Bank Lawyer's Blog

Another Whistle Blower Blows The Whistle

As residential real estate lenders continue to suffer, more claims emerge that certain corners of the business may have been rotting from the inside out long before anyone noticed the smell. We recently profiled outside appraiser Jennifer Wertz, who was allegedly blackballed by Washington Mutual, and a former credit analyst, who claimed he was fired by Wamu, for "doing the right thing," or, more accurately, refusing to "do the wrong thing." Today comes word that a former employee of Countrywide KB Home Loans has filed a lawsuit "claiming he was wrongly fired after he reported fraudulent lending practices to superiors and refused to approve mortgages for unqualified applicants."

In the suit, Zachary contended he was given an excellent performance review last February then fired three months later after he blew the whistle on fellow employees and outlined instances in which appraisers were "being strongly encouraged to inflate homes' appraised value by as much as 6 percent."

That resulted in buyers owing more than their home was worth, Zachary claimed in the lawsuit filed Jan. 17 in U.S. District Court in the Southern District of Texas.

[...]

Calabasas based Countrywide Financial said in a statement that it investigated each of Zachary's claims and found them to be meritless.

"Countrywide has policies and procedures in place that aim to prevent the type of activities Mr. Zachary is alleging," the company said.

The lender also denied that Zachary was fired due to the allegations he made in his lawsuit.

Among other allegations, Zachary claims Countrywide loan officers would advise applicants who were denied a prime-rate loan about what income level they should report so they could be approved for no-documentation or stated-income subprime loans.

Zachary said he was fired after he failed to meet a quota for new loan approvals because he refused to clear unqualified applicants, according to the complaint.

I wonder how many of these suits will settle before trial? I'd like to see the facts come out, publicly, but that's easy for me to say. I'm not footing the bill for, nor suffering the brain damage of, civil litigation in which I have a personal stake. My guess is that these suits will be settled, money will be paid, and confidentiality provisions will be incorporated into the settlement documents. That might be the cynic in me talking, however. With all the state and federal regulators swarming over these institutions, I think that light will be shed on these practices from some source, most likely the states. And here you all thought I was an opponent of state attorneys general.

 

I doubt that this is the last such lawsuit we'll see in the next year or two that will sound remarkably similar in its allegations or in the defendant's defense that the allegations are "without merit." That old saw just doesn't cut it in the market of public perception.

From Russia, With Love

Fort Worth-based OmniAmerican Bank was the target of a sophisticated band of cyber crooks recently, which hacked into the bank's system, "stole account numbers, created new PINs, fabricated debit cards, then withdrew cash from ATMs in Eastern Europe, including Russia and Ukraine, as well as Britain, Canada and New York."

"It was a pretty sophisticated scheme," said Tim Carter, president of the Fort Worth-based bank.

The amount stolen is not yet known, he said, describing it only as "minimal." No depositors will lose money, he said.

Fewer than 100 accounts, some of them dormant, were compromised, all with a daily withdrawal limit of less than $1,000, he said.

According to a security expert from McAfee, Michael Carmichael, this type of breach is "a commonplace occurrence," although banks are reluctant to publicize these incidents.

Carmichael gave some props to the bad boys who hit OmniBank.

"If you look at the sophistication of it -- going in, modifying PINs, issuing cards -- this is not a kid out there," he said. "This appears to be something set up. Time was involved in executing it."

Carmichael said the group could have originated in Russia, although similar skilled hackers are now being found in Asia, particularly China.

Whoever they are, he said, "they're elite, more elegant, and it's difficult for banks and many enterprises to keep pace with their activities.

"Banks are under a great amount of pressure to balance risk and shareholder value," said Carmichael, speaking from Las Vegas, where he is attending a conference. "They could do more, [but they] have a hard time justifying the cost until an incident occurs."

We've frequently ranted about the kleptocracies that have emerged out of the ruins of the former Soviet Empire. They're the breeding ground of tech-savvy, amoral cyber thieves. While such gangs might make nice fodder for pulp fiction and the movies, in real life they're presenting an increasing to risk to banks everywhere, including, obviously, Cowtown, USA. I doubt that the directors and senior management of OmniAmerican Bank will have a tough time justifying additional expenditures on Internet security in light of this ""incident." Although relatively few accounts were hit, and the amount stolen was "minimal," the costs of the breach to the bank may be substantial. According to the press report, letters were sent to all debit card holders notifying them of the breach and the bank is issuing 40,000 new debit cards with a revised PIN, to prevent future fraud. That's got to hurt. Moreover, there is a hit to reputation that flows simply from the publicity of the incident.

On the other hand, if Carmichael is correct, and these types of intrusions (which he indicated can happen in "any number of ways") are "commonplace," then banks can learn something from how OmniAmerican appears to have handled the breach. It seems to have acted with reasonable dispatch to minimize the damage.

After discovering the fraudulent activity Friday afternoon, OmniAmerican placed temporary limits on some ATM and debit-card transactions and suspended some electronic banking services, which were restored Sunday, Carter said. At no time were customer deposits at risk, he stressed. "We reduced by half the dollar amount that could be withdrawn and limited [access] to Texas. We cut out anything outside Texas," Carter said.

The unauthorized withdrawals were stopped Friday, and bank employees worked over the weekend to deal with the damage, he said.

The bank learned of the breach from customers inquiring about unusual activity in their accounts, from internal monitoring and from a law-enforcement agency, which Carter declined to name.

My guess, without any personal knowledge, is that the unnamed law-enforcement agency is the US Secret Service. It's involved in monitoring international cyber crooks who are using their technical skills to go where the money is: in US banks.

The bank appears to have reacted quickly and efficiently once it discovered the breach. I'm certain that they've closed the door through which the crooks entered the bank's system this time; however, rest assured that these organized, sophisticated, "elite" criminals are already patiently knocking on other doors at other targets of opportunity.

It's a fact of life.

Doing The Chavez Shuffle

A few readers have asked for my thoughts about the call last week of tin horn Venezuelan socialist dictator and Tony Soprano wanna-be Hugo Chavez, a man whose face appears once to have been set on fire and beaten out with a rake,  for South American nations to pull their reserves out of U.S. banks.

Venezuelan President Hugo Chavez urged his Latin American allies on Saturday to begin withdrawing billions of dollars in international reserves from U.S. banks, warning of a looming U.S. economic crisis.

Chavez made the suggestion as he hosted a summit aimed at boosting Latin American integration and countering U.S. influence.

"We should start to bring our reserves here," Chavez said. "Why does that money have to be in the north? ... You can't put all your eggs in one basket."

To help pool resources within the region, Chavez and other leaders launched a new development bank at the summit of the Bolivarian Alternative for the Nations of Our America, or ALBA.

Currently, ALBA is being funded with a grub stake of a gross of fried plantains and a lame burro donated by Juan Valdez. Yet, just as soon as the billions and billions of dollars that South American governments have on deposit in the U.S. can be wired out of an industrial bank located in Miami by a guy known only as "Pepe," ALBA is expected to be looking hotter than its namesake, Jessica Alba. And the bank ALBA won't be pregnant, either. On the down side, you won't get a kick out of fantasizing about carnal knowledge of the bank ALBA, as you might with the feminine Alba, since in South America, only a bank's depositors get screwed, and we at Bank Lawyer's Blog, even when we fantasize, always practice safe fake sex.

The fact that there's been virtually no follow up to this story in the trade press, and that the American government, including the Treasury Department and the State Department, have treated it like a non-event, lead me to the obvious conclusion that Hugo's been up to his old tricks. Sure enough, after scouring the world's press for confirmation, I found it in the dank environs of gloomy Scotland.

At the summit, Mr Chavez accepted some coca leaves from Bolivian leader Evo Morales, insisting "coca isn't cocaine".

"You know the strength that coca gives," Mr Chavez said. "I've really grown used to it every day in the morning."

The  two men defend the leaf, which has been chewed by Andean Indians for centuries,  but condemn its use in making cocaine. 

US officials have long tried to stamp out coca cultivation. But Mr Chavez accused Washington of trying to use the issue of drug trafficking to discredit his government for political reasons, noting that John Walters, the White House drug tsar, had accused him of facilitating the flow of Colombian cocaine through Venezuela.

Mr Chavez called that "a serious thing," but smiled as he thanked Mr Morales for recently sending coca to him and asked for more.

Standing up from a table, Mr Morales walked to Mr Chavez and opened a drawstring bag. "Oh, friend, I knew you wouldn't fail me," Mr Chavez said, as he put some in his mouth.

Chavez then used a 32-inch Louisville Slugger baseball bat to tamp a fistful of coca leaves up his left nostril and completely filled his sinus cavity, at which point he leaped upon a conference table, dropped to his side, and began circling wildly in a "Curly Shoulder Spin" while screaming "woo, woo, woo" and "Baseball been bery, bery good to me."

Sorry, I just can't take a man seriously who doesn't understand that before you can drop and do the shoulder spin, you have to splay your fingers under your chin, palm downward, wiggle the fingers, and give a "nyuk-nyuk-nyuk." It's this lack of knowledge of proper diplomatic protocol that makes that man a master of disaster of international relations.

To Dream The Impossible Dream

It's not as if we didn't see this coming.

According to yesterday's American Banker (paid subscription required), the US Justice Department is about to hit money services business Sigue Corp "with a record money laundering fine that experts said signals more aggressive enforcement of the Bank Secrecy Act."

To date the Justice Department has fined companies for failing to have an effective anti-laundering program, but according to a copy of the settlement obtained by American Banker, the government went further by accusing Sigue of failing to prevent laundering or investigate suspicious activity for which it filed reports.

"They're reinterpreting, redefining what their [BSA] expectations are," said Robert Pargac, Sigue's general counsel. "Under the Justice order, I think they are saying you just don't have to have your AML compliance program, detect suspect activity, and report it to law enforcement, but it goes a step further, and they are requiring institutions to prevent money laundering."

Outsiders, including Peter Djinis, the former executive assistant director for regulatory policy at the Financial Crimes Enforcement Network, backed up Mr. Pargac's interpretation.

"I don't think any institution could meet the standards that are now being imposed by this agreement," Mr. Djinis, now a lawyer in Sarasota, Fla., said in an interview Friday. "Aggressiveness is fine as long as it's fair. This is changing the rules after the activity is covered and I think that is unfair."

The Justice Department "went too far," he said. Under this standard, even a financial institution that filed a suspicious activity report could be held criminally liable "if they have not done an effective job of uncovering the entire money laundering operation."

Ralph Sharpe, a partner at the Washington law firm Venable LLP and a former enforcement official at the Office of Comptroller of the Currency, agreed with that assessment.

"It has implications not just for MSBs, but also banks and anyone else subject to the SAR filing requirements or BSA requirements, and that is it is not enough to file a SAR or a good SAR, but you've got to take the next step to see if there is something there — some pattern, some abuse — and you have to act on it," he said.

Here's the rub: the company detected the potential money laundering, filed SARs, yet still was fined.

Sigue had an anti-laundering program in place and filed suspicious activity reports on some of the transactions. But in the settlement order, the Justice Department held it liable for not adequately investigating the suspicious activity and for not preventing the broader pattern of laundering.

In all, Sigue identified more than $47 million of structured transactions, but the order said it "failed to take action to prevent from reoccurring."

"Failed to take action to prevent from recurring"? It's bad enough that banks feed SARs into the black hole that is FinCen, where they're eaten by FinCen's pet goat. Now, banks not only have to do law enforcement's job of detecting crimes, they have to prevent them, too. They have to stop the criminals in their tracks, or they'll be hit with a record fine and a deferred criminal prosecution, if they're lucky. If they're not lucky, then what? They get "rendered" to a foreign intelligence service? Waterboarded? Forced to go on a drug free, alcohol free, sex free date with Lindsay Lohan?

We've been yapping like a wee bitty Pekingese for some time now about the ridiculously onerous BSA requirements that are being placed upon banks. Of course, we felt like the canary in the coal mine. Now, the big dogs, ex-FinCen officials and ex-federal banking regulators, are starting to bark loudly. Do you think the US government and federal banking regulators will listen, or just grab a baseball bat and start beating all of us like a pack of mangy curs? Neither. They'll ignore us, as they always do.

Here's an idea for bankers: no matter what your political persuasion, start contributing to a Democratic Party war chest near you and hope that a change in administration and a clean sweep of the Justice Department and the federal banking agencies, at the top levels at least, imposes a modicum of reality on the powers that be. I thought that I'd seen the peak of jack-booted thuggery in the late 1980s and early 1990s, during two previous Republican administrations that I helped vote into power, but they had nothing on the latest circus clowns in D.C. The old boys at least extended you the courtesy of listening to you before they ignored you and proceeded to stone your clients to death like enraged Imams after a teenage girl who left her eyelids uncovered.  The current crop of bank cops doesn't even pretend to listen to voices of reason, even to their ex-cohorts. The only thing a bully understands is power. In this case, it's got to be the power of the ballot box.

Of course, there's always the risk that faces any special interest group when dealing with the boys and girls in D.C.: too many politicians turn out not to be "good politicians," i.e., those who, once they are bought, "stay bought."

Thus, banks may be forced to continue to attempt to do the impossible. And fail, naturally.

So, how are those money service businesses looking to all you commercial banks out there?

And The Winners Are...Trial Lawyers

Housing Wire's Paul Jackson ended a post last Friday about the expansion  of New York City's class action lawsuit Countrywide Financial Corporation and others with the words "It’s pretty clear that the biggest winners out of current market turmoil are the lawyers." It's hard to argue.

Paul referred specifically to the press release issued by New York City Comptroller William C. Thompson, Jr.on Friday in which the Comptroller crowed about adding "26 different financial services companies that underwrote Countrywide stock and bond offerings, two global accounting firms, and additional Countrywide officers and directors who signed SEC filings that contained false and misleading information about Countrywide's business and finances." I'm sure it's purely coincidental that the expansion of the lawsuit follows so closely on the heels of Bank of America's recent announcement that it plans to buy Countrywide. The fact that the City is adding a laundry list of rich defendants, most covered by E&O policies and perhaps better capitalized than Countrywide, and the further fact that there's now a pending acquisition that you can possibly use as leverage to force some kind of settlement, are just due to slap-happy serendipity.

Paul's correct about lawyers, of course. When stock prices tumble, class action attorneys come out of the woodwork. Settlements are extracted, the investors often receive a relatively small percentage of their actual losses, and the class action attorneys make millions. If stock prices fall, it must be because of fraud, it couldn't be because "stuff happens." There are no accidents in a universe where every negative occurrence must be rectified through the payment of money by a defendant or its insurer.

Yet, lawyers can't exist without clients. True, in some cases it's been alleged that some of the more shady class action attorneys may have purchased lead plaintiffs, and a few famous class action attorneys are being pursued by the authorities for the such alleged conduct. In this case, however, the City of New York is leading the charge and nobody had to pay it a dime. Not yet, at least.

The Big Apple is in good company. Last week, the Attorney General of Ohio filed a lawsuit against Freddie Mac on behalf of the Ohio Public Employees Retirement System, also alleging that fraudulent statements were made by a defendant involved in the mortgage business, in this case Freddie Mac, that misled investors like OPERS. According to Ohio Attorney General Marc Dann, Freddie Mac Freddie Mac had "secretly and intentionally participated in one of the largest housing investment deceptions in modern U.S. economic times." Nothing overblown about that allegation, is there?

Dann said Freddie Mac, a private company that holds a federal charter, was "deeply invested in the subprime mortgage industry and failed to disclose that it was not protecting itself from the billion-dollar risks it incurred."

[...]

In addition to the Ohio case, Dann said he filed a request for the Ohio Public Employees Retirement System to become the lead plaintiff in a class-action suit of Freddie Mac shareholders making similar claims in a suit filed recently in a federal court in New York.

In addition to attorneys, there are plenty of plaintiffs, including, obviously, state and local governments, who are eager to hop on board the class action gravy train and ride the rails to the promised land of recovered losses. Regardless of the percentage of the alleged losses that are actually recovered by the time, years down the road, these lawsuits actually settle, the state and local governments can tell the voters that they "did something" to "get the bad guys who caused this mess." As Marc Dann bloviated so well in his press release:

"I would like to commend the trustees and staff at OPERS for supporting my effort to hold Freddie Mac accountable for the role the company and its top executives played in bilking investors and fueling the foreclosure crisis that is destroying neighborhoods across our state and the entire nation," Mr. Dann said. "By authorizing me to bring this suit on their behalf they are protecting the interests of the pension plan, the workers and retirees who depend upon it, and the taxpayers whose hard-earned dollars fund it. And they are also sending a loud and clear message to Wall Street that this type of fraud and manipulation will not be tolerated by the people who live on the Main Streets that are being devastated by what Freddie Mac has done."

As well as furthering Dann's pursuit of higher political office. As CNN notes, Dann has a track record against Freddie Mac, so the template makes cynical sense, regardless of the changed facts and circumstances.

The pension fund was the lead plaintiff in an earlier lawsuit against the government-sponsored Freddie Mac that ended in a $410 million settlement.

And so it goes.

No Longer Civil

Last spring, The Arizona Republic ran an article that gave a laundry list of lawsuits that large lenders and Wall Street firms were filing against local lenders, brokers, agents, appraisers, title companies, and other third parties who had engaged in bilking them through various mortgage fraud schemes, particularly with respect to subprime mortgages. The paper predicted that the civil litigation was a precursor of many criminal actions to come.

"The discovery, deposition and documents from civil litigation of cash-back deals will clearly show criminal conduct. Private lawyers will be able to package up these cases for prosecutors and criminal trials," said Michael Manning, a lawyer representing several groups, including Lehman and Aurora, that are suing Arizona lenders.

I'm not sure about Arizona, but nearly a year later,  the hammer of the criminal justice system is falling on mortgage loan fraudsters in North Texas. The latest example was reported this week (free registration required). It involved the consumer advocate's favorite whipping boy, Countrywide.

An Arlington real estate appraiser has been sentenced to five years in prison after participating in what U.S. Attorney Richard Roper called a widespread North Texas home scam that cost Countrywide Home Loans millions of dollars.

In August, Gandhi Ben Morka, 52, was found guilty on a charge of conspiracy to commit wire fraud, four counts of wire fraud and two counts of mail fraud after a weeklong trial.

In addition to the five-year sentence handed down Tuesday, he must repay $2.3 million.    

Mr. Morka was accused of working with seven others who were indicted in May 2005 on mortgage fraud charges – Sean Cung-Kim Nguyen, Dai Quoc Nguyen, Xuyen Thi-Kim Nguyen, Tam Nguyen, Myna Tran, Hong Thanh Duong and Cuc Kim Tran. Mr. Roper's office said that most of those seven have been convicted and sentenced to prison.

Obviously, America continues to be a melting pot, where diverse criminals of many national origins can steal to their heart's content.

Under the scam, Mr. Morka would assess the home at roughly double its value in order to get more money from the mortgage company, which in these cases was Countrywide. The group would submit faked loan documents in order to get the financing, pay off the original owners of the property and split the rest, according to Mr. Roper.

I guess none of those folks will be helped by a Hope Now loan modification. More's the pity.

We've previously reported on North Texas as a hotbed of mortgage fraud. It turns out that Texas as a whole is among the nation's leaders in mortgage fraud.

In a 2006 report by the federal Financial Crimes Enforcement Network, Texas ranked fourth in real estate mortgage loan fraud. Only California, Florida and Georgia had more instances of mortgage fraud than Texas.

Apparently, Texas will never catch up. Our failure to generate a bubble of inflated real estate prices makes us a poor horse to back in the top mortgage fraud state sweepstakes.

But a local mortgage expert said that while there were concerns about appraisals in North Texas earlier in the decade, for the most part there aren't problems with appraisals happening today.

"We haven't had the really high prices and then running down of prices in this market compared with others," said Gary Akright, an independent mortgage broker in Dallas.

The stability of home prices here makes fraud related to appraisals less likely, he said, and Texas laws prohibit any influencing of real estate appraisers by real estate agents.

As of Sept. 1, mortgage companies doing business in Texas must warn loan applicants of the criminal consequences if they provide false information on the application, including inflated appraisal values.

As if crooks are ever deterred by disclosures or specific criminal penalties for conduct that they already knew was illegal under general anti-fraud criminal laws. As in most states, however, our politicians can point with pride to the disclosure law and crow about how they did something to combat mortgage fraud.
Following which, they'll issue a press release complaining about how Countrywide's not doing enough to help the poor mortgage borrowers that it misled.

Bank Customers Still Going Phishing (and Vishing)

The American Banker (paid subscription required) reported last month that notwithstanding banks' efforts to thwart "phishing," more bank customers are falling for phishing schemes.

The number of people who said they lost money as a result of a phishing scam rose 43% from a year earlier, to 3.3% of survey respondents, according to the report, which was published Friday. The Stamford, Conn., market research company conducted an online survey of 5,000 U.S. adults in August.

“Attacks are more targeted,” said Avivah Litan, a vice president and research director at Gartner who wrote the report. “So it’s less obvious it’s a phishing attack.”

Modern phishing e-mails often use personal information, such as the name of a friend or employer, to better deceive their recipients.

[...]

Although the number of victims is rising, the amount of money they are losing is declining, due in large part to banks’ efforts to detect scammers earlier, Ms. Litan said.

The average loss victims reported dropped 29%, to $866 in 2007 from the prior year, Ms. Litan’s survey found.

“Banks and other companies have put limits on how much you can transfer without raising a red flag,” she said. “There are tighter controls out there … it’s harder to get money out.”

But that is no reason to claim victory over the phishers, Ms. Litan said. “We haven’t made a dent in fighting phishing at all.”

Phishers are also favoring the theft of debit card numbers over credit card numbers because it is easier to get cash with debit cards, she said.

One of the most troubling trends she has noticed is the use of online advertising as a distribution tool for malicious software, she said. This could prove extremely disruptive for e-commerce if it leads consumers to stop trusting online ads.

It appears that those "red flags" and background monitoring procedures are paying off, at least in terms of limiting the size of losses. On the other hand, until more bank customers stop falling for phishing schemes, the crooks will continue to use them.

Unfortunately, a new variation of this scheme recently popped up. According to an FBI alert, it's called "vishing."

Are you one of many who have received an e-mail, text message, or telephone call, purportedly from your credit card/debit card company directing you to contact a telephone number to re-activate your card due to a security issue? The IC3 has received multiple reports on different variations of this scheme known as "vishing". These attacks against US financial institutions and consumers continue to rise at an alarming rate.

Vishing operates like phishing by persuading consumers to divulge their Personally Identifiable Information (PII), claiming their account was suspended, deactivated, or terminated. Recipients are directed to contact their bank via telephone number provided in the e-mail or by an automated recording. Upon calling the telephone number, the recipient is greeted with "Welcome to the bank of ..." and then requested to enter their card number in order to resolve a pending security issue.

For authenticity, some fraudulent e-mails claim the bank would never contact customers to obtain the PII by any means, including e-mail, mail, and instant messenger. These e-mails further warn recipients not to provide sensitive information when requested in an e-mail and not to click on embedded links, claiming they could contain "malicious software aimed at capturing login credentials."

Please beware; spam e-mails may actually contain malicious code (malware) which can harm your computer. Do not open any unsolicited e-mail and do not click on any links provided.

A new version recently reported involved the sending of text messages to cell phones claiming the recipient's on-line bank account has expired. The message instructs the recipient to renew their on-line bank account by using the link provided.

Due to rapidly evolving criminal methodologies, it is impossible to include every scenario. Therefore, be cognizant and protect your PII. Beware of e-mails, telephone calls, or text messages requesting your PII.

If you have a question concerning your account or credit/debit card, you should contact your bank using a telephone number obtained independently such as; from your statement, a telephone book, or another independent means.

And remember this simple rhyme, kids: if anyone lays a hand on your PII, stick your finger in his eye.

In the world of bricks and mortar crime fighting, the old "No Hats, No Hoods, No Problem" fad (actually called "No Hats, No Hoods, No Sunglasses," but we prefer to modify the lyrics so that we can sing them to the Kenny Cheseny tune "No Shirt, No Shoes, No Problems") is catching on, coupled with the FBI-promoted "meet and greet." At least, it's catching on in the Sunshine State.

Florida banks are being asked to ban patrons from wearing hats, sunglasses or hoods to curb holdups.

The Florida Bankers Association, in cooperation with the FBI, the Florida Department of Law Enforcement, the Florida Highway Patrol and Fraud-Net, announced a new program that strongly encourages patrons to remove hats, hoods and sunglasses when they enter Florida banks.

The program, dubbed "No Hats, No Hoods, No Sunglasses," stops short of denying service to clients wearing the offending clothing or accessories. Bank personnel will direct those who refuse to remove hoods, hats or sunglasses to areas of the bank with more experienced tellers and heightened security.

"Heightened security" being code words for "patrolled by a Rottweiler named 'He-Eat-Me' and an Iranian Imam whose issued a fatwa against Hoodies and who carries an AK-47 he calls 'The Hater of Hats.' "

California: Here It Comes

Our federal solons are busy concocting sweet treats for the voters in an election year, the kind that melt in your mouth, give you a brief sugar high, then bring you crashing back down to earth smack dab in the midst of an economic cycle that will work its way out the painful way regardless of your wishful thinking. In California, activist legislators are getting down to more serious business: micromanaging the subprime mortgage meltdown in a manner sure to make a painful situation downright excruciating. From today's Housing Wire:

While Federal efforts at mortgage reform seem to have stalled, Housing Wire has learned that California Assemblyman Ted Lieu is set to introduce sweeping reform to statewide mortgage legislation.

His bill, AB1830 – the Subprime Lending Reform Act – will seek to outlaw negative amortization mortgages and stated income lending, while placing tough new restrictions on when yield spread premium would be allowed.

Via an anonymous source, who suggested the bill could be unveiled as early as Thursday, HW obtained an advance copy of proposed changes to California’s Financial Code as part of AB1830, which would amend the state’s current law regulating so-called "covered loans" – conforming loans where rates are eight percentage points above the yield on US Treasuries, or loans with points and fees that exceed 6 percent.

The proposed bill seeks to extend the state’s regulatory authority to loans where the APR is as little as three percentage points above the Treasury yield, and to non-traditional mortgages as well, including interest-only and option ARM products.

In addition to outlawing option ARM mortgages altogether, the bill would essentially eliminate stated-income lending for high-cost, subprime and non-traditional mortgages — the bill’s language says stated income applications must be “verified,” which really means they aren’t stated at all. The bill would also outlaw YSP as a method of compensation for high-cost, subprime and non-traditional mortgages.

The use of YSP in all other mortgages (including, ostensibly, prime originations) would be limited by establishing a rate ceiling of 200 basis points above par, and only permitting the use of YSP whenever it is the broker’s sole form of compensation on a loan.

For high-cost mortgages in particular, the bill would outlaw balloon payments and prepayment penalties, as well as requiring full borrower documentation. The bill would also require certification of third-party counseling “on the advisability of the loan transaction” from a HUD-approved agency prior to origination.

AB1830 would also prohibit brokers, lenders and servicers from engaging in direct marketing designed to get a consumer to refinance out of an existing subprime or non-traditional loan within 12 months of closing on a purchase or prior refinance, although borrowers may still inquire regarding refinancing opportunities.

AB 1830 sounds fairly consistent with the overreaching legislation introduced or already enacted in other states. I've been badgered to comment in depth on the various state laws, especially Maine's, which appears to be particularly odd, and I might do so once I work through the current stack of Marvel comics that I haven't been able to read. However, my banking and thrift clients have mostly national charters, and all of them, state and federal, are consistent in their response: we won't make any loans covered by any such law. FDIC-insured institutions were not the culprits in the subprime mortgage lending fiasco. Again: even Barney Frank admits it. Whether it's amping up state law restrictions or tightening HOEPA at the federal level, the effect will be to further restrict residential mortgage credit. Banning or severely restricting the use of yield spread premiums, as opposed to requiring an adequate disclosure of them, is another brilliant idea that will further reduce the availability of credit. Banning all option ARMs also seems draconian, but I'm merely a shill for the Dark Lord Sauron, so what do you expect?

There's an old adage that "bad facts make bad law." Substitute "brains" for "facts" and you've got another truism.

Who's On First?

Among the many MENSA members who populate the US Congress and who are helping to straighten out the mortgage mess is Rep. Marcy Kaptur of Ohio, a Democrat, a 13-year veteran of the House, and member of the House Budget Committee. Tuesday's American Banker (paid subscription required) had a priceless tidbit that illustrates that the Bozo Factor is alive and well in halls of Congress.

Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke are certainly two of the biggest players in financial services, but Rep. Marcy Kaptur, D-Ohio, had to be reminded Thursday which was which.

During Mr. Bernanke's appearance before the House Budget Committee, Rep. Kaptur asked whether bank executives who profited from the housing boom should be forced to hand over their paychecks to taxpayers.

"Seeing as how you were the former CEO of Goldman Sachs, what percentage …" she said before being cut off by fellow lawmakers, who explained that she had mistaken the Fed chief for Mr. Paulson.

"I've got the wrong person?" Rep. Kaptur asked as the committee room burst into laughter. "Who were you the CEO of?"

Mr. Bernanke quipped, "I was the CEO of the Princeton economics department."

His first congressional appearance of the year also attracted two protestors: one dressed as a polar bear, and another holding a sign reading, "Stop your greed for oil."

It was nice to see that Al Gore and Cindy Sheehan could make the hearing.

Here's a clip of the confused Rep. Kaptur and the amused Chairman Bernanke.

Mortgage Modification And The "Free" Market

Hell hath no fury like a bureaucrat scorned.
---Milton Friedman

"Did, too!"
"Did not!"
"Did, too!"
"Did, not!"

No, that's not Paris Hilton and Britney Spears fighting over who went commando in the limo last night, that's the Mortgage Bankers Association and FDIC Chairman Sheila Bair having in their own little bitch-slap-fest last week concerning whether or not mortgage loan servicers are modifying residential loans quickly enough to satisfy the "unreasonably imprudent subprime lender test." As you might have guessed, the MBA believes that its members have been faster than a speeding bullet in modifying every ARM they can lay their grubby little hands upon. Just as obviously, Ms. Bair thinks that progress has been moving at a bit slower than Warp Factor 3.

First, the MBA:

A mortgage industry trade group insisted Thursday that lenders are doing a better job of helping troubled borrowers than outside reports say they are.   

The Mortgage Bankers Association said in a new report that mortgage lenders modified 54,000 loans and established 183,000 repayment plans in the third quarter, a period in which there were 384,000 new foreclosures.   

"The industry is doing a good job, and I think we're going to see these numbers grow," said Jay Brinkmann, vice president of research and economics for the trade group.

[...]

The mortgage industry was criticized by consumer groups, lawmakers and regulators last fall after a survey by Moody's Investors Service in August showed lenders had modified only 1 percent of subprime loans to people with poor credit records. A follow-up survey by Moody's found in September that 3.5 percent of subprime loans that reset to higher levels in the first eight months of 2007 had been modified.   

The new analysis, however, argued that Moody's study incorrectly compared the number of borrowers receiving help to the total number of outstanding subprime loans, many of which are refinanced before they reset at higher rates. A better way to examine the issue, the group said, is to compare the total number of loan modifications to the total number of foreclosures in the quarter.

[...]

The trade group's report used its own estimate for foreclosures, which is lower than that of RealtyTrac Inc., which reported more than 635,000 filings in the third quarter.   

The Mortgage Bankers Association says its results are more accurate than those of Irvine, Calif.-based RealtyTrac, which includes default notices, auction sale notices and bank repossessions in its reporting and can include two notices on the same property if the owner has multiple mortgages.   

Today's report, the trade group says, underscores how hard banks are working to assist strapped borrowers with loan modifications and repayment plans. Making matters difficult, the group said, is a high proportion of homes owned by speculators and situations in which borrowers didn't respond to repeated attempts to contact them.   

Among the foreclosures, 63 percent involved cases in which borrowers had already defaulted on a previous loan workout plan, didn't respond to efforts to contact them or didn't live in the home, the survey found.

Consumer advocates disputed the meaning of the MBA report, contending that only 24% of the loan modifications were made to subprime ARM loans, and that the number represented less than 1% of the 3 million subprime ARM loans outstanding. However, I thought that the goal was to modify subprime ARM loans where the borrowers could not afford the post-adjustment payments, not all subprime ARM loans. Oh, wait a minute, I forgot: Sheila Bair and other full-time professional consumer advocates want all subprime borrowers to get a better deal than they bargained for on the basis that none of the participants in the subprime mortgage market expected the loans to be repaid as originally written, so what the heck! As Ellen Schloemer, research director at the Center for Responsible Lending in Durham N.C., put it, "It's rare that those loans are going to be able to be repaid as they are currently structured."

Sorry, I momentarily forgot that we weren't operating in a free market.

Ms. Bair made it plain that she's not buying the MBA's line.

"We must see a pickup in the pace, and the sooner the better,'' Bair said [last Thursday] at a Bear Stearns mortgage and structured products conference in New York. The industry's progress on modifications is not going "as well as it should be,'' and regulators will be "closely watching'' its progress, Bair said.

Bair cited a November Moody's Investors Service report that showed 3.5 percent of loans that reset in the first eight months of 2007 had been modified.

"That puts us way behind the curve going into the new year,'' Bair said, adding that nearly 2 million subprime borrowers will face resets through the end of 2009.

And, of course, all 2 million loans will have to be modified, if you follow Ms. Bair's line of mandatory subprime borrower relief.

Bair then made a not-so-veiled threat that if the mortgage lending industry doesn't bend to her will voluntarily, she'll bend it by force.

I very much believe in the market,'' Bair said. "But if market solutions fail to solve the problem, government will step in.''

Yeah, Chairman Bair "very much believes in the market."

I can't wait until the federal government steps in to "solve the problem."

If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.
---Milton Friedman