Needing a Republican Solution for Underwater Mortgages (ContributorNetwork)

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Analysis: Banks expect to spend less on bad mortgages (Reuters)

(Reuters) – Even as President Barack Obama is calling for more assistance for struggling mortgage borrowers, major banks are looking forward to spending less to handle problem home loans.

The chief executives of JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N), the two biggest U.S. banks, said this month their rate of spending to handle troubled mortgages had topped out and should begin to decline soon with falling delinquency rates. Wells Fargo & Co (WFC.N), the fourth-biggest bank, also is counting on lower mortgage expenses this year.

With fewer problem loans to process, the banks could reduce the army of back-office staffers who handle the paperwork and phone calls required by foreclosures.

Bank executives are under pressure from investors to reduce expenses to improve profits amid weak demand for loans in the slow economy. If the three big banks are right in anticipating that the wave of mortgage defaults will subside, their bottom lines will get a lift -- and property values will firm up, to the benefit of neighborhoods across the country.

Others are not so optimistic. Executives of Citigroup Inc (C.N), the third-biggest bank, continue to caution that mortgage issues, including legal liability for alleged abuses, remain the biggest single threat to the U.S. banking industry. And some consumer advocates worry that the banks could scale back too quickly on their mortgage workout staff.

Obama, who said in his State of the Union address on Tuesday that he intends to ease the mortgage burdens of "millions of innocent Americans," is sending Congress a plan to allow homeowners to refinance at lower rates even when they owe more than their homes are worth. Also under discussion: a multistate settlement in which banks could pay up to $25 billion in exchange for protection from future lawsuits about improper foreclosures and lending and servicing abuses.

After the bust in house prices, the banks built up armies of staff to handle problem loans, said Guy Cecala, publisher of industry trade journal Inside Mortgage Finance.

"I'm not passing judgment on how well it works or how efficient it is," he said. "But they have adequate staffing."

JPMorgan nearly tripled its staff over three years to 20,000 people. "That number has probably peaked, and I think you will see it coming down over the next couple years," JPMorgan Chief Executive Jamie Dimon told analysts who questioned him about expenses after the company reported lower fourth-quarter profits.

Dimon forecast that two-thirds of the $925 million of expenses JPMorgan incurred to service mortgages in the quarter will go away.

JPMorgan's mortgage delinquencies are down sharply from 18 months ago, and the bank charged off less than half as much money for problem home loans in the fourth quarter as it did a year earlier.

Bank of America is working off a mountain of mortgage problems left from its 2008 purchase of subprime lender Countrywide Financial. It now has about 32,000 workers handling delinquent or other at-risk mortgage loans, more than six times the staff it had in 2008. The bank spent $2 billion in the fourth quarter, excluding litigation costs, on the issue.

Chief Executive Brian Moynihan said that over time that spending will be reduced to $300 million per quarter, even taking into account stricter servicing regulations faced by banks.

Moynihan noted that total loans more than 60 days past due declined more than 20 percent from a year earlier to about 1.1 million in the fourth quarter. He said the bank expects costs to decline in 2012 but that it could take up to two years for expenses to return to normal levels.

The resolution of problem loans will depend on how fast the economy improves and the unemployment rate declines, Bank of America spokesman Dan Frahm said. The bank will continue to make "investments necessary to meet the needs of our customers," he added.

San Francisco-based Wells Fargo told analysts it expects to reduce its quarterly expenses for troubled mortgages and foreclosures to as low as $600 million, compared with $718 million in the fourth quarter.

"We do believe that there are some cyclically high mortgage costs that are going to roll off," CEO John Stumpf told analysts.

Dan Alpert, managing partner with investment bank Westwood Capital LLC, said, "If the expectation is that the economy is strengthening and new defaults will start to slack off, then yes, expenses should go down."

But Alpert cautioned that if the economy is doing "a head fake, like in the first and second quarters of last year, then defaults will start going up again."

Diane Thompson, an attorney with the not-for-profit National Consumer Law Center, said it is premature for banks to say their operations are ready to be scaled back.

Banks continue to lose documents, give bad information to customers and take too long to resolve loan modification applications, said Thompson, whose organization assists struggling borrowers.

Banks could also have additional costs if they agree to new servicing standards to reach a settlement with federal officials and state attorneys general investigating alleged foreclosure abuses.

Some statistics suggest the foreclosure crisis is far from over. A study last fall by the Center for Responsible Lending estimated that while more than 2.7 million homeowners who received loans between 2004 and 2008 had already lost their homes to foreclosure, another 3.6 million were still at serious risk of ending up in the same boat.

Citigroup executives cautioned last week, for the second time in three months, that overall delinquency rates had stopped falling recently because some borrowers, who previously defaulted and had their mortgages modified, had defaulted again. Citigroup also said its servicing costs increased in the fourth quarter because it spent more to comply with a settlement banks reached last year with some regulators over the handling of mortgages.

"We continue to believe mortgage-related issues are the single largest source of risk facing the U.S. banking industry," Citigroup Chief Financial Officer John Gerspach told analysts.

Alongside servicing costs for existing mortgages and potential losses on the loans, banks also still face allegations that they broke laws during the housing boom by giving loans to unqualified borrowers and then fraudulently packaged and sold mortgage-backed bonds. Obama pledged Tuesday to ramp up government investigations of those allegations, which could lead to billions of dollars of litigation expenses and penalties for banks.

But Citigroup executives also noted that repeat defaults are

not as frequent as it had expected and that early-stage delinquencies were less common in the fourth quarter than in the third quarter.

Paul Miller, a bank analyst at FBR Capital Markets, said big banks' servicing expenses are likely to fall from current levels. But he cautioned that significant relief will not come as quickly as the banks would like.

"I would think 2012 is probably the year it peaks," Miller said, "but it's not like it's going down by 50 percent."

(Reporting By Rick Rothacker in Charlotte, North Carolina and David Henry in New York.; Editing by Alwyn Scott and John Wallace)

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Morgan Stanley settles with MBIA over mortgages (AP)

NEW YORK – Morgan Stanley said Tuesday that it has reached a settlement with insurance company MBIA Inc. over disputes involving mortgage-backed investments.

It's the latest sign that banks are working hard to clean up their balance sheets by getting rid of lawsuits involving poor-quality investments like mortgage backed securities that lost value after the housing bust.

The agreement includes a cash payment of $1.1 billion from MBIA to Morgan Stanley, according to a person familiar with the settlement. The person was not authorized to speak publicly about the payment. The two companies did not publicly disclose the amount of the payment.

Both sides have withdrawn lawsuits against each other as part of the agreement.

Morgan Stanley had bought insurance protection from MBIA on commercial mortgage-backed securities it owns. After the settlement, the New York investment bank is writing down the value of the entire investment, which will result in a $1.8 billion pre-tax charge to its fourth quarter earnings.

The settlement is the result of lawsuits MBIA filed against several banks. The company said it was misled about the quality of home and commercial property loans that were written prior to the financial crisis.

MBIA provided insurance and sold guarantees on the bonds that were based on those faulty real estate loans. When the market for homes and commercial property went bust, defaults spiked, leaving MBIA on the hook for large claims that threatened to put the company out of business.

In 2009, MBIA said it would separate its relatively safe municipal bond insurance business from the more complex mortgage-backed securities insurance business. Morgan Stanley and 17 other banks sued MBIA to challenge its restructuring plan. The banks said the bond insurer's mortgage insurance division would be unable to pay the banks on the insurance they bought.

Morgan Stanley says the settlement significantly cut its risky assets and helped increase a key capital measure, helping the bank better comply with new international regulatory standards.

Morgan Stanley's stock dropped 21 cents, or 1.4 percent, to close at $15.17. MBIA shares added 8 cents to $11.48.

MBIA has settled disputes with other banks this year. Last month it reached a deal with HSBC Holdings. The New York State Financial Services Department, which regulates the insurer, says it is working closely with the remaining financial firms to reach resolutions.

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California subpoenas BofA over mortgages: report (Reuters)

(Reuters) – The California attorney general's office subpoenaed Bank of America Corp this week about the sale and marketing of troubled mortgage-backed securities to investors in the state, the Los Angeles Times reported.

The state is trying to determine whether the bank and Countrywide Financial had sold the securities to investors under false pretenses, the paper reported, citing a person familiar with the matter.

Bank of America bought Countrywide in 2008, leaving itself with billions in losses from soured loans and lawsuits.

The subpoenas come as state attorneys general and federal officials are negotiating a broad mortgage settlement with Bank of America and other major lenders. California reportedly walked away from those talks two weeks ago, although it is possible the state could still sign onto an agreement.

Bank of America declined to comment to Reuters.

The company's shares were down 2.8 percent at $6.22 in morning trading.

(Reporting by Rick Rothacker in Charlotte, North Carolina, editing by Gerald E. McCormick and Lisa Von Ahn)

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Gross' PIMCO makes a big move into mortgages (Reuters)

NEW YORK (Reuters) – Bill Gross, manager of the world's largest bond fund, ramped up buying of mortgage-backed securities in September on the likelihood the Federal Reserve's reinvestment program in those securities will boost prices significantly.

Gross increased mortgage debt to 38 percent of assets in his $242 billion PIMCO Total Return Fund (PTTRX.O) in September, from 32 percent in August, as the U.S. central bank announced last month that it "will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities."

PIMCO's latest bet on mortgages isn't going unnoticed.

Gross, who helps oversee $1.2 trillion as co-chief investment officer at PIMCO, made headlines earlier this year and came under heavy criticism when the manager widely known as the "bond king" bet heavily against U.S. Treasuries -- one of the biggest outperformers of this year.

His move into mortgage-backed securities also comes as the PIMCO Total Return fund's cash equivalents and money-market securities fell to negative 19 percent September, from negative 9 percent in August.

In having a so-called negative position in cash equivalents and money-market securities, it is an indication of derivative use and short-term securities being put up as collateral as a way to boost leverage and increase the fund's holdings in bonds with longer maturities such as mortgage-backed securities, Treasuries and corporate bonds, according to Eric Jacobson, director of fixed-income research at Morningstar who has covered PIMCO for more than a decade.

Over the years, some analysts in the fixed-income world have pointed out that Gross' use of derivatives to boost leverage and exposure to higher-yielding assets is what distinguishes the Total Return Fund from an ordinary plain vanilla bond fund.

"One very basic thing to know, too, is that PIMCO classifies anything with a duration of one year or shorter as cash -- regardless of sector," Jacobson added.

Jacobson said after careful examination of the PIMCO fund's effective duration of 7.14 years -- about double over the last six months -- "it doesn't necessarily mean PIMCO raised their pure interest-rate risk to the United States. They didn't double down on Treasuries."

Rather, PIMCO took on "loose" interest rate risk to other credit and government markets, he said, noting that the Total Return fund increased exposure in non-U.S. developed and emerging markets securities in September.

Duration is a bond's sensitivity to interest rate fluctuations, and going longer duration is an investment strategy when rates are expected to remain low or drop further and vice versa.

All told, the PIMCO Total Return fund's bad call on Treasuries earlier this year has cost it.

It is up only 1.06 percent year to date versus the benchmark BarCap U.S. Aggregate Index which is up 3.99 percent. But on a three-year basis, the fund is up 10.14 percent against the benchmark's 9.36 percent returns. The fund has also held up well over the last five years, with the fund up 7.80 percent versus the BarCap's 5.48 percent returns.

(Reporting by Jennifer Ablan; Editing by Matthew Goldstein and Andrew Hay)

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MBIA settles lawsuit over mortgages for $68 million (Reuters)

NEW YORK (Reuters) – MBIA Inc (MBI.N) and two top executives agreed to pay $68 million in cash to settle lawsuits accusing the bond insurer of misleading investors about its exposure to risky residential mortgage debt.

Tuesday's settlement also covers former Chief Executive Gary Dunton and current Chief Financial Officer C. Edward Chaplin, according to papers filed with the U.S. District Court in Manhattan. Court approval is required.

Smaller rival Ambac Financial Group Inc (ABKFQ.PK), its insurers and some banks earlier this year agreed to pay $33 million to settle similar investor claims. Ambac is now operating under Chapter 11 bankruptcy protection.

(Reporting by Jonathan Stempel, editing by Bernard Orr)

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Nevada, U.S. regulator challenge BofA on mortgages (Reuters)

NEW YORK (Reuters) – Bank of America Corp's mortgage practices came under fresh fire as state and federal regulators questioned whether the largest U.S. bank is doing what it must to address perceived harm to homeowners and investors.

Nevada's attorney general on Tuesday accused the bank of repeatedly violating its $8.4 billion agreement with that state and others to address fraudulent lending charges involving its Countrywide unit, which it bought in 2008.

Catherine Cortez Masto, the state attorney general, asked a federal judge in Reno, Nevada, to let her back out of that accord and sue Bank of America on behalf of homeowners in Nevada, which has one of the nation's highest foreclosure rates and percentages of borrowers who owe more than their homes are worth.

Separately on Tuesday, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, as well as dozens of investors lodged objections to Bank of America's proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities, an agreement negotiated by the trustee Bank of New York Mellon Corp.

Among the other objectors was Goldman Sachs Group Inc, which said it lacks enough information to know whether the accord treats all "similarly situated" investors equally.

And in a third proceeding, a group of homeowners sued to block that $8.5 billion accord, saying it would speed up foreclosures and prolong mortgage abuses. That group asked for a court order requiring the bank to follow servicing policies that are "higher than current industry standards."

In her proposed complaint, the Nevada attorney general said Bank of America still engages in "a pattern and practice" of misleading consumers about such matters as why it denies mortgage modifications, or begins foreclosures while modification requests are pending.

Bank of America was to help 400,000 borrowers modify their home loans under the 2008 accord.

But Masto called the process "chaotic," even accusing the Charlotte, North Carolina-based bank of reprimanding workers for spending "too much time" on the phone -- an average of seven to 10 minutes -- with individual customers.

"Defendants' deceptive practices have resulted in an explosion of delinquencies and unauthorized and unnecessary foreclosures" in Nevada, Masto said in court papers. "The state no longer can get the benefit of its original settlement."

It is unclear how the allegations might affect long-running negotiations on a potential multibillion-dollar settlement with regulators nationwide to improve foreclosure practices at several big banks, including Bank of America.

"We disagree that there has been any material breach of the consent decree and will continue to vigorously defend this action." Bank of America spokeswoman Jumana Bauwens said in response to the Nevada filings.

Lawrence Grayson, another bank spokesman, declined to comment on the other litigation matters, as did Bank of New York Mellon spokesman Kevin Heine.

INVESTOR, HOMEOWNER CLAIMS

The settlement with mortgage-backed securities covers 530 mortgage pools from the former Countrywide Financial Corp, the largest U.S. mortgage lender before Bank of America bought it.

Bank of New York Mellon had negotiated the accord, covering $174 billion of unpaid principal balances, with 22 big investors including the Federal Reserve Bank of New York, BlackRock Inc and Allianz SE's Pimco.

But some other investors say the payout is too low, or they lack enough information to know whether the accord is fair.

In a court filing, the FHFA called it a "positive" that the settlement calls for improving loan servicing and fixing deficient documentation, and said the support of many large market participants is "encouraging."

Still, the FHFA said it lacks enough information about the accord, and wants to be ready to voice a "substantive" objection "should a now unforeseen issue arise."

Fannie Mae and Freddie Mac in 2010 guaranteed 70 percent of single-family mortgage-backed securities that were issued, and provided $1.03 trillion of market liquidity, an FHFA report to Congress in June shows.

"The FHFA sounds like it wants to preserve its right to contest refinements that could expose Fannie and Freddie to greater losses," said Kathleen Engel, associate dean at Suffolk University Law School in Boston and co-author of "The Subprime Virus."

Marc Kasowitz, a lawyer for the FHFA, did not immediately respond to a request for comment.

Meanwhile, the homeowners, who say they have received default notices, seek class-action status for Countrywide borrowers from 2004 to 2008 whose loans are in the trusts and are serviced by Bank of America."

"The settlement agreement will speed up foreclosures, perpetuate existing servicing abuses in the system, and undermine federal programs designed to stabilize the housing market," the complaint said.

"It is not clear the borrowers have standing," Engel said. "They certainly may be aggrieved by servicing problems, but they have to show the settlement itself causes them harm, either new injury or the loss of legal rights."

A lawyer for the homeowners did not immediately respond to a request for comment.

DOZENS OF OBJECTIONS

Bank of America paid $2.5 billion to buy Countrywide, but writedowns and legal costs have pushed the estimated cost of that purchase to more than $30 billion.

Several dozen objections to the $8.5 billion settlement were filed ahead of a Tuesday deadline to intervene in the case, which is overseen by New York State Supreme Court Justice Barbara Kapnick in Manhattan.

Some of the challenges were filed simultaneously in federal court, where some of the objectors hope to move the case.

American International Group Inc, the insurer suing Bank of America for $10 billion in a separate MBS case, is among the objectors. Others include the Federal Deposit Insurance Corp, attorneys general of New York and Delaware, and various banks, insurers, investment funds and pension funds.

US Bancorp, trustee for a $1.75 billion Countrywide mortgage pool, this week separately sued Bank of America to force it to buy back the underlying loans.

The Nevada case is Nevada v. Bank of America Corp et al, U.S. District Court, District of Nevada, No. 11-00135. The New York state case is In re: The Bank of New York Mellon, New York State Supreme Court, New York County, No. 651786/2011. The New York federal case is The Bank of New York Mellon et al v. Walnut Place LLC et al, U.S. District Court, Southern District of New York, No. 11-05988. The homeowner case is Iesu et al v. The Bank of New York Mellon et al, U.S. District Court, Southern District of New York, No. 11-06078. (Reporting by Jonathan Stempel; Additional reporting by Joe Rauch in Charlotte, N.C.; editing by Carol Bishopric, Gary Hill)

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Summary Box: Delinquent mortgages rise (AP)

DELINQUENCIES UP: The number of Americans at risk of foreclosure rose slightly in the April-June quarter to 8.44 percent of all homeowners, the Mortgage Bankers Association said Monday. In a normal market, the percentage of delinquent borrowers is only about 1.1 percent.

LOWER THAN LAST YEAR: Missed mortgage payments have fallen from a record high of more than 10 percent a year ago. But the decline is due partly to delays in foreclosure filings that are backlogged in state courts.

LIKELY TO RISE: The end of an investigation into faulty foreclosure paperwork will likely lead to increased foreclosures later this year.

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U.S. investigating S&P over mortgages: report (Reuters)

(Reuters) – The Justice Department is investigating whether Standard & Poor's improperly rated dozens of mortgage securities in the years before the financial crisis, The New York Times reported on Thursday, citing sources familiar with the matter.

The investigation began before S&P, a unit of McGraw-Hill, downgraded the long-term U.S. debt from a AAA rating to AA-plus this month, the paper said.

In the mortgage investigation, the Justice Department has been asking about instances in which S&P analysts wanted to assign lower ratings to mortgage bonds but may have been overruled by S&P business managers, the Times reported.

Justice Department spokesman declined to comment on the story upon being contacted by Reuters. S&P did not immediately respond to phone calls seeking comment outside regular U.S. business hours.

It was unclear whether the Justice Department investigation also involves the other two ratings agencies, Moody's Corp and Fimalac SA's Fitch, or only S&P, the newspaper said.

The paper quoted Ed Sweeney, a spokesman for S&P, in an e-mail that the agency had received several requests from different government agencies over the last few years and that it was cooperating with these requests.

The Times said that despite the outcry over the ratings agencies' failures in the financial crisis, investors still rely heavily on ratings from the three main agencies for their purchases of sovereign and corporate debt, as well as other complex financial products.

Companies and some countries, though not the United States, pay the agencies to receive a rating. For decades, the government issued rules that banks, mutual funds and others could rely on a AAA stamp of approval for investing decisions -- which bolstered the agencies' power, the newspaper said.

A successful case or settlement against a giant like S&P could accelerate the shift away from the traditional ratings system, the Times said.

For instance, the Dodd-Frank financial reform overhaul sought to decrease the emphasis on ratings, but bank regulators have been slow to spell out how the reform would work.

S&P has been under fire from lawmakers, market players and the U.S. Treasury Department since its decision to cut the U.S. credit rating.

The U.S. Securities and Exchange Commission was also reviewing whether S&P followed all of its policies leading up to the credit downgrade, according to sources familiar with the review.

Key committees in Congress may also hold hearings about the downgrade and reforms of the ratings industry.

(Reporting by Soham Chatterjee in Bangalore and JoAnne Allen in Washington; Editing by Philip Barbara and Ramya Venugopal)

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AIG sues Bank of America for $10B over mortgages (AP)

NEW YORK – More trouble piled up for Bank of America Corp. on Monday, as American International Group Inc. sued it for more than $10 billion, saying the bank cheated it by selling residential mortgage-backed securities that were overvalued.

The suit comes on top of similar suits, which together put the bank in a precarious position, analysts say. The bank's stock dove 20 percent, or $1.66, to $6.51, revisiting levels seen at the nadir of the recession, in March 2009

AIG said Bank of America and two companies that were later gobbled up by the bank, Countrywide and Merrill Lynch, sold the insurance company $28 billion in securities backed by home mortgages between 2005 and 2007, at the height of the housing boom. It said it looked at more than 260,000 of the underlying mortgages, and found that the bank's "stated metrics" for 40 percent of the securities were false.

In one case, a borrower said she had been the owner of a construction business for 25 years, which would have made her 10 years old when she took ownership, AIG said.

Bank of America denied the allegations, saying AIG was big enough and sophisticated enough to know the risks.

"AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets. It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors," Bank of America spokesman Lawrence Grayson said.

AIG spokesman Mark Herr shot back: "It is disappointing but unsurprising that Bank of America continues to attempt to blame others for its own misconduct. Investors, no matter how sophisticated, were entitled to rely on its numerous written representations about the securities it sold."

AIG shares fell $2.52, or 10 percent, to $22.58. They hit a 52-week low of $22.10 earlier in the day.

In June, Bank of America agreed to pay $8.5 billion to a group of investors for selling them poor-quality mortgage securities. AIG's suit is separate, but the company is raising questions about whether the settlement went far enough. On Friday, New York Attorney General Eric Schneiderman urged the judge to reject the settlement, calling it unfair.

Bank of America wrote a number of bad mortgages, but it is in worse shape than other major banks like JPMorgan Chase & Co. and Wells Fargo & Co. because of its purchase of Countrywide for $4 billion in 2008. What seemed like a bargain price for the country's largest mortgage lender has cost the bank tens of billions more in mortgage losses, regulatory fines, repurchases of poorly written loans and expensive litigation.

In January the financial institution paid $2.6 billion to settle buyback claims on home loans sold to Fannie Mae and Freddie Mac. In April, the bank agreed to pay up to $1.6 billion to Assured Guaranty Ltd., an insurer that also pressed the bank to repurchase shoddy mortgages.

In March the Federal Reserve did not allow Bank of America to increase its dividend, citing uncertainty about the depth of its mortgage problems. It was the only denial issued to the four largest U.S. banks. And it raised questions over whether the bank was strong enough to withstand another economic downturn.

Christopher Whalen, managing director of Institutional Risk Analytics, believes the government will eventually have to step into restructure the company.

"You're having this accumulation of claims ... and it's very clear they can't pay them," Whalen said. "At some point, the government has to acknowledge that this bank has far too many liabilities, and they don't have the capital and earnings to deal with it."

The cost of insuring Bank of America bonds against default with a "credit default swap" rose by about 50 percent on Monday, according to Markit.

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Regulator sues Goldman Sachs over risky mortgages (AP)

LOS ANGELES – The U.S. regulator of credit unions on Tuesday sued Goldman Sachs & Co. for more than $491 million in damages over losses incurred by two failed credit unions that purchased mortgage-backed securities underwritten by the investment bank.

The complaint filed by the National Credit Union Administration in U.S. District Court in Los Angeles is the latest lawsuit brought by the federal regulatory agency against a major bank as it seeks to recover billions in losses related to risky mortgage-backed securities that brought down credit unions in recent years.

Buyers of mortgage-backed securities, mostly banks, pension funds and other big investors, made money from the investments if the underlying debt was paid off. But as U.S. homeowners started falling behind on their mortgages and defaulted in droves in 2007, the securities failed and their buyers lost billions.

In the complaint, which also names as defendants several issuers of mortgage-backed securities, regulators claim that the documents used in offering the securities contained untrue statements or omissions as to how risky the investments were.

As a result, U.S. Central Federal Credit Union in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif., acquired the mortgage-backed securities, believing the risk of loss was minimal, according to the complaint.

However, even though virtually all of the securities had a triple-A rating, they represented a substantial risk of losses, the NCUA claims. And when the investments' market value plummeted, the credit unions — two of the nation's largest — failed.

The NCUA placed the two credit unions into conservatorship in March 2009. In October of 2010, it placed them into involuntary liquidation.

Goldman Sachs declined to comment Tuesday.

The NCUA says it may sue five to 10 other banks in coming weeks. In June, regulators sued JPMorgan Chase & Co. and Royal Bank of Scotland PLC.

Factoring in the latest lawsuit, regulators are seeking to recover nearly $2 billion in damages.

Any recoveries from the lawsuits would reduce the total losses resulting from the failure of Western Corporate, U.S. Central and three other failed corporate credit unions: Southwest Corporate, Members United Corporate and Constitution Corporate, the NCUA said.

Corporate credit unions provide financing and investment services to the much larger population of retail credit unions.

Shares of The Goldman Sachs Group Inc. added 50 cents to $123.30 in aftermarket trading. The shares ended the regular trading session up $5.07, or 4.3 percent, to $122.73.

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Banks cutting principal on some mortgages: report (Reuters)

NEW YORK (Reuters) – Bank of America Corp and JPMorgan Chase & Co have started modifying tens of thousands of mortgages where the banks deem the loans especially risky, even if the borrowers have not asked, the New York Times reported on Sunday.

In some cases, the paper said, the banks are slashing the amount borrowers owe, citing one case in Florida where a woman's principal balance was cut in half.

The paper said the banks are targeting holders of pay option adjustable-rate mortgages, a type of loan where borrowers have the option of skipping some principal and interest payments and having the amount added back onto the loan.

Such "option ARM" loans were seen as especially high risk in the wake of the financial crisis; the two banks collectively still have tens of billions of dollars of such loans in their portfolios.

One law professor quoted by the Times said the banks were behaving in contradictory ways, modifying some loans that should not be and not modifying some loans that should be.

Spokespeople for the two banks were not immediately available to comment.

(Reporting by Ben Berkowitz. Editing by Maureen Bavdek)

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Wells Fargo to stop making reverse mortgages (AP)

DES MOINES, Iowa – Wells Fargo Home Mortgage said Thursday that it will no longer make so-called reverse mortgage loans, citing unpredictable home values and restrictions that make it difficult to determine if borrowers can afford homeowners' insurance and other financial obligations.

Reverse mortgages are typically sold to people over age 62 who want to access the equity in their homes for personal expenses, such as medical bills. But unlike home equity loans, reverse mortgages don't have to be repaid until the homeowner sells the property or passes away.

However, the housing downturn has made it harder for banks to gauge the trajectory of home values, and thus how much they should loan. Foreclosures have contributed to falling home prices, often vaporizing the amount of equity that borrowers have in their home. In addition, reverse mortgages aren't subject to the same types of tests as traditional loans. Eligibility is determined by an FHA formula that calculates age and the home's appraised value. Seniors aren't subject to the same types of income and credit score restrictions that protect banks making traditional loans. Wells Fargo said that makes it difficult to figure out if seniors are able to afford property tax and homeowners' insurance payments.

Wells Fargo began originating reverse mortgages in 1990. As of last year, the funded volume of its reverse mortgage business was about 2.2 percent of all its retail mortgage volume and 1.2 percent of overall mortgage volume. The lender said it will stop taking new applications for reverse mortgages after June 30, but will continue to service the loans of its existing reverse mortgage customers. The 1,000 workers in the bank's reverse mortgage division will be given opportunities to apply for other jobs at Wells Fargo.

In February, Bank of America also announced that it would exit the reverse mortgage origination business.

Wells Fargo Home Mortgage is a unit of San Francisco-based bank Wells Fargo & Co. Shares rose 25 cents to close earlier at $26.80.

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H&R Block tumbles on fears regarding mortgages (AP)

By EILEEN AJ CONNELLY, AP Business Writer Eileen Aj Connelly, Ap Business Writer – Mon May 9, 8:54 pm ET

NEW YORK – Shares of H&R Block Inc. lost nearly 8 percent Monday on renewed fears that the company will be dragged back into the subprime mortgage mess.

News that a group of mortgage bond investors may try to force H&R Block's former mortgage unit to buy back potentially billions of dollars in defaulted home loans sent shares sliding.

The mortgages written by Block's former Option One unit, which stopped issuing new loans in December 2007, have been a recurring issue for investors in recent years, but one that had been discounted lately.

Morgan Stanley analyst Vance Edelson said that many — but not all — Block investors had grown complacent about the mortgage issue over the past year. Yet the topic has been raised on every recent conference call. "This has remained part of the investor debate, because many investors have realized that H&R Block is not entirely out of the woods on this issue."

At the end of its fiscal third quarter in March, then-CEO Alan Bennett said the unit created to deal with the remaining mortgage issues, Sand Canyon Corp., had $131 million in reserve to cover potential claims, and that claims were coming in "within reserved expectations."

The exact amount of loans in question is not yet known.

Dallas attorney Talcott Franklin told The Associated Press he is still bringing together the group of investors in mortgage bonds backed by bad Option One loans. Once it is assembled, the group will press H&R Block to repurchase the soured agreements. "At this stage you don't really know what you have, until you actually get confirmation of those holdings," he said.

Some analysts have estimated the bonds purchased by banks and other non-government entities could add up to as much as $100 billion.

An H&R Block spokesman said the company has not received any requests, and cannot comment on actions by outside parties. During a conference call late last month, Bennett said the company would provide "a full update" on mortgage activity when it reports fiscal full-year results on June 23.

Morgan Stanley's Edelson said the company has a number of factors on its side. To force the buyback, bond investors would have to prove there was wrongdoing in the mortgage lending on some level, not simply that a homeowner defaulted on an Option One loan, he said.

"This could be a messy situation that takes years to litigate, because going through all the paperwork is a painstaking process," Edelson said.

Earlier this year, the analyst pointed out to clients that Option One had avoided home equity loans and second liens, which are a typical generator of buybacks. Plus, Block did little business with government sponsored enterprises Fannie Mae and Freddie Mac, which have been the source of most buybacks in the industry.

Franklin said the investors would only need to show a "material and adverse effect." For example, Sand Canyon could be pressed to buy back loans where it could be shown that borrowers committed fraud by providing incorrect information that misrepresented their income. During the housing bubble, such loans were known as "liar's loans" because individuals did not have to provide documentation for their income. "What do you think the odds are that some of the borrowers were, in fact, liars?" the attorney asked.

"A lot of this liability is back-end driven," he added. "If the loan doesn't have a loss associated with it, then there's no repurchase."

Franklin said he hopes the matter can be settled through negotiation, not litigation.

Concerns about the sputtering housing market may have provided fuel to the stock sell-off. With home prices remaining suppressed, and some suggesting the bottom of the market has not yet been reached, investors may be worried that a new round of foreclosures is on the way.

H&R Block shares fell $1.31, or 7.6 percent, to close at $15.93. The stock has traded between $10.13 and $18.08 in the past 52 weeks, with the low point hit in October, the last time the mortgage issue came to the top of traders' agenda.

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Mortgages, foreclosures top agenda at BofA meeting (AP)

CHARLOTTE, N.C. – Foreclosures and home mortgage modifications took center stage at Bank of America Corp.'s annual meeting Wednesday.

Outside the headquarters of the nation's largest bank, protesters held signs and gave testimonials about their own foreclosure experiences. At the meeting, which was held inside the bank's new 32-story building located adjacent to its headquarters, shareholders confronted CEO Brian Moynihan about mortgage woes in their communities.

Reverend Clyde Ellis, a pastor from Virginia, said Bank of America should take responsibility for its role in the foreclosure crisis. Ellis invited Moynihan to visit Prince William County in Virginia to see the damage that foreclosures have caused, including families that have lost homes and empty homes.

"Come to Prince William County and I will show you disaster," said Ellis.

Losses and litigation related to foreclosures and poorly-written mortgages have haunted Bank of America for several quarters. In its latest quarter, the bank's income dropped 39 percent on higher costs related to mortgages and legal expenses. At the end of the first quarter, the bank had $2 billion of foreclosed properties on its book, and its customers were late by 90 days or more on $24 billion of its total loans, which included commercial and residential properties.

Moynihan tried to separate the rest of the bank's business from its mortgage woes. In his address to shareholders at the start of the meeting, he described the company as being made up of two stories, with the mortgage business on one side and all its other business units on the other.

"The power of the franchise is held back by the mortgage challenges we face," he said.

The bank's stock is one of the worst performers of the S&P 500 index this year. Recently, the stock slid after the Federal Reserve rejected the bank's capital plan and its request for a dividend increase.

BofA was the only bank among the country's four largest that didn't pass a stress test from the Fed. The central bank examined the 19 largest banks in the country to see if they were strong enough to withstand another economic downturn. Bank of America will submit a revised plan later this year.

Moynihan said the bank will pay dividends once it resolves more of its mortgage issues and submits a plan that is acceptable to regulators.

Some shareholders want the bank to scrutinize itself more closely. Michael Garland, who was representing several large public pension funds at the meeting, said he had written to Bank of America's audit committee asking that it conduct an independent review of mortgages and foreclosures to show that they conform with the laws.

Garland said that audit committees of other banks responded soon after he sent them a similar letter in January. He said was disappointed that there had been no response from Bank of America's audit committee until just five days before the annual meeting.

"If this is your response to shareholders with a $1.3 billion stake in the company, I can only imagine how you treat your residential mortgage customers," said Garland, who was also representing the New York City Comptroller's Office, which oversees the public pension funds of New York. The New York Comptroller had put forth a shareholder proposal for the bank to conduct the independent review. The plan didn't get enough votes to pass on Wednesday.

The annual shareholder meeting was held in a brand-new auditorium with red velvet seats in its 32-story Bank of America tower, which opened last year.

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House panel OKs new way to fund home mortgages (Reuters)

By Corbett B. Daly Corbett B. Daly – Tue May 3, 3:27 pm ET

WASHINGTON (Reuters) – A bill to create a new market for financing mortgages that would help wean the $10.6 trillion mortgage market off government support advanced in the House of Representatives on Tuesday.

The House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises approved the legislation on a voice vote.

The bill, which the White House supports, would have to be approved by the full committee, the full House and the Senate before being sent to President Barack Obama for his signature into law.

The bill aims to establish a market for covered bonds, which are securities issued by banks and backed by pools of loans.

The loans underlying the covered bonds would remain on the issuer's balance sheet. That is different from the current U.S. mortgage system, in which lenders sell many of the loans they make to government-sponsored Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), which then repackage them as securities for investors.

The panel's chairman, New Jersey Republican Representative Scott Garrett, hopes to reduce the role of Fannie Mae and Freddie Mac with a covered bond market.

"Covered bonds will serve not as a replacement" to existing credit markets but should function as "an additional arrow in the quiver" for funding home mortgages, Garrett said ahead of the vote on his legislation.

Senator Charles Schumer, a New York Democrat, said in March he was considering introducing a version of Garrett's bill in the Senate.

Representative Carolyn Maloney, a New York Democrat, backed Garrett's bill as one way to help the U.S. mortgage market on the margins, though she cautioned that it is not a panacea.

"Why not give it a chance?" Maloney said, adding that she considers covered bonds "a strong tool we could use to help ... our housing market rebound."

The government seized Fannie Mae and Freddie Mac in 2008 as losses on the loans they held spiraled.

The government, through Fannie Mae, Freddie Mac and the Federal Housing Administration, now backs almost nine in 10 new mortgages.

In Europe, covered bonds have long been in use. But they have failed to catch on in the United States.

In a covered bond system, banks can borrow against the value of the underlying mortgages to obtain fresh capital to extend further loans. The bond investors have the right to those underlying assets in the case of a bank default.

The Federal Deposit Insurance Corporation has warned that a covered bond system could put its bank deposit insurance fund at increased risk for losses because the investors would have seniority over the agency in the event of default.

Treasury Secretary Timothy Geithner has said the FDIC's concerns are legitimate and would have to be worked out.

"For this to work, you would be putting the taxpayer in some sense behind private investors, and that has its own consequences, but that is something we can work through and I think it can play a greater role in our system," Geithner said in March.

The White House and Congress are in the midst of a major policy debate on how to overhaul the finance system for buying U.S. homes, which collapsed in 2008.

The Obama administration in February announced several steps to make government-backed mortgages more expensive in a bid to lure private capital back to the mortgage market.

It also announced plans to phase-out Fannie Mae and Freddie Mac over time and presented Congress with three options for replacing them long-term.

(Reporting by Corbett B. Daly, Editing by Dan Grebler)

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Consumers still pay credit cards before mortgages (AP)

By EILEEN AJ CONNELLY, AP Personal Finance Writer Eileen Aj Connelly, Ap Personal Finance Writer – Wed Mar 30, 6:57 pm ET

NEW YORK – It's not just mortgages that are upside down.

People are staying current with their credit card payments even when they are behind on their mortgage, continuing a trend first seen three years ago.

Data now shows that the flip was even more pronounced at the end of 2010, long after industry experts expected patterns to return to normal.

Among consumers who had at least one credit card and a mortgage, 7.24 percent were 30 days late on mortgage payments but current on their card payments at the end of 2010, credit reporting agency TransUnion said. That compared with 4.3 percent in the first quarter of 2008, when the change was first seen on a national basis.

In contrast, 3.03 percent of consumers with both forms of debt were at least 30 days late on credit cards, but current on their mortgage in the 2010 fourth quarter, compared with 4.1 percent in early 2008.

The reversal from traditional payment habits reflects the steep drop in home values and the spike in unemployment.

"As long as housing problems persist and unemployment is high, things are likely to stay flipped," said Sean Reardon, a consultant for TransUnion who produced the study by analyzing data from consumer credit reports.

Not surprisingly, the situation is most pronounced in two states hit hardest by the housing crisis, Florida and California. Both states saw the flip earlier that the rest of the country — in the third quarter of 2007.

The persistence of the reversal shows that consumers don't want to lose access to credit on their cards, especially if they depend on using them to make necessary purchases. "You can't buy groceries with your house," Reardon said.

With tighter regulations making it difficult to manage the accounts of risky customers, banks will now shut a card down if a consumer misses one or two payments. By six months, the account is written off as uncollectible.

In contrast, it can take a year or more after the first missed payment before a house is foreclosed. That gives people who fall behind more time to try to solve their financial problems, said John Ulzheimer, president of consumer education at SmartCredit.com.

It's also easier to keep current on credit cards when times get tight. "The minimum payment on a credit card is a heck of a lot lower than a mortgage," Ulzheimer noted.

The question now is whether credit cards will remain a higher priority for cash-strapped consumers.

TransUnion found in a recent survey that consumers say they would pay their mortgages first if it was possible to make only one of the two payments. But the data show that behavior doesn't reflect those intentions.

Of the consumers who defaulted in the last three months of 2010, 52 percent defaulted on their mortgages while keeping their credit cards current, and 22 percent defaulted on credit cards while keeping their mortgages current.

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Consumers still pay credit cards before mortgages (AP)

By EILEEN AJ CONNELLY, AP Personal Finance Writer Eileen Aj Connelly, Ap Personal Finance Writer – 31 mins ago

NEW YORK – It's not just mortgages that are upside down.

People are staying current with their credit card payments even when they are behind on their mortgage, continuing a trend first seen three years ago.

Data now shows that the flip was even more pronounced at the end of 2010, long after industry experts expected patterns to return to normal.

Among consumers who had at least one credit card and a mortgage, 7.24 percent were 30 days late on mortgage payments but current on their card payments at the end of 2010, credit reporting agency TransUnion said. That compared with 4.3 percent in the first quarter of 2008, when the change was first seen on a national basis.

In contrast, 3.03 percent of consumers with both forms of debt were at least 30 days late on credit cards, but current on their mortgage in the 2010 fourth quarter, compared with 4.1 percent in early 2008.

The reversal from traditional payment habits reflects the steep drop in home values and the spike in unemployment.

"As long as housing problems persist and unemployment is high, things are likely to stay flipped," said Sean Reardon, a consultant for TransUnion who produced the study by analyzing data from consumer credit reports.

Not surprisingly, the situation is most pronounced in two states hit hardest by the housing crisis, Florida and California. Both states saw the flip earlier that the rest of the country — in the third quarter of 2007.

The persistence of the reversal shows that consumers don't want to lose access to credit on their cards, especially if they depend on using them to make necessary purchases. "You can't buy groceries with your house," Reardon said.

With tighter regulations making it difficult to manage the accounts of risky customers, banks will now shut a card down if a consumer misses one or two payments. By six months, the account is written off as uncollectible.

In contrast, it can take a year or more after the first missed payment before a house is foreclosed. That gives people who fall behind more time to try to solve their financial problems, said John Ulzheimer, president of consumer education at SmartCredit.com.

It's also easier to keep current on credit cards when times get tight. "The minimum payment on a credit card is a heck of a lot lower than a mortgage," Ulzheimer noted.

The question now is whether credit cards will remain a higher priority for cash-strapped consumers.

TransUnion found in a recent survey that consumers say they would pay their mortgages first if it was possible to make only one of the two payments. But the data show that behavior doesn't reflect those intentions.

Of the consumers who defaulted in the last three months of 2010, 52 percent defaulted on their mortgages while keeping their credit cards current, and 22 percent defaulted on credit cards while keeping their mortgages current.

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Summary Box: Underwater mortgages in US rise (AP)

WASHINGTON – UNDERWATER MORTGAGES RISE: The number of Americans who owe more on their mortgages than their homes are worth rose in the October-December quarter to 11.1 million. About 23 percent of all mortgaged homes are underwater.

FORECLOSURES A FACTOR: The number of underwater mortgages had fallen in the first nine months of last year. But that was mostly because more homes had fallen into foreclosure. An estimated 3 million homes will be foreclosed upon this year, according to foreclosure tracker RealtyTrac.

HOME PRICES FALLING: Home prices in December hit their lowest point since the housing bust in 11 of 20 major U.S. metro areas.

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Banks receive proposals on troubled mortgages: report (Reuters)

(Reuters) – U.S. banks received a proposal from state attorneys general and several federal agencies that could require them to reduce loan balances of troubled mortgage borrowers, the Wall Street Journal said, citing people familiar with the matter.

The 27-page document, sent to the nation's largest mortgage lenders, does not specify penalties or fines but instead represents a detailed code of conduct for how they must treat borrowers throughout the loan modification process, the sources told the paper.

The proposed code of conduct would require banks to first consider reducing loan balances of mortgage borrowers in certain instances before modifications or foreclosure, the paper said.

(Reporting by Sakthi Prasad in Bangalore; Editing by Tomasz Janowski)

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