Rating agencies win dismissal of Ohio funds lawsuit

CINCINNATI, Mon Dec 3, 2012 — The three major credit rating agencies won a fresh court victory as a federal appeals court rejected claims by five Ohio pension funds alleging that they lost hundreds of millions of dollars on risky mortgage debt because they relied on flawed ratings.

The 6th U.S. Circuit Court of Appeals in Cincinnati upheld the September 2011 dismissal of the lawsuit against Moody’s Corp’s Moody’s Investors Service, McGraw-Hill Co.s’ Standard & Poor’s, and Fimalac SA’s Fitch Ratings.

Pension funds led by the Ohio Police & Fire Pension Fund had claimed to have lost $457 million by having made 308 investments in mortgage debt between Jan. 1, 2005, and July 8, 2008, and relying on ratings they called “unfounded and unjustified.”

Wells Fargo third-quarter net up on strong mortgage lending

SAN FRANCISCO, Fri Oct 12, 2012 – Wells Fargo & Co. on Friday reported a 22 percent increase in third-quarter profit on a surge in mortgage lending.

The fourth biggest U.S. bank said net income totaled $4.9 billion, or 88 cents a share, in the quarter, up from $4.1 billion, or 72 cents a share, in the same period a year earlier. The bank’s latest EPS topped the analysts’ consensus estimate of 87 cents, according to Thomson Reuters I/B/E/S.

Wells Fargo, the largest U.S. home lender, posted mortgage banking revenue of $2.8 billion, up more than 50 percent from a year ago. The bank made $139 billion in mortgages versus $89 billion a year ago, but up only slightly from the second quarter.

Wells Fargo and other banks are experiencing a jump in home lending as borrowers refinance their homes at low interest rates.

The bank’s net interest margin – the spread it makes on what it pays on deposits and makes on loans – fell to 3.66 percent from 3.91 percent in the second quarter, a bigger drop than it had warned of last month. Banks are seeing the margin shrink as older loans with higher interest rates are paid down.

Equifax settles U.S. charges of improperly selling consumer data

WASHINGTON, Wed Oct 10, 2012 – Consumer credit rating company Equifax Inc. has agreed to pay $393,000 to settle allegations that it improperly sold information on consumers who had fallen behind on their mortgages, the Federal Trade Commission said on Wednesday.

Equifax Information Services LLC improperly sold 17,000 such lists of consumer information to Direct Lending Source, which turned around and sold them to companies under investigation for allegedly duping consumers with mortgage rescue scams, the FTC said.

Direct Lending Source agreed to pay a $1.2 million civil penalty.

Equifax ended its business relationship with Direct Lending Source and its affiliates in the summer of 2011, said Equifax spokesman Tim Klein.

“We reached an agreement with the FTC regarding issues they brought to our attention regarding Direct Lending, which was a former customer of Equifax,” Klein said. “As part of this settlement we did not and do not admit to any wrongdoing.”

Direct Lending Source could not be located for a comment. It does not appear to have a website and a telephone number listed as belonging to the company has been disconnected.

In the past several years, the FTC has filed more than 40 cases against companies that promise mortgage relief services but fail to deliver, the agency said.

How an experienced attorney can help you work with a bank during financial hardship

David M. Hunter, Chair of the Real Estate Practice Group, Brouse McDowell

There are many ways that small and medium-sized businesses can find themselves facing financial difficulties that lead to trouble in their commercial lending relationship. When this happens, many times business owners become paralyzed, shutting down and failing to communicate with their lender. While that is understandable, it is the wrong thing to do, says David M. Hunter, chair of the Real Estate Practice Group for Brouse McDowell.

“When a business anticipates that it is entering a period of financial challenge, one of the first things it should do is get competent legal counsel,” says Hunter.

Often, business owners only do this as a last resort. However, retaining knowledgeable counsel early on allows you to obtain practical pointers when there is often greater flexibility to negotiate an agreeable outcome, he says.

“Once a lawsuit is pending, things become much more difficult to negotiate, even with a lawyer involved,” he says.

Smart Business spoke with Hunter about how to work with your bank to preserve good relations during difficult financial times.

When a company realizes it may be headed for financial difficulties, what should it do first?

Small and medium-sized businesses typically have a large file that contains the underlying governing documentation when the business took out the credit facility. In the event that your business is slipping into financial turbulence, locate that file and review the terms and conditions of your loan.

However, most businesspeople are overwhelmed by the paperwork. This is a good reason to get counsel involved early. Your counsel will determine the secured or unsecured position of your lender. If your loan is secured, what are the assets that secure it and what are the current valuations of those assets? Is the loan in default? If not, what is the time period you project you could make the required payments and otherwise adhere to the terms of the loan agreement?

How can an attorney help?

A good attorney either has knowledge to assist a borrower facing a potential loan default or is with a firm with others who have knowledge of the federal bankruptcy law protections or other approaches that would aid a borrower facing an approaching problem.

Once you have secured counsel and discussed the issues, the next step is to contact your lender. Bankers appreciate knowing that a borrower is alert to the problem and wants to collaborate with the bank to address it or explore what remedial options are available.

Business owners often believe that banks want to seize a borrower’s property or shut down a borrower’s business. No bank really wants to do that. If it is reasonably achievable, banks want to rehabilitate nonperforming loans and transform them back into performing loans that pay as agreed. They want to lend money to borrowers that use loan proceeds effectively and to create an improved economic performance for the borrower, which will allow the borrower to repay the loan.

Are there risks in alerting a bank of a potential missed payment?

Some businesses, regardless of efforts taken to head off financial difficulties, can face a situation in which the next loan payment might be missed. No bank will think unkindly of a call from a borrower saying an upcoming payment might not be paid timely. Some borrowers might worry that if a bank finds out about a potential missed payment, an awful consequence will be triggered. But if that is the impulsive reaction you receive from the bank, you are likely dealing with the wrong bank.

However, after 90 days of delinquency, the loan will likely go into a nonaccrual status — a consequence which immediately and negatively impacts the bank’s earnings. This is a more serious situation. If you alert your bank early enough, it will likely work with you to find a solution. But it gets more difficult to take these steps the longer a borrower waits.

At what point does this become a legal issue?

There are legal issues every step of the way. But these become more acute when the evolving facts empower a lender to take steps that can disrupt a borrower’s business. Many loans contain a cognovit provision, a tool a bank can use if a loan is in default. This authorizes a bank to obtain an expedited judgment against a borrower. This expedited judgment can quickly empower the bank to attach the bank accounts or levy upon the assets of its debtor.

It’s important to communicate with your bank before such a provision is implemented in an effort to find a way to augment the terms and conditions of the loan to give the borrower a window of opportunity to make payments. This often leads to the creation of a forbearance agreement — a mutually agreeable written understanding between the bank and its borrower as to how the parties will treat this troubled loan. Forbearance agreements customarily provide that as long as the borrower adheres to the agreement, the bank will refrain from pursuing certain remedies, such as obtaining or enforcing a cognovit judgment.

Preservation of value should be paramount for both the borrower and the bank. Under potential default circumstances, borrowers and banks can do things that can negatively impact a business’s value, and banks know that. If a bank acts aggressively to prompt a forced sale of assets, often the value realized when the assets are sold will be reduced.

Before a borrower gets to that point, the borrower would be well advised to work with a lawyer and devise a strategy to deal with the situation. Often, the owner and lawyer can come up with a plan of payment and present it to the lender. If the plan is reasonable, many times the lender will be receptive.

What are some other potential resolutions?

There is often relief available in bankruptcy. But its practical effectiveness hinges on the size of the company, as the pursuit of such a remedy can often be cost prohibitive. Chapter 11 cases, for example, can come at a high cost and be labor intensive. But a Chapter 11 filing can make sense in certain circumstances.

David M. Hunter is chair of the Real Estate Practice Group for Brouse McDowell. Reach him at (330) 535-5711, ext. 262, or [email protected]

Insights Legal Affairs is brought to you by Brouse McDowell

Wells Fargo reports higher profit on mortgage gains

SAN FRANCISCO, Fri Apr 13, 2012 – A surge in mortgage banking income lifted Wells Fargo & Co’s. first-quarter profit by 13 percent, but its shares fell on concern that the bank is falling behind on its drive to cut expenses.

Wells Fargo, the fourth largest U.S. bank and the country’s biggest mortgage lender and servicer, said on Friday that net income increased to $4.25 billion, or 75 cents a share, from $3.76 billion, or 67 cents a share, year earlier.

The results beat analysts’ average forecast of 73 cents per share, according to Thomson Reuters I/B/E/S, but the bank’s shares opened lower and were off 1.4 percent in early trading.

Shares of JPMorgan Chase & Co., which also reported stronger-than-expected results on Friday, were trading down by 2.2 percent and the KBW Banks Index .BKX was off 2.4 percent.

Total revenue at Wells rose to $21.6 billion, from $20.3 billion a year earlier, signaling stronger demand for consumer and commercial loans.

“We’re seeing improvement,” Wells Chairman and Chief Executive John Stumpf said in a conference call with respect to the U.S. housing market. Profit in general benefited from “improvement in the economy,” he said.

The bank’s expenses increased to $13 billion from $12.5 billion in the fourth quarter, partly because of higher personnel costs related to mortgage banking compensation and higher legal reserves.

Wells said it is targeting expenses of $11.25 billion in the fourth quarter, at the upper end of the range set out in its efficiency program called Project Compass. The bank previously said expenses could drop to as low as $10.75 billion, but it said on Friday higher-than-expected revenue from its mortgage business and acquisitions would also result in higher costs.

How consumers can navigate the current mortgage climate

Before the financial meltdown in 2008, prospective homeowners breezed through the lending process while pursuing the American dream. Now, even veteran borrowers can be stymied by today’s stricter lending environment, especially if they rely on previous knowledge and experience to navigate the process.

Marc Reneau, First Vice President of Consumer Lending, First State Bank

“Fortunately, education, preparation and a little perseverance can help novices as well as seasoned borrowers take advantage of historically low interest rates and home prices,” says Marc Reneau, first vice president of consumer lending at First State Bank. “And there are new programs that may allow owners to refinance an ‘underwater’ mortgage (in which they owe more than the house is worth) that were not previously available.”

Smart Business spoke with Reneau about the current mortgage climate and how education and preparation will help borrowers through the process.

How has mortgage lending changed, especially in Southeastern Michigan?

Lending has been very challenging in Southeast Michigan, with lenders going out of business, new and updated regulations, declining housing values and the number of foreclosures. The good news is that there are definite signs of recovery.

However, lenders remain very careful. Gone are the days when you just stated your income. Now you must provide sufficient documentation to verify your earnings and assets in order to show you can repay the loan.

What should a consumer know about the current mortgage qualification process?

All information provided during the application process is validated. When applying for a mortgage, borrowers should be up front and answer all questions posed by their loan officer truthfully and completely. Today, lenders are using a new set of standards to underwrite and evaluate risks. While they may differ from lender to lender or by program, these are the general guidelines.

* Minimum credit score of 620 and a history of financial responsibility and saving. Borrowers can drive a better deal for a conventional loan if their credit score is 740 or higher; however, this does not apply to FHA loans.

* Proof of employment for the past two years and explanation of any gaps.

* Sufficient assets to survive a temporary financial setback. Borrowers should have six months of payments saved. These funds needn’t be liquid, and can be in the form of a 401(k) or other securities.

* Minimum down payment will vary depending upon the loan program and these funds must be in the borrower’s account for at least two months.

* Total monthly housing costs for principal and interest, taxes and insurance should not exceed 33 percent of gross income, while total monthly expenditures for all liabilities should not exceed 45 percent for conventional loans and 50 percent for FHA loans. Remember, even deferred payments on a student or other deferred loan count toward monthly liabilities.

How should consumers prepare for the lending process?

If borrowers are prepared, the process can still be quick and smooth. Borrowers will need, at a minimum, the most recent month’s pay stubs; most recent bank statement(s) including all pages (even if the last page is nothing more than an advertisement); the last two years’ W-2s; if there has been a recent divorce or bankruptcy, a copy of the divorce/bankruptcy papers is needed. Most important, all income must be verifiable. If the borrower plans to obtain a gift, there is a correct way to do so and the loan officer should be able to provide proper guidance.

What are some things consumers do unknowingly that can hinder their chances of obtaining a mortgage?

It’s important to keep spending in check while going through the application process. Borrowers should avoid buying or leasing a new car or trying to fill the new home with furniture with one of those ‘same as cash’ deals, as this is still considered debt and must be counted in the calculation for qualifying for a loan.

Lenders are required to obtain an updated credit report at the time of closing the loan to ensure nothing has changed between the time the borrower applied and the loan closing. If there has been a major purchase, especially on credit, borrowers will most likely need to explain it to the satisfaction of the underwriter before the loan can close.

Has anything changed for consumers who are unable to refinance due to their house being underwater?

There has been a lot in the news lately about a new and revamped government program for homeowners who owe more than their home is currently worth. Homeowners whose mortgage is owned by Fannie Mae or Freddie Mac (and was closed prior to April 2009) may qualify to refinance using the HARP 2.0 program (Home Affordable Refinance Program).

The key difference in this program is that it lifts the cap previously in place on the Loan to Value. Homeowners who are current with their monthly payments but are unable to refinance due to a drop in the value are the typical prime candidates for the new HARP program. Not all financial institutions will participate in this program and not all loans will be eligible. Homeowners should contact a loan officer they trust to see if they qualify.

The program is just taking shape as of March 2012 and it may take longer for these loans to process than conventional loans, but the program does not expire until Dec. 31, 2013, so there is time to take advantage.

Marc Reneau is first vice president of consumer lending at First State Bank. Reach him at (586) 447-4851 or [email protected]

Insights Banking & Finance is brought to you by First State Bank

Bank of America CEO says mortgage process ‘healing’

NEW YORK – Thu Mar 8, 2012: Though costly for banks, a $25 billion settlement over foreclosure abuses will help a slowly improving housing market, Bank of America Corp. CEO Brian Moynihan said Thursday.

“The mortgage process is healing, which is good for all of us and the economy,” Moynihan said at an investor conference in New York.

The settlement, which will cost Bank of America $11.9 billion in cash payments and loan modifications, was announced Feb. 9, but final documents have not yet been filed.

Moynihan’s presentation was interrupted twice by protesters, including one who called for the breakup of the second-largest U.S. bank. Bank of America has lagged its peers in recovering from the financial crisis, as it struggles with losses and lawsuits tied to its 2008 purchase of subprime lender Countrywide Financial.

Fed may need to buy more mortgage bonds: Williams

SAN RAMON, Calif. – The U.S. central bank may need to buy more bonds to bolster a housing market whose distress is at the heart of a “frustratingly slow” economic recovery, a top Federal Reserve official said on Wednesday.

“Looking ahead, we may still need to provide more policy accommodation if the economy loses momentum or inflation remains well below 2 percent,” San Francisco Fed President John Williams said at the Bishop Ranch Forum, a business group in this San Francisco suburb. “Should that occur, restarting our program of purchasing mortgage-backed securities would likely be the best way to provide a boost to the economy.”

Williams, a voting member this year on the Fed’s policy-setting panel, is on the dovish end of a policy spectrum, more concerned with the harm wrought by continued high unemployment than with the threat of inflation.

The Fed is increasingly pinpointing housing as the key to the nation’s recovery, and Williams is the second regional Fed president inside of a week to make the case for more monetary policy accommodation through the purchase of more mortgage-backed securities.

Chicago Fed President Charles Evans last Thursday said he would be “aggressive” in seeking more help for the economy through the purchase of such bonds.

Further bond purchases by the Fed would amount to a third round of quantitative easing, a controversial move that drew criticism both at home and abroad the last time the Fed took that path.

Goldman to face mortgage debt class-action lawsuit

NEW YORK – Goldman Sachs Group Inc was ordered by a federal judge to face a securities class-action lawsuit accusing it of defrauding investors about a 2006 offering of securities backed by risky mortgage loans from a now-defunct lender.

U.S. District Judge Harold Baer in Manhattan certified a class-action lawsuit by investors led by the Public Employees’ Retirement System of Mississippi.

These investors claimed they lost money in the GSAMP Trust 2006-S2, a $698 million offering of certificates backed by second-lien home loans made by New Century Financial Corp, a California subprime mortgage specialist that went bankrupt in 2007.

Thursday’s decision is a setback for Goldman, which had sought to force investors to bring their cases individually.

Class certification lets investors pool resources, which can cut costs, and can lead to larger recoveries than if investors are forced to sue individually.

Goldman spokesman Michael Duvally declined to comment.

The bank is one of many accused by Congress, regulators and others of having fueled the nation’s housing crisis and 2008 financial crisis in part by having misled investors about the quality of mortgage debt they sold.

Goldman in 2010 agreed to pay $550 million to settle U.S. Securities and Exchange Commission fraud charges over a collateralized debt obligation it sold, Abacus 2007-AC1 CDO.

Bank of America lawyer says settlement challenger is Baupost

NEW YORK ― Walnut Place, a group of undisclosed investors who oppose Bank of America Corp’s. $8.5 billion mortgage bond settlement, is the Baupost Group, a distressed debt fund, according to an attorney for the bank.

“Walnut Place is actually a made up name,” Theodore Mirvis, an attorney with Wachtell, Lipton, Rosen & Katz who represents Bank of America, said at a hearing in New York state Supreme Court Thursday.

The “real” firm, which sued Bank of America and Bank of New York Mellon, as trustee, over mortgage-backed securities trusts is Baupost — “known as a distressed debt or sometimes a vulture fund,” Mirvis said.

Baupost spokeswoman Elaine Mann declined to comment on whether the Boston-based hedge fund was behind Walnut. David Grais, an attorney at Grais & Ellsworth LLP in New York who represents the Walnut entities, also declined to comment on whether Walnut was Baupost.

Like most hedge funds, Baupost doesn’t usually disclose its earnings or investments, but was reported to have $23 billion in assets last year.

Walnut Place is involved in separate cases against Bank of America.

In August, 11 entities sharing the name Walnut Place filed to remove the global $8.5 billion settlement case from New York state to federal court, citing its size and complexity.

The settlement was intended to resolve much of Bank of America’s remaining legal liability tied to its disastrous 2008 purchase of mortgage lender Countrywide Financial Corp. The deal, which was reached with over 20 institutional investors, would apply to other investors as well.

The decision to remove the case to U.S. District Court for the Southern District of New York is on appeal to the U.S. Court of Appeals for the 2nd Circuit.

Bank of New York Mellon is the trustee for the 530 mortgage securitization trusts covered by the proposed agreement.

Mirvis and Grais were in state court Thursday, arguing on a motion by Bank of America to dismiss a separate case that the Walnut Place entities brought against Countrywide Home Loans for breaching the agreements governing two mortgage-backed securities trusts. Trustee Bank of New York Mellon is also a defendant.