Countrywide’s Mozilo charged with fraud

June 4, 2009

Thu Jun 4, 2009 7:41pm EDT

By Gina Keating and Rachelle Younglai

LOS ANGELES/WASHINGTON (Reuters) – Angelo Mozilo, who built the largest U.S. mortgage lender, was charged with securities fraud and insider trading on Thursday, making him the most prominent defendant so far in investigations into the U.S. subprime mortgage crisis and housing bust.

Mozilo, 70, co-founder of Countrywide Financial Corp (CFC), was accused by the U.S. Securities and Exchange Commission with making more than $139 million in profits in 2006 and 2007 from exercising 5.1 million stock options and selling the underlying shares.

The sales were under four prearranged stock trading plans Mozilo prepared during the time period, the SEC said.

The accusations were made in a civil lawsuit filed by the SEC in Los Angeles on Thursday.

The SEC said that in one instance, the day before he set up a stock trading plan on September 25, 2006, Mozilo sent an email to two Countrywide executives that said: “We are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.”

Those executives, then Countrywide President David Sambol, 49, and Chief Financial Officer Eric Sieracki, 52, were charged by the SEC with knowingly writing “riskier and riskier” subprime loans that they had a limited ability to sell on the secondary mortgage market.

The SEC said that all three executives failed to tell investors how dependent Countrywide had become on its ability to sell subprime mortgages on the secondary market. All three were accused of hiding from investors the risks they took to win market share.

At one stage, Countrywide was writing almost 1 in 6 of American mortgages. The lawsuit said that by September 2006, Countrywide estimated that it had a 15.7 percent share of the market, up from 11.4 percent at the end of 2003.

“While Countrywide boasted to investors that its market share was increasing, company executives did not disclose that its market share increase came at the expense of prudent underwriting guidelines,” the lawsuit said

Bank of America Corp (BAC) bought Countrywide last July 1 for $2.5 billion, less than a tenth of what it had been worth in early 2007.

“TWO COMPANIES”, EARLY WARNING SIGNS

“This is a tale of two companies,” the SEC’s director of enforcement, Robert Khuzami, told reporters. “One that investors from the outside saw. It was allegedly characterized by prudent business practices and tightly controlled risk.”

“But the real Countrywide, which could only be seen from the inside, was one buckling under the weight of deteriorating mortgages, lax underwriting, and an increasingly suspect business model,” Khuzami said.

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Mortgage woes no longer just a “subprime thing”

March 5, 2009

Thursday March 5, 6:37 pm ET
By J.W. Elphinstone, AP Real Estate Writer

Delinquencies, foreclosures climb to almost 12 percent of US home loans in 4th quarter

NEW YORK (AP) — Foreclosures are spreading by epidemic proportions, expanding beyond a handful of problem states and now affecting almost 1 in every 8 American homeowners.

It’s an economic role-reversal: The economy, driven down by the collapse of the housing bubble, is causing the housing crisis to spread.

Figures released Thursday show that nearly 12 percent of all Americans with a mortgage — a record 5.4 million homeowners — were at least one month late or in foreclosure at the end of last year.

That’s up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007. In addition, the numbers now include many once-qualified borrowers who took out fixed-rate loans.

Data from the Mortgage Bankers Association also showed that a stunning 48 percent of homeowners who have subprime, adjustable-rate mortgages are behind on their payments or in foreclosure.

The reckless lending and borrowing practices in states like Florida, California and Nevada that were the epicenter of the problem are no longer driving up the nation’s delinquency rate.

Instead, foreclosures are being fueled by a spike in defaults in places such as Louisiana, New York, Georgia and Texas, where the economy is rapidly deteriorating and unemployment is climbing.

“It’s jobs. People are losing their jobs left and right,” said Houston real estate agent Michael Weaster.

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Maybe the meltdown wasn’t what you think

March 5, 2009

By Peter Brimelow, MarketWatch
Last update: 1:03 a.m. EST Feb. 23, 2009

NEW YORK (MarketWatch) — Everyone knows the crash of 2008 was caused by financial deregulation except Thomas E. Woods, who blames financial regulation, in the shape of the Federal Reserve.

Wood’s new book, “Meltdown: A Free Market Look At Why the Stock Market Collapsed, the Economy Tanked and Government Bailouts Will Make Things Worse” (Regnery), has just made it to the New York Times best-seller list without the benefit of any major reviews.

That’s par for the course for Woods, a fellow of the Auburn, Ala.-based Ludwig von Mises Institute, advocates of “Austrian economics,” a particularly embattled faction of free market economists — all of whom are pretty embattled, or out of fashion, right now.

The Austrian school argues that business cycles are driven by central banks keeping interest rates too low, expanding credit and encouraging uneconomic investments, creating an unsustainable boom, inevitably followed by a bust.

That’s what happened here, says Woods, most recently with the Fed’s multiple interest rate cuts to stave off the 2000-2002 slowdown.

Certainly debt levels had reached historic highs before the crash.

Woods argues the crash of 2008 was a perfect storm. Other elements included immense government pressure on mortgage lenders to loosen standards and make loans to questionably credit-worthy but politically favored demographic groups; and securitization, which spread the effects of bad mortgage lending around the world.

Recovery from even serious business cycle downturns can be swift, says Woods, citing the almost-forgotten 1920-1921 slump. But that’s because the federal government did not step in. It allowed excesses to correct themselves. In contrast, the federal government did step in after 1929, as Japan’s government did in a similar downturn after 1990. Result, according to Woods: the Great Depression in the U.S.; 18 years of stagnation in Japan.

If Woods is right, public policy is on exactly the wrong course right now in trying to sustain demand and asset prices, just as it was in the early years of the Depression. Ironically, this wrong course is bipartisan. Both Hebert Hoover and George W. Bush, Woods notes, were highly interventionist presidents just like their successors, contrary to myth.

Woods’ cheerful prediction: prolonged stagnation, eventual inflation and an even bigger collapse.

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How About a Stimulus for Financial Advice?

February 26, 2009

By ROBERT J. SHILLER
Published: January 17, 2009

In evaluating the causes of the financial crisis, don’t forget the countless fundamental mistakes made by millions of people who were caught up in the excitement of the real estate bubble, taking on debt they could ill afford.

Many errors in personal finance can be prevented. But first, people need to understand what they ought to do. The government’s various bailout plans need to take this into account — by starting a major program to subsidize personal financial advice for everyone.

A number of government agencies already have begun small-scale financial literacy programs. For example, the Treasury announced the creation of an Office of Financial Education in 2002, and President Bush started an Advisory Council on Financial Literacy a year ago. These initiatives are involved in outreach to schools with suggested curriculums, and online financial tips. But a much more ambitious effort is needed.

The government programs that are already under way are akin to distributing computer manuals. But when something goes wrong with a computer, most people need to talk to a real person who can zero in on the problem. They need an expert to guide them through the repair process, in a way that conveys patience and confidence that the problem can be solved. The same is certainly true for issues of personal finance.

The significance of this was clear at the annual meeting of the American Economic Association this month in San Francisco, where several new research papers showed the seriousness of consumer financial errors and the exploitation of them by sophisticated financial service providers.

A paper by Kris Gerardi of the Federal Reserve Bank of Atlanta, Lorenz Goette of the University of Geneva and Stephan Meier of Columbia University asked a battery of simple financial literacy questions of recent homebuyers. Many of the respondents could not correctly answer even simple questions, like this one: What will a $300 item cost after it goes on a “50 percent off” sale? (The answer is $150.) They found that people who scored poorly on the financial literacy test also tended to make serious investment mistakes, like borrowing too much, and failing to collect information and shop for a mortgage.

A paper by Liran Einav and Jonathan Levin, both of Stanford, reporting on work with William Adams of Citigroup, shows how sophisticated automobile lenders can be in their loan technology. They use complicated statistical models not only to approve people for credit, but also to fine-tune the down payment and even to suggest what kind of car individuals can buy. This suggests to me that many borrowers can’t match the expertise of lenders.

And another paper, by Paige Marta Skiba of Vanderbilt University and Jeremy Tobacman of the University of Pennsylvania, showed that payday loans — advanced to people who run out of cash before their next paycheck — exploit people’s overoptimism and typically succeed in charging annual rates of interest that may amount to more than 7,000 percent.

One wishes that all this financial cleverness could be focused a bit more on improving the customers’ welfare!

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Obama sets aside $75 billion to slow foreclosures

February 18, 2009

Program would seek to bring mortgage payments down to 31% of income

By Ronald D. Orol, MarketWatch
Last update: 2:38 p.m. EST Feb. 18, 2009

WASHINGTON (MarketWatch) — The White House unveiled a plan Wednesday to help 9 million “at risk” homeowners modify their mortgages, committing $75 billion of taxpayer money to back the initiative.

The plan contains two separate programs. One program is aimed at 4 million to 5 million homeowners struggling with loans owned or guaranteed by Fannie Mae (FNM) or Freddie Mac (FRE) to help them refinance their mortgages through the two institutions.

The Obama mortgage plan

Below is a list of key elements of the plan outlined Wednesday by President Obama that aims to aid as many as 9 million households in fending off foreclosures:

* Allows 4 million–5 million homeowners to refinance via government-sponsored mortgage giants Fannie Mae and Freddie Mac.
* Establishes $75 billion fund to reduce homeowners’ monthly payments.
* Develops uniform rules for loan modifications across the mortgage industry.
* Bolsters Fannie and Freddie by buying more of their shares.
* Allows Fannie and Freddie to hold $900 billion in mortgage-backed securities — a $50 billion increase.

A separate program would potentially help 3 million to 4 million additional homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate, and the government would provide subsidies to the lender.

“The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in subprime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments,” President Barack Obama said.

Homeowners that have Fannie Mae or Freddie Mac loans, who are having a difficult time refinancing and owe more than 80% of the value of their homes, would be eligible to refinance with this program. Even if homeowners with Fannie or Freddie loans have negative equity on their mortgages, they can qualify for this refinancing program. The program would only help homeowners occupying the property, not individuals who own property as investors.

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Low rates defuse ‘exploding’ ARMs

February 6, 2009

Thanks to low interest rates, resetting ARMs are no longer posing the dire threat to homeowners that many thought they would.

By Les Christie, CNNMoney.com staff writer
Last Updated: February 6, 2009: 4:28 PM ET

NEW YORK (CNNMoney.com) — A wave of resetting adjustable rate mortgages had been poised to add to the flood of foreclosures as their rates jumped.

Some 420,000 hybrid ARMs are scheduled to reset in 2009, according to the Treasury Department. A year or so ago, it seemed that many of these loans were going to see their interest rates reset to as high as 12% or more.

But then interest rates started falling, hitting lows they hadn’t seen in 37 years.

“Many people are actually seeing their adjustable rates fall,” said Barry Glassman, a financial adviser with Cassady & Company. “Some loans are resetting even lower than some fixed-rate loans.”

A ticking time bomb. Adjustable rate mortgages start out with a two or three year period of low introductory rates, sometimes called “teaser rates.” After that, the interest rates start to adjust according to a set schedule – sometimes as often as monthly or as little as once a year – until the mortgage is paid off.

For the most part, this was a recipe for disaster. Many homeowners took out ARMs because they couldn’t afford the monthly payments that came with a 30 year fixed-rate loan. They were counting on having the value of their homes appreciate and then refinancing. Instead, home prices have plunged a record 18.2% according to the S&P/Case-Shiller index.

But as the economy soured, interest rates dipped.

“We thought that the 8% interest loans would reset to about 12%,” said Alan White, a law professor at Valparaiso University who has studied the lending industry’s mortgage modification efforts, “but they only went to 9% or less.”

The adjustments are calculated by adding what’s called a margin, which is a number of percentage points agreed to when the mortgage is first issued, to an index.

The index that most hybrid ARMs are tied to is the London Interbank Offered Rate (Libor). So, homeowners whose loans are resetting will get new interest rates equal to their margins, which range from about three percentage points for the lowest risk borrowers to six percentage points for those who at higher risk, plus the current Libor rate.

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A short history of modern finance

October 16, 2008

Link by link
Oct 16th 2008
From The Economist print edition

The crash has been blamed on cheap money, Asian savings and greedy bankers. For many people, deregulation is the prime suspect.

THE autumn of 2008 marks the end of an era. After a generation of standing ever further back from the business of finance, governments have been forced to step in to rescue banking systems and the markets. In America, the bulwark of free enterprise, and in Britain, the pioneer of privatisation, financial firms have had to accept rescue and part-ownership by the state. As well as partial nationalisation, the price will doubtless be stricter regulation of the financial industry. To invert Karl Marx, investment bankers may have nothing to gain but their chains.

The idea that the markets have ever been completely unregulated is a myth: just ask any firm that has to deal with the Securities and Exchange Commission (SEC) in America or its British equivalent, the Financial Services Authority (FSA). And cheap money and Asian savings also played a starring role in the credit boom. But the intellectual tide of the past 30 years has unquestionably been in favour of the primacy of markets and against regulation. Why was that so?

Each step on the long deregulatory road seemed wise at the time and was usually the answer to some flaw in the system. The Anglo-Saxon economies may have led the way but continental Europe and Japan eventually followed (after a lot of grumbling) in their path.

It all began with floating currencies. In 1971 Richard Nixon sought to solve the mounting crisis of a large trade deficit and a costly war in Vietnam by suspending the dollar’s convertibility into gold. In effect, that put an end to the Bretton Woods system of fixed exchange rates which had been created at the end of the second world war. Under Bretton Woods, capital could not flow freely from one country to another because of exchange controls. As one example, Britons heading abroad on their annual holidays in the late 1960s could take just £50 (then $120) with them. Investing abroad was expensive, so pension funds kept their money at home.

Once currencies could float, the world changed. Companies with costs in one currency and revenues in another needed to hedge exchange-rate risk. In 1972 a former lawyer named Leo Melamed was clever enough to see a business in this and launched currency futures on the Chicago Mercantile Exchange. Futures in commodities had existed for more than a century, enabling farmers to insure themselves against lower crop prices. But Mr Melamed saw that financial futures would one day be far larger than the commodities market. Today’s complex derivatives are direct descendants of those early currency trades.

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