For this, our final post covering FT Alphaville’s meeting with Yves Smith of Naked Capitalism, we asked her about the regulations that have arisen from the ashes of the financial crisis. Not wanting to leave the series on a depressing note, we (gently) prodded Ms Smith to also share with us something to be optimistic about.
AV: What do you think some of the biggest pitfalls/missteps have been since the crisis in terms of regulation?Read more
Five big US banks accused of abusive mortgage practices have agreed to a $25bn government settlement that may help roughly one million borrowers, says Reuters, but is no magic bullet for the ailing housing market. Thursday’s announcement brings an end to 16 months of negotiations that culminated in a tense week of round-the-clock dealmaking. The result is a record state-federal settlement that will deliver wide, but not deep, relief to US homeowners. The settlement is good news for the economy – but it could actually drag house prices down in the short term if banks start to seize homes again, says the FT, adding that the overall result should help the housing market get back to normal, but the immediate consequences are less clear. Read more
US regulators are preparing to announce a settlement, worth up to $39.5bn, and covering nearly all 50 states that would resolve allegations that five leading banks systematically abused borrowers in their pursuit of improper home seizures. The FT, citing people with knowledge of the matter, says under the proposed agreement, BofA, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial would be forced to improve their mortgage procedures; reduce borrowers’ loan balances and monthly payments; and make about $4.2bn in cash payments to an estimated 750,000 aggrieved homeowners and state governments. In exchange, officials would promise not to pursue certain mortgage-related legal claims against the targeted banks. The NYT says despite the billions to be paid out, the aid will help a relatively small portion of the millions of borrowers who are facing foreclosure. However, it’s the broadest effort yet to help borrowers who are underwater on their mortgages. Read more
The White House has quietly injected itself into ongoing settlement discussions aimed at resolving regulators’ allegations that leading US banks abused struggling homeowners, underscoring the deal’s potential impact on the broader housing market and the presidential election, says the FT, citing people involved in the talks. Aides to President Barack Obama have in recent weeks courted civil rights groups and borrower advocacy organisations, scheduling meetings and calls in an attempt to gain support for the expected settlement and muffle criticism from key political allies. A broad settlement with major banks over mortgage servicing abuses that would bring relief to distressed US homeowners could be announced as early Thursday, says Reuters, citing two people familiar with the matter. Negotiators said a federal-state mortgage servicing settlement already has the backing of over 40 states but so far lacks the support of a handful of critical states, including California and New York. The size of the settlement is estimated at up to $25bn, but that could drop if a number of states stay on the sidelines. New York attorney general Eric Schneiderman had planned an announcement late Tuesday about the settlement but postponed it “indefinitely” without explanation. Last Friday New York filed a lawsuit that conflicted with part of the settlement. His office has been in discussions with bank lawyers to move forward with both the lawsuit and the settlement, according to two other sources familiar with the matter. Read more
US state attorneys general have until Friday to join a potential national settlement of alleged foreclosure abuses, the WSJ says, citing a document. The deadline, set by negotiators trying to pull together an agreement with the federal government, states, and five major banks, is the latest sign that the finish line is in sight for what has been a bruising, yearlong haul. Government officials are aiming for a deal valued at $25bn in loan write-downs and other homeowner compensation with Ally Financial, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. Representatives of the five banks declined to comment. Read more
The outlook for securing a broad mortgage settlement that would bring housing relief nationwide has clouded, says Reuters, as California on Wednesday said the latest proposal is inadequate and New York was tapped to help lead a separate mortgage investigation effort. Federal enforcement agencies, state attorneys general and some of the nation’s top banks had appeared to be in the final stages to reach a deal that the Obama administration said last week would give relief to one million American homeowners. As part of the settlement, the banks would pay up to $25bn to homeowners, including through principal reduction on troubled loans. In exchange, the banks would put behind them potential government lawsuits about improper foreclosure and mortgage lending and servicing abuses. But California’s Attorney General Kamala Harris said she remained unhappy with the proposed terms, saying they must include meaningful relief and enforcement. The WSJ says that when it comes to bringing criminal charges against individual executives, the unit is likely to face the same kind of difficulties earlier task forces have encountered. Read more
The regulator for Fannie Mae and Freddie Mac told Congress that forcing the government-controlled mortgage firms to write down the principal on underwater home loans would require more than $100bn in fresh taxpayer funds, Reuters reports. In a letter sent on Friday to the Republican and Democratic leaders of a House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth. In that situation, the mortgage is deemed “underwater.” About 22 per cent of US home mortgages have negative equity totaling about $750bn, according to CoreLogic. The FT says Mr DeMarco’s letter, made public on Monday, buttresses his long-held belief that cutting loan balances would cost taxpayers far more than the benefits conferred on Fannie Mae and Freddie Mac in the way of lower defaults. Read more
Household debt in the US fell by 0.6 per cent in the third quarter compared to last year, according to statistics released by the Federal Reserve Bank of New York on Monday. However, this fall was primarily due to defaults, debt being paid down, and Americans taking out fewer and smaller home loans, the WSJ reports. Once debt related to real estate is removed, the figure points to a 1.3 per cent increase between the second and third quarters, which may indicate that deleveraging is nearing an end. However, the real estate part of the picture remains gloomy. The Fed report also stated that new mortgage debt in the third quarter, reported at $292bn, was the lowest level reported since 2000. Furthermore, the value of new mortgages is down 24.7 per cent compared to a year ago. The delinquency rate on debt also inched up, from 9.8 in the previous quarter to 10.0 per cent in the third. Read more
Ally Financial, the US lender that reeled in $17bn of US aid at the height of the global crisis, is weighing up whether to file for bankruptcy protection for its beleaguered mortgage lending unit, Residential Capital, the Wall Street Journal reported. The company is looking to stem the rot in ResCap, which has lost $555m in the past two quarters. One option being considered is a so-called strategic bankruptcy that would reduce Ally’s exposure and not derail the parent’s IPO bid. The development highlights how lenders are struggling to deal with the ongoing US mortgage mess. Read more
The New York Times’ Joe Nocera has spoken to FT Alphaville favourite Laurie Goodman of Amherst Securities Group and is now convinced of the need for principal reductions to clean-up the US mortgage mess.
Nocera’scolumn on Monday contains some startling statistics from Goodman: Read more
How big a hit should US banks take on their second mortgage portfolio?
A question that’s been asked again and again (and again and again) by this blog and others. Regulators are worried: Bloomberg reported last month that the Fed and the OCC are checking whether banks have put aside enough reserves to cover losses. Read more
The Federal Housing Finance Agency is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation, the New York Times reports. The FHFA, which oversees Fannie Mae and Freddie Mac, is expected to file the suits in the coming days. They’re expected to be aimed at Bank of America, JPMorgan, Goldman Sachs and Deutsche Bank, among others. The FT says the move is deeply controversial within the Obama administration, which is looking to ensure that the economy avoids a double-dip recession and that the banking system remains on an even keel. Bloomberg adds that BofA slumped the most in three weeks in Tokyo trading after the NYT report. Read more
The mortgage industry will take a step toward cleaning up some of its most controversial practices under a deal between a New York regulator and three financial firms, including Goldman Sachs, the Wall Street Journal reports. Under the agreement with the state’s financial-services superintendent, Benjamin M. Lawsky, the three firms—Goldman, its Litton Loan Servicing business and Ocwen Financial Corp.—promised to end so-called robo-signing, in which bank employees signed foreclosure documents without reviewing case files as required by law. The agreement, expected to be announced Thursday, could provide a blueprint for other regulators as they pursue settlements with the largest U.S. banks over allegations they failed to properly handle home loans, according to people familiar with the matter. Read more
The Obama administration is considering a proposal that would allow millions of homeowners with government-backed mortgages to refinance them at current, lower interest rates, about 4 per cent, the NYT says, citing two people briefed on the administration’s discussions. The measure is being considered alongside other tactics to stimulate the economy by strengthening the housing market. Administration officials said that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. Meanwhile Reuters reports the number of sales of bank-owned US homes remained high in the second quarter, while sales of homes in default or scheduled for auction rose compared to the previous quarter, according to a RealtyTrac report. Overall sales of homes in some stage of foreclosure or owned by banks totaled 265,087, up 6.5 per cent from a revised 248,959 in the first quarter. First-quarter sales were originally reported as 158,434. Read more
Flying beneath our radar last week was a hearing on the tax treatment of debt for both households and business, held by the Congressional Joint Committee On Taxation (tip of the Stetson to Simon Johnson, who testified at the hearing).
We’ll focus here on the report on household debt prepared by the committee — and specifically on the issue of how the tax code favours homeownership over renting. (Interest on mortgage debt is deductible from personal income for tax purposes, as are capital gains of up to $500,000 on the sale of a primary residence. Rent payments are not deductible.) Read more
You’re looking at an excerpt from the 2008 Housing and Economic Recovery Act. That’s the thing which created the Federal Housing Finance Agency (FHFA), which is currently charged with regulating the US’s massive Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. Read more
As big banks prepare to report their second-quarter results, federal regulators are scrutinising what these institutions are telling shareholders about possible payouts to clean up mortgage-related messes, the WSJ reports, citing people familiar. Officials at the SEC are looking closely at bank estimates of possible liability in the wake of a surprise June 29 announcement that Bank of America would take mortgage-related charges of $20.6bn during the second quarter, more than some analysts had expected. The SEC is focusing on whether banks are doing enough to disclose the so-called “reasonably possible” category of losses in their accounts. Read more
The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recovery — and possibly the president’s re-election in 2012, the Wall Street Journal reports. Last year, advisers considered several housing-policy prescriptions but rejected them in favor of letting the market sort things out. Since then, weak demand and a stream of foreclosed properties have put renewed pressure on home prices, prompting concern within the White House. Policy ideas include having taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors, allowing those buyers to vacuum up excess housing inventory. Officials also could sweeten incentives for banks to reduce loan balances for borrowers who are underwater, or owe more than their homes are worth. Read more
Last week he spoke to a group of European politicians, including representatives from the UK, Spain and Germany, to talk mortgage reform. In particular, he was presenting a new paper, written together with Marc Rothemund, and published by the Centre for European Policy Studies (CEPS). It’s a big deal given the current consumer protection debate on European mortgages, and the European Commission’s recent interest in the cost and benefits of various mortgage credit policies. Read more
Lee Farkas, former chairman of US mortgage company Taylor Bean & Whitaker, has been sentenced to 30 years for running a $2.9bn fraudulent scheme, making him the highest ranking executive to go to prison for illegal conduct committed during the financial crisis. Mr Farkas, 58, was convicted by a federal jury in April on charges that included allegations he misappropriated more than $1.4bn from Colonial Bank’s mortgage warehouse lending division to shore up Taylor Bean, the FT reports. The fraud, which began in 2002, contributed to the failure of Colonial Bank in 2009. His sentence surpasses the one passed on Bernard Ebbers, the head of WorldCom, who is serving a 25-year sentence for conducting an accounting fraud. Meanwhile NYT DealBook reports that Galleon Group hedge fund manager Raj Rajaratnam’s sentencing will be delayed for two months until late September. Read more
The bondholders had alleged that Countrywide had failed to meet certain underwriting standards for the loans included in these RMBS deals and had improperly serviced the loans, and had breached representations and warranties. Read more
Federally-backed loans already make up a majority of the mortgages classified as ‘seriously delinquent’ in the US financial system. In other words, there are more soured loans held or backed by the US’s giant GSEs — Fannie Mae and Freddie Mac — plus the Federal Housing Administration (FHA), than those held by banks and in private-label securitisations. Read more
Here’s something you might have missed during last week’s (UK) holiday.
Michael Cembalest has made a retraction. JPMorgan’s private banking chief investment officer (and reportedly the only JPM-er who refused to do business with Ponzi-schemer Bernard Madoff, according to Forbes) has a new view on the roots of the US subprime debacle. Read more
The justice department has sued Deutsche Bank for more than $1bn, accusing the German lender and a subsidiary of lying their way into a government mortgage scheme and “recklessly” endorsing risky loans for federal insurance, the FT reports. The suit marks the latest effort by US officials to hold lenders accountable for the financial crisis. FT Alphaville has a copy of the court filing and details the skeletons (or mortgage audits) in Deutsche Bank’s closet, while pondering the naiveté of the FHA mortgage insurance programme. Separately, the FT says the DoJ is also reviewing the findings of a Senate report that found Goldman Sachs misled clients buying mortgage-related securities in the run-up to the financial crisis. Read more
One word to describe the narrative in the just-announced civil suit against Deutsche Bank’s mortgage unit: quaint. Though parts of it are still shocking.
The suit centres on alleged abuses of the US government’s mortgage insurance programme, which has the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD) assume the ultimate default risk on millions of American mortgages. Here’s how it works. Read more