FBI Investigation Widens Subprime Probe

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Fed crackin' down...

Fed to curb shady home-lending practices
9 July `08 WASHINGTON - The Federal Reserve will issue new rules next week aimed at protecting future homebuyers from dubious lending practices, its most sweeping response to a housing crisis that has propelled foreclosures to record highs.

Fed Chairman Ben Bernanke spoke of the much-awaited rules in a broader speech Tuesday about the challenges confronting policymakers in trying to stabilize a shaky U.S. financial system. To that end, Bernanke said the Fed may give squeezed Wall Street firms more time to tap the central bank's emergency loan program. To prevent a repeat of the current mortgage mess, Bernanke said the Fed will adopt rules cracking down on a range of shady lending practices that have burned many of the nation's riskiest "subprime" borrowers — those with spotty credit or low incomes — who were hardest hit by the housing and credit debacles.

The plan, which will be voted on at a Fed board meeting on Monday, would apply to new loans made by thousands of lenders of all types, including banks and brokers. Under the proposal unveiled last December, the rules would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

"These new rules ... will address some of the problems that have surfaced in recent years in mortgage lending, especially high-cost mortgage lending," Bernanke said. Consumer groups have complained that the proposed rules aren't strong enough, while mortgage lenders worry that they are too tough and could crimp customers' choices. The Mortgage Bankers Association urged the Fed to "take a balanced approach in devising final regulations so that the credit crisis is not worsened."

More Fed to curb shady home-lending practices - Yahoo! News

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Housing slump may go on and on
WASHINGTON - Tues., July. 8, 2008 - Housing market slump seen stretching further; Realtor group's top economist: 'We are not out of the woods by any means'

Signs are emerging that the U.S. housing market’s long slump is likely to fester through the summer, and the real estate market may not recover for at least another year. The latest report, the National Association of Realtors’ pending home sales index, slipped by 4.7 percent in May to the third-lowest reading on record. The decline “suggests we are not out of the woods by any means,” said the trade group’s chief economist Lawrence Yun.

The bad news came as the regulator for Fannie Mae and Freddie Mac tried to reassure investors that an accounting rule change wouldn’t force the government-chartered mortgage finance companies to raise tens of billions in capital to offset losses. With more negative data about the housing market continuing to emerge as the economy weakens and job losses accelerate, economists are reluctant to say the worst is over.

“Even if housing market activity does manage to bottom out later this year, it is likely that any recovery would be exceedingly slow,” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond said in a speech in Washington. While home sales are likely to fall to their lowest point late this year or early next year, any recovery is likely to be weak through at least 2010, said Mark Vitner, senior economist with Wachovia Corp.

More Housing market slump may stretch further - Mortgage Mess - MSNBC.com

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SEC Finds Credit Raters Had Conflicts of Interest...

SEC Finds Subprime Conflict of Interest
WASHINGTON July 8, 2008 - SEC finds credit rating agencies failed to rein in conflicts of interest on mortgage ratings

The three main credit-rating agencies failed to rein in conflicts of interest in giving high ratings to risky securities backed by subprime mortgages that later collapsed, federal regulators said Tuesday. The results of the yearlong review by the Securities and Exchange Commission illuminate the role of Wall Street's credit rating industry in the turmoil that has gripped the financial markets in recent months. The three agencies that dominate the industry — Standard & Poor's, Moody's Investors Service and Fitch Ratings — have been widely criticized for failing to identify risks in investments tied to high-risk subprime mortgages.

The rating agencies "sometimes deviated from their own models and their own procedures," SEC Chairman Christopher Cox said at a news conference. "Conflicts of interest were not always managed properly." The problems were serious enough to cause concern among employees of the agencies themselves, Cox noted, citing internal e-mails uncovered in the SEC review. "There were generalized concerns about laxity, about adherence to stated norms," he said. Among the conflicts of interest cited in the SEC report were the practice of companies that issue the securities paying the rating agencies for their work.

In one e-mail cited in the report, an analyst at one unnamed agency expressed concern that its model for determining ratings didn't capture "half" of a transaction's risk, but added that "it could be structured by cows and we would rate it." The rating agencies have had to downgrade thousands of securities backed by mortgages as home-loan delinquencies have soared and the value of those investments has plummeted. The downgrades have contributed to hundreds of billions in losses and writedowns at major banks and investment firms.

More ABC News: SEC Finds Subprime Conflict of Interest

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The Fannie and Freddie doomsday scenario
July 9, 2008: It's time to wonder what would happen if Fannie Mae and Freddie Mac failed.

Here's a scary, and relevant, question to ponder as the housing market continues to slide: What would it take for the government to step in and help Fannie Mae and Freddie Mac, and how would a rescue affect you, the taxpayer? A Lehman analyst's note on Monday sent shares of both companies plunging. Though they've recovered some, the fall, and Fed Chairman Ben Bernanke's downbeat outlook for housing issued Tuesday, is forcing investors to consider what would happen if a bailout is needed.

Fannie Mae and Freddie Mac are government sponsored enterprises that help the mortgage market function by purchasing pools of loans and packaging them into securities. If one or both couldn't function, the result would be chaos. At the end of last year, Fannie alone had packaged and guaranteed about $2.8 trillion worth of mortgages, approximately 23% of all outstanding US mortgage debt. And these securities are highly rated and sold to investors all over the world. "If Fannie or Freddie failed, it would be far worse than the fall of [investment bank] Bear Stearns," says Sean Egan, head of credit ratings firm Egan Jones. "It could throw the economy into depression or something close to it."

Clearly, investors remain concerned. Credit default swaps - a kind of insurance against the possibility of Fannie and Freddie defaulting on their corporate bonds, are at their most expensive levels in 14 weeks; both companies are expected to report steep losses for the second quarter; and their main business, mortgage securitization, is under pressure as home price values decline and foreclosure numbers rise. "The major issue is that these are very leveraged financial institutions, leveraged much more than any other bank, and they have lots of mortgage assets. As real estate values decline every day, the value of [the mortgages that it bundles, guarantees, and sells] are called into question," says Dalton Investments co-founder Steve Persky, who has been focused on distressed mortgage assets.

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G-men after `em now...

FBI Looking into IndyMac Bancorp.
Wednesday, July 16, 2008 Washington (AP) - The Associated Press has learned that now-defunct IndyMac Bancorp Inc. is under investigation for possible fraud in connection with home loans made to risky borrowers.

It was not immediately clear how long the FBI's probe of the bank has been ongoing. The investigation is focused on the company - which was taken over last Friday by the FDIC - and not individuals who ran it, according to a law enforcement official who was not authorized to speak publicly about the investigation.

IndyMac Bank's assets were seized by federal regulators after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.

The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said.

CNSNews.com - FBI Looking into IndyMac Bancorp.

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As faith in bank bailouts dims, losses set to deepen
Wed Jul 16, 2008 - The nightmare scenario for U.S. economic authorities is here: confidence in their ability to rescue the country from a housing-led financial panic is now at its lowest level since the crisis began.

This means losses for investors, already totaling nearly half a trillion dollars, could mount even further over the next few months, with implications for business investment and the overall health of the economy. "You see a massive potential for financial meltdown on a global scale," said T.J. Marta, fixed-income strategist at RBC Capital Markets.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson, testified before Congress this week on the country's precarious financial state. They were met with unusually fierce questions from lawmakers on the feasibility of a plan to provide extra funding for mortgage finance giants Fannie Mae and Freddie Mac. "I will use every power in my arsenal to stop this," said Jim Bunning, Republican Senator from Kentucky, berating the Treasury initiative in no uncertain terms.

The government's vow to back the institutions largely failed to restore faith in a near-term recovery for battered financial markets. After a momentary jolt higher on Monday, U.S. stocks ended lower. The Dow Jones industrial average on Tuesday slipped below 11,000 for the first time in two years. U.S. shares did recover on Wednesday, but this was largely due to a rapid retreat in oil prices than any renewed confidence in credit markets or growth prospects.

More As faith in bank bailouts dims, losses set to deepen | Special Coverage | Reuters

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Fannie an' Freddie been busy influencin' Congress...

Fannie, Freddie Spent Millions on Lobbying
Thursday, July 17, 2008 - Washington (AP) - For years, mortgage giants Fannie Mae and Freddie Mac tenaciously worked to nurture, and then protect, their financial empires by invoking the political sacred cow of homeownership and fielding an army of lobbyists, power brokers and political contributors.

New attention is being focused on the bruised mortgage companies as the Bush administration presses its rescue plan to Congress. Some lawmakers have challenged the plan's open-ended nature and expressed fears of a potential big taxpayer bailout in an election year. Over the past decade, both Fannie and Freddie made the list of Washington's top 20 lobbying spenders. They spent a combined $170 million to cultivate allies during that period, a bit less than the American Medical Association and a bit more than General Electric. At the same time, their executives have consistently led the mortgage-banking sector in campaign giving to members of Congress, contributing a combined $16.2 million since 1997.

People who have lobbied on their behalf have played or are playing roles in the presidential campaigns of both Republican John McCain and Democrat Barack Obama. Defenders, including President Bush and Treasury Secretary Henry Paulson, say the nation's two major mortgage companies - which own or guarantee roughly half of the nation's $12 trillion in outstanding mortgage debt - are more vital than ever to the smooth functioning of the nation's jittery financial markets.

The two companies were set up by federal law as "government-sponsored enterprises" that operate as private companies with profits and stockholders. Critics say they have used their clout and unusual status to create a sort of regulation-free zone around their businesses. When times are good, shareholders and executives of the companies are richly rewarded. When times are bad, as now, taxpayers could be left holding the bag. "Congress created this problem by creating special rules at Fannie Mae and Freddie Mac and ignored the problem for years," said Sen. Jim DeMint, R-S.C., a sharp critic of what he sees as a looming federal bailout.

More CNSNews.com - Fannie, Freddie Spent Millions on Lobbying

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Freddie Mac CEO got $19.8 million in '07
Fri., July. 18, 2008 - Company loses half its value, but Syron could get $20M in stock awards

Freddie Mac Chairman and Chief Executive Richard Syron pocketed nearly $19.8 million in compensation last year, according to a Securities and Exchange Commission filing Friday, even though the mortgage company's stock lost half its value in 2007. If Syron stays at the helm of Freddie Mac through the end of next year, he will receive nearly $20 million in stock awards if the board says he has met certain goals. This year, he is guaranteed to get $8.8 million in stock grants regardless of performance. For 2007, Syron received a $1.2 million salary, a $3.45 million bonus, including $1.25 million to remain at the company, and $771,585 in other compensation. He also received stock and options valued by the company at $14.3 million at the time they were awarded.

The company last year picked up the tab for Syron's financial planning expenses, car and driver for commuting, home security system, business-related dining and travel costs for his wife and $100,000 in legal fees from negotiating his employment contract. Syron also received $898,444 from dividends on restricted stock and options he holds. If Syron resigns or is fired with cause, he will owe the company $1.25 million. But if he is fired without cause, he will pocket $19.1 million. The Associated Press calculations of total pay include executives' salary, bonus, incentives, perks, the estimated value of stock options and awards granted during the year and above-market returns on deferred compensation. The calculations don't include changes in the present value of pension benefits and sometimes differ from the totals released by the companies.

The news of Syron's pay package comes after the government pledged on Sunday to help provide larger credit lines for Freddie and its sister company Fannie Mae. The Treasury Department will ask Congress to allow it to buy equity stakes in the two if necessary. The Federal Reserve also has stepped in and said it would open a special lending option to the pair. The lenders hold or guarantee $5.3 trillion of mortgage debt, about half the outstanding mortgages in the U.S. Experts agree the sustainability of Freddie and Fannie is key to helping prevent the already beleaguered real estate market from getting worse. Shares of Freddie rose 87 cents, or 10 percent, to $9.20 in late afternoon trading. Fannie's stock rose $2.64, or 24 percent, to $13.57.

Freddie Mac CEO got $19.8 million in '07 - Mortgage Mess - MSNBC.com

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IndyMac regulator under scrutiny...

IndyMac regulator could feel heat from senator
Tue Aug 5, 2008 WASHINGTON (Reuters) - A dust-up between a top U.S. banking regulator and an outspoken senior senator over blame for the country's third biggest bank failure shows no signs of cooling and could help alter the regulatory landscape.

John Reich, director of the Office of Thrift Supervision, says New York Democratic Sen. Charles Schumer scared depositors at IndyMac Bancorp Inc by making public a letter to regulators expressing his concerns about the bank's viability. In the 11 days after the June 26 letter was made public, depositors withdrew $1.3 billion in deposits from IndyMac, a once big U.S. mortgage lender.

But in a sign investor confidence in the bank had already been rattled, IndyMac's shares had fallen 82 percent since the beginning of the year to June 25, compared with a 23 percent decline of the Dow Jones U.S. financials index .DJUSFN. In the tiff that erupted on July 11, as IndyMac was seized by the Federal Deposit Insurance Corp, Schumer responded to Reich by charging the OTS had let IndyMac's lending standards erode.

The confrontation has not been forgotten amid heightened anxiety that the IndyMac meltdown could foreshadow a wave of bank failures and questions about whether regulators should have moved sooner to shore up such institutions. Schumer, a fixture on news and talk shows, New York's senior senator, and a major recipient of Wall Street political donations, has asked the Senate Banking Committee to hold a hearing to examine IndyMac's insolvency and Chairman Christopher Dodd has said he will likely hold a hearing in September.

More IndyMac regulator could feel heat from senator | Special Coverage | Reuters

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BoA in the cross-hairs...

Bank of America Subpoenaed by SEC
Thursday, Aug. 07, 2008 — Bank of America Corp. revealed Thursday that it has received subpoenas and requests for information from various state and federal regulators regarding its sale of auction-rate securities.

In a filing with the Securities and Exchange Commission, the Charlotte, N.C.-based bank said subsidiaries Banc of America Investment Services Inc. and Banc of America Securities LLC are cooperating fully with the requests. Auction-rate securities are bonds whose interest rates are set at periodic auctions, on the basis of bids submitted. The market collapsed in February amid turmoil in the credit markets.

Regulators have been investigating some banks' involvement in the sale of the securities. Earlier Thursday, Citigroup Inc. said it reached a settlement with the New York Attorney General and regulators to repurchase $7 billion in auction-rate securities and pay $100 million in fines. Regulators claimed the investments were marketed as safe even when banks knew of liquidity risks during the downturn in the credit markets.

According to the SEC filing, four purported class action lawsuits have also been filed against Bank of America on behalf of purchasers of auction-rate securities. The cases relate to the sale of the investments between May 2003 and February 2008 and allege that the bank violated certain securities laws in regards to its marketing and sale of the securities. The actions seek unspecified damages and attorneys' fees. A related individual federal action as well as several related Financial Industry Regulatory Authority arbitrations have also been filed, the bank said.

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Regulations affecting appraisers largely useless...

Final appraisal: Feds dropped ball
Sun., Aug. 17, 2008 - Lax enforcement of appraisal rules helped worsen housing market crisis.

As soaring home prices set the stage for America's great housing meltdown, a critical step in making sure those home sales were a fair deal — the real estate appraisal — was undermined from within. After the nation's last major banking disaster, Congress set up a system to catch rogue appraisers. Their game: inflating the value of homes at the direction of equally unscrupulous real estate agents and mortgage brokers, whose commissions are determined by the size of the deals.

But a six-month Associated Press investigation found that the system is crippled by both the bumbling of its policemen and their inability to effectively punish those caught committing fraud. And despite ample evidence appraisers are pressured into inflating home values — sometimes to prices in support of loans that are more than buyers can afford — the federal regulators charged with protecting consumers have thus far made a conscious choice not to act.

"The system is completely broken," Marc Weinberg, the former acting director at the federal agency charged with monitoring the appraisal industry, told the AP before he retired earlier this year. "It's amazing that the system ever worked at all."

More Regulations affecting appraisers largely useless - Mortgage Mess - MSNBC.com

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9th bank failure this year...

US regulators shut Kansas bank
WASHINGTON -- August 23, 2008: Columbian Bank of Topeka, reported $92 million in delinquent loans in the second quarter.

Federal regulators on Friday shut down Kansas bank Columbian Bank and Trust Company, which was struggling with losses on soured real estate loans. The Federal Deposit Insurance Corp. was appointed receiver of Columbian Bank of Topeka, Kan., which had $752 million in assets and $622 million in deposits as of June 30.

The FDIC did not give a reason for the closure, but Columbian reported $92 million in delinquent loans in the second quarter, citing a "volatile real estate market." The bank set aside $9.2 million for loan losses in the first quarter, up nearly 30 percent from the $7.1 million it set aside in the first quarter of 2007.

5 problem borrowers

A financial statement for the bank shows $482.3 million in real estate loans in the first quarter, including $439.4 million in construction and development and commercial real estate loans. Columbian has said that five borrowers represented nearly half the $92 million in problem loans. Construction and development loans are areas that have been under greater scrutiny from federal examiners, the FDIC has said, and a growing number of banks have cited weakness in those areas of their loan portfolios.

The agency said Columbian's deposits will be assumed by Citizens Bank and Trust of Chillicothe, Mo. Its nine offices will reopen Monday as branches of Citizens Bank. Depositors of Columbian Bank will continue to have full access to their deposits, the agency said. It was the ninth failure this year of an FDIC-insured bank. That compares with three failures in all of 2007. More banks are in danger of failing this year, agency officials have said. The FDIC estimated the resolution of Columbian Bank will cost the deposit insurance fund around $60 million.

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Calif. Won't Probe Sen. Schumer Over IndyMac
August 23, 2008 -- New York Sen. Charles Schumer won't face a California investigation into whether he helped fuel IndyMac Bancorp Inc.'s collapse by expressing concerns about the mortgage lender's soundness.

The California Attorney General's office said in a letter Thursday that there was "insufficient evidence" to investigate Sen. Schumer. A Schumer spokesman declined to comment Saturday.

Some former IndyMac employees said Sen. Schumer's remarks in June 26 letters to regulators spurred a run on the bank that led to a government takeover. They want the senator to be prosecuted under a California law against making false statements about a bank's solvency.

Assistant Attorney General Thomas Greene said Sen. Schumer's statements were true and drawn from public information.

http://online.wsj.com/article/SB1219...googlenews_wsj

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Subprime loan fraud still a problem...

Mortgage fraud still soaring
August 26, 2008: A crackdown on underwriting has failed to halt an explosion of fraudulent home loans.

With the housing market in turmoil and lending standards tougher than ever, you'd think that the kind of unscrupulous activity that helped plunge the industry into crisis would be a thing of the past. You'd be wrong. Mortgage fraud is still soaring, according to a new report from the Mortgage Asset Research Institute (MARI), a division of ChoicePoint. (CPS) The study found that the number of fraudulent loans issued during the first three months of 2008 skyrocketed 42% compared with the same period in 2007.

The big jump was a surprise even to MARI. "We were stunned," said spokeswoman Jennifer Butts. "It shows that some folks [in the industry] are desperate." Loan applications are at an eight-year low, according to the Mortgage Bankers Association, and deals are harder than ever to come by for real estate professionals. Loan originators, real estate agents and property appraisers are all scrambling for clients. Making things even more difficult, mortgage lenders have tightened underwriting standards after getting clobbered with soaring delinquencies and foreclosures.

Now, the credit histories of many applicants are not good enough to get approved for mortgages, except through some creativity - or chicanery - by brokers and loan officers. The most common type of fraud that MARI found pertained to employment history and income. Many applications exaggerated how much borrowers earned and misrepresented their job descriptions. The biggest increase came from a jump in the number of undisclosed or incorrectly reported debts, liens and judgments.

Most fraud involves average home buyers whose lending officers feel compelled to tweak their applications. But some involves criminal enterprises. Cases of identity theft accounted for 6% of all mortgage fraud in Illinois, for example. In many of these deals, crime rings use phony identities to obtain mortgages on properties they don't own, then take the cash and vanish.

Same industry, same problems

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Granny says dey ain't tellin' the whole story...

What the 'problem bank' list doesn't say
August 28, 2008: More banks are in trouble nowadays, but some experts wonder just how accurate a picture the FDIC's list paints of the industry.

The government's latest assessment of the nation's financial system showed that many more small banks are in trouble. But what the report didn't say may speak volumes. On Tuesday, the Federal Deposit Insurance Corp. revealed that the number of institutions on its so-called "problem bank" list jumped to 117 during the second quarter, up from 90 just three months earlier.

That list has gained greater attention lately as many banks continue to suffer losses stemming from the deteriorating housing market and slowdown in the broader economy. Nine banks have failed so far this year, including IndyMac, a California-based mortgage lender with assets of $32 billion at the time of its collapse. But experts contend that the list is a lagging indicator and, as a result, may not provide an accurate picture of the current health of U.S. banking industry.

Typically, the list is published some 8 weeks after all of the nation's banks have reported their latest quarterly results. What's more, notes Mark J. Flannery, a professor of finance at the University of Florida's Warrington College of Business Administration, regulators base their decision on what banks tell them. And since current accounting standards give banks some discretion about when they recognize bad news, they may want to put it off as long as possible. Exactly how bank regulators determine which institution is worthy for the "problem list" remains a process shrouded in secrecy.

But what is known is that the health of a bank tends to be based on several factors including the amount of capital an institution has on hand to protect against losses, the quality of its assets, its management, and its earnings, liquidity and sensitivity to market risk. Bank regulators - which in addition to the FDIC include the Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) - then give the banks a report card, assigning a composite rating based on the bank's performance in each category. Those that receive a rating of 4 or 5 are put on the list.

A selective list?