If the Federal Home Loan Bank of San Francisco can go back and seek to undo the purchase of mortgage-backed securities because of alleged “untrue or misleading statements” then why is it that borrowers who were sold option ARMs, interest-only loans and mortgages based on no-doc loan applications can’t do the same?

Does anyone really think that a large number of such loans, or maybe most of such loans, were sold with anything other than untrue and misleading statements? After all, why would any sentient borrower go to a lender who promised anything other than the best possible rates and terms — advertised and promoted qualities which were plainly not delivered with toxic loans.

Statement of the Federal Home Loan Bank of San Francisco

Today the Federal Home Loan Bank of San Francisco (Bank) filed complaints in the Superior Court of California, County of San Francisco, against nine securities dealers in relation to certain of the Bank’s investments in private-label residential mortgage-backed securities (PLRMBS). The Bank is seeking to rescind its purchases of 134 securities in 113 securitization trusts, for which the Bank originally paid more than $19.1 billion. The Bank’s complaints allege that the dealers made untrue or misleading statements about the characteristics of the mortgage loans underlying the securities.

All of the PLRMBS in the Bank’s mortgage portfolio, including those identified in the complaints filed today, were rated AAA when purchased, based on the information provided by the securities dealers. The Bank employs conservative criteria and guidelines for all its MBS investments. The Bank invests in high-quality financial instruments to facilitate its role as a cost-effective provider of credit and liquidity to its member financial institutions. These investments support the Bank’s mission of promoting housing, homeownership, and community development by providing the Bank with greater financial flexibility in helping members meet the credit needs of their communities during all economic times and in funding the Bank’s Affordable Housing Program and other programs that create affordable housing and promote community economic development.

In filing these complaints, the Bank seeks to continue supporting its mission and to protect the interests of its member shareholders, which include over 400 community banks, credit unions, and savings institutions headquartered in Arizona, California, and Nevada that serve millions of consumers.

San Francisco Home Loan Bank Wants $19 billion Back From Wall Street is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Sen. Ted Kaufman (D-DE) is now proposing systemic financial reform. One part of that reform — a big part — would clearly involve changes in the way mortgages are originated, underwritten, bundled, sold and re-sold. The impact on borrowers and the housing marketplace would be significant.

From the Senator’s speech, Wall Street Reform That Will Prevent The Next Financial Crisis:

“On one end of the securitization supply chain, regulators allowed underwriting standards to erode precipitously without strengthening mortgage origination regulations or sounding the alarm bells on harmful nonbank actors (not even those within bank holding companies over which the regulators had jurisdiction). On the other, securities backed by risky loans were transformed into securities deemed “hi-grade– by credit rating agencies, only after a dizzying array of steps where securities were packaged and repackaged into many layers of senior tranches, which had high claims to interest and principal payments, and subordinate tranches.

“The non-banking actors — investment banks, hedge funds, money market funds, off-balance-sheet investment funds — that powered structured finance came to be known as the shadow banking market. Of course, the shadow banking market could only have grown to surpass by trillions of dollars the actual banking market with the consent of regulators.”

Kaufman also looks at how companies on Wall Street sold mortgage-backed securities — and then bet that those securities would fail:

“t has also become known that some firms underwrite securities — promoting them to investors — and then short these same securities within a week and without disclosing this fact, which any reasonable investor would regard as adverse material information. In the structured finance arena, investment banks sold pieces of collateralized debt obligations — which were packages of different asset-backed securities divided into different risk classes — to their clients and then took proceeded to take short positions in those securities by purchasing credit default swaps. Some banks went further by shorting mortgage indexes tied to securities they were selling to clients and by shorting their counterparties in the CDS market. This is how a firm like Goldman Sachs could claim that they were effectively hedged to an AIG collapse.

“Unfortunately, the use of products like CDS in this way allows the banks to become empty creditors who stand to make more money if people and companies default on their debts than if they actually paid them. These and other problematic practices that place financial firms’ interests against those of their clients need to be restricted. They also completely violate the spirit of our seminal legislation from the 1930s, which insisted — for the first time — that the sellers and underwriters of securities disclose all material information. This is nothing less than a return to the unregulated days of the 1920s; to be sure, those days were heady and exciting, but only for a while — such practices always end in a major crash, with the losses disproportionately incurred by small and unsuspecting investors.”

For the full speech, see: Wall Street Reform That Will Prevent The Next Financial Crisis

Mortgage Reform — Getting Back To Basics is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The Federal Reserve, under section 129(i) of the Home Ownership Equity Protection Act (HOEPA) has had the authority since 1994 to banish loan products which it defines as “unfair and deceptive acts or practices (UDAP).” Had the Fed used this authority in 2002, 2003 or 2004 it could have outlawed option ARMs, interest-only mortgages and loans made with stated-income loan applications — the applications where lenders do not check income. The result would have been far fewer toxic loans in your neighborhood and mine, far fewer toxic assets on Wall Street and little or no mortgage meltdown.

The Fed Didn’t Act

However, the Fed, under Alan Greenspan, didn’t act. The Fed did nothing to protect the public even though appropriate regulations were on the books and in place.. No additional action or authority by Congress or the President was required. Instead of a small problem, a crucial opportunity to end the mortgage mess before it got out of hand was lost.

Understand that the problem of toxic loans was well known. As one example, I wrote at the time:

“What’s obviously best is to get the numbers right when making a loan application,– it said here in November 2004. “It’s equally obvious that ‘stated income’ mortgages open the vault to temptation. Such no-tell loans ask borrowers what they earn and the borrower then puts down a number. Unlike a typical mortgage application, the lender usually does not verify the figure with tax returns, pay stubs or calls to employers.–

Of course, if it happens that those self-estimates of income are off a touch then lenders will have problems.

“With a growing number of stated income loans on the books, financing with exaggerated numbers could quickly become a lender concern if home values dip, the economy slows and monthly payments don’t show up. That’s the point at which stated income loans will come home to roost.– (See: How Much Is Too Much? November 16, 2004)

Rules and regulations are worthless if you have officials who do nothing. The new regulations ought to include a provision for firings, fines and jail for federal officials who fail to act in the public interest.

Real Consumer Protection Is Missing

There is a way to clean up the mortgage industry — make loan officers have a fiduciary obligation to get the best rates and terms for borrowers. The lending industry is opposed to such a standard, or at least much of the lending industry is opposed.

What is a “fiduciary” obligation? it’s merely the requirement that when you hire someone they will act in your best interest; that they will put your needs ahead of their opportunity to sell you the most expensive product or service they can find. Generally, a “fiduciary” obligation can be defined by remembering these four initials: C-O-A-L:

Care for the client’s interests.

Obedience to the client’s lawful instructions.

Accountability for the client’s money and paperwork.

Loyalty to the client by not working for a competing interest.

The President’s proposal seeks to protect investors on Wall Street but not mortgage borrowers. This means when you go to get a mortgage you cannot be certain that the loan officer on whom you depend for information, ideas, advice, counsel and product options is going to do anything but sell you the loan with the highest-possible mark-up. If you think this sounds like dealing with a car salesman, you’re partially right — auto buyers in many states are protected if they are sold a lemon but the same is not true for mortgage borrowers.

Fiduciary Obligations

Doctors have an obligation to their patients, lawyers have an obligation to their clients, buyer brokers and listing brokers have an obligation to their buyers and sellers respectively but loan officers have no obligation to borrowers under federal rules. Until this obvious and overt problem is corrected the process of getting a loan will never offer a fair and even playing field for borrowers.

Many in the mortgage industry would like to see the situation changed. There are honest and ethical institutions and loan officers. They would welcome government regulation to protect their clients and themselves — and because they would sleep better at night.

The President is right to try and regulate Wall Street but he needs to go further. He needs to help folks on Main Street who don’t have millions of dollars or lots of lawyers, accountants or PAC money. Think of the President’s announcement as step one on the road to real reform.

Obama Regulatory Reform: Right Idea — Not Far Enough is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The Securities and Exchange Commission today charged former Countrywide Financial CEO Angelo Mozilo and two other former executives with securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company’s market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.

The SEC alleges that Mozilo along with former chief operating officer and president David Sambol and former chief financial officer Eric Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors.

The SEC’s enforcement action alleges that from 2005 through 2007, Countrywide engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company’s ability to sell them. Countrywide was required to disclose these important trends to its investors in the Management Discussion and Analysis portion of its SEC filings, but failed to do so.

“This is the tale of two companies,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one Countrywide product as ‘toxic,’ and said another’s performance was so uncertain that Countrywide was ‘flying blind.’”

Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office, added, “Angelo Mozilo had access to detailed and alarming information about Countrywide’s operations. He knew that Countrywide was gambling with increasingly risky mortgages and he kept those details from investors while he was actively taking his own chips off the table.”

Countrywide Former CEO, Angelo Mozilo, Charged With Securities Fraud is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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