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| Banks To Buy Back Bad Loans Freddie Mac and Fannie Mae are asking some of Wall Street's big banks to buy back bad mortgage loans. Some regional banks, like Federal Home Loan Bank of Seattle has taken the matter to the courts. It's obvious, they want their money, and they want it now. The Wall Street banks include Bank of America and Citigroup. They are expected to buy back $21 billion in faulty mortgages from Freddie Mac and Fannie Mae. As of December 31, 2009, nearly 30% of Freddie Mac's request to buy back were outstanding more than 90 days. A case that many lenders are watching carefully, is brewing in Seattle. The Federal Home Loan Bank of Seattle has brought separate lawsuits against eleven banks totalling $4 billion. FHLBS claims that there was no proper documentation, that many of the statements on the mortgage applications were untrue, and that there was inadequate underwriting. Federal Home Loan Bank of Seattle is one of the nation's 12 home loan banks that funds hundreds of the nation's banks. The biggest lawsuit is against Bear Stearns for $719 million. The mortgages from Bear Stearns ended up with a 25% foreclosure rate. This is a stunning revelation when we compare Countrywide Financial's foreclosure rate of 2.7% to 10.3%. The second largest claim is Barclays for $661 million. If Federal Home Loan Bank of Seattle wins, we can expect more lawsuits to fill the courts and collecting made easier for Freddie Mac and Fannie Mae. Fannie Mae and Freddie Mac buy about 70% of new mortgages. This situation forces the banks to do a balancing act. To buy back the loans increases their losses, and they need to sell their mortgages to get more money to lend. The lenders have to write down their buy back loans 40 to 50 cents on the dollar. Mortgage insurers also pose a threat to the major banks' bottom line. MGIC Investment refuses to pay about $6 billion in claims from delinquent home loans since January 2008. In September MBIA sued Countrywide over questionable bonds backed by home equity line of credit and second liens. There are other groups that have legitimate concerns about the financial products that were sold to them. In February 2008 the State of Massachusetts brought a lawsuit against Merrill Lynch claiming fraud and misrepresentation. The deal involved about $14 million of subprime securites that were sold to the City of Springfield. The a lot of the securities became illiquid within months after the transaction. In January 2008, the City of Baltimore sued Wells Fargo. In January 2008, Cleveland sued 21 major investment banks. The mayor of Cleveland, Frank Jackson felt strongly that the big banks had enabled subprime lending and that this led to numerous foreclosures in his city. This resulted in lost taxes for devalued houses. Freddie Mac and Fannie Mae will be paid. The banks and cities and states will be paid. However, the under lying problem is twofold. One the holders of mortgage backed securities, and the individual homeowners. A victory in court by either one of these groups could threaten the financial structure of the United States. In other words it could bankrupt the country. The holders of mortgage backed securities, if they can prove fraud, and win in court, would lead to bank failures. The loan sale contracts specify that lenders must take back loans that default unusually quickly, or if there were mistakes or fraud in the documents. The homeowner can seek rescission of the loan if he or she can prove that the disclosures of the loan terms or loan costs were deceptive. This is the foundation of the Truth In Lending Act. In 2007 in Wisconsin, Chevy Chase Bank was found to have violated the Truth In Lending Act by U.S. District Judge Lynn Adelman. The ruling is under appeal. prev: next: Home: |
| Good-Bank, Bad-Bank A Savior The financial cesspool that we find ourselves in has given us some time to think. How do we get out of this mess? Can we ever come up smelling like roses? Well, yes, or maybe. The good-bank bad-bank model seems to be the best alternative. In theory it is simple. We create a separate company. We take all the toxic assets, such as those garbage mortgages, and transfer them to the bad-bank. Now, the good-bank has a clean balance sheet. The good-bank can expect restored investor confidence, it can raise capital, and it can lend again. Synovus has seen the writing on the wall. Toxic assets will kill a bank. So Synovus has decided to act now rather than later. Synovus Financial Corp opened a subsidiary which is basically a bad bank. Synovus has 31 banks in the south east so they are well established. They know that there's money to be made in bad loans and distressed properties. This is not a ground breaking strategy. In the 1980s Resolution Trust Corporation was created to manage and dispose assets that were acquired during the Savings and Loans crisis. This was a public-private venture. There have already been positive results, and good models to copy. In 1987 Mellon Bank had bad loans in excess of $1.4 billion because of decline in real estate prices. Mellon created a bad bank, Grant Street National Bank. Grant Street bought the bad loans which were written down 53%. GSNB liquidated all the loans and wound down in 1995. Citigroup proved that the good-bank bad-bank model can be a success. In 2009 Citigroup decided to split. Citicorp became the good-bank, and Citi Holdings was the bad-bank. At the end of March 2009, the good-bank had a profit of $7.68 billion, while Citi Holdings the bad bank, had a loss of $5.34 billion. Outside of the United States there have been great success with the good-bank bad-bank theory. It worked in Sweden. Ireland In April 2009, Ireland established the National Asset Management Agency to take over the land and development loans of six of the country's biggest lenders. Germany In May 2009, the German cabinet will allow its banks to exchange their toxic assets for government backed bonds. Korea In 1999 South Korea created the Korea Asset Management Corporation which is an authorized bad-bank. In August 2009, after seeing the success of KAMCO six South Korean banks signed an agreement to create a private bad-bank. The bad-bank will run through 2014 and will compete with KAMCO. Ukraine The Ukraine is considering a bad-bank. In August 2009 the central bank proposed a plan to accumulated the distressed assets and ease the pressure on its currency. Another success story using the good-bank bad-bank model is Northern Rock in the UK. "The ratings on Northern Rock reflect our view of its robust asset quality, liquidity, and capitalisation," said Richard Barnes, a S&P credit analyst. The bad-bank created was Northern Rock Asset Management (NRAM) which holds about 50 billion pound sterling in mortgages. Virgin Money and Tesco were two companies anxious to purchase the assets of NRAM. The greatest challenge in setting up such a venture as the good-bank bad-bank, is the valuation of the toxic assets. Other than that, this plan should be a winner. |
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| Hire A Real Estate Lawyer To Close You should put together a team of experts when you are buying or selling real estate. An important member of the team should be a real estate lawyer. Choose your lawyer. Ask a friend, co-worker or family member to recommend someone. Do not use a lawyer referred by the realtor. There is an obvious conflict of interest. The real estate agent or broker might try to discourage you. He might say that the extra expense is not necessary and that the forms are standard. Be very careful! The realtor might be afraid of losing the deal. A lawyer could kill the deal or cause delays in closing. This is not what the realtor wants. You have to decide what's in your best interest. The realtor doesn't decide this. It's the stuff that is out of the ordinary that will jump up and bite you and cost you frustration and money down the road. Get these issues out of the way from day one. You need certain items addressed in the purchase agreement. If the property was changed or there was an addition to the house, was it done so legally? Did the owner have the right permits? Did it meet the city's zoning and building standards? If you are planning on changing the property, maybe add an in-law suite, can this be done? If it is okay with the city, is it also okay with the home owners association? HOAs can make life miserable if you do not comply. If you are a trucker, can you park your rig in front of the house? There might be weight and height restrictions on the street. It might be unattractive for the neighborhood, but is it unlawful? If the home inspection turns up asbestos or termites, can you walk away from the deal and still get your full deposit returned? These are some of the areas that you will need help with. Putting the terms and conditions on paper so that it is clear to all the parties involved should be left to a lawyer. The money spent on a lawyer should be considered an investment not an expense. |
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