A Bank Crisis Whodunit, With Laughs and Tears

Gretchen Mogenson, NY Times

TRULY startling revelations were few in the voluminous report, published last Thursday by the Financial Crisis Inquiry Commissionon the origins of the financial panic. This is hardly a shock, given the flood-the-zone coverage and analysis of the crisis since it erupted four years ago.

Yet the report still makes for compelling reading because so little has changed as a result of the debacle, in both banking and in its regulation. Providing chapter and verse, for example, on the bumbling and siloed management at the nation’s largest banks is enlightening, in that many of these institutions are even bigger than they were before. With too-big-to-fail institutions now larger than ever, we are almost certain to go through another episode like 2008 in the not-too-distant future.

For those who might find the report’s 633 pages a bit daunting for a weekend read, we offer a Cliffs Notes version.

Let’s begin with the Federal Reserve, the most powerful of financial regulators. The report’s most important public service comes in its recitation of how top Fed officials, both in Washington and in New York, fiddled while the financial system smoldered and then burned. It is disturbing indeed that this institution, defiantly inert and uninterested in reining in the mortgage mania, received even greater regulatory powers under the Dodd-Frank law that was supposed to reform our system.

The report shows how the Fed refused to exert its authority on predatory lending. On Page 94, we learn that from 2000 to 2006, it referred a grand total of three institutions to prosecutors for possible fair-lending violations in mortgages.

The Fed “succumbed to the climate of the times,” its general counsel, Scott G. Alvarez, told commission investigators. It is hard for a supervisor to challenge banks when they are highly profitable, other officials said. Richard Spillenkothen, head of supervision at the Fed until 2006, attributed its reluctance to “a desire not to inject an element of contentiousness into what was felt to be a constructive or equable relationship with management.”

Is it any shock, then, that neither the Federal Reserve Bank of New York nor the Office of the Comptroller of the Currency, a partner in regulatory inadequacy, saw that the S.S.Citigroup was headed for the shoals? This depressing case is chronicled in depth in the report.

Read more here

Massachusetts’ highest court will consider whether a home buyer can rightfully own a property if the bank that sold it to him didn’t have the right to foreclose on the original owner.

The state’s Supreme Judicial Court, which agreed last month to take the appeal, already ruled Jan. 7 that banks can’t foreclose on a house if they don’t own the mortgage. The lower- courtdecision now under review said the buyer of residential property in Haverhill, Massachusetts, never really owned it because U.S. Bancorp foreclosed before it got the mortgage.

“It appears to be the next step in the conversation,” Paul R. Collier III, who represented the borrower in the earlier case, U.S. Bank v. Ibanez, said in a phone interview.

Like the Ibanez case, the court’s decision may resonate with other states as they grapple with the rights of new homebuyers who may be hesitant to complete a purchase for fear of uncertain title, and with how such a trend may hobble the broader housing market.

Claims of wrongdoing by banks and loan servicers triggered a 50-state investigation last year into whether thousands of U.S. foreclosures were properly documented during the housing collapse. Last year, completed foreclosures in Massachusetts rose 32 percent to 12,233 from 9,269 in 2009, according to Boston-based Warren Group, which tracks local real estate.

Bundled Mortgages

The latest case, Bevilacqua v. Rodriguez, could affect trusts that bundled mortgages and sold securities to investors. Questions about lending practices, including alleged overstatements of borrowers’ income and inflated appraisals, have pitted mortgage-bond investors against banks. Also, loan originators or trust sponsors may be forced to buy back mortgages wrongly transferred into loan pools.

The Ibanez and Bevilacqua cases both originated before Massachusetts Land Court Judge Keith C. Long in Boston.

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Worried that your bank might go after your other assets if you’re late on the mortgage or lose your home to foreclosure?

It can happen in Florida, especially if a bank sells your foreclosed house and doesn’t recoup the full loan amount and if you’re a big-dollar borrower.

With nearly half of all mortgages under water in South Florida, plenty of residents may wonder if their home lender can garnishee their wages or suddenly lock down their deposit accounts.

Rules on tapping assets vary by state and depend on the terms of specific loans and accounts.

Problems on typical home loans usually don’t crop up before foreclosure. They tend to come after the bank sells the home and ends up short.

In Florida, banks can go to court for a “deficiency judgment” to collect the rest of the money owed on a mortgage after foreclosure, said Anthony di Marco, vice president of the Florida Bankers Association.

Banks can pursue other assets with that judgment. They can file a lien on your boat or car. But “they can’t jump priority on a loan,” so the lender for that boat or car has first dibs to collect, di Marco said.

Florida banks usually don’t target other assets after foreclosure if they don’t see much to tap. “Collecting on judgments is time-consuming and costly,” said real estate attorney Shari Olefson, a partner at Fowler White Boggs in Fort Lauderdale and author of “Foreclosure Nation: Mortgaging the American Dream.”

But banks pay more attention to borrowers with multimillion-dollar homes or businesses that default on big commercial properties. The lender can check if the customer has other accounts with the same bank. Depending on the terms of those savings or checking accounts, they may move to freeze, sweep, garnishee or otherwise tap those accounts to collect money owed, Olefson said.

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Federal Reserve Chairman Ben Bernanke delivered his semi-annual testimony before the House Committee on Financial Services today. He pretty much said what was expected: the economy is recovering but still fragile; the job market is improving, but is still horrible; inflation is low now, but the Fed needs to keep an eye on it in the future. As a result, interest rates are likely to remain low for an “extended period.”

All on script. But there was an interchange between one lawmaker and Bernanke that deserves your attention. Please watch this video of Congresswoman Maxine Waters – in it, she demonstrates that there is obviously NO intelligence requirement necessary to be named to the House Financial Services Committee.

Watch the video here:  http://www.cbsnews.com/blogs/2010/02/25/business/econwatch/entry6241870.shtml

A top Treasury Department official indicated Thursday that the Obama administration’s signature foreclosure-prevention initiative may not deliver on its promise to help three to four million troubled homeowners permanently reduce their monthly payments.

Under questioning by a Congressional panel, Phyllis Caldwell, chief of Treasury’s Homeownership Preservation Office, would not repeat previous assurances about the Home Affordable Modification Program.

Through January, only about 116,000 homeowners have received permanent modifications, resulting in average monthly savings of more than $500. The program was launched last year. Wall Street analysts, mortgage experts and homeowner advocates have criticized the program for its slow progress. Treasury and White House officials have, in the past, repeatedly stressed that the plan would eventually meet its goal of helping three to four million borrowers by 2012.

Caldwell put that to rest Thursday, declining to answer a direct question about whether the administration would meet that goal.

Separately, Republicans on the House Oversight and Government Reform Committee put out a report stating that:

Read more here:  http://www.huffingtonpost.com/2010/02/25/top-treasury-official-bac_n_477296.html

The Florida Supreme Court continues to make it more difficult for lenders to foreclose in the Sunshine State.

The court says lenders are now required to verify they own loans before they file a foreclosure lawsuit. And, according to the court order, lenders can no longer charge the homeowner for that investigation.

This follows the court’s order in late December that requires lenders to offer owners of primary residences a chance to negotiate with a third-party mediator before moving forward with foreclosure.

Florida has the nation’s fourth-highest foreclosure rate, and the court estimates about 456,000 foreclosure cases are clogging the state’s court system.

The new rules are an effort to help the courts better manage foreclosure cases and make sure lenders have tried to modify loans before taking back homes.

The rules and corresponding legal forms were proposed by a pair of Florida Bar panels.

“They found that many cases were being filed by plaintiffs that didn’t own the mortgages any more,” said Miami lawyer Mark Romance, who chairs the Civil Procedures Rules Committee.

Lenders sometimes have a difficult time coming up with the original note to prove they have the authority to foreclose. This is because loans were often bundled and sold as securities. In some cases, the notes are stored in warehouses or get lost in the shuffle.

Read more here: http://www2.tbo.com/content/2010/feb/19/wp-court-makes-it-more-difficult-for-lenders-to-fo/

Two lawsuits filed yesterday in US District Court in Boston claim Wells Fargo and Bank of America have not followed federal rules for mortgage loan modifications, leaving some homeowners stuck in foreclosure “limbo.’’

According to one of the lawsuits, Wells Fargo Bank North America did not honor agreements with Wilfredo and Odalid Bosque of Leominster and Germano DePina of Roxbury that would have made their temporary loan modifications permanent through the US Treasury’s Home Affordable Modification Program.

The Financial Fraud Enforcement Task Force kicked off the first of its mortgage-fraud summits Wednesday in the epicenter of the nation’s mortgage-fraud crisis and pledged to begin finding solutions.

The interagency task force — established last November by President Barack Obama to combat financial crime — is a team of federal, state and local law enforcement agencies, financial regulators, and inspectors general dedicated to curbing mortgage fraud, predatory lending, and other financial crimes.

There are 23 task forces and 67 mortgage-fraud working groups throughout the country.

“Nowhere is the problem more serious than here in Florida,” said U.S. Attorney Jeffrey Sloman.

In fact, according to Fannie Mae, Florida ranked No. 1 in loan-origination fraud in 2008 and 2009.

South Florida is ranked first in the nation for the number of residents named in mortgage fraud-related suspicious activity reports, called SARs, filed by financial institutions, according to the U.S. Financial Crimes Enforcement Network.

The problem, Sloman said, is that “mortgage fraud perpetrators have infiltrated every part of the loan industry” from title companies to mortgage brokers to bank employees.

“They fabricate documents so it looks legitimate, when in reality it may not be.” he said.

For example, 10 Miami-Dade County residents were indicted in late January for allegedly defrauding three financial institutions of more than $24 million in loan proceeds. According to the indictment, three of the defendants recruited friends and family members to pose as buyers through Miami Dade Mortgage Professionals, a company they owned. Two of the defendants prepared loan applications with false information about the buyers’ employment and assets.

The defendants flipped the properties to each other and used the money for down payments on other properties, the indictment said. Eventually, they ran out of money and stopped paying the mortgages, resulting in $7 million in losses for Washington Mutual, Impac Lending Group, Loan City and other lenders.

Read more here:  http://www.miamiherald.com/2010/02/25/1498709/task-force-comes-to-fraud-hotbed.html