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A federal judge in Manhattan has found Bank of America’s Countrywide Financial unit liable for selling thousands of defective loans to Fannie Mae and Freddie Mac in the first mortgage fraud case prosecuted by the U.S. government to go to trial, Bloomberg reported Oct. 23.
U.S. District Judge Jed Rakoff also found Countrywide executive Rebecca Mairone liable for defrauding the government. She was the only individual named as a defendant in the case.
Rakoff said he would determine a liability award at a later date, although Assistant U.S. Attorney Pierre Armand asked for a penalty of as much $848 million, which represents gross losses to Fannie and Freddie. Net losses came in at $131 million.
Rakoff said he would rule on the penalty by Dec. 31, Bloomberg reported.
Bank of America said it might appeal Rakoff’s decision, and Mairone’s attorney said he definitely would file an appeal.
Before being bought out by Bank of America in 2008, Countrywide was the biggest U.S. residential home lender and originated $1.4 trillion in mortgages from 2005-07, most of them sold as mortgage-backed securities.
Manhattan U.S. Attorney Preet Bharara argued that Countrywide exercised very little quality control and did not adhere to underwriting standards in the origination of the loans. “In a rush to feed at the trough of easy mortgage money on the eve of the financial crisis, Bank of America purchased Countrywide, thinking it had gobbled up a cash cow,” Bharara said in a statement, Bloomberg reported. “That profit, however, was built on fraud, as the jury unanimously found.”
Prosecutors focused on a division of Countrywide that allegedly initiated a program in 2007 known as the “High Speed Swim Lane, which fast-forwarded mortgage processing.
Countrywide earned at least $165 million using the HSSL program, Bloomberg reported. Under the program, Countrywide processed loans in as little as 10 days; loan processing previously averaged 60 days.
The case presided over by Rakoff originally was brought by whistleblower Edward O’Donnell, a former Countrywide executive. The U.S. government joined the case in 2012. As a whistleblower, O’Donnell could collect as much as $1.6 million of any monetary damages awarded to the government.
The U.S. government brought the case against Bank of America under the Financial Institution Reform, Recovery and Enforcement Act of 1989. The act has been used half a dozen times to claim about $500 million in mortgage fraud recoveries, Bloomberg reported.
Fannie Mae and Freddie Mac announced Oct. 24 that they would not reduce loan limits and will continue to fund higher-priced mortgages for the time being, CNBC reported.
President Obama had asked the Federal Housing Finance Agency, which oversees Fannie and Freddie, to lower the loan limits by year’s end. However, Edward DeMarco, FHFA’s acting director, said it was too soon to do so.
“We are not making a change there in the immediate term,” DeMarco told reporters, CNBC reported. “I recognize and understand that the industry is very busy right now making implementation of other regulations that take effect the first of next year, and that's enough.”
The other regulations that DeMarco referenced include those from the Consumer Financial Protection Bureau related to “ability to repay” requirements for the new qualified mortgage rule, which will go into effect Jan. 1.
While the White House has been advocating for lowering loan limits to draw private capital back into the mortgage markets, the FHFA thinks it’s premature to make major moves. In 2008, government-backed mortgage limits jumped from a high of $417,000 to as much as $729,750 in high-priced markets. In 2011 the max was reduced to $625,500 — the level at which it remains.
Housing industry advocates have lobbied against lowering loan guarantee limits, fearful such a move could slow the housing recovery by reducing consumer access to mortgages, CNBC reported.
DeMarco has not ruled out a potential drop in loan limits later in 2014, and he also noted that Fannie’s and Freddie’s guarantee fees will continue to rise, part of the overall strategy to increase borrowing costs for government-backed loans and to encourage private investment in the market.
Five federal bank regulators issued a joint statement Oct. 22 stating that the new and stricter qualified mortgage standards that take effect in January would not lead to government claims of discrimination so long as banks follow federally mandated standards regarding loans to minorities, The Wall Street Journal reported.
Banks had asked for clarity on the effect of the disparate impact doctrine of the Equal Credit Opportunity Act on the requirement to only originate qualified mortgages.
Richard Cordray, director of the Consumer Financial Protection Bureau, said that in issuing the joint statement the agencies are trying to provide certainty to the housing market. Others agencies involved in the statement include the Federal Reserve, Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the National Credit Union Administration.
The U.S. Department of Housing and Urban Development refrained from signing onto the statement and so banks remain somewhat vulnerable to investigations by that agency, the Journal reported.
“The absence of HUD is noticeable,” David Stevens, chief executive of the Mortgage Bankers Association, told the Journal. “This is exactly why we’ve continued to call for better policy coordination in these rule makings among all the regulators.”
HUD is responsible for enforcing the Fair Housing Act and uses statistical analysis to determine if lenders have engaged in activities that have a disproportionate negative impact on minorities.
The new qualified mortgage standards initiated by the CFPB will go into effect in 2014 as part of a mandate from the Dodd-Frank Act. Loans that meet QM standards will enjoy protection from borrower-initiated lawsuits, the Journal reported.
Read the joint statement.
Federal Reserve officials on Oct. 24 unveiled a Basel III proposal that would require banks to hold enough liquid assets to meet cash needs for 30 days and would require U.S. banks to meet the new standard two years before foreign banks would be required to comply, Reuters reported.
The Fed unanimously voted on the proposal.
“Since financial crises usually begin with a liquidity squeeze that further weakens the capital position of vulnerable firms, it is essential that we adopt liquidity regulations,” Fed Gov. Daniel Tarullo said at a meeting Oct. 24, Reuters reported.
According to regulators, the rules would offer assurance that banks would have on hand sufficient government debt and other easy-to-sell assets to manage customer withdrawals, post collateral and meet any other needs.
Banks with more than $250 billion in assets would be required to meet the full obligation, while mid-sized banks would be subject to less stringent requirements; banks with less than $50 billion would be exempt.
The Fed estimated a deficit of approximately $200 billion in liquid assets across all institutions as a result of the rule, which banks would have until 2017 to address. Internationally, banks would have until 2019 to fully comply with Basel due to concerns that a faster transition could slow down economic growth. Officials say the shorter timeframe in the U.S. was agreed upon because many U.S. banks appear close to complying.
“It's clear that the other guys won't have to have that money squirreled away for several more years after our guys,” Bill Sweet, a partner with the law firm Skadden, Arps, Slate, Meagher & Flom, told Reuters.
Under the Basel rule, banks would be required to calculate their expected obligations and hold enough liquid assets to cover net cash expenditures at the end of a 30-day period and must calculate liquidity ratios based on the particular day when cash outflows are the highest.
Oliver Ireland, a partner at the law firm Morrison Foerster and a former Fed official, said the liquidity plan could mean that U.S. banks need more liquid assets than they would under the international rule, and he expects banks to push back on the new rule.
“Essentially, what they've done is they've created a higher ratio,” Ireland told Reuters. “You could have real volatility in liquidity during a period because of just cash flow issues generally, how they shape up and so this could be a very big deal.”
Banks will have 90 days to submit comments, and then regulators will decide whether or not to finalize the plan. The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency are expected to propose similar rules.
Under the Fed’s proposal, government debt and excess reserves are considered the most liquid, but claims on the government-sponsored enterprises would be deemed less liquid and could make up as little as 40 percent of the buffer. Covered bonds, private-label mortgage securities and municipal debt would not count toward the liquidity buffer.
Although regulators already monitor banks’ liquid assets, the Fed proposes U.S. banks conduct liquidity stress tests. International regulators also are working on a longer-term liquidity standard — the so-called net stable funding ratio, which will also be implemented in the U.S.
“While this is an important step forward, there's still more work to do,” Janet Yellen, vice chairman of the Federal Reserve, said at a meeting Oct. 24, Reuters reported. “There certainly remains a need to address the financial stability risks associated with short-term wholesale funding transactions.”
Read the proposal and find information on how to comment on it.
JPMorgan Chase agreed to pay $5.1 billion to resolve outstanding allegations that it sold bad mortgages to Fannie Mae and Freddie Mac, HousingWire reported Oct. 25.
The payout is the result of two separate agreements with the government-sponsored enterprises.
JPMorgan Chase agreed to pay $2.54 billion to Freddie to resolve claims over securities sold by it and its affiliates, Bear Stearns and Washington Mutual. The bank also will pay $1.26 billion to Fannie to resolve legacy mortgage issues, HousingWire reported.
JPMorgan also will pay $1.1 billion to resolve putback claims from the two GSEs, and agreed to pay Fannie $670 million in the fourth quarter in a deal that would release it from all repurchase liability on loans sold between 2000 and 2008. The bank also will pay $480 million to Freddie to resolve claims of violations of representations and warranties.
“This agreement appropriately resolves our repurchase claims, compensates taxpayers for losses fairly and allows Fannie Mae and JPMorgan Chase to move forward as strong business partners,” Timothy J. Mayopoulos, president and chief executive officer of Fannie Mae, said in a news release, HousingWire reported.
JPMorgan also reportedly has reached a $13 billion agreement with the U.S. Department of Justice to resolve the government’s investigations into bad loans it sold through mortgage-backed securities before the financial crisis. The tentative deal does not, however, release the bank from criminal liability.
In early October, JPMorgan noted that it has put $23 billion aside in reserves to cover settlement costs and other legal expenses. Many of the bank’s legal issues stem from its 2008 purchases of Bear Stearns and Washington Mutual.
The U.S. Department of Justice is investigating nine banks for their sales of mortgage-backed securities, CNBC reported Oct. 24.
The investigations, which are part of an effort by the task force that reached a tentative $13 billion settlement with JPMorgan Chase, are occurring in U.S. attorneys’ offices from coast to coast and include probes into Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, Royal Bank of Scotland, UBS and Wells Fargo.
The probes mainly involve allegations that the banks misled purchasers of residential mortgage-backed securities. The probes have not yet resulted in lawsuits, but there have been substantial document requests from the U.S. government.
The investigations are being spearheaded by a joint state and federal RMBS task force formed in January 2012 following finalization of the $26 billion national settlement with the nation’s five biggest banks over faulty foreclosure practices.
Bank of America is under investigation by the U.S. attorneys’ offices in California, Georgia and New Jersey. The U.S. attorney’s office in North Carolina previously sued BofA, though the bank has denied wrongdoing.
Meanwhile Morgan Stanley is under civil investigation by the Northern District of California, and the Royal Bank of Scotland faces investigations by the U.S. attorney’s office in Massachusetts. Colorado and New Jersey are probing Credit Suisse, while New York and Colorado investigators are pursuing probes into Citigroup. UBS, Deutsche Bank and Wells Fargo also are under investigation.
The U.S. office market is expected to see increased leasing activity and expansion in 2014, according to commercial real estate services firm Jones Lang LaSalle Chicago’s Third Quarter Office Outlook Report, MBA NewsLink reported Oct. 24.
The report also noted that office rents are expected to rise at a faster, more sustainable rate across the country.
“There is resurging strength in the U.S. office market, buoyed by improving fundamentals and a pick-up in expansion activity across diversified industries and geography,” John Sikaitis, director of office research for the Americas with Jones Lang LaSalle, told MBA NewsLink.
Sikaitis said that reasons for office sector optimism include increasing rents and decreasing concessions, even in secondary and tertiary markets. The third quarter’s 1.4 percent rent growth rate is the highest quarterly increase of the recovery and annualizes at a 5.6 percent rate of return. Office absorption also is continuing, with 14 consecutive quarters of occupancy growth.
U.S. office construction now is greater than the 50-million-square-foot threshold for the first time in six years. Sikaitis told MBA NewsLink, “In prior quarters, expansion activity was focused in tech and energy-centric markets. This quarter, more than 87 percent of markets have posted positive absorption through October.”
Kevin Thorpe, chief economist with commercial real estate services firm Cassidy Turley, agreed with JLL’s findings, telling MBA NewsLink that the U.S. office sector will reach equilibrium in mid-2014 assuming current absorption rates going forward. “In half of the country — mostly in energy and tech-centric markets — the pendulum has already shifted from a rent-declining tenant’s market to a rent-rising landlord’s one. By the second half of next year, the majority of the country’s office markets will see rents pushing upwards.”
Sikaitis said that JLL anticipates office sector increases to continue in 2014 “as more than half of the markets reported stronger tour activity this quarter. The markets that were particularly strong movers are those that have lagged the domestic recovery for more than two years: Atlanta, Chicago and Florida,” he told MBA NewsLink.
Sikaitis said that he expects the market to sustain its recovery, but cautioned “keep an eye on external economic influences — particularly on the U.S. political front — as potential thwarts to the current momentum,” MBA NewsLink reported.
Other major findings from the JLL Outlook:
• Sales activity went up across the country compared to the second quarter, with significant foreign interest in New York, Washington, D.C., Chicago and Los Angeles.• Houston realized an increase in sales activity.• Four big sales in Los Angeles reflected the slow-but-steady capital markets recovery.• Phoenix had a number of sizeable leases, including a 2-million-square-foot commitment in a new development, and a 135,000-square-foot deal by a financial services company.
Private-equity firm Blackstone Group, which has spent $20 billion acquiring some 200,000 single-family homes that it turned into rentals, is preparing to sell lease payment-backed bonds, Bloomberg reported Oct. 23.
The firm controls the nation’s largest single-family rental business, and the bond market promises to bring additional funding for property purchases and a chance to increase returns.
Deutsche Bank, along with JPMorgan Chase and Credit Suisse Group, is poised to start marketing some $500 million of these securities, which have acquired the highest investment grade from at least one ratings firm, according to a source who spoke to Bloomberg on the condition of anonymity because the deal has not been finalized.
“Securitization is the next step in the evolution of the single-family rental business,” Rob Bloemker, chief executive officer of investment firm Five Ten Capital, told Bloomberg.
Blackstone currently is the largest single-family home rental business and has reportedly been spending around $100 million a week on residences in Arizona, California, Florida and Nevada since the start of 2013. While home values have increased 12.4 percent from a year ago, investment firms continue to buy because real estate values remain 21 percent below their 2006 peak levels.
The nation’s homeownership rate declined to 65 percent in the first half of 2013 following a peak of 69.2 percent in June 2004. A Morgan Stanley analyst said he expects the rate to level off at 63 percent, adding two million new households to the rental market, Bloomberg reported.
The draw for Blackstone’s bonds should be a low-risk investment opportunity for buyers seeking higher yields than those provided by government-backed mortgage bonds. “Having these bonds come out into the public capital markets could buoy the industry for more financing options going forward and potentially for lower cost of capital for operators,” Dennis Cisterna, co-head of the opportunistic-finance division at real estate advisory firm Johnson Capital, told Bloomberg.
Bryan Whalen, managing director of the U.S. fixed-income group at investment management firm TCW Group, told Bloomberg that financing this new asset class through securitization is “untested,” and added that it requires more income because of operational, property management and liquidity risks.
As servicers prepare themselves for the Consumer Financial Protection Bureau’s new mortgage servicing requirements, a new report suggests that many are unaware of the Equal Credit Opportunity Act Valuation Rule, which amends Regulation B, Mortgage Daily reported Oct. 21.
According to a report written by Nanci L. Weissgold, a partner at the law firm K&L Gates, and her associate Kerri M. Smith, some servicers might incorrectly assume that the ECOA rule only applies to loan originations.
“But the scope is not so limited,” the report states, Mortgage Daily reported. “The bureau has stated in its Small Business Compliance Guide that the rule applies to ‘loss-mitigation transactions, such as loan modifications, short sales and deed-in-lieu transactions, if they are credit transactions covered by Regulation B.’ The CFPB also affirms in the preamble to its ECOA Valuation Rule that ‘some loan modifications can be subject to provisions of Regulation B’.”
The CFPB essentially has tasked servicers with deciding whether an application for an extension of credit triggers the Regulation B requirements. But it’s different from the analysis that servicers use to determine whether an adverse action notice is required for certain loss mitigation denials.
According to K&L, “adverse action” in Regulation B does not include actions on delinquent loans and there is no comparable exception in the determination of what defines an “application” for an extension of credit under Regulation B.
“Since the CFPB signaled that at least ‘some loan modifications’ can be subject to the ECOA Valuation Rule, servicers will need to brush up on these valuation-related requirements effective for applications received on or after Jan. 18, 2014,” the attorneys wrote, Mortgage Daily reported.
Read K&L’s report on the ECOA Valuation Rule.
Property values increased in September after a nominal slowdown in housing price growth over the summer, according to the Property Intelligence Report from real estate analytics firm DataQuick, National Mortgage News reported Oct. 23.
Home prices increased in all 42 counties included in the PIR over the most recent quarter, month and year. However, DataQuick warned that the appreciation over the past 12 to 18 months is higher than the long-term average and is occurring at an unsustainable pace.
DataQuick reported that for the past year, property value increases ranged from 4 percent in Suffolk County, N.Y., to 31 percent in Sacramento, Calif., with a national average of 16 percent, National Mortgage News reported.
Additional cities with significant home price increases included Las Vegas at 31 percent, Oakland, Calif., at 27 percent, Portland, Ore., at 22 percent and Detroit and Phoenix both at 21 percent.
Gordon Crawford, vice president of analytics for DataQuick, told National Mortgage News that moderate economic fundamentals supported long-term home price growth rates of 3 to 4 percent, respectively, in the past. He added that the rapid increase in home prices since last year should have some immediate implications on various areas of the housing market.
According to the PIR, homes listed for sale on the open market will go up as homeowners move from a negative equity situation to a positive position. Also, borrowers who no longer are underwater can sell their properties without having to bring cash to close.
The report further indicated that future foreclosures from currently delinquent loans will decrease as homeowners avoid defaulting on their loan because they have regained equity and should be able to sell their property. Foreclosures in September were down in 24 of the 42 reported counties analyzed by the PIR on a monthly and yearly basis, National Mortgage News reported.
Home price increases also are likely to result in continued single-family rental demand driven by decreases in home affordability, sustained risk of home price corrections and tight mortgage credit standards and more purchases by investors driven by ongoing rental demand, the report noted.
However, Crawford cautioned that current home price growth rates cannot continue without further risk of a significant correction.
“This rate of growth is spreading at an unsustainable pace as it is not supported by the underlying economic fundamentals,” Crawford said, National Mortgage News reported. “While generally positive, current economic drivers are weaker than those experienced in most previous expansions, leading to considerable uncertainty about future economic prospects.”
Homes near cemeteries sell on average for more per square foot than those farther away, Redfin reported Oct. 21.
Redfin analyzed the sale prices of homes 50 feet (or closer) from a cemetery compared to those 100, 200, 500 and 1,000 yards away from one. Although slightly smaller on average, homes near cemeteries sell for $162 per square foot while those more than 500 yards away sold for $145 per square foot.
However, the data also showed that homes near cemeteries take longer to sell on average. Homes less than 50 feet away from a cemetery took an average of 48 days to sell while those more than 500 yards away took an average of 39 days to sell.
Redfin also evaluated 90 metropolitan areas to determine which cities had the most homes for sale near cemeteries and found that some of the country’s oldest cities topped the list.
1. Baltimore had 172 homes for sale near cemeteries with a median list price of $101,950.2. Philadelphia had 157 homes for sale near cemeteries with a median list price of $134,900.3. Chicago had 115 homes for sale near cemeteries with a median list price of $229,900.4. Boston had 50 homes for sale near cemeteries with a median list price of $711,809.5. Atlanta had 41 homes for sale near cemeteries with a median list price of $229,900.
This study looked at 90 U.S. Census Metro and Micro Areas, including nearly 600 cities and towns with at least 100 homes near a cemetery. The study included single-family homes, condominiums and townhomes that sold in the MLS from January 2012 through September 2013, as well as current active listings as of Oct. 15, 2013.
Fixed mortgage rates this past week hit their lowest levels since the summer, Freddie Mac reported Oct. 24 in its weekly Primary Mortgage Market Survey.
The 30-year fixed-rate dropped 0.15 percent to 4.13 percent (up from 3.41 percent a year ago). The 15-year fixed-rate fell 0.09 points to 3.24 percent (up from 2.72 percent a year ago).
The one-year adjustable-rate mortgage decreased 0.03 percent to 2.60 percent (down from 2.59 percent a year ago). The five-year Treasury-indexed moved down 0.07 percent to 3 percent (up from 2.75 percent a year ago).
“Mortgage rates slid this week as the partial government shutdown led to market speculation that the Federal Reserve will not alter its bond purchases this year,” Frank Nothaft, Freddie Mac vice president and chief economist, said in a news release. “The weak employment report for September added to this expectation. The economy added just 148,000 jobs, which was below the market consensus forecast and less than the 193,000 jobs increase in August.”
View Freddie Mac’s weekly Primary Mortgage Market Survey.