Mortgage Investors Protest as California Localities Weigh Seizing Loans

By Kate Berry

JUL 6, 2012 11:51am ET

Three California local governments may use their eminent domain powers to seize mortgages and restructure them to help distressed borrowers stay in their homes – much to the dismay of investors who hold the mortgages.

Eighteen trade groups, including the American Bankers Association, the Securities Industry and Financial Markets Association and the Housing Policy Council of the Financial Services Roundtable, have called into question the legality of a plan proposed by a venture capital firm and being considered by three California municipalities. The program would allow the governments to use their eminent domain powers to seize loans held in private-label mortgage-backed securities.

“We believe that the contemplated use of eminent domain raises very serious legal and constitutional issues,” the trade groups said in a letter late last month to California’s San Bernardino County and two of its city governments, Fontana and Ontario.

But those protests may be premature. After the San Bernardino County program was highlighted in a front-page Wall Street Journal article, a spokesman said the county is not sold on the idea.

“We see it as intriguing, but it’s definitely not something we’ve decided to do,” says San Bernardino spokesman David Wert. “We just wanted to get all the information and see if it might actually work. We fully expect the banking, mortgage, real estate and investment communities to show up and tell us what they think.”

The San Bernardino County board of supervisors last month unanimously allowed the municipalities to form a Joint Powers Authority to consider the idea, and Wert says the county may hold public hearings as early as next week. The plan would restructure mortgages with negative equity, in which the homeowner owes more than the home’s current market value.

The program is the brainchild of Mortgage Resolution Partners, a San Francisco venture capital firm headed by Steven Gluckstern, the chairman and CEO of Ivivi Health Sciences and former CEO of Zurich Reinsurance and Centre Reinsurance.

The venture capital firm has hired investment banks Evercore Partners and Westwood Capital to raise funds from private investors that would be used by the San Bernardino County government to purchase the loans. The municipalities could then modify or restructure the loans.

A spokesperson for Mortgage Resolution Partners declined to comment and referred queries to San Bernardino.

Wert says that executives from the venture capital firm came to the county with the idea because Gregory C. Devereaux, San Bernardino’s chief executive, is regarded as an expert on local government housing issues. But Devereaux was not comfortable having discussions “behind closed doors,” Wert says.

“One of the things that has to be looked at is whether this would be the right thing to do or if it could cause more problems than it would solve,” Wert says. “We aren’t sold on it yet. It looks intriguing and if it actually works it could benefit tens of thousands of families.”

The mortgage investor groups claim that seizing homes through eminent domain could result in “significant harm” to homeowners, by reducing access to credit for future borrowers and potentially dragging down home prices. Doing so would undermine “the sanctity of the contractual relationship between a borrower and creditor, and similarly [undermine] existing securitization transactions,” the groups said in letters to the municipalities.

“It’s quite clear to us that there are a lot of questions about the legality of this,” says Chris Killian, a managing director at Sifma. “Is it legal for a county to use eminent domain for mortgage loans? When you exercise eminent domain, you have to compensate the person you’re taking the properties from and how that compensation is defined is an important question.”

The plan has the backing of Yale University economist Robert Shiller, who wrote in an Op-Ed in the New York Times last month that the troubled real estate market represents a “collective action problem.”

“In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners .but the different stakeholders have been unable to reach an agreement even if it is in their common interest,” Shiller wrote.

San Bernardino has roughly 150,000 underwater mortgages.

Trying to get the spigots open

By KENNETH R. HARNEY Jul 6, 2012

Two federal agencies with far-reaching influence over the mortgage market are working on a problem that could affect the ability of many consumers to obtain a home loan: How to encourage private lenders to ease up on their underwriting restrictions that go beyond what the agencies themselves require for mortgage approvals.

Both the Federal Housing Finance Agency, which oversees giant investors Fannie Mae and Freddie Mac, and the Federal Housing Administration, which runs the low-down-payment FHA program, are considering steps they might take to persuade lenders to open the mortgage spigots a little wider. Together, Fannie, Freddie and FHA account for 90 percent-plus of all home loan funding. The focus of their little-publicized reform projects: the “overlay” rules many lenders have adopted that lump extra fees, larger down payments and higher credit-score requirements onto home loans than Fannie, Freddie or FHA actually require.

For example, Fannie and Freddie may accept FICO credit scores of 660 to 680, and FHA will approve applications with scores as low as 580. Yet lenders originating loans for them often want to see scores 100 points higher. Another example: FHA recently inaugurated a “streamline refi” program designed to encourage widespread refinancings for borrowers with good payment histories by offering low mortgage insurance fees, no appraisals and no credit checks.

Great idea, but lenders have clamped their own more stringent underwriting restrictions on the program, frustrating consumers. Some banks require full appraisals, credit checks and add-on fees. Other lenders have announced that they are limiting eligibility for the program to customers they already service, despite the fact that FHA allows borrowers to seek streamline refinancings from any FHA-approved lender.

Why are lenders making it tougher than necessary for creditworthy applicants to obtain a mortgage? Tops on the list: They are practicing what one prominent mortgage industry consultant describes as “defensive lending.”

“Defensive lending is the mortgage equivalent of defensive medicine,” where doctors run more tests than needed to reduce litigation risk, says Brian Chapelle, principal at Potomac Partners in Washington, D.C. “Rather than more medical tests, mortgage lenders are adding underwriting requirements and program restrictions to avoid overstepping a sometimes ambiguous line” that will trigger penalties from Fannie, Freddie or FHA.

Even minor technical infractions in underwriting or documentation can cause “buyback” demands by Fannie or Freddie when loans go into default, with costs per loan for the lender sometimes soaring to hundreds of thousands of dollars. Plus the Justice Department is putting pressure on major banks to pay millions of dollars to settle allegations of systemic flaws in their mortgage practices – settlements the banks consent to not on the merits but to avoid protracted litigation and hits to their stock prices.

On top of this, banks and other originators are uncertain about upcoming mortgage regulations that stem from the Dodd-Frank financial reform law that will spell out the rules for future lending.

In a nutshell, says Chapelle, government agencies and Congress have fostered a play-it-ultra-safe environment, where the pressure is intense to lend only on the most conservative terms, even if that means turning down creditworthy applicants.

What to do? The two agencies are mum about specifics but are expected to announce reforms sometime in the coming weeks. Lenders, on the other hand, know precisely what they’d like to see. Steve O’Connor, senior vice president of the Mortgage Bankers Association, says lenders want several key changes in current procedures, including clear, point-by-point guidance on how the agencies will define reasonable grounds for buybacks or indemnifications going forward. Lenders also need assurance that after an agreed-upon period of time – say, 24 to 36 months – they will not be blamed for deficient underwriting on a loan that goes belly up. Some mortgage companies have been confronted with buyback demands on loans that defaulted for economic reasons after seven or eight years of on-time payments – “That’s crazy,” said O’Connor.

FHA lenders, said Chapelle, also want greater fairness in the way they’re treated when loans default, including revisions of lender monitoring standards that evaluate them poorly when they try to accommodate borrowers with lower credit scores and other blemishes.

Bottom line: Lenders say they could loosen up a little on underwriting when federal agencies ease their buyback demands. Since the two top agencies are trying to figure how to do this, homebuyers might see slightly less punitive “overlay” fees and underwriting later in the year.

Don’t hold your breath but it could happen, and just might help you get approved for a mortgage.

Countrywide Built Web of Influence Through VIP Program

By Kevin Wack

JUL 5, 2012 5:21pm ET

WASHINGTON – Countrywide’s VIP program not only benefited numerous members of Congress, but also assisted a handful of Capitol Hill staffers and HUD Secretary Alphonso Jackson as the mortgage lender built a large web of political influence prior to the financial crisis, according to a congressional report released Thursday.

The Republican staff of the House Oversight Committee, which has been probing the Countrywide VIP program since late 2008, appears to have finally closed the door on the matter with the release of the 136-page report.

The report provides fresh details on how seven sitting lawmakers – Democratic Sens. Chris Dodd and Kent Conrad, Democratic Reps. Ed Towns and Tom Campbell, and Republican Reps. Howard “Buck” McKeon, Pete Sessions and Elton Gallegly – received preferential treatment from Countrywide.

“The foremost benefit of being a Countrywide VIP was access to discounted loans in the form of waived points. The standard reduction was 0.5 points,” the report stated, though it noted that some participants asked not to receive a discount. “Countrywide routinely waived junk fees typically ranging from $350 to $400 for VIP borrowers.”

The report also fills in the broader picture about the VIP program, whose participants were referred to internally as “Friends of Angelo,” a reference to Countrywide CEO Angelo Mozilo.

Between 1996 and 2008, when Countrywide was acquired by Bank of America, records from the firm’s VIP unit showed 17,879 loans, though some of those records were duplicates, according to the report.

Many of the borrowers were referred by Mozilo himself, he told the congressional committee.

“The referrals I made included people from all walks of life with whom I came in contact, including, for example, prominent business people, doctors and nurses, entertainers, civic and community leaders, taxi or limo drivers, secretaries, a car dealer and his employees, a golf club employee, and gardeners,” Mozilo stated in a written response to the committee’s questions.

Other customers came from Countrywide lobbyist Jimmie Williams, who indicated that he made the referrals in order to burnish the lender’s image in Washington and to make it easier for him to concentrate on lobbying rather than on customer complaints.

“I could walk in an office on any given day and spend the first 30 minutes talking about someone whose loan was mishandled, whose papers didn’t come, or who didn’t get the rate,” Williams told the committee. “I felt that it got in the way of me doing what my real job was, that I was becoming more of an ambassador, also, and that was beginning to wear thin.”

The report describes a friendship between Williams and Jackson, who served as secretary of the Department of Housing and Urban Development under President George W. Bush.

According to the report, not only did Jackson receive a VIP loan, but so did his daughter. Williams told the congressional staffers that Jackson referred his daughter to the VIP program because doing so would make Williams look good to other members of Countrywide’s management.

“I knew the Secretary, so I think that might have counted for something,” Williams told the committee. “Seriously. Even if I just referred it up.”

According to the report, the congressional staffers who received VIP loans from Countrywide were House Financial Services Committee Deputy Staff Director Joseph Ventrone; House Financial Services Committee Chief Counsel Clinton Jones III; Joyce Bilbray, chief of staff for Democratic Rep. Mel Watt; Moira Lenehan-Razzurri, legislative assistant to Democratic Rep. Ruben Hinojosa; Maria Meier, executive director of the Congressional Hispanic Caucus; and Mary Jane Collipriest, communications director for Republican Sen. Robert Bennett.

The report stated that Dodd referred Collipriest to the Countrywide VIP program in 2002, despite a claim from the former Connecticut senator that he was not aware that he was enrolled in the program.

The report also focuses on ties between Countrywide and Fannie Mae. Countrywide gave VIP loans to numerous Fannie Mae officials, and the two firms had a strategic alliance that linked their growth, according to the report.

Other former Cabinet secretaries who received loans from the VIP unit were Democrats Henry Cisneros, who was serving on Countrywide’s board at the time, and Donna Shalala, the report stated.

Both Cisneros and Sessions, a GOP congressman from Texas, asked not to receive discounts on their loans, according to report.