Compliance & Regulation

Banks selling bad assets into Treasury's public-private investment funds should be prohibited from investing in those investment funds to prevent abuses, according to the Shadow Financial Regulatory Committee.The panel of finance experts and academics view the Obama administration's plan to cleanse bank balance sheets as ill-conceived. The shadow regulators expect the government will have to "over-pay" to get banks to sell their assets. They also expect the investment funds will be very profitable for investors due to the amount of leverage and low-risk with the Treasury Department providing low-cost financing on a non-recourse basis. As a safeguard, banks selling assets into the program should be "prohibited from turning around and participating directly as investors in any fund formed to buy legacy assets," said professor Edward Kane. The Boston College finance professor also pointed out that distressed institutions with little capital to lose may find PPIFs to be "especially attractive" investments. "It could result in high stakes gambles that may represent for some firms their only hope of repaying government guarantees and other forms of credit support," he said.

Bank loan officers expect to see continued deterioration in their residential and commercial real estate mortgage portfolios for the rest of this year, according to a periodic survey conducted by the Federal Reserve. The survey of senior loan officers shows that 78% of 50 banks expect delinquencies and charge-offs on prime single-family loans will increase "somewhat" and three are bracing for substantial deterioration. Only 14 banks expect loan quality to stabilize and only two expect some improvement. More than 90% of the banks surveyed see continued deterioration in the performance of CRE loans. Only four banks said loan quality should stabilize or improve. Meanwhile, loan officers reported a "substantial" increase in demand for prime mortgages since the last survey in January. However, demand for CRE loans continue to weaken to the lowest level since 1995 when the Fed first started asking survey questions about CRE lending.

The Federal Deposit Insurance Corp. is preparing for a "test sale" of troubled real estate loans under its new 'Legacy Loan Program' and wants to send the mortgage package to investors by next month."We have received initial positive interest from institutions after contacting them to assist us in this pilot and hope to have the first sales package out to investors in June," the agency said in a statement. FDIC has already solicited public comments on the Legacy Loan Program, which could remove $500 billion in high risk mortgages from the banking system if private investors put up $50 billion in capital to invest in public-private investment funds. The public comments have been "useful," the agency said, and it continues to "craft a "workable framework" to sell pools of residential and commercial real estate loans. The test sale will "help guide and build the foundation for the larger program," FDIC said.

The Senate on Tuesday moved closer to passing a housing bill after defeating two amendments that would weaken legal protections for residential servicers engaged in loan modifications and potentially handcuff the Federal Housing Administration's single-family program.The bill (S-896) includes improvements to the FHA Hope for Homeowners program to refinance underwater mortgages and increases Federal Deposit Insurance Corporation's borrowing authority to deal with rising bank failures. The legislation also tries to increase loan modifications by creating a "safe harbor" that protects servicers from investor lawsuits. Sen. Bob Corker, R-Tenn., said the provision goes too far and gives big banks a license to act in their self interest by modifying loans. His amendment would require servicers to "make sure homeowners and investors are both treated fairly," he said. Sen. Mel Martinez, R-Fla., warned that the Corker amendment would weaken the safe harbor and increase the number of foreclosures. The Cocker amendment failed by a 39-63 vote. The Senate also voted down an amendment by Sen. David Vitter, R-La., that could trigger a cut back in FHA lending if the agency is headed toward insolvency. The Vitter amendment was defeated by a 36-56 vote.

After conning thousands of dollars from seniors and homeowners facing foreclosure in a loan modification scam, Anna Santos of Los Angeles County pleaded guilty to mortgage fraud. Santos was arrested in March after using forged documents to convince victims to hand over thousands of dollars for nonexistent loan mod services. According to the California Attorney General's office, Santos obtained a fictitious business permit through Los Angeles for "Payment Processing Department," opened several bank accounts and two post office boxes under that name and then mailed flyers to vulnerable homeowners appearing to be from victims' lenders or a government agency. The flyer advised homeowners that they qualified for a special program to save their home from foreclosure. After signing up for "loan modification services," homeowners then received phony confirmation that their lender had been notified and forged loan mod documents that falsely appeared to be from their lender. The victims were informed they had been placed in a probationary program and their payments should be sent to a given post office box address, none of which were credited to the victims' home loans, but were instead retrieved by Santos and deposited into the bank accounts she had opened. The AG's office believes she scammed more than 100 victims, who lost on average $3,000. "Santos conned thousands of dollars from homeowners trying to save their homes through a cruel and sophisticated scam," said AG Edmund G. Brown, Jr., in a statement. "She held out hope, but in reality did not provide an ounce of loan modification, leaving her victims in far worse straits." Santos, who is currently out on bail, is scheduled for sentencing on May 20 in Los Angeles Superior Court.

Financial services executives would like to think the cramdown issue is dead for this year, but it could crop up again - sooner than expected. On Thursday, the Senate killing a cramdown amendment offered by Sen. Richard Durbin, D-Ill. was widely anticipated. (The amendment would have allowed bankruptcy judges to reduce the principal amount of mortgage on a primary residence.) But House leaders want to keep the issue alive and they may attach a cramdown amendment to a conference report on an FDIC/housing bill. The House has already passed the bill that includes improvements to the Federal Housing Administration's 'Hope for Homeowners' program, legal protections for servicers, and more borrowing authority for the Federal Deposit Insurance Corp. The Senate is expected to pass a similar bill in a few days now that the Senate has voted down the Durbin cramdown amendment. On the eve of that vote, Rep. Debbie Wasserman Schultz, D- Fla., told a Mortgage Bankers Association meeting that House leaders plan to attach a cramdown provision to an FDIC/housing bill in conference with the Senate. "We look forward to working with you on a revised bill once the legislation returns to the House side," Rep. Shultz said. Voluntary modifications are not working and "doing nothing is simply not an option," she added. The congresswoman chairs an appropriations subcommittee. The next day, the Senate voted down the Durbin amendment by a 45-51 vote. "Given the resounding vote in the Senate, the conference report probably will not include cramdown," said Scott Talbott, chief lobbyist for the Financial Services Roundtable. "Cramdown appears to be dead for this year," he said.

Loans with five-year maturities will be available for June funding through the government's Term Asset-Backed Securities Loan Facility to finance purchases of AAA-rated commercial mortgage-backed securities. Previous to this expansion of the program, TALF had only allowed maturities of three years. The Federal Reserve had said in February it could broaden eligible collateral for TALF to encompass other types of newly issued AAA-rated asset-backed securities such as commercial mortgage-backed securities and private-label residential MBS.

Senate Democratic leaders want to pass an FDIC/housing bill on Tuesday but first they have to wade through a number of amendments including one that would require a temporary shutdown of the FHA single-family program if it is headed toward insolvency. The sponsor of the Federal Housing Administration amendment, Sen. David Vitter, R-La., says there are signs that FHA is a "ticking time bomb" and the government should be "very cautious" about expanding the FHA program. "My amendment would simply say that the first duty of the FHA is to maintain solvency," Sen. Vitter said. Industry groups, such as the mortgage cooperative Lenders One, are urging the Senate to reject the Vitter amendment. Shutting down the FHA program would be "devastating to the economy," and "shock" the housing and mortgage markets, Lenders One warns in a letter to the Senate. The FDIC/housing bill (S. 896) includes improvements to the FHA Hope for Homeowners program, legal protections for servicers and increases the Federal Deposit Insurance Corp.'s borrowing authority. The House has passed a similar bill (H.R. 1106). The House version contains a bankruptcy cramdown provision that the Senate has rejected.

Financial services executives would like to think the cramdown issue is dead for this year, but it could crop up again — sooner than expected. On Thursday, the Senate killing a cramdown amendment offered by Sen. Richard Durbin, D-Ill. was widely anticipated. (The amendment would have allowed bankruptcy judges to reduce the principal amount of mortgage on a primary residence.) But House leaders want to keep the issue alive and they may attach a cramdown amendment to a conference report on an FDIC/housing bill. The House has already passed the bill that includes improvements to the Federal Housing Administration's 'Hope for Homeowners' program, legal protections for servicers, and more borrowing authority for the Federal Deposit Insurance Corp. The Senate is expected to pass a similar bill in a few days now that the Senate has voted down the Durbin cramdown amendment. On the eve of that vote, Rep. Debbie Wasserman Schultz, D- Fla., told a Mortgage Bankers Association that House leaders plan to attach a cramdown provision to an FDIC/housing bill in conference with the Senate. "We look forward to working with you on a revised bill once the legislation returns to the House side," Rep. Shultz said. Voluntary modifications are not working and "doing nothing is simply not an option," she added. The congresswoman chairs an appropriations subcommittee. The next day, the Senate voted down the Durbin amendment by a 45-51 vote. "Given the resounding vote in the Senate, the conference report probably will not include cramdown," said Scott Talbott, chief lobbyist for the Financial Services Roundtable. "Cramdown appears to be dead for this year," he said.

An MBIA Inc. subsidiary and LaCrosse Financial Products LLC have filed a lawsuit against two Merrill Lynch entities for misrepresentation and breach of contract in connection with credit default swaps tied to subprime residential mortgages.A spokesman for Merrill, which is now owned by Bank of America, declined to comment on the lawsuit which was filed in New York State Supreme Court. The plaintiffs are seeking rescission and damages. MBIA alleges in the suit that Merrill's "effort to market the CDS contracts to MBIA was part of a deliberate strategy to offload billions of dollars in deteriorating U.S. subprime residential mortgages that Merrill held on its books by packaging them into collateralized debt obligations or hedging their exposure through swaps guaranteed by insurers." The plaintiffs charge that "as a direct result of Merrill Lynch's misrepresentations" and breaches of contract, MBIA now faces expected losses of almost $700 million on four CDOs.