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OVERVIEW OF ATTORNEY GENERAL MARTHA COAKLEY’S INITIATIVE TO COMBAT THE SUBPRIME LENDING CRISIS

OVERVIEW OF ATTORNEY GENERAL MARTHA COAKLEY’S INITIATIVE TO COMBAT THE SUBPRIME LENDING CRISIS


THE COMMONWEALTH OF MASSACHUSETTS
OFFICE OF THE ATTORNEY GENERAL
ONE ASHBURTON PLACE
BOSTON, MASSACHUSETTS 02108

617) 727-2200
(617) 727-4765 TTY
www.mass.gov/ago

OVERVIEW OF ATTORNEY GENERAL MARTHA COAKLEY’S INITIATIVE TO COMBAT THE SUBPRIME LENDING CRISIS

During the Economic Crisis, AG Coakley’s Office has secured more than $563 million in relief for investors and borrowers, recovered nearly $52 million in taxpayer funds to the Commonwealth and ensures mortgage relief to more than 24,700 homeowners in Massachusetts

  • In August 2011, Attorney General Coakley settled her office’s 2008 enforcement action against Option One Mortgage Corp., a subsidiary of H&R Block, which alleged predatory lending and discriminatory lending. The settlement provides a loan modification program for certain ultra-risky loans, which will provide an estimated $115 million in value to Massachusetts borrowers in principal write-downs and reduced monthly payments. Coakley also obtained a $9.8 million payment for restitution and the Commonwealth’s litigation costs.
  • In June 2010, Attorney General Coakley’s Office reached a $102 million settlement with Morgan Stanley over its role in financing and securitizing subprime loans, which contributed to the housing crash in Massachusetts.
  • In March 2010, Attorney General Coakley’s office secured $3 billion in loan modifications for homeowners nationwide with Countrywide Financial Corporation. The agreement secured an estimated $18 million in loan modifications for Massachusetts homeowners, $3 billion in loan modifications for homeowners across the country, and a $4.1 million payment to the Commonwealth. Countrywide is now owned by Bank of America.
  • In February 2010, Attorney General Coakley’s office, together with the SEC, reached a $310 million settlement with State Street Bank to resolve allegations that the financial giant misled fund investors, including numerous Massachusetts charities and retirement funds, regarding the extent of the funds’ subprime exposure.
  • In June 2009, Attorney General Coakley’s office reached a $10 million settlement with Fremont Investment & Loan and Fremont General Corporation in which Fremont resolved claims that it wrote 15,000 Massachusetts mortgages that were considered “doomed to foreclosure.” The agreement also secured an injunction affording state officials the opportunity to review any of Fremont’s 2,200 remaining Massachusetts mortgages before the initiation of foreclosure proceedings.
  • In May 2009, Attorney General Coakley’s office reached a first-in-the-nation $60 million settlement with Goldman Sachs in which the company agreed to provide loan restructuring for over 700 Massachusetts homeowners.
  • During 2008, the Attorney General’s Office recovered more than $77 million for Massachusetts cities, towns, and other government entities under the state’s civil False Claims Act in connection with misleading and unlawful investment marketing to local governments. These recoveries included settlements with investment banks Merrill Lynch, UBS, Morgan Stanley & Company, and Citibank.
  • The Attorney General’s Office has also brought civil and criminal actions against local lenders and brokers who engaged in fraudulent lending activity, or who perpetrated foreclosure rescue or loan modification scams.

In addition to the enforcement component of her initiative, Attorney General Coakley has also taken regulatory and legislative action to address predatory lending:

  • In January 2008, the Attorney General’s Office implemented new consumer protection regulations governing mortgage brokers and lenders.
  • In June 2007, the office enacted emergency Consumer Protection Act regulations which barred “foreclosure rescue transactions” to protect homeowners from losing their homes in these scams.
  • In October 2007, Attorney General Coakley testified before the U.S. House of Representatives Committee on Financial Services about racial and ethnic disparities in mortgage lending:
  • Attorney General Coakley, State Senator Karen Spilka, and State Representative Steven Walsh sponsored state legislation which requires that creditors take reasonable steps to avoid foreclosure and prohibits foreclosures without appropriate documentation. The legislation will also prevent additional foreclosures by mandating loan modifications in certain circumstances.

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© 2010-17 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.



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GRETCHEN MORGENSON: Too Large for Stains

GRETCHEN MORGENSON: Too Large for Stains


By GRETCHEN MORGENSON The Wall Street Journal

Published: June 25, 2010

OUR nation’s Congressional machinery was humming last week as legislators reconciled the differences between the labyrinthine financial reforms proposed by the Senate and the House and emerged early Friday morning with a voluminous new law in hand. They christened it the Dodd-Frank bill, after the heads of the Senate Banking and House Financial Services Committees who drove the process toward the finish line.

The bill is awash in so much minutiae that by late Friday its ultimate impact on the financial services industry was still unclear. Certainly, the bill, which the full Congress has yet to approve, is the most comprehensive in decades, touching hedge funds, private equity firms, derivatives and credit cards. But is it the “strong Wall Street reform bill,” that Christopher Dodd, the Connecticut Democrat, said it is?

For this law to be the groundbreaking remedy its architects claimed, it needed to do three things very well: protect consumers from abusive financial products, curb dangerous risk taking by institutions and cut big and interconnected financial entities down to size. So far, the report card is mixed.

On the final item, the bill fails completely. After President Obama signs it into law, the nation’s financial industry will still be dominated by a handful of institutions that are too large, too interconnected and too politically powerful to be allowed to go bankrupt if they make unwise decisions or make huge wrong-way bets.

Speaking of large and politically connected entities, Dodd-Frank does nothing about Fannie Mae and Freddie Mac, the $6.5 trillion mortgage finance behemoths that have been wards of the state for almost two years. That was apparently a bridge too far — not surprising, given the support that Mr. Dodd and Mr. Frank lent to Fannie and Freddie back in the good old days when the companies were growing their balance sheets to the bursting point.

So what does the bill do about abusive financial products and curbing financial firms’ appetites for excessive risk?

For consumers and individual investors, Dodd-Frank promises greater scrutiny on financial “innovations,” the products that line bankers’ pockets but can harm users. The creation of a Consumer Financial Protection Bureau within the Federal Reserve Board is intended to bring a much-needed consumer focus to a regulatory regime that was nowhere to be seen during the last 20 years.

It is good that the bill grants this bureau autonomy by assigning it separate financing and an independent director. But the structure of the bureau could have been stronger.

For example, the bill still lets the Office of the Comptroller of the Currency bar state consumer protections where no federal safeguards exist. This is a problem that was well known during the mortgage mania when the comptroller’s office beat back efforts by state authorities to curtail predatory lending.

And Dodd-Frank inexplicably exempts loans provided by auto dealers from the bureau’s oversight. This is as benighted as exempting loans underwritten by mortgage brokers.

Finally, the Financial Stability Oversight Council, the überregulator to be led by the Treasury secretary and made up of top financial regulators, can override the consumer protection bureau’s rules. If the council says a rule threatens the soundness or stability of the financial system, it can be revoked.

Given that financial regulators — and the comptroller’s office is not alone in this — often seem to think that threats to bank profitability can destabilize the financial system, the consumer protection bureau may have a tougher time doing its job than many suppose.

ONE part of the bill that will help consumers and investors is the section exempting high-quality mortgage loans from so-called risk retention requirements. These rules, intended to make mortgage originators more prudent in lending, force them to hold on to 5 percent of a mortgage security that they intend to sell to investors.

But Dodd-Frank sensibly removes high-quality mortgages — those made to creditworthy borrowers with low loan-to-value ratios — from the risk retention rule. Requiring that lenders keep a portion of these loans on their books would make loans more expensive for prudent borrowers; it would likely drive smaller lenders out of the business as well, causing further consolidation in an industry that is already dominated by a few powerful players.

“This goes a long way toward realigning incentives for good underwriting and risk retention where it needs to be retained,” said Jay Diamond, managing director at Annaly Capital Management. “With qualified mortgages, the risk retention is with the borrower who has skin in the game. It’s in the riskier mortgages, where the borrower doesn’t have as much at stake, that the originator should be keeping the risk.”

In the interests of curbing institutional risk-taking, Dodd-Frank rightly takes aim at derivatives and proprietary trading, in which banks make bets using their own money. On derivatives, the bill lets banks conduct trades for customers in interest rate swaps, foreign currency swaps, derivatives referencing gold and silver, and high-grade credit-default swaps. Banks will also be allowed to trade derivatives for themselves if hedging existing positions.

But trading in credit-default swaps referencing lower-grade securities, like subprime mortgages, will have to be run out of bank subsidiaries that are separately capitalized. These subsidiaries may have to raise capital from the parent company, diluting the bank’s existing shareholders.

Banks did win on the section of the bill restricting their investments in private equity firms and hedge funds to 3 percent of bank capital. That number is large enough so as not to be restrictive, and the bill lets banks continue to sponsor and organize such funds.

On proprietary trading, however, the bill gets tough on banks, said Ernest T. Patrikis, a partner at White & Case, by limiting their bets to United States Treasuries, government agency obligations and municipal issues. “Foreign exchange and gold and silver are out,” he said. “This is good for foreign banks if it applies to U.S. banks globally.”

That’s a big if. Even the Glass-Steagall legislation applied only domestically, he noted. Nevertheless, Mr. Patrikis concluded: “The bill is a win for consumers and bad for banks.”

Even so, last Friday, investors seemed to view the bill as positive for banks; an index of their stocks rose 2.7 percent on the day. That reaction is a bit of a mystery, given that higher costs, lower returns and capital raises lie ahead for financial institutions under Dodd-Frank.

Then again, maybe investors are already counting on the banks doing what they do best: figuring out ways around the new rules and restrictions.

A version of this article appeared in print on June 27, 2010, on page BU1 of the New York edition.

© 2010-17 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.



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