walk away" from one's home.

On DailyStrength.org, Nilsen says moderators go through the forums and ensure they're not becoming targets for spammers plying foreclosure-avoidance services.

In some cases, real estate professionals do enter the forums and offer advice, something Nilsen says the site encourages as long as they don't cross the line and start peddling their services.

Sherwood says his site doesn't allow users to become members if they're doing it to conduct business.

Mike Bertrand of Newbury Park, Calif., who organizes a foreclosure support group at a church, says he's come across online forums full of spam advertising loan modification and other services to distressed homeowners.

"They don't need to pay someone $3,000 to do it for them," says Bertrand, who launched his own online foreclosure forum , WeAreMovingForward.org , a few months before he lost his home to foreclosure last year.

Still, only a handful of people have been shown up to the meetings, and fewer have posted on the Web site.

"It's good for some people, but not everyone is comfortable going to a computer for a support group," Bertrand says. "Other people love it and don't mind sharing to the whole wide world and spilling their guts out."

,,,

On the Net:

Daily Strength: http://dailystrength.org/c/Mortgages-and-Foreclosures/support-group

The Survivors Club: http://www.thesurvivorsclub.org/support-center/money/foreclosure/foreclosure .html

We Are Moving Forward: http://wearemovingforward.org/forum/index.php

Obama housing fix: Banks not ready

Obama housing fix: Banks not ready

Loan servicers are still working to start federal mortgage plan. Meantime, borrowers can use a new U.S. Web site to determine if they are eligible.

By Tami Luhby, CNNMoney.com senior writer

Last Updated: March 19, 2009: 3:41 PM ET

NEW YORK (CNNMoney.com) -- As loan servicers scramble to implement President Obama's foreclosure prevention plan, the administration on Thursday unveiled a Web site to assist homeowners in determining whether they are eligible for help.

Obama rolled out his $75 billion foreclosure prevention program on Feb. 18, saying it would begin two weeks later when financial institutions received the guidelines.

The two-part Obama plan calls for servicers to reduce monthly payments to no more than 31% of eligible borrowers' pre-tax income or to refinance eligible mortgages even if the homeowner has little or no equity. It also provides thousands of dollars in incentives for servicers and borrowers to participate.

0:00 /02:50The $75 billion housing fix

Servicers, however, are still updating their systems to process modification and refinancing applications. And they are waiting for clarification on a few points of the president's plan.

It could be weeks before borrowers learn whether they qualify for either program. Many have complained about being turned away by their servicers.

Administration officials reiterated the need for borrowers to be patient as the servicers work to implement the program. The nation's four major servicers -- Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500) -- have said they would participate.

"They are moving as fast as humanly possible," a senior administration official said Wednesday in a discussion about the government's new Web site.

The site can be found at makinghomeaffordable.gov.

Contact your servicer

Some financial institutions, while still not processing applications, are encouraging borrowers to contact them and submit their paperwork. That way homeowners can learn whether they qualify soon after the systems are in place.

Bank of America, for instance, is collecting borrowers' information. If it's clear they aren't eligible for the Obama plan, the bank looks to help them through one of the other loan modification programs already underway. If they might qualify for the president's program, Bank of America is compiling taking down names for future follow-up.

"As soon as we're ready, we'll make calls to the people who've already contacted us," said Rick Simon, a Bank of America spokesman.

Citigroup, meanwhile, is already modifying mortgage payments to no more than 31% of borrowers' monthly income, as part of its November bailout from the federal government.

"We anticipate that the modifications we are making will qualify under the Obama plan once the details are finalized," said Mark Rodgers, a Citigroup spokesman.

Servicers are encouraging borrowers to collect the financial information needed to determine eligibility.

"We're also asking our customers to gather the necessary documents so that when our systems are up and running, we can begin quickly to help those who will likely qualify," said a Wells Fargo spokeswoman.

Determining eligibility

The administration's new Web site helps homeowners determine whether they might qualify for either a loan modification or refinancing. It also provides links to finding government-approved housing counselors and warns people to avoid foreclosure rescue scams.

Borrowers can answer a set of questions to learn whether they could benefit from either the Obama modification or refinancing programs. The loan modification interactive tool, for instance, asks whether the borrower lives in the home, has a mortgage of less than $729,500 that was originated before Jan. 1 and is having trouble making payments.

The site also helps homeowners determine whether their monthly payments are more than 31% of their pre-tax income. And it gives an estimate of how low their new payment might go under the plan. For example, if you earn $4,000 a month and pay $1,400 a month, you could see your payments drop to $1,240 under the modification plan.

The refinancing tool, meanwhile, provides links to Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) that let borrowers determine whether they have loans held by either mortgage finance company, a key eligibility criteria.

Borrowers will also find a checklist of financial documents -- including pay stubs, tax returns and credit card statements -- that they will need to present when applying for the program.

The administration estimates that its foreclosure prevention fix will help up to nine million homeowners.

"We want to encourage as many eligible borrowers as possible to take advantage of our program," said a senior administration official. "This site encourages borrowers to investigate if they are eligible for one or both programs." 

First Published: March 19, 2009: 5:27 AM ET

Mortgage Investors Call for Changes in Rescue Plan

Mortgage Investors Call for Changes in Rescue Plan

MARCH 12, 2009

By RUTH SIMON

Investors who hold billions of dollars of residential mortgage-backed securities are pressing the Obama administration to make changes in its housing rescue plan.

Participation by these investors will help determine the success of President Barack Obama's $75 billion plan to reduce foreclosures and help stabilize the housing market. But many investors are critical of features of the program and have been meeting with Treasury officials in an effort to influence parts of the plan, such as how it treats second mortgages.

Some investors say they are contemplating legal action because they think the administration's plan and legislation before Congress would violate their rights. They are particularly concerned about measures that would prevent lawsuits against mortgage servicers, which collect loan payments for the investors and are responsible for modifying loans with homeowners.

"Investors are given rights through the contracts in the securities, and we expect those rights to be honored," said Jeffrey Gundlach, chief investment officer of TCW Group Inc., which manages roughly $52 billion in residential mortgage-backed securities.

Many of the four million borrowers the administration hopes to help through its loan-modification program have mortgages that were packaged into securities and sold to investors world-wide. Roughly $1.9 trillion of mortgage loans outstanding as of Dec. 31 had been packaged into securities that don't carry government backing, according to Inside Mortgage Finance. Thus far, servicers have been more reluctant to modify those loans than mortgages they own.

Administration officials say they are trying to address the concerns of investors and others as they work out details of the program. The range of investors in mortgage-backed securities includes hedge funds, insurance companies and pension funds.

Some investors say they are willing to work with the administration. Mr. Grundlach says the program would be more palatable to investors if, for instance, modifications weren't given to borrowers who lied when they took out their initial mortgage.

Treasury Department officials say they believe that servicers will be able to modify the vast majority of investor-owned loans based on their current contracts. They also point out that the plan includes financial incentives to encourage investor participation in loan modifications, but doesn't mandate that investor loans are reworked.

Home-equity loans and other second mortgages are an issue because such debt is junior to first mortgages. Some investors and analysts say that mortgage servicers may find it in their own financial interest to modify the first mortgage and not touch the related home-equity loan or line of credit.

Roughly half of delinquent subprime borrowers also have a second mortgage, according to Credit Suisse Group.

Mortgage investors say that rewriting the first mortgage without touching the second violates their rights, because second mortgages are supposed to be repaid second. Modifying the first loan can help the holder of the second mortgage, because it increases the chances the loan will be repaid, they say. But fixing both loans is a better strategy, they add, because it will produce a more affordable payment and reduce the chances that borrowers owe more than their homes are worth.

Investors say the Obama plan results in a conflict of interest, because many loans are serviced by big banks that also hold second mortgages -- and as a result have a financial interest in how these loans are handled.

Government officials say they are working on a plan that would provide incentives for servicers to extinguish these second mortgages.

Investors are also calling on the administration to strengthen the federal government's Hope for Homeowners program. Under it, some delinquent borrowers can refinance and get a more affordable, government-backed loan, provided the investor who currently holds the mortgage agrees to a principal write-down. So far, the program has fallen far short of initial expectations that it would help as many as 400,000 homeowners.

Write to Ruth Simon at ruth.simon@wsj.com

The Crisis of Credit Visualized - Part 1

The Crisis of Credit Visualized - Part 2

Ousted homeowners fight back

Ousted homeowners fight back

The truth about credit default swaps

The truth about credit default swaps

Regulators have long feared a derivatives blowup, but the CDS market held up despite the collapse of Bear and Lehman. Still, some worries remain.

By Colin Barr, senior writer

Last Updated: March 16, 2009: 7:44 AM ET

NEW YORK (Fortune) -- A year after the government rescued Bear Stearns, the economy has stumbled badly.

But one market that regulators were deeply concerned about when Bear hit the wall -- the one for unregulated over-the-counter derivatives called credit default swaps -- has defied fears of a meltdown.

When Bear Stearns faltered last March, federal officials rushed to save it by making some $30 billion in loans to Bear's fire sale buyer, JPMorgan Chase (JPM, Fortune 500).

What wounded Bear was a cash crunch that ensued as investors fled from risky mortgage-related assets. But officials acknowledged their decision to keep the brokerage firm from defaulting was driven by the threat a bankruptcy may have posed to Bear's trading partners.

"The sudden discovery by Bear's derivatives counterparties that important financial positions they had put in place to protect themselves from financial risk were no longer operative would have triggered substantial further dislocation in markets," said Tim Geithner, then the president of the Federal Reserve Bank of New York and now the Treasury Secretary, in congressional testimony last April.

Geithner wasn't alone in worrying about so-called counterparty risk in the markets for derivatives such as credit default swaps, or CDS, which allow one party to pay another to take on the risk that a company will default on its bonds.

Regulators and market participants have been warning for years about the dangers of the unchecked growth of the credit default swap market -- and about the difficulty of assessing who could be at risk for derivatives blowups.

Yet the events of the past year -- including the collapse of Lehman Brothers six months after Bear -- suggest regulators may have overestimated the risk of counterparty failures.

Market functioned despite 'unprecedented' turmoil

A report earlier this month from the senior financial supervisors of the G-7 nations concluded that the credit default swap market functioned well in the second half of 2008, despite "an unprecedented 12 credit events" -- or actions that obliged the sellers of credit protection to make payments to those who had bought protection.

The credit events included the government takeover of U.S. mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), the collapse of Icelandic bank Landsbanki and, most notably, the bankruptcy of Lehman, a broker-dealer that was even bigger than Bear.

"Overall, the review confirmed the effectiveness of the existing auction-based settlement mechanism," the report said.

The fact that CDS settlements have worked largely as advertised doesn't mean the worries have dissipated. To the contrary, the fiasco at AIG (AIG, Fortune 500), the insurer that has been propped up by the government at a cost to taxpayers of more than $160 billion, has led to a new round of scrutiny for the credit derivatives market.

0:00 /03:22Greenberg vs. AIG Round 8

AIG was pushed to the brink of bankruptcy last fall when a credit downgrade allowed swap counterparties to demand tens of billions of dollars of collateral AIG didn't have. Rather than risk another blow to already fragile markets, policymakers chose to rescue AIG.

It's worth wondering how the CDS market would have handled an AIG bankruptcy, which might have led to losses at counterparties such as Goldman Sachs and some big European banks.

But a more pressing question is whether there are other AIGs out there -- a worry that is impossible to dispel in part because there is no way of telling whether a firm has failed to make sure it has the cash on hand to honor its swap obligations.

"Clearly there have been institutions that wrote CDSs that didn't expect to honor them and didn't have the recourse to cover them," said Charles Taylor, a fellow at the Wharton Financial Institutions Center at the University of Pennsylvania. "It would appear these things did contribute to credit market stresses."

Those stresses have prompted some notable responses.

House Agriculture Committee Chairman Collin Peterson, D-Minn., proposed legislation that would restrict the use of credit default swaps. And Myron Scholes, a Nobel prize-winning economist, said this month regulators should "blow up" the derivatives markets because they have stopped providing useful information.

But even some longtime critics of over-the-counter derivatives markets say the AIG case isn't a reason to take drastic action.

"Credit default swaps are not the centerpiece of this crisis," said Benn Steil, director of international economics at the Council on Foreign Relations. "AIG was just greedy and irresponsible."

Clearinghouses could clear up confusion

To be sure, substantial reforms are still necessary. The International Swaps and Derivatives Association trade group says it is working on refining procedures governing how credit default swaps are documented and settled.

But observers say introducing clearinghouses into the CDS markets, which could happen by year's end, should eventually eliminate the counterparty risk problem.

Earlier this month, the Federal Reserve made an IntercontinentalExchange (ICE) unit a member of the Federal Reserve System. That will enable this entity to act as a central counterparty.

Exchange companies such as Intercontinental, Chicago's CME Group (CME) and NYSE Euronext (NYX) are eager to set up clearinghouses for CDS trades because their days of go-go growth from existing products appear to have come to an end.

Meanwhile, installing central clearing could ensure that parties to CDS trades have the wherewithal to make good on their obligations.

Howard Simons, a strategist at Bianco Research in Chicago, added that the CDS market is useful as a source of information about the health of credit markets. One popular CDS-based indicator of credit market stress - the Credit Derivatives Research counterparty risk index - recently surpassed the peak it reached the week of Lehman's failure, though it has since eased off those highs.

Establishing central clearing won't end all the questions about the derivatives markets, and the fear that another big financial company will emerge as the new AIG may continue to lurk.

"People have been warning about the CDS market for years," said Simons.

But with the economy and the markets reeling, investors have bigger problems than the CDS market, Simons said.

He points instead to the deflation of an asset bubble that was created in part by easy monetary policy that started in earnest when Alan Greenspan took over the Fed. So no matter what policymakers do, Simon thinks it will take a long time to heal the economy.

"You can't just bail out 25 years of policy mistakes," he said.  

First Published: March 16, 2009: 4:44 AM ET

Nonprofit touring US to help struggling homeowners

Mar 14, 5:06 AM EDT

Nonprofit touring US to help struggling homeowners

By KATRINA GOGGINS
Associated Press Writer

COLUMBIA, S.C. (AP) -- Philip and Gloria Spigner saw their monthly mortgage payments climb from $800 to $1,300. Carol and Butch Dycus have received foreclosure notices though they say they're not behind on their payments. And Tony Jumper's mortgage hasn't changed, but 26 people were laid off this week from his job.

They were among the hundreds of people who gathered here Friday to seek advice from a nonprofit group that finds ways to help at-risk homeowners lower their mortgage payments.

It was the third stop on the Neighborhood Assistance Corporation of America's nationwide "Save the Dream Tour," which offered mortgage restructuring help in Washington, D.C., last year and in Stamford, Conn., last month. The nonprofit also plans to visit areas hard-hit by foreclosure, like Florida and California.

Using paycheck stubs, interviews and tax filings, NACA counselors calculate what struggling homeowners can afford to pay, then negotiate with lenders who have signed agreements with the group.

Around 10,000 people had registered for the free counseling service before the event began Friday and a total of 20,000 were expected to participate over three days, said organizer Carmon Orta.

"Everyone is in an unaffordable mortgage right now whether it be that they were in a predatory loan and got duped into a bad interest rate or because of the economy they have a job loss," she said. "We will go to the lender's CEO's office. We will go and do what we have to do to sit with them until they sign a contract with us and agree to have real solutions and modifications for people."

U.S. House Majority Whip Jim Clyburn, D-S.C. and a fan of the group, said such efforts will help stabilize families and give them hope.

"And I think it will do a whole lot to help get this country back where it ought to be," he said.

Some lenders are beginning to recognize the problems with the foreclosure process and working with several nonprofit groups to restructure mortgages, Bank of America spokesman Rick Simon said.

"We're now looking more and more at the cost of going to foreclosure," he said. "And knowing what that cost is - and it's tens of thousands of dollars per foreclosure - it doesn't make much sense in today's environment."

NACA boasts of lowering the mortgage payments of more than 90 percent of the people who seek their services.

Carol Dycus hopes she's next. The 64-year-old, who can't work because she had a heart attack, said a prayer before leaving her Newberry home around 6 a.m. Friday and making the 40-mile trip to the Carolina Coliseum in the state capital.

It's been hard for her and her 59-year-old husband to make their mortgage payments, which increased under an adjustable rate from $569 to $624. The couple made the payments but still received foreclosure notices - a mistake that's happened before, Carol Dycus said.

Now, after months of trying to talk with their lender, they're ready to try another approach.

"It hurts," Carol Dycus said, showing three months of receipts for payments she says the mortgage company insists never arrived. Lenders "have a lot of money. We don't. My husband works every day - sick or well ... it's hard on us."

Philip and Gloria Spigner hope they won't have to leave the Columbia home where they raised their children.

"We're hoping after this that our adjustable rate won't be adjustable anymore," said Gloria Spigner, a 64-year-old nurse.

"All we want is a solution and to hang on to our home," said Philip Spigner, a 52, an assistant manager at a restaurant. "We want to put some money into the bank and be able to do some other things besides struggling every month to make the mortgage payment. That's all we want."

NAACP sues major lenders

NAACP sues major lenders

The lawsuit alleges that HSBC and Wells Fargo gave subprime rates to African-Americans who qualified for better rates.

March 13, 2009: 4:14 PM ET

NEW YORK (CNN) -- The NAACP filed lawsuits Friday against two of the nation's largest mortgage lenders -- HSBC and Wells Fargo -- alleging "systematic, institutionalized racism" in their sub-prime lending.

"We have targeted these banks because we have gone through what we can get our hands on, and it seems like there's a real problem here," NAACP CEO Benjamin Jealous told CNN.

0:00 /1:16UK home sales plummet

He added that the group wants "transparency. We want to see the books. We are not seeking damages, we just want them to fix the problem."

Both companies denied the allegations.

HSBC (HBC) spokeswoman Kate Durham said the company does not comment on litigation, but she added, "We stand by our lending practices."

Wells Fargo (WFC, Fortune 500) spokeswoman Melissa Murray issued a statement saying, "The NAACP's allegations are totally unfounded and reckless. We have never tolerated, and will never tolerate, discrimination in any way, shape or form in any of our business practices, products, or services."

She went on to say that the company has been "working with the NAACP for the past two years to develop a partnership that would benefit the NAACP, its constituents, and our communities, so we are dismayed that the NAACP has chosen to abandon that constructive dialogue in order to pursue this litigation."

Under subprime lending, people who don't qualify for lower interest rates can borrow money at higher rates. The NAACP lawsuits argue that the companies gave subprime rates to African-Americans who qualified for better rates, and gave better rates to white customers with similar credit histories.

The lawsuits, filed in U.S. District Court in central California, note several studies showing African-Americans have been disproportionately affected by subprime lending.

"These statistical disparities are not mere happenstance, but instead result from the systematic and predatory targeting of African-Americans, as well as facially neutral lending policies and practices that have a disparate adverse impact on African-Americans," the lawsuits say.

The NAACP previously launched similar suits against numerous other lenders. In its statement Friday, the nation's oldest civil-rights group said, "One lender has already entered into a preliminary settlement agreement with the NAACP, and a number of other lenders are engaged in similar discussions." 

Home Foreclosures Ramping up in L.A. County

Home Foreclosures Ramping up in L.A. County

March 12, 2009 Kevin Smith--San Gabriel Valley Tribune

Home foreclosures in Los Angeles County spiked nearly 70 percent last month, according to figures released this week by Foreclosures.com.

A total of 3,921 foreclosures were reported in February, up from 2,314 the previous month, the real estate information provider reported.

The organization also noted a hefty rise in notices of default, the first step in the home foreclosure process.

In February, 9,228 notices of default were issued, a 47 percent increase over the 6,286 issued the previous month.

On a nationwide level, completed foreclosures in February reached the highest monthly total since the foreclosure crisis began, soaring by more than 67 percent over January's reduced foreclosures, ForeclosureS.com said.

Foreclosure expert, educator and author Alexis McGee said its doesn't appear the upward trend will be slowing any time soon.

"Many homeowners are in trouble and rising unemployment continues to threaten to intensify the problem," she said. "Annualizing the first two months of this year, if foreclosures were to continue unabated, we could end up with another 1.2 million homes back in lenders' hands by year-end."

Still, McGee said she is hopeful that the Obama administration's plan to stem the foreclosure tide will take hold, leading to fewer foreclosures by year's end.

But at the present time, there are lots of foreclosed properties out there.

Noman Cox, regional vice president of Coldwell

Bank Town & Country, said that 80 percent to 85 percent of the transactions his office handles are either foreclosures or short sales.

"There are a lot of them to wade through and there are more coming," said Cox, whose office covers the eastern San Gabriel Valley and western Inland Empire. "But we're seeing an upsurge in buying. We're getting multiple offers on anything under the $300,000 range."

James Joseph, owner of Century 21 Ambassador and Coldwell Banker Ambassador in Whittier, said the housing crash has had a dramatic effect on real estate operations throughout Southern California.

"Every real estate office has been consolidating and trimming what they can in order to survive," he said. "This will be my third real estate cycle. You look for redundancies and try to find creative ways to do things."

Realtors are placing an increasing emphasis on the Internet as a means of outreach to potential clients, Joseph said.

"A lot of agents are using FaceBook and MySpace as a way to reach out to their sphere of influence in a more efficient way," he said.

Cox said home prices have fallen so dramatically that most sellers are opting to wait on the sidelines.

"We counsel people that if you don't have to sell now, don't," he said.

Cox said banks are beginning to take a longer look at whether they might be better served to pursue more short sales.

A short sale is when a home is sold for less than the loan balance.

Short sales are sometimes considered more desirable for lenders because they allow a bank to recoup some of its losses on loan defaults instead of hanging on to a property, fixing it up and trying to sell it at a later date when home prices may have fallen lower.

The Top 10 Foreclosure States as of February

The Top 10 Foreclosure States as of February

March 12, 2009 12:33 PM ET | Luke Mullins

From RealtyTrac:

RealtyTrac has released its U.S. Foreclosure Market Report for February:

Foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 290,631 U.S. properties during the month, an increase of nearly 6 percent from the previous month and an increase of nearly 30 percent from February 2008. The report also shows one in every 440 U.S. housing units received a foreclosure filing in February.

“The increase in foreclosure activity from January to February is somewhat surprising, given that many of the foreclosure prevention efforts and moratoria in place in January were extended through most of February as well,” said James J. Saccacio, chief executive officer of RealtyTrac. “There were some notable exceptions to this: a 45-day voluntary moratorium in Florida expired at the end of January, and foreclosure activity there was up 14 percent from the previous month; and many New York foreclosure proceedings delayed by a new law for an extra 90 days appear to have hit the system in February, when the state’s foreclosure activity increased 23 percent from the previous month.”

Which states have the highest foreclosure rates?

1. Nevada: 1 in 70 homes

2. Arizona: 1 in 147 homes

3. California: 1 in 165 homes

4. Florida: 1 in 188 homes

5. Idaho: 1 in 358 homes

6. Michigan: 1 in 360 homes

7. Illinois: 1 in 369 homes

8. Georgia: 1 in 389 homes

9. Oregon: 1 in 446 homes

10. Ohio: 1 in 451 homes

Phila. foreclosure filings up 15% in Feb. compared to a year earlier

Thursday, March 12, 2009, 5:11pm EDT

Phila. foreclosure filings up 15% in Feb. compared to a year earlier

Philadelphia Business Journal

Philadelphia-area foreclosure filings increased by less than 1 percent in February from January and by 15 percent from February 2008, according to data released Thursday by RealtyTrac.

Nationally, filings increased by 6 percent in February from January and by 30 percent from February 2008.

RealtyTrac considers the Philadelphia area to be the Philadelphia-Camden-Wilmington metro areas plus the two most northern counties of Maryland. One out of every 1,088 homes in the area were in some stage of foreclosure, compared to one out of 440 nationwide.

In February, there were 2,192 area filings, compared to 2,172 in January.

In the city of Philadelphia, where the courts are engaged in a foreclosure prevention program, filings were up by 8.94 percent from January but down by a little less than 1 percent from February 2008. The highest percentage of foreclosures in the region was in Delaware County, where one out of every 568 homes was in some state of foreclosure, followed by Camden County with one out of every 951 and Philadelphia with one out of 986. The lowest percentage was in Chester County, the region’s wealthiest county, with one out of every 1,913, followed by Montgomery County with one out of every 1,432.

Filings increased in Delaware County by 197 percent from January and 221 percent from February 2008. In Chester County, filings increased by 256 percent from January and 10 percent from February 2008. All three South Jersey counties saw significant percentage declines in foreclosure filings from February.

Pennsylvania’s filing rate increased by 14 percent from January, with one in every 1,307 houses in the state in some phase of foreclosure. In New Jersey, filings dropped 35 percent from January. With one in every 1,067 homes in some stage of foreclosure.

With one in every 70 housing units receiving a foreclosure filing in February, Nevada continued to have the nation’s top state foreclosure rate. Foreclosure filings were reported on 15,783 Nevada properties during the month, a 9 percent increase from the previous month and a 156 percent increase from February 2008.

Arizona posted the nation’s second-highest foreclosure rate in February, with one in every 147 housing units receiving a filing during the month. California had the nation’s third-highest state rate, with one in every 165 housing units receiving a foreclosure filing.

Other states with foreclosure rates ranking among the nation’s 10 highest were Florida, Idaho, Michigan, Illinois, Georgia, Oregon and Ohio.

“The increase in foreclosure activity from January to February is somewhat surprising, given that many of the foreclosure prevention efforts and moratoria in place in January were extended through most of February as well,” said James J. Saccacio, chief executive officer of RealtyTrac. “There were some notable exceptions to this: a 45-day voluntary moratorium in Florida expired at the end of January, and foreclosure activity there was up 14 percent from the previous month; and many New York foreclosure proceedings delayed by a new law for an extra 90 days appear to have hit the system in February, when the state’s foreclosure activity increased 23 percent from the previous month.”

Getting out of a bad real estate deal

Getting out of a bad real estate deal

There are legal ways to fight back against a plummeting housing market.

By Gerri Willis, CNN personal finance editor

Last Updated: March 10, 2009: 12:21 PM ET

NEW YORK (CNNMoney.com) -- Consumers are finding new tools to fight back against the deteriorating housing market.

The downturn of the real estate market has led a lot of purchasers to re-evaluate their condo purchases. And now there are companies out there that will help those folks get out of their contracts and get their deposit money back.

No-condo.com was started last year -it's a company staffed by lawyers who currently have about 10 cases in litigation.

How do they overturn a signed contract?

They find legal loopholes - they maintain there were certain procedures these firms were supposed to follow through on, but they failed to do so ...rendering the contract null and void.

It's not just condo buyers trying to get out of a deal. People who have seen their monthly mortgage payment balloon in cost often sue their lender, claiming that their mortgage documents are invalid.

Here are some reasons why: the lender may have failed to provide a good faith estimate of the loan cost, there may have been excessive fees or perhaps the lender created a false income for the borrower.

These borrowers threaten a lawsuit and that may encourage the lender to modify the loan instead of foreclosing on it.

It's a fairly new technique that's being used. One expert we talked to said that lenders have been slow to respond to inquiries.

Challenging the legality of your mortgage shouldn't be your first step. It's much more cost effective to try to work out a loan modification with your lender. But if you've been denied any kind of a workout, it may be worthwhile to give your mortgage documents a second look - paying close attention to good faith estimates and any modifications or addendums.

If you decide to pursue this route, you can get a forensic loan audit, but be prepared to pay at least $1,000. And make sure you vet any auditor you use with the better business bureau.

Got a question about jobs or unemployment? We want to hear from you. Send us an email and a picture and your question could be answered in an upcoming story on CNNMoney.com. 

First Published: March 10, 2009: 10:59 AM ET