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A ‘Flawed’ SEC Program [A Retrospective “April Fool’s Day” Analysis]

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SEC Failed to Rein in Investment Banks [April Fool’s Day – 2015]

By Ben Protess, ProPublica – October 1, 2008 5:01 pm EDT

Editor’s Note: This investigative report was first published ten years ago. And so, we ask you to consider – on this April Fool’s Day 2019 – how [if] things have changed since then?  

***

Flag MOney

***

The Securities and Exchange Commission [SEC] last week abolished the special regulatory program that it applied to Wall Street’s largest investment banks. Known as the “consolidated supervised entities” program, it relaxed the minimum capital requirements for firms that submitted to the commission’s oversight, and thus, in the view of some experts, helped create the current global financial crisis.

But, the SEC’s decision to ax the program currently affects no one, since three of the five firms that voluntarily joined the program previously collapsed and the other two reorganized.

The Decision – 18 Months Ago

The decision came last Friday, one day after the commission’s inspector general released a report [1] (PDF) detailing the program’s failed oversight of Bear Stearns before the firm collapsed in March. The commission’s chairman, Christopher Cox, a longtime opponent of industry regulation, said in a statement [2] that the report “validates and echoes the concerns” he had about the program, which had been voluntary for the five Wall Street titans since 2004.

The report found that the SEC division that oversees trading and markets was “not fulfilling its obligations. “These reports are another indictment of failed leadership,” said Sen. Charles Grassley (R-Iowa) who requested the inspector general’s investigation.

The SEC program, approved by the commission in 2004 under Cox’s predecessor, William Donaldson, allowed investment banks to increase their amount of leveraged debt. But, there was a tradeoff: Banks that participated allowed their broker-dealer operations and holding companies to be subject to SEC oversight. Previous to 2004, the SEC only had authority to oversee the banks’ broker dealers.

Longstanding SEC rules required the broker dealers to limit their debt-to-net-capital ratio and issue an early warning if they began to approach the limit. The limit was about 15-to-1, according to the inspector general report, meaning that for every $15 of debt, the banks were required to have $1 of equity.

But the 2004 “consolidated supervised entities” program revoked these limits. The new program also eliminated the requirement that firms keep a certain amount of capital as a cushion in case an asset defaults.

Bear Sterns

As a result, the oversight program created the conditions that helped cause the collapse of Bear Stearns. Bear had a gross debt ratio of about 33-to-1 prior to its demise, the inspector general found. The inspector general also found that Bear was fully compliant with the programs’ requirements when it collapsed, which raised “serious questions about whether the capital requirement amounts were adequate,” the report said.

The report quoted Lee Pickard, a former SEC official who helped write the original debt-limit requirements in 1975 and now argues the 2004 program is largely to blame for the current Wall Street crisis.

“The SEC gave up the very protections that caused these firms to go under,” Pickard said in an interview with ProPublica. “The SEC in 2004 thought it gained something in oversight, but in turn it gave up too much public protection. You don’t bargain in a way that causes you to give up serious protections.”

Pickard, now a senior partner at a Washington, D.C.-based law firm, estimated that prior to the 2004 program most firms never exceeded an 8-to-1 debt-to-net capital ratio.

The previous program “had an excellent track record in preserving the securities markets’ financial integrity and protecting customer assets,” Pickard wrote [3] in American Banker this August. The new program required “substantial SEC resources for complex oversight, which apparently are not always available.”

Asked if he believes the 2004 program was a direct cause of the current crisis, Pickard told ProPublica, “I’m afraid I do.”

The New York Times reported Saturday that the SEC created the program after “heavy lobbying” for the plan from the investment banks. The banks favored the SEC as their regulator, the Times reported, because that let them avoid regulation of their fast-growing European operations by the European Union, which has been threatening to impose its own rules since 2002.

SEC Spokesman

A SEC spokesman declined to comment for this article, referring inquires to Chairman Cox’s statement. In the statement, Cox admitted the program “was fundamentally flawed from the beginning.” But Cox, a former Republican congressman from California, offered mild support for the program as recently as July when he testified before the House Committee on Financial Services. The program, among other oversight efforts, Cox said, had “gone far to adapt the existing regulatory structure to today’s exigencies.” He added that legislative improvements were necessary as well, and has since told Congress that the program failed.

More Questions

So why did the commission not end the program sooner? Some say that the program’s flaws only recently became apparent. “As late as 2005, the program seemed to make a lot of sense,” said Charles Morris, a former banker who predicted the current financial crisis in his book written last year, The Trillion Dollar Meltdown [4]. The SEC “didn’t know it didn’t work until we had this stress.”

And leverage does not always spell trouble. In a strong economy, leverage can also be attractive because it can increase the profitability of banks through lending.

In his recent statement, Cox said the inspector general’s findings reflect a deeper problem: “the lack of specific legal authority for the SEC or any other agency to act as the regulator of these large investment bank holding companies.”

Secretary of the Treasury Henry Paulson has called for a refining of the regulatory structure to reflect the global and interconnected nature of today’s financial system. In any case, the program’s failure can be seen in the disappearance of the participating banks: Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs.

skeleton-jpeg1

***

Assessment

Merrill Lynch’s leverage ratio was possibly as high as 40-to-1 this year and Lehman Brothers faced a ratio of about 30-to-1, according to Bloomberg [5].

The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And the last two months, Lehman Brothers went bankrupt and sold their core U.S. business to British bank Barclays PLC, and Merrill Lynch was acquired by Bank of America. Morgan Stanley and Goldman Sachs, the two remaining large independent investment banks, changed their corporate structures to become bank holding companies, which are regulated by the Federal Reserve.

As these banks have folded or reorganized over the last several months, the Federal Reserve has largely assumed the SEC’s oversight responsibilities, though the commission will still have the power to regulate broker dealers.

Original Essay: http://www.propublica.org/article/flawed-sec-program-failed-to-rein-in-investment-banks-101

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Who Does a Stock Broker Work for – Really?

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And … What’s Up at the Bank of America?

[By Ann Miller RN MHA]

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According to E. Dilts, BoA is making it harder for brokers to take some of their clients with them when they leave Merrill Lynch-specifically, clients that were referred to the broker by a Bank of America branch.

Brokers in recent months have been asked to sign contracts saying that if they leave Merrill Lynch, they can’t take the names or phone numbers of those customers with them, because those clients belong to the bank.

Lawyers said this policy chips away at the decade-old truce among brokerages known as the Protocol for Broker Recruiting.

The agreement was meant to end the continual and costly legal battles between brokerages and their brokers over who had the right to keep clients, and allows departing brokers to take client information including names and phone numbers with them.

***

Stocker

Stock Broker versus Brokerage House

[Courtesy Pixabay]

***

Assessment

So, who does the broker [er-ah! financial advisor] really work for – the [physician] client or the brokerage house? And doesn’t this make your account just a portion of their “book of business?”

Talk about advice versus product sales?

Link: http://wealthmanagement.com/wirehouse/bank-america-chips-away-brokerage-industry-truce?NL=WM-27&Issue=WM-27_20150224_WM-27_400&sfvc4enews=42&cl=article_2&YM_RID=CPG09000002702210&YM_MID=2033

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Merrill Lynch Investigated for CDO Deal Involving Magnetar

Hedge Fund Probed

By Marian Wang

ProPublica, June 15, 2011, 3:10 pm

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The Securities and Exchange Commission is investigating whether Merrill Lynch short-changed investors and gave undue influence to the hedge fund Magnetar in the creation of a $1.5-billion mortgage-backed security deal.

The investigation, which was first reported [1] by the Financial Times ($), appears to be the agency’s first probe of Merrill Lynch’s CDO business since the financial crisis. (Check our bank investigations cheat sheet [2] for which other firms are being probed.) Here’s the FT:

The investigation is one of several SEC probes into banks that helped underwrite billions of dollars of collateralised debt obligations, securities comprised of mortgages or derivatives linked to them.

It also marks a broadening of the SEC’s investigation into the role of collateral managers, institutions that help select the assets included in CDOs.

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The deal that the SEC is investigating—a collateralized debt obligation, or CDO, called Norma—was detailed both in our reporting last year [3] and in a report [4] by the Financial Crisis Inquiry Commission released in January. Norma was one of more than two dozen CDO deals [5] done by Magnetar, whose bets against a number of CDOs earned it billions in the waning days of the housing boom.

As the FCIC detailed, Magnetar helped select the assets that went into Norma even though it had a $600 million bet that would pay off substantially if the CDO failed. As we reported [6], Magnetar often invested in the portion of the CDO that was riskiest and hardest for the banks to sell. Banks typically gave such investors—equity investors—more say in how the deal was structured. (Magnetar isn’t named as a target of the investigation and had no responsibility to investors. It has also maintained that it did not have a strategy to bet against the housing market.)

In the offering documents for Norma, there’s no mention of Magnetar’s role in asset selection, according to the FCIC. Investors were told that an independent collateral manager, NIR Capital Management, would be selecting the assets with their best interest in mind. The report concluded: “NIR abdicated its asset selection duties… with Merrill’s knowledge.”

Bank of America

Bank of America, which took over Merrill Lynch in 2008, declined our request for comment. The firm’s general counsel told [4] the Financial Crisis Inquiry Commission that it was “common industry practice” for equity investors to have input during the asset selection process, though the collateral manager had final say.

NIR Capital Management

NIR Capital Management is also being investigated by the SEC, according to the FT. The firm did not immediately respond to our request for comment. (The Wall Street Journal did an impressively detailed story in 2007 on how NIR came to be manager [7] of the Norma deal.)

Magnetar declined our earlier requests for comment on Norma, but FT reports it has denied claims [1] that it selected the assets for Norma.

Assessment

As we reported, the SEC had launched a probe of Merrill’s CDO business 2007, but that investigation petered out without resulting in any charges.

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Mortgage Investors Join Outcry Against Banks

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Coordinated Strategies Emerging

[By Karen Weise ProPublica: Oct. 18, 2010, 1:18 p.m.]

Homeowners, and at times the government, have long complained that banks and other companies that service mortgages aren’t good at their job of collecting monthly payments, modifying loans and processing foreclosures. Now, a new cast of characters are piling on the criticism: the servicer’s own clients, the investors that actually own the mortgages.

The Servicers

Servicers handle the day-to-day of working with homeowners on behalf of the investors, who bought bundled mortgages from Wall Street. But investors are now threatening servicers with legal action. Just like homeowners, investors are frustrated by the poor job in modifying loans that servicers have been doing. They also say servicers are looking out for themselves, not investors’ interests as their contracts typically require.

For example, Investor Bill Frey, who runs the securities firm Greenwich Financial Services, says servicers view investors as “a Thanksgiving turkey to be carved up and shared among them-selves.” Investors can range from foreign governments and hedge funds to college endowments and pension funds. During the housing bubble, they gobbled up AAA-rated bonds created by pools of mortgages. Now that defaults and foreclosure are mounting, investors argue that flaws in how loans are serviced are costing them billions of dollars.

They say servicers have often dragged out foreclosures to rack up fees and refused to reduce second mortgages to make modifications sustainable. Investors often prefer modifications to foreclosures. But for modifications that won’t ultimately prevent a homeowner from defaulting, investors still prefer quick foreclosures so they can recoup their money and move on.

Of Terminal In-Decision

“Terminal indecision is not good,” says Frey. “If it can be fixed, fix it. If it can’t, nix it.”

Servicers have been slow [1] to modify mortgages—something we’ve written [1] about many times [2] — and when they do modify loans, homeowners are still saddled with other debt from second mortgages and home equity lines. Even after modifications under the government’s program, homeowners typically still must spend almost two-thirds of their income to pay off their mortgage and other loans, like credit cards or second mortgages.

Emerging Paperwork Scandal

The current mortgage paperwork scandal [3] adds more fuel [4] to the fire as major servicers have halted foreclosures because of potential paperwork irregularities around the country. Concerns are also growing that banks may not have properly transferred loans into the mortgage pools in the first place. “This deficient approach undermines the integrity and the operational framework of the housing finance and mortgage system as it exists today,” the Association of Mortgage Investors wrote [5] in a press release.

(For more on the growing scandal, check out our recent explanation of the main players involved.)

The Mortgage Bankers Association, which represents most major servicers, did not respond to ProPublica’s request for comment.

Legal Strategies

Investors from across the country have been coordinating legal strategies for over a year ago, with the effort ramping up in early spring, according to Frey. Since then, more and more investors have formed a loose consortium, gaining momentum “like a snowball going downhill,” he says. In the last month alone, the group added other investors that own an additional $100 billion in mortgage bonds.

They have not filed any suits yet, Frey says, because the group is first trying to grow even more. Also, since each investor group has different, nonmortgage business with the banks, some investors have conflicting interests in how to proceed, he says. The consortium now represents investors that own more than $600 billion in mortgage securities, which is around a third of the entire mortgage securitization market. The group includes 65 major mortgage investors; Bloomberg reported that large investment companies including Black Rock, PIMCO and Fortress are part of the effort, as are the quasi-governmental Fannie Mae and the Federal Home Loan Banks, which both own private securitized loans.

Coordinating investors is no easy task, since the mortgage bonds were sliced and diced to be sold off to investors around the world. To assert legal rights, investors must coordinate to prove that they collectively represent a certain percentage of each mortgage pool, or in some cases, a certain percentage of each slice of each mortgage pool. (The Wall Street Journal [6] and Bloomberg [7] both describe how Texas-based attorney Talcott Franklin is coordinating a clearinghouse to keep track of the various investments.)

Once investors have standing in each pool, they have the legal right to pressure servicers and trustees to improve or face litigation. The group says they have the legal authority to act in over 2,300 deals.

Investors say servicers must reduce or cancel second mortgages entirely before adjusting the primary loan, since that follows the legal pecking order of how loans should be paid off. But investors say servicers have are dragging their feet in reducing second mortgages to protect their own books, since the largest servicers — Bank of America, Citigroup, JPMorgan Chase and Wells Fargo — also own almost 60 percent of the $1 trillion second lien market.

Bank

Congressional Oversight Panel

A Congressional Oversight Panel concluded in April that there is “tension” between Treasury’s goal of supporting reductions to second mortgages and Treasury’s interest in ensuring that writing down second liens doesn’t severely weaken banks’ balance sheets. The panel wrote than when a servicer owns the second lien, the “inexorable conflict of interest” will more likely lead to modifications on the first loan, “as it benefits the bank at the expense of the mortgage-backed security investors.”

We’ve previously reported [8] that mortgages servicers frequently tell homeowners that investors are the roadblock to loan modifications, even though few mortgage deals actually restrict modifications.

Servicers are also supposed to act like watchdogs and report back to investors when they identify loans they suspect didn’t meet the lending standards promised when the bonds were initially sold to investors. If the banks did misrepresent the quality of the loans initially, the banks would have to buy back the invalid mortgages from the investors. But in many cases, the servicers are subsidiaries of the banks that sold the bonds, which investors say helps explain why servicers have been dragging their feet. Bloomberg noted [7] an analyst’s report that said mortgage repurchases could total over $179 billion.

Original Link: http://www.propublica.org/article/investors-join-outcry-against-mortgage-servicers

Assessment

According to an investor letter cited [6] in the Wall Street Journal, in some mortgage pools that have high default rates, the banks have not repurchased any loans when the servicers are subsidiaries of the banks that sold the bonds. Investors say this is all no small matter. Since the country’s mortgage market is heavily dependent on government support right now, they insist servicers make good on their contracts before start buying loans and supporting the mortgage market again.

Related Articles:

  1. http://www.propublica.org/article/mod-program-falling-short-of-govts-vague-goals
  2. http://www.propublica.org/article/loan-mod-profiles-runaround
  3. http://www.propublica.org/blog/item/biggest-banks-ensnared-as-foreclosure-paperwork-problem-broadens
  4. http://www.businessweek.com/news/2010-10-13/document-flaws-may-lead-investors-to-fight-mbs-deals.html
  5. http://www.propublica.org/documents/item/association-of-mortgage-investors-press-release-oct.-1-2010
  6. http://online.wsj.com/article/SB10001424052748704814204575508143329644732.html
  7. http://www.bloomberg.com/news/2010-09-23/mortgage-investors-target-banks-using-texas-lawyer-s-novel-clearing-house.html
  8. http://www.propublica.org/article/when-denying-loan-mods-loan-servicers-often-blame-investors-wrongly

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Texas Mortgage Firm Survives and Thrives Despite Repeat Sanctions

The Allied Home Mortgage Capital Caper

By Charles Ornstein and Tracy Weber, ProPublica July 2, 12:24 a.m.

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As his competitors imploded one by one, Jim Hodge, the folksy founder of Allied Home Mortgage Capital [1], touted his sprawling Houston firm as a survivor.

Not only was Allied still standing, Hodge told employees in a company newsletter in December, it was thriving. “The good news,” Hodge wrote, “is that even though we are all having to work harder, most branches are making lots of money.”

But an examination of Hodge’s mortgage company by ProPublica found that its prosperity has come at a price for dozens of customers who claim Allied brokers have put their homes at risk, lied to them or improperly siphoned money from their deals.

The firm has left behind a trail of alleged misconduct and piecemeal government sanctions spanning at least 18 states [2] and seven years. Yet Allied chugs along unimpeded, aided by access to the government-backed Federal Housing Administration [3] loan program.

Over the past year, the FBI and federal prosecutors have made mortgage fraud a priority, filing criminal charges across the country. Regulators, such as the U.S. Department of Housing and Urban Development [4], also say they are getting tough. But Allied’s [5] history shows how even repeat offenders can fall through gaps in the fragmented safety net meant to protect mortgage borrowers.

Now Consider

  • Allied has the highest serious delinquency rate [2] among the top 20 FHA loan originators from June 2008 through May.
  • Nine states have sanctioned the firm in the last 18 months for such violations as using unlicensed brokers and misleading a borrower.
  • Federal agencies have cited or settled with Allied or an affiliate at least six times since 2003 for overcharging clients, underpaying workers or other offenses.
  • At least five lenders have sued, claiming Allied tricked them into funding loans for unqualified buyers by falsifying documents and submitting grossly inflated appraisals, among other allegations.

“Everything is just a nightmare for me,” said Cheryl Stewart, who is suing Allied alleging that its Hammond, La., office misrepresented her income to qualify her for a loan, then deposited money from her closing into the branch manager’s bank account. Stewart said she is on the brink of losing her home as a result. Allied has successfully argued that the case should be moved out of state court and into arbitration.

Despite these repeated complaints, no single agency is investigating the sweep of the company’s actions and whether they represent a pattern or, as Hodge maintains, are to be expected for a company of Allied’s size. It bills itself as the nation’s biggest privately held mortgage broker-banker with some 200 branches.

William Black, an associate professor of economics and law at the University of Missouri-Kansas City, said Allied’s record exemplifies the failings of a regulatory system that has teeth but seldom bites.

“It’s a wonderful example of the overall crisis,” said Black, who has testified before Congress about financial fraud. “What would it take before somebody would take serious action?”

Federal housing officials would not discuss Allied’s performance or their own negative audits of the firm. But after a recent review, the FHA has recommended that the Mortgagee Review Board take action against Allied. The board can fine companies or revoke their access to the FHA market, which has caused firms to close.

Drs. Home

Secret Service Investigations

Separately, the Secret Service, which conducts criminal investigations for the Treasury Department and Federal Deposit Insurance Corp., confirmed that it is looking into allegations of fraud and wrongdoing at Allied’s now-shuttered branch in Hammond.

Although Allied is dwarfed by Wells Fargo, Bank of America, Quicken Loans and JPMorgan Chase, the nation’s largest mortgage firms, it remains a big player in FHA-insured loans.

In the last two years, Allied Home Mortgage Capital originated more FHA mortgages than all but 15 of the more than 10,000 firms that handled such loans. Since 2005, it has processed nearly 40,000 FHA loans worth nearly $5.85 billion, according to the FHA. Those loans now account for at least 70% of Allied’s business, Hodge said.

Allied differs from most other FHA players in that it is both a broker and a lender. It has an affiliated company with a nearly identical name that has been the lender on about 30% of its FHA loans in the last two years.

Since the collapse of the subprime market, the volume of FHA-insured loans has boomed, rising from about 5% of all home loans in 2007 to 20% in 2009. When these loans fail, an insurance fund supported by FHA borrowers picks up the tab.

Both as a broker and a lender, Allied’s rate of seriously delinquent loans is nearly 60% higher than the national average for the past two years. And the FHA paid out more than $500 million from 2005 to 2009 for claims on defaulted loans brokered by Allied, statistics show.

In an interview, Hodge said the delinquency rates reflect more on the lenders that funded the loans than on his brokers.

The $500 million in claims FHA paid out, he said, were covered in part by insurance premiums paid by Allied borrowers — who largely do not default. “They didn’t have a complete loss of a half a billion,” he said.

Hodge said the problems experienced at some of Allied’s branches should not tarnish his firm’s overall record. “If you look at the volume that we did or do,” he said, “it’s not significant.”

Broken Trust

Sal and Ashley DePaula said they had more reason than most people to trust their broker: The manager of Allied’s Hammond branch was a tenant in one of their rental houses.

Over the course of 2006 and 2007, Allied’s staff helped them sell that property to an acquaintance of the manager and refinance several others.

It wasn’t until months later, the DePaulas allege, that they realized they’d become pawns in a scam.

The buyer of the property the couple sold for $93,000, had actually paid $47,000 more than that, according to a lawsuit in state court by the couple and documents they provided. The cash ended up in the account of Shane Smith, the branch manager, a wire-transfer record shows.

Then, after a tornado hit one of the DePaulas’ refinanced rental homes in 2008, they learned they’d never been signed up for the insurance Allied said it had arranged — even though they’d paid for it every month. The couple said they expect to spend more than $36,000 on repairs.

“Had somebody robbed me and stole $50 out of my purse, they would be in jail,” said Ashley DePaula, who said she is “bitter” that no one has been punished.

Last year, the couple learned that Allied had put another borrower’s name on Sal DePaula’s retirement account statement and submitted it in a loan qualification packet.

That other borrower, Louisiana state criminal investigator Terry Apple, said he only realized he was part of an alleged scam when ProPublica showed him a copy of the statement.

“I’m now finding out that I’m just a small part of a very large puzzle,” Apple said.

At least four lawsuits, including one by the DePaulas, have been filed against Allied over the conduct of its Hammond branch. Other borrowers, some of whom are mentioned in legal filings, allege they, too, were defrauded but can’t afford to sue.

“You know how your body can be quivering?” said Franklin Morgan, 62, a disabled Vietnam veteran who faces losing his home. “That’s what my body’s been doing every day.”

In towering stacks of legal documents, attorneys allege that the Hammond office deceived their clients from 2005 through 2007 by misrepresenting loan terms, falsifying records, failing to pay off prior mortgages and diverting hundreds of thousands of dollars. A title lawyer who worked closely with the Allied branch also stands accused — and has been sued by Allied.

The alleged victims include friends and relatives of Allied staff and the birth mother of the assistant manager’s adopted daughter. That assistant manager’s past — including an arrest warrant for allegedly stealing $24,000 from a previous employer — has come to light.

The lawsuits are proceeding, but Ashley DePaula says Allied has offered a small settlement that has not been finalized.

In an interview, Hodge conceded that “serious fraud” had taken place at the branch, which closed in 2008. He also acknowledged personally hiring branch manager Smith even though Smith previously had lost a home to foreclosure and declared personal bankruptcy. Smith and his attorney could not be reached for comment.

Hodge said the Allied corporate office does not appear to be a target of any criminal probe.

“I don’t know all the details,” he said. “It’s a pretty bizarre situation.”

Row Homes

Customers’ Stories

Around the country, other Allied borrowers tell similar tales.

Pete Pauley, pictured with his wife Mary Ellen, sued Allied in W. Va. state court alleging that a broker misled him about a low-interest loan in 2004.

In Charleston, W.Va., businessman Pete Pauley sued Allied in state court alleging that a Weirton, W.Va., broker misled him into signing for a low-interest loan in 2004 whose rate began rapidly rising after one month.

As part of the loan approval process, the branch submitted a letter from a local accountant verifying Pauley’s ownership of his company. That accountant later testified he didn’t know Pauley or write the letter.

Pauley, who runs an oil and gas company, said the experience was humiliating. He and his wife, Mary Ellen, a nurse, learned of other complaints.

Four other couples alleged similar betrayals by another Weirton loan officer, the sister of Pauley’s broker.

Allied settled for $240,000, Pauley said. But Hodge said Allied did so only after the judge strongly encouraged it.

“We ended up buying that guy a house,” he said.

Allied also settled with the other four couples. In addition, it agreed to pay $12,000 in education and restitution costs after the West Virginia attorney general found it had misled borrowers about their loans.

Lenders, too, have felt aggrieved. AmericaHomeKey sold loans brokered by Allied to a secondary investor. After four borrowers failed to make even the first payments on their loans, the investor demanded the lender make good.

AmericaHomeKey then sued Allied in Harris County, Texas, alleging that it had misrepresented the self-employment status of three of the borrowers and failed to check out other basic facts.

“Clearly, these borrowers lacked the financial means and/or the intent to make the payments on these mortgage loans,” the lawsuit said.

Allied disputes the allegations and will defend itself “with vigor,” Hodge said.

In South Carolina, Charleston title attorney Elizabeth Stuckey Murphy testified in a deposition that she became so concerned about possible fraud at Allied’s Goose Creek branch that she complained to the FHA and law enforcement agencies in 2005.

The branch manager, Murphy claimed in a letter to authorities, had padded closing statements with invoices for contracting work by her husband that was never performed — nearly $30,000 in one case alone.

In a deposition two years later, Murphy was asked about her complaint to the FHA hotline. “To date,” she said, “I haven’t received any response.”

Frequent Troubles

Every year since 2003, Allied has landed in trouble somewhere.

It’s a streak that began with twin wallops from the U.S. Department of Housing and Urban Development totaling $420,000 in settlements — a significant sum for the agency. HUD oversees the FHA program, which insures mortgages for buyers who can’t afford big down payments.

In all, regulators and attorneys general in at least 18 states have acted against the firm or its brokers. Most of the matters have been settled without any admission of wrongdoing by Allied.

Washington state banned a former broker in Allied’s Spokane office after he was convicted of 10 felonies for stealing Allied clients’ money and laundering it. Arizona denied a broker’s license to a firm owned by Allied’s Tucson branch manager because she had previously been convicted of embezzling from a bank.

State regulators say they must limit their actions to what happens within their borders. Federal officials say they don’t generally look into state actions unless a mortgage company’s conduct may also violate federal rules.

Assessment

Although HUD and FHA have recently stepped up oversight of the mortgage industry, they have long had tools to police it. Using data collected on every loan, housing officials can statistically track whether mortgage firms are putting borrowers into FHA loans they can’t or don’t pay on. According to this data, Allied for several years has had a serious delinquency rate well above the national average. And, over the last two years at one Houston branch, some borrowers mustered only a few payments or none at all. The serious delinquency rate within one year of closing was 12%, compared with 4.2% nationwide.

Gary Lacefield, a former HUD investigator, said the numbers are an obvious red flag about Allied that regulators should have acted upon. “I see no reason,” he said, “why they shouldn’t have been hammered.”

Note: ProPublica director of research Lisa Schwartz contributed to this story. USA TODAY editors assisted in preparing it for publication.

http://www.propublica.org/article/texas-allied-home-mortgage-capital-thrives-despite-sanctions

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Beware Medical and Money Management ‘Groupthink’

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Helping Doctors Understand Peer Comparisons

By J. Wayne Firebaugh CPA, CFP® CMP™

By Dr. David E. Marcinko MBA, CMP™

Source: http://www.CertifiedMedicalPlanner.org

More than a few mutual, hedge and endowment fund managers have noted that they commonly compare their endowment and portfolio allocations to those of peer institutions and that as a result, allocations are often similar to the “average” as reported by one or more surveys/consulting firms.

One interviewed endowment fund manager expanded this thought by presciently noting that expecting materially different performance with substantially the same allocation is unreasonable. It is anecdotally interesting to wonder whether any “seminal” study “proving” the importance of asset allocation could have even had a substantially different conclusion. It seems likely that the pensions and funds surveyed in these types of studies have very similar allocations given the human tendency to measure one-self against peers and to use peers for guidance.

This is a truism in medicine as well as the financial services sector.

Understanding Peer Comparisons

Although peer comparisons can be useful in evaluating your portfolio, or your hospital or medical practice’s own processes, groupthink can be highly contagious and dangerous.

For historical example, in the first quarter of 2000, net flows into equity mutual funds were $140.4 billion as compared to net inflows of $187.7 billion for all of 1999. February’s equity fund inflows were a staggering $55.6 billion, the record for single month investments. For all of 1999, total net mutual fund investments were $169.8 billion[1] meaning that investors “rebalanced” out of asset classes such as bonds just in time for the market’s March 24, 2000 peak (as measured by the S&P 500).

Of course, physicians and investors are not immune to poor decision making in upward trending markets. In 2001, investors withdrew a then-record amount of $30 billion[2] in September, presumably in response to the September 11th terrorist attacks. These investors managed to skillfully “rebalance” their ways out of markets that declined approximately 11.5% during the first several trading sessions after the market reopened, only to reach September 10th levels again after only 19 trading days. In 2002, investors revealed their relentless pursuit of self-destruction when they withdrew a net $27.7 billion from equity funds[3] just before the S&P 500’s 29.9% 2003 growth.

Amateurs versus Professionals [is there such a thing?]

Although it is easy to dismiss the travails of mutual fund investors as representing only the performance of amateurs, it is important to remember that institutions are not automatically immune by virtue of being managed by investment professionals.

For example, in the 1960s and early 1970s, common wisdom stipulated that portfolios include the Nifty Fifty stocks that were viewed to be complete companies.  These stocks were considered “one-decision” stocks for which the only decision was how much to buy. Even institutions got caught up in purchasing such current corporate stalwarts as Joe Schlitz Brewing, Simplicity Patterns, and Louisiana Home & Exploration.  Collective market groupthink pushed these stocks to such prices that Price Earnings ratios routinely exceeded 50 [nothing in the internet age]. Subsequent disappointing performance of this strategy only revealed that common wisdom is often neither common nor wisdom.

The Bear Sterns Example

Recall that The New York Times reported on June 21, 2007, that Bear Stearns had managed to forestall the demise of the Bear Stearns High Grade Structured Credit Strategies and the related Enhanced Leveraged Fund.  The two funds held mortgage-backed debt securities of almost $2 billion many of which were in the sub-prime market.  To compound the problem, the funds borrowed much of the money used to purchase these securities.  The firms who had provided the loans to make these purchases represented some of the smartest names on Wall Street, including JP Morgan, Goldman Sachs, Bank of America, Merrill Lynch, and Deutsche Bank.[4]  Despite its efforts Bear Stearns had to inform investors less than a week later on June 27 that these two funds had collapsed. The subsequent fate of these firms, and the history of the past two years, need not be repeated to appreciate that the king surely had no clothes.

Assessment

What broader message lies in this post relative to such medical initiatives as P4P, various clinical quality improvement endeavors and benchmarks, hospital peer-review, PROs, Medicare compliance, etc?  

Conclusion

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References


[1]   2001 Fact Book, Investment Company Institute.

[2]   Id.

[3]   2003 Fact Book, Investment Company Institute.

[4]    Bajaj, Vikas and Creswell, Julie. “Bear Stearns Staves off Collapse of 2 Hedge Funds.” New York Times, June 21, 2007.

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

Disorganization at Banks

Causing Mistaken Foreclosures

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By Paul Kiel, ProPublica – May 4, 2010 9:20 pm EDT

Millions of people face losing their homes in the continuing foreclosure crisis, but homeowners often have more than the struggling economy and slumping house prices to worry about: Disorganization within the big banks that service mortgages has made a bad problem worse.

ProPublica is matching local journalists with homeowners having trouble getting loan mods.

Are you a homeowner with a story to tell?
Are you a reporter and want to cover it?

Sometimes the communication breakdown within the banks is so complete that it leads to premature or mistaken foreclosures. Some homeowners, with the help of an attorney or housing counselor, have eventually been able to reverse a foreclosure. Others have lost their homes.

“We believe in many cases people are losing their homes when they should not have,” said Kevin Stein, associate director of the California Reinvestment Coalition, which counts dozens of nonprofits that work with homeowners among its members.

In the worst breakdowns, banks — and other companies that service loans — actually work at cross-purposes, with one arm of the company foreclosing on the home while the other offers help. Servicers say such mistakes are rare and result from the high volume of defaults and foreclosures.

The problems happen even among servicers participating in the administration’s $75 billion foreclosure-prevention program [1]. Servicers operating under the year-old program are forbidden from auctioning someone’s home while a modification decision is pending. It happens anyway.

Consumer advocates say the lapses continue because they go unpunished. “We’ve had too much of the carrot, and we need a stick,” Stein says. The Treasury Department has yet to penalize a servicer for breaking the program’s rules. The program provides federal subsidies to encourage modifications.

Treasury officials overseeing the program say they’re aware of the problems and have moved to fix them. But some states are going further to protect homeowners, with recent rules that stop the foreclosure process if the homeowner requests a modification.

Many homeowners, seeing no other option, have gone to court to reclaim their homes. At least 50 homeowners have recently filed lawsuits alleging the servicer foreclosed with a loan mod request pending or even while they were on a payment plan.

Homeowners have long waits for help

In good times, banks and other servicers — Bank of America is the biggest, followed by Chase and Wells Fargo — were known mainly to homeowners simply as where they sent their monthly mortgage payments. But the companies have been deluged over the past couple of years by requests for help from millions of struggling homeowners.

Homeowners commonly wait six months for an answer on a loan mod application. The federal program for encouraging loan mods includes a three-month trial period, after which servicers are supposed to decide whether to make the modifications permanent. But some homeowners have waited as long as 10 months [2] for a final answer.

Communication breakdowns occur because of the way the servicers are structured. One division typically deals with modifications and another with foreclosures. Servicers also hire a local trustee or attorney to actually pursue foreclosure.

“Often they just simply don’t communicate with each other,” said Laurie Maggiano, the Treasury official in charge of setting policy for the modification program. Such problems were particularly bad last summer, in the first few months of the program, she said. “Basically, you have the right hand at the mortgage company not knowing what the left hand is doing,” said Mark Pearce, North Carolina’s deputy commissioner of banks. Communication glitches and mistakes are “systemic, more than anecdotal” among mortgage servicers, he said.

“We’ve had cases where we’ve informed the mortgage company that they’re about to foreclose on someone.” The experience for the homeowner, he said, can be “Kafkaesque.”

“We’re all human, and the servicers are overworked and trying their best,” said Vicki Vidal, of the Mortgage Bankers Association. She said foreclosure errors are rare, particularly if struggling homeowners are prompt in contacting their servicer.

The Human Face

Frances Gomez, of Tempe, Ariz., lived in her house for over 30 years. Three years ago, she refinanced it with Countrywide, now part of Bank of America, for nearly $300,000. The home’s value has declined dramatically, said Gomez, who put some of the money from the refinancing into her hair salon.

Last year, the recession forced her to close her shop. Gomez fell behind on her mortgage, and after striking out with a company that promised to work with Bank of America to get her a loan mod, she learned in December that her home was scheduled for foreclosure.

So Gomez applied herself. She twice succeeded in getting Bank of America to postpone the sale date and said she was assured it would not happen until her application was reviewed. Gomez had opened a smaller salon and understood there was a good chance she would qualify.

She was still waiting in March when a Realtor, representing the new owner of her home, showed up. Her house had sold at auction — for less than half of what Gomez owed. “They don’t give you an opportunity,” she said. “They just go and do it with no warning.”

It’s not supposed to work that way.

Federal Programs

Under the federal program, which requires servicers to follow a set of guidelines for modifications, servicers must give borrowers a written denial before foreclosing. When Gomez called Bank of America about the sale, she said she was told there was a mistake but nothing could be done. She did get a denial notice [3] — some three weeks after the house was sold and just days before she was evicted.

“I just want people to know what they’re doing,” Gomez, now living with family members, said.

After being contacted by ProPublica, Bank of America reviewed Gomez’s case. Bank spokesman Rick Simon acknowledged that Gomez might not have been told her house would be sold and that the bank made a mistake in denying Gomez, because it did not take into account the income from her new salon business. Simon said a Bank of America representative would seek to negotiate with the new owner of Gomez’s house to see if the sale could be unwound.

Simon said the bank regrets when such mistakes happen due to the “very high volume” of cases and that any errors in Gomez’s case were “inadvertent.”

Timeline: How Michael Hill Almost Lost His Home [4]

Even avoiding a mistaken sale can also be a stressful process.

One day in February, a man approached Ron Bermudez of Emeryville, Calif., in front of his house and told him his home would be sold in a few hours. This came as a shock to Bermudez; Bank of America had told him weeks prior that he’d been approved for a trial modification and the papers would soon arrive. He made a panicked phone call to an attorney, who was able to make sure there was no auction.

Last November, Michael Hill of Lexington, S.C., finally got the call he’d been waiting for. Congratulations, a rep from JPMorgan Chase told him, your trial mortgage modification is approved. Hill’s monthly payment, around $900, would be nearly halved.

Except there was a problem. Chase had foreclosed on Hill’s home a month earlier, and his family was just days away from eviction.

“I listened to her and then I just said, ‘Well, that sounds good,’” recalled Hill, who is married and has two children. “‘Tell me how we’re going to do this, seeing as how you sold the house.’” That, he found out, was news to Chase.

Hill was able to avoid eviction — for now. Chase reversed the sale by paying the man who’d bought the home an extra $19,500 on top of the $86,000 [5] he’d paid at the auction.

After the mistaken foreclosure, he began the trial modification last December. He made those payments, but two months after his trial period was supposed to end, Hill is still waiting for a final answer from Chase.

The miscommunications have continued. He received a letter in January saying that he’d been approved for a permanent modification, but he was then told he’d received it in error.

His family remains partially packed, ready to move should the modification not go through. “I’m on pins and needles every time someone’s knocking on the door or calling,” he said.

Christine Holevas, a Chase spokeswoman, said that Chase had “agreed with Hill’s request to rescind the foreclosure” and was “now reviewing his loan for permanent modification.” She said Chase services “more than 10 million mortgages — the vast majority without a hitch.”

HOPE Hotline

To contest a foreclosure under the federal program, Maggiano, the Treasury official, said a homeowner should call the HOPE Hotline, 888-995-HOPE, a Treasury Department-endorsed hotline staffed by housing counselors. Those counselors can escalate the case if the servicer still won’t correct the problem, she said.

That escalation process has saved “a number” of homeowners from being wrongfully booted out of their homes, Maggiano said. Hill, the South Carolina homeowner, is an example of someone helped by the HOPE Hotline.

Of course, the homeowner must know about the hotline to call it. Gomez, the Arizona homeowner who lost her home to foreclosure, said she’d never heard of it.

Many homeowner advocates say the government’s effort has been largely ineffective at resolving problems with servicers.

“I uniformly hear from attorneys and counseling advocates on the ground that the HOPE Hotline simply parrots back what the servicers have said,” said Alys Cohen, an attorney with the National Consumer Law Center. Cohen said she’d voiced her concerns with Treasury officials, who indicated they’d make improvements.

Bank

New rules to offer more protection

Under the current rules for the federal program, servicers have been barred from conducting a foreclosure sale if the homeowner requested a modification, but are allowed to push along the process, even set a sale date. That allows them to foreclose more quickly if they determine the homeowner doesn’t qualify for a modification.

As a result, a homeowner might get a modification offer one day and a foreclosure notice the next. As of March, servicers were pursuing foreclosure on 1.8 million residences, according to LPS Applied Analytics.

Maggiano, the Treasury official, said that’s been confusing for homeowners. Some “just got discouraged and gave up.”

New rules issued by the Treasury in March say the servicer must first give the homeowner a shot at a modification before beginning the process that leads to foreclosure.

They also require the servicer to adopt new policies to prevent mishaps. For instance, the servicer will be required to provide a written certification to its attorney or trustee that the homeowner does not qualify for the federal program before the house can be sold.

Maggiano said the changes resulted from visits to the servicers’ offices last December that allowed Treasury officials to “much better understand (their) inner workings.”

The rules, however, don’t take effect until June. Nor do they apply to hundreds of thousands of homeowners seeking a modification for whom the process leading to foreclosure has already begun. And Treasury has yet to set any penalties for servicers who don’t follow the rules.

Maggiano said Treasury’s new rule struck a balance to help homeowners who were responsive to servicer communications to stay out of foreclosure while not introducing unnecessary delays for servicers. Some borrowers don’t respond at all to offers of help from the servicers until they’re faced with foreclosure, she said.

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States Differ

Some states, such as North Carolina, have recently gone further to delay moving toward foreclosure if a homeowner requests a modification. State regulators there passed a law that requires a servicer to halt the process if a homeowner requests a modification.

Pearce, the North Carolina official, said the rule was prompted by the delays homeowners have been facing and puts the burden on the servicers to expeditiously review the request. “They’re in total control.”

Stopping the process not only removes the possibility of a sudden foreclosure, he said, but also stops the accumulation of fees, which build up and can add thousands to the homeowner’s debt as the servicer moves toward foreclosure.

In California, state Sen. Mark Leno, a Democrat from San Francisco, is pushing a bill that would do something similar. The servicers “should be working a lot harder to keep homeowners in their home,” he said.

Assessment

Original article: http://www.propublica.org/feature/disorganization-at-banks-causing-mistaken-foreclosures-050410

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