Archive for October, 2009
Global financial services firm Credit Suisse announced a shift to the ratio of base salary and bonus salary for its employees, to attain compliance with pay guidelines proposed by the Group of 20 and accepted by a number of UK business units of the world’s top banks.
The change applies to managers and directors and will result in a change in the proportion of non-deferred compensation paid as fixed base salary, Credit Suisse said. The changes take effect January 1, 2010 and will apply for bonus pay awarded for 2009.
“At a time of strong focus on executive compensation, we are announcing a compensation structure that enables us to strike the right balance between paying our employees competitively, doing what is right for our shareholders and responding appropriately to regulatory initiatives and political as well as public concerns,” said Brady Dougan, Credit Suisse Group CEO.
In addition, the financial services firm created two programs for deferred variable compensation awarded to managing directors and directors. The Scaled Incentive Share Units (SISU) and Adjustable Performance Plan Awards (APPA) programs will be used to evenly fund these employees bonus pay.
SISU are similar to the Incentive Share Units (ISU), the share-based bonus program Credit Suisse had in place for the past three years. The new SISU will deliver a base share amount on a four-year pro-rata basis and the award of additional shares will depend on the average share price as well as return on equity over four years, the company said.
APPA is a cash bonus with a notional value that adjusts upward annually based on Credit Suisse’s return on equity over three years. A mechanism will adjust the outstanding awards downward, should the business area of the employee losses equity.
In addition, Credit Suisse will set share ownership requirements for members of divisional and regional management committees and for the executive board.
Write to Austin Kilgore.
Regulatory reforms is reaching nearly all aspects of the securitization market, yet the government lags on clearer legislation for mortgage financing reform, said analysts at Information Management Network’s ABS East gathering in Miami yesterday.
George Miller, executive director of the American Securitization Forum said that future legislation should prevent bad loans from being written and second, in the vent that they do occur; legislation should be in place in order to provide assistance to these loans.
Miller said that lending should not be extended without demonstrating the ability to repay. Going forward the market is likely to see significant focus on remedies and greater liability for lending activities. These future requirements are likely to cure the bad loan situation.
Legacy assets will also continue to have limited outlets for disposal. Speakers at the conference questioned whether there would ever be a vibrant secondary market for anything other than the plainest vanilla assets.
“The legacy asst program for PPIP is meant to facilitate price discovery for a healthy functioning secondary market,” said Matthew Bass, program director for legacy securities PPIP at the US Treasury. “Since announcing the program we have seen an improvement in liquidity and we’ve seen an increase in re-remics and seasoned loans traded – this is all important toward improving the secondary market.”
(For a full update on PPIP, please see the November issue of HousingWire)
Stephen Kuddenholdt, co-chair of the capital market practice at Sonnenschein, Nath & Rosenthal said that the government modification program has also worked toward stabilizing the market. So far the program accounts for 63 servicers, which is roughly 88% of the servicing market.
“This means that the accounting impediments have been resolved and the safe harbor has improved enough to make the industry feel protected,” he said. “The market has always had loan modifications but it was a hand crafted cottage industry. Now it’s the way you identify borrowers in default or those that are about to.”
Investors can then, after a binary test is concluded, decide whether the loan modification is better or worse than foreclosing.
But the significant issue of forbearance remains an obstacle for loans within a securitization pool. The Treasury’s guidance states that forborne principal should be treated as a realized loss “unless otherwise directed by the applicable PSA. This requires the servicer to turn to the PSA to determine if principal forbearance can be treated as a realized loss. And principal forbearance is not enumerated as a realized loss in the PSA, as it was not contemplated as a loss mitigation technique at the time the PSA was written."
But some investors are still reluctant to readily adapt the guideline set by the Treasury. If losses on the forborne principal are not realized until the payment comes due, the junior tranches are not written down, and will receive cash flow if there are sufficient funds. Alternatively, if forborne principal is taken as a realized loss when the loan is modified, the junior tranches are written down more quickly.
Panelists said they expect Treasury to revise implementation guideline that drives its forbearance stance and sets better guidelines for investors.
“Another question is why HAMP doesn't direct forgiveness instead of forbearance,” suggests Kuddenholdt. “There is a strong line of thinking out there that believes borrowers won’t really benefit from a forbearance because it still keeps them feeling underwater.”
Going forward, it likely that future securitization transactions will include detailed loan modification guideline and Kuddenholdt said it was likely that the market would borrow the HAMP guideline as a template on which to base future provisions.
Write to Jacob Gaffney.
Fraud risk in the mortgage industry surged more than 11% from Q209 to Q309, according to a mortgage fraud risk index compiled by Agoura Hills, Calif.-based mortgage software developer Interthinx.
The index comprises several common types of mortgage fraud.
The Property Valuation Fraud Risk Index is up 25% from the previous quarter and up 46% from the year-ago quarter, indicating a shift toward fraudulent schemes involving short sales, real estate-owned inventories and refinancings by borrowers with equity impaired by falling property values.
The Occupancy Fraud Risk Index, on the other hand, dropped 30% from the year-ago quarter as financial pressure and a depressed real estate market for investment and rental properties cut down on opportunities for schemes involving speculative investments, according to Interthinx.
The Employment/Income Fraud Risk Index fell by 2% from Q209 and by 35% from the year-ago quarter, a decline Interthinx attributed to lenders' increased use of Intternal Revenue Service (IRS) data to verify income. Affordability is also on the rise, meaning the need for misrepresentation of income to qualify for purchases is diminishing.
The geographic instance of mortgage fraud risk spread since the previous quarter, with many metropolitan statistical areas (MSAs) moving into a higher risk category. The Stockton, Calif. MSA experienced the highest mortgage fraud risk index in the quarter, rising 68.1% over the level seen there a year earlier.
Several Florida MSAs, one Nevada MSA and a handful of other California MSAs rounded out the top ten MSAs in terms of their risk level.
Write to Diana Golobay.
The commercial mortgage-backed securities (CMBS) servicer ratings of Capmark Financial Group remain on Fitch Ratings' “evolving” watch amid financial hardship at the commercial real estate lender.
Fitch downgraded Capmark's issuer default rating to single-D from single-C after the company filed for Chapter 11 bankruptcy in a reorganization effort in the wake of posting a $1.6bn loss in Q209.
On Sept. 2, 2009, Capmark announced a put option agreement to sell its servicing and origination operations to Berkadia Commercial Mortgage – a partnership between William Buffet's Berkshire Hathaway and Leucadia National Corporation (LUK: 28.30 -0.39%). Berkadia indicated to Fitch that it expects to retain all of Capmark’s servicing staff, according to a Fitch report.
Fitch will continue to monitor Capmark’s servicing quality and said it may downgrade, upgrade or affirm its CMBS servicer ratings when or if the Berkadia purchase is completed. According to Fitch, Capmark has shown that it has enough liquidity to fulfill short-term obligations. Fitch does not expect any ratings action or disruption on the CMBS transactions serviced by Capmark.
At the end of June, Capmark’s total servicing portfolio swelled to 35,507 loans with $270.1bn in unpaid principal balance. Of the total portfolio, 16,712 loans worth $131.1bn were CMBS, according to Fitch.
Write to Jon Prior.
Home prices in the Standard & Poor’s (S&P)/Case-Shiller 10-City and 20-City Composite Home Price Indices, declined 10.6% and 11.3%, respectively, in August 2009 compared to August 2008.
While down from last year’s level, August marks the seventh month of year-over-year improvements for the indices, which track the price path of typical single-family homes located in major metropolitan areas. In 19 of the 20 metropolitan areas, Cleveland being the only exception, price decline improved in August from July.
“Broadly speaking, the rate of annual decline in home price values continues to improve,” said David Blitzer, chairman of the S&P index committee. “We see this general trend whether you look at the as-reported data or the seasonally adjusted figures.”
From the peak in the second quarter of 2006 through the trough in April 2009, the 10-city composite is down 33.5% and the 20-city composite is down 32.6%, the report said.
Of individual metropolitan areas, Las Vegas had the biggest rate of annual decline at nearly 30%. Dallas had the lowest decline, 1.2%.
On notable cities include Denver (1.9% decline), Charlotte (8.6% decline), Minneapolis (13.7% decline), San Francisco (12.5% decline).
Write to Austin Kilgore.
The US economy and housing market in particular are recovering well ahead of the schedule previously anticipated by analysts and market observers, according to commentary by Royal Bank of Scotland (RBS) economists.
RBS raised its near-term gross domestic product (GDP) forecasts "significantly" in response to positive economic data. Risks of a second economic dip are diminishing as post-Cash for Clunkers consumer spending remains stronger than analysts expected.
Although the foreclosure inventory and the distressed mortgage pipeline cast a shadow on the US housing market, key indicators including new and existing home sales and prices suggest housing may be bouncing back.
Foreclosures are working through the pipeline slowly, RBS says, because "the various mortgage modification programs initiated by the government have not done much to prevent foreclosures, but they have certainly delayed their timing, dragging out the adjustment process."
The government program seen as having a lasting positive effect, however, is the $8,000 first-time homebuyer tax credit, which spurred households to move off the sidelines and into the market. Although the response has been less extreme than the Cash for Clunkers program in the automotive market, the tax credit is likely to have a similar effect upon its expiration.
The stability of housing starts from June through September indicates a drastic drop-off in construction is unlikely, RBS said, since home construction typically takes around six months and so orders taken to coincide with the tax credit would have needed to start during summer. Steady starts through September indicates construction should not suffer much, regardless of whether the credit expires or is extended.
Existing and new home sales show encouraging signs of bottoming in January and may even have risen by 25% from the low by September, according to RBS economists. At the same time, new and existing inventory have dropped. New home inventory remains lean although existing inventory is likely to be kept high as foreclosures continue to enter the market.
House prices also appear to have bottomed in spring, although RBS warned seasonal winter weakness would not be unexpected and is unlikely to bring prices too far below the trough seen earlier in the year. The positive signs in price data mean house prices may have stabilized close to a year ahead of the schedule anticipated by economists, RBS said.
"Certainly, we do not expect the sharp increases seen in recent months to be sustained for very long, but an end to the relentless plunge in home values would go a long way toward not only bringing balance to the housing market but also bolstering household attitudes toward spending," RBS economists wrote this week.
Write to Diana Golobay.
The Minnesota housing market continues to show distress through Q209 as delinquencies, foreclosures and unemployment continues to climb, according to a report from the Minnesota Housing Partnership.
The amount of 60-plus day delinquencies surged in the quarter, gaining 7% from the first quarter of the year – following a continuous upward trend for the past three years, according to the report.
Even renters felt the shake of the current foreclosure crisis. With unemployment hovering around 8% in the state, a rate not held through any three-month period since 1983, vacancy rates grew and rent prices shrank. The average vacancy rate climbed to 6%, the highest since 2005. A 5% vacancy rate is considered “balanced,” according to the report.
The inventory of homes for sale in Minnesota bumped up in Q209. Foreclosed and short sale homes made up 27% of the inventory in June 2009.
Foreclosures jumped by 15% from the previous quarter. The volume reached 5,932 from 5,157 in the previous quarter. The majority of the increase came from the Twin Cities metro area. An array of moratoria from Fannie Mae and Freddie Mac, foreclosure postponements from lenders and state legislation kept foreclosure levels below the expected amount, according to the report.
Write to Jon Prior.
Private equity and hedge fund administrator Bank of New York Mellon was selected last week to provide global hedge fund custody services for Capula Global Relative Value Master Fund.
It's the flagship fund investment managed by Capula Investment Management, the London-based government fixed-income specialist firm with nearly $4bn of assets under management.
“We selected BNY Mellon as a global custodian as in the current economic environment it is important – to both the firm and to its clients – to have a provider with the financial stability to ensure the safekeeping of our assets,” said Neil McCallum, chief operating officer at Capula Investment Management.
BNY Mellon was also selected to provide derivatives collateral management services to the Invensys Pension Scheme (IPS) via its DM Edge platform. The DM Edge system facilitates administrative, processing, reinvestment and valuation activities associated with posting and receiving collateral for over-the-counter derivatives transactions.
BNY Mellon and IPS also partnered to develop single collateral management platform by which BNY Mellon will manage IPS's aggregate collateral requirements across asset managers and bank counterparts.
As a hedge fund administrator, BNY Mellon has more than $210bn of assets under administration. As a provider of tri-party collateral management services, BNY Mellon services more than $1.8trn in tri-party balances worldwide.
Write to Diana Golobay.
Mortgage giant Fannie Mae (FNM: 0.00 N/A) announced that its new Payment Reduction Plan (PRP) provides forbearance for struggling borrowers who are ineligible for the Home Affordable Modification Program (HAMP).
Through HAMP, the US Treasury Department provides capped incentives to servicers for the modification of eligible loans on the verge of foreclosure. The PRP will grant transitional support for borrowers who do not qualify for HAMP while more permanent mortgage solutions are determined, according to Brian Faith, a vice president at Fannie Mae.
The mortgage principal and interest payments will be reduced by up to 30% for borrowers qualified for PRP, which replaces Fannie’s HomeSaver Forbearance program. PRP reduces the payments by 30% rather than the previous 50% under HomeSaver Forbearance, because permanent solutions are closer to 30%, Faith said.
Faith added that non-owner-occupied properties became eligible under PRP, and owners will receive new options and support for their investment properties and second homes – even though they do not fit under the HAMP umbrella.
Incentive payments under the PRP were restructured to support the implementation of a more permanent foreclosure prevention solution earlier in the life cycle of the loan, Faith said.
Write to Jon Prior.
The civil lawsuit filed against Lend America parent company Ideal Mortgage Bankers takes aim at 40 Federal Housing Administration (FHA)-backed mortgages the Department of Housing and Urban Development (HUD) and the Justice Department claim were fraudulently approved by the New York-based lender.
But HousingWire’s review of the 155-page suit reveals allegations of a pattern of mortgage fraud that’s spanned more than 20 years across a number of mortgage firms.
The mastermind behind the fraud, HUD and the Justice Dept. claim, is Mike Ashley. Ashley is perhaps best known as a team owner and championship-winning racecar driver in the National Hot Rod Association (NHRA). According to the race team’s Web site, Lend America provides financial support to the racing business through a sponsorship agreement.
The DOJ claims Ashley fostered an environment that encouraged Lend America sales staff to originate FHA loans, even when borrowers were not eligible. In his meetings with sales staff, the suit claims, Ashley told them there were “no minimum credit score requirements” for FHA loans and that it was okay if a borrower made late payments on previous mortgages.
Sales staff could make 10 times the commission on FHA loans than on standard mortgages and almost four times the commission than a subprime mortgage. The suit claims Ashley set a sales goal of one loan origination per week and told loan officers “loans should not be closed in two weeks or a month, but in eight hours.”
In addition, Ashley told sales staff those who did not originate large numbers of FHA-insured mortgages would be terminated from employment at Lend America and that he would fire the lower producing members of his sales staff.
The suit further claims Ashley’s employment agreement required he be paid equivalent to one-half of a percentage point of the principal of every mortgage Lend America originated. Lend America originated nearly $1.1bn in loans in the financial year ending September 30, 2008. Accordingly, Ashley was entitled to nearly $5.4m in compensation during the year. In the suit, Justice claims this arrangement is a violation of HUD regulations.
The sales environment at Lend America resulted in the origination of at least 40 FHA loans that included various fraudulent documentation, the suit claims. The fraudulent documents range from verification of income and employment documents with incorrect information, to in one case, a hand written note, represented to FHA to be from a borrower’s parents indicating the parents would be moving in with the borrower and contributing to the mortgage payment, when in fact, the borrower told Lend America that arrangement would not happen.
The suit claims Lend America also created a slush fund of cash to fund delinquent mortgages for borrowers to conceal their inability to keep up with payments during the first two years of the loan, the period of time that HUD monitors its Direct Endorsers’ delinquency and default rates.
According to the Justice Department lawsuit, Ashley’s worked in a number of positions at mortgage firms, and by his own admission, committed his first act of mortgage fraud in 1989.
According to legal documents filed in the US District Court for the Eastern District of New York against Ideal Mortgage and Ashley, in 1984, Ashley began working for Liberty Mortgage Banking, which was owned by his father, Kenneth Ashley. After working six to eight months at Liberty Mortgage, the younger Ashley left Liberty Mortgage to work for Chase Capital, doing business as Shares Capital Company, a mortgage brokerage set up by his father and others. While Ashley owned a portion of Shares Capital, his father controlled it, Justice said.
As president of Shares Capital, Ashley primarily brokered government-backed mortgages to Liberty Mortgage. Ashley “basically falsif[ied] documentation on mortgages” so that they would meet guidelines for the secondary market, Fannie Mae (FNM: 0.00 N/A), Freddie Mac (FRE: 0.00 N/A) and other secondary market investors, he would later admit, primarily by fraudulently increasing non-qualifying borrower's income with false verification of income statements.
In 1991, Liberty and Ashley surrendered their New York mortgage licenses and Liberty gave up its status as a HUD-approved lender. In 1993, Ashley plead guilty to three counts of conspiracy to commit wire fraud in connection with multiple instances of mortgage fraud. In 1996, he was sentenced to five years probation, including two months home confinement and was ordered to pay restitution to Freddie Mac. In 1994, Liberty was found guilty of two counts of wire fraud in a jury trial and in the same year, was sentenced to a $1m fine.
Around 1991, Ashley began work at another firm, Consumer Home Mortgage. After his conviction, Consumer Home Mortgage terminated Ashley's employment. He then filed a lawsuit against the New York State Banking Department and in a settlement of that suit, paid $30,000 to the Freddie Mac Fraud Unit and $6,300 to two complainants, as well as agreed to not work in the mortgage industry until August 1997. After that time he could return, but until January 1999, he could not hold a managerial or processing position, nor be a principal of a mortgage firm until January 2000. He also appealed his suspension and disbarment as a participant, principal or contractor with HUD, which was later reduced to a ban expiring in May 1998.
In light of the ban, the Justice Department says Ashley formed a marketing firm, Diversified Marketing, and continued to perform marketing for Consumer Home Mortgage's in a "consultant" capacity, including “training for loan officers and real estate offices including the development of seminars and marketing plans.”
The DOJ claims Ashley rejoined Consumer Home Mortgage in 1997, serving in a variety of roles including sales manager, vice president of marketing, president and chief financial officer.
Despite his background and history of fraudulent behavior, and his temporary industry ban, Ashley continued to find work in the mortgage world. According to the lawsuit, from 1996 to 2001, Ashley increased loan volume 525% from $80m in loans to $500m loans during his second stint at Consumer Home Mortgage.
Ashley’s next career move was to US Mortgage, the company that began the Lend America business unit. The suit claims Ashley brought approximately 40 to 50 of Consumer’s employees with him to US Mortgage to start up the Lend America lending unit.
Consumer Home Mortgage’s president, Robert Standfast, said in an DOJ interview that after Ashley left Consumer, business plummeted. US Mortgage eventually acquired Consumer Home Mortgage.
Ashley worked as an executive vice president at US Mortgage, but left the company on November 9, 2002, as part of a “mutual termination.”
Less than a year later, HUD issued US Mortgage a notice of violation, the result of a quality assurance review that revealed found numerous instances of fraud, including falsified documents, improperly documented funds, improperly documented income, insufficient credit analysis, excessive ratios and insufficient compensating factors.
US Mortgage claimed the violations resulted from Ashley’s work with the Lend America unit, which had since been terminated.
After leaving US Mortgage, Ashley re-opened the Lend America brand, this time under current owner Ideal Mortgage. The Justice Department claims Lend America and Ashley fraudulently concealed Ashley’s employment and criminal history from state regulators. It is during this time that Justice and HUD make their latest claims against Ashley.
After the suit was filed last week, a judge denied the Justice Department’s request for a temporary restraining order to prevent Ideal Mortgage from originating FHA insured loans.
A Lend America spokesperson declined comment for this story.
Write to Austin Kilgore.
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