H&R Block 2Q loss widens; mortgage claims spike (AP)

By EILEEN AJ CONNELLY, AP Personal Finance Writer Eileen Aj Connelly, Ap Personal Finance Writer – Thu Dec 1, 7:03 pm ET

NEW YORK – A spike in claims related to bad loans written by its now-shuttered subprime mortgage unit shouldn't create any new liability for H&R Block Inc., company executives said Thursday after releasing results that showed a wider loss for its fiscal second-quarter.

The nation's largest tax preparer said claims from investors in securities backed by those mortgages, and from insurers who covered those investments, shot up to $483 million during the quarter, from $21 million a year earlier.

Sand Canyon Corp., as the former OptionOne mortgage unit is now called, reviewed $61 million in claims during the quarter, resulting in incurred losses of $3 million.

While the losses remained in line with prior quarters, the new claims totaled more than three times as many as were filed in the previous four quarters combined. But Block executives said the higher claims won't likely result in a similar increase in losses.

Chief Financial Officer Jeff Brown said since May 2009, 85 percent of claims that Sand Canyon has reviewed were found invalid, mainly because OptionOne was a pure subprime lender, which had relatively weak lending standards.

The claims increase led Sand Canyon to set aside an additional $20 million during the quarter to cover losses. But executives said that doesn't portend any increased liability to Block.

"Whether or not claim activity remains at elevated levels in the near future, we believe Sand Canyon's financial position is sufficient to satisfy all valid claims," said Block CEO Bill Cobb during a conference call to discuss the quarterly results.

He noted Sand Canyon is a "separate legal entity" from Block, and the tax preparer believes it is therefore sheltered from having to pitch in cash to cover any claims.

The issue has weighed on Block shares for some time, as Wall Street has fretted it could end up on the hook for buying back millions more in soured mortgages.

The topic's resurgence after a few quarters in the background hurt Block's shares. In afterhours trading after Block released its results, the company's shares fell 43 cents, or 2.6 percent, to $15.63. The stock closed the regular session at $16.06.

Block said it closed its previously announced sale of its RSM McGladrey business consulting unit on Wednesday. And it booked charges for the previously planned shutdown of its ExpressTax unit.

The resulting shifting of funds boosted Block's loss to $141.7 million, or 47 cents per share, for the three months ended Oct. 31. A year earlier, it posted a loss of $109 million, or 36 cents per share.

Block typically posts a second-quarter loss because most of its revenue comes during the U.S. tax season.

Excluding the ExpressTax charges and losses from discontinued operations, H&R Block said it lost 38 cents per share in the recent quarter.

On the revenue side, growth in Block's Australian tax business helped the quarter's revenue rise 8 percent to $129.2 million, from $119.6 million last year.

That performance fell short of analyst projections.

On average, analysts expected an adjusted loss of 35 cents per share, on $328.9 million in revenue, according to data provided by FactSet. Both figures included RSM McGladrey's business. Last year, the consulting unit took in revenue of $203.4 million in the quarter.

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Criminal probe into online mortgage scams widens (AP)

By MICHAEL LIEDTKE, AP Technology Writer Michael Liedtke, Ap Technology Writer – Mon Nov 21, 8:24 pm ET

SAN FRANCISCO – A criminal investigation into mortgage swindlers has expanded beyond deceptive advertising on Google's Internet search engine to root out con artists who were luring their victims on Bing and Yahoo, too.

Monday's news of the widening probe confirmed that the Internet's three largest search engines had been turned into tools of prey for crooks looking to bilk homeowners scrambling to avoid foreclosure. The scams involved online ads making bogus promises of help people hold onto their homes under a government-backed program to modify mortgage payments.

After finding their victims using ads triggered by phrases such as "stop foreclosure," the swindlers extracted upfront fees or arranged to have the mortgage payments sent them without providing any assistance. The ruses had become increasingly common.

The crackdown had shuttered 125 mortgage scams by Monday, up from 85 last week, when the Office of the Special Inspector General for the Troubled Asset Relief Program announced it was cleaning up the misconduct on Google. The U.S. Treasury Department division said many of the con artists bought ads on all three search engines.

The identities of the alleged swindlers haven't been disclosed, partly because the criminal investigation is still open. A spokesman for agency steering the investigation declined to provide any further details Monday.

Like Google Inc., Microsoft Corp.'s Bing search engine agreed to stop accepting ads from hundreds of Internet advertisers and agencies tied to the scams. The ban also applies to Yahoo Inc., because it depends on Microsoft to sell its search advertising as part of a revenue-sharing partnership.

"Microsoft is committed to preventing fraud within its advertising network and online community and is working closely with the Special Inspector General for the Troubled Asset Relief Program to help tackle the problem of fraudulent mortgage-modification advertising," the software maker said in a statement.

The mortgage scams are the latest example of marketing malfeasance on large Internet advertising networks. Critics have complained the largely automated systems for buying ads next to Internet search results are vulnerable to abuse and that the companies running them aren't doing enough to screen the marketing pitches before they appear on websites.

The criminal investigation into fraudulent mortgage ads is surfacing three months after Google agreed to pay $500 million to avoid prosecution in Rhode Island for profiting from online ads from Canadian pharmacies that illegally sold drugs in the U.S.

Consumer Watchdog, a group that published a study about mortgage ad scams nine months ago, is calling for criminal charges and financial penalties against the major search engines in the current investigation.

"These Internet company executives were active enablers of fraud against vulnerable homeowners," said John Simpson, director of Consumer Watchdog's privacy project. "They cannot be allowed to benefit from these ill-gotten gains."

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Fannie Mae loss widens, asks taxpayers for $7.8B (AP)

WASHINGTON – Mortgage giant Fannie Mae is asking the federal government for $7.8 billion in aid to cover its losses in the July-September quarter.

The government-controlled company said Tuesday that it lost $7.6 billion in the third quarter. Low mortgage rates reduced profits and declining home prices caused more defaults on loans it had guaranteed.

The government rescued Fannie Mae and sibling company Freddie Mac in September 2008 to cover their losses on soured mortgage loans. Since then, a federal regulator has controlled their financial decisions.

Taxpayers have spent about $169 billion to rescue Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates that figure could reach up $220 billion to support the companies through 2014 after subtracting dividend payments.

Fannie has received $112.6 billion so far from the Treasury Department, the most expensive bailout of a single company.

Michael Williams, Fannie's president and CEO, said Fannie's losses are increasing for two reasons: Some homeowners are paying less interest after refinancing at historically low mortgage rates; others are defaulting on their mortgages.

"Despite these challenges, we are making solid progress," he said. For example, Fannie's rate of homeowners who are late on their monthly mortgage payments by 90 days or more has decreased each quarter since the beginning of 2010, he said.

When property values drop, homeowners default, either because they are unable to afford the payments or because they owe more than the property is worth. Because of the guarantees, Fannie and Freddie must pay for the losses.

Fannie said lower mortgage rates contributed to $4.5 billion in quarterly losses. While those losses are large, they are temporary and should ease in future earnings reports, said Mahesh Swaminathan, mortgage strategist at Credit Suisse.

"They are accounting losses on their books rather than economic losses," he said.

Fannie's July-September loss attributable to common shareholders works out to $1.32 per share. It takes into account $2.5 billion in dividend payments to the government. That compares with a loss of $3.5 billion, or 61 cents per share, in the third quarter of 2010.

Last week, Freddie requested $6 billion in extra aid — the largest request since April 2010 — after it reported losing $6 billion in the third quarter.

Washington-based Fannie and McLean, Va.-based Freddie own or guarantee about half of all mortgages in the U.S., or nearly 31 million home loans. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.

Fannie and Freddie buy home loans from banks and other lenders, package them with bonds with a guarantee against default and sell them to investors around the world. The companies nearly folded three years ago because of big losses on risky mortgages they purchased.

The Obama administration unveiled a plan earlier this year to slowly dissolve the two mortgage giants. The aim is to shrink the government's role in the mortgage system, remaking decades of federal policy aimed at getting Americans to buy homes. It would also probably make home loans more expensive.

Exactly how far the government's role in mortgage lending would be reduced was left to Congress to decide. But all three options the administration presented would create a housing finance system that relies far more on private money.

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Fannie Mae taps $7.8 billion from Treasury, loss widens (Reuters)

WASHINGTON (Reuters) – Fannie Mae, the biggest source of money for U.S. home loans, on Tuesday said it needed a further $7.8 billion in federal aid to stay afloat as a shaky housing market widened its third-quarter loss to $5.1 billion.

The government-controlled firm also attributed the deeper cash drain to losses on derivatives used to hedge its exposure to interest-rate swings and on expenses related to home loans made prior to the 2008 financial collapse. In the year-earlier quarter it had a loss of a $1.3 billion.

Fannie Mae has now drawn $112.6 billion in bailout funds from the Treasury Department since being seized by the government in 2008 as mortgage losses mounted, and it has returned $17.2 billion to taxpayers in the form of dividends.

"There is certainly a lot of pre-2009 loans that we need to work through and that is certainly driving the credit losses you saw in this quarter and over the last several years," Fannie Mae Chief Financial Officer Susan McFarland told Reuters.

She said the company was "working to reduce losses" on those legacy loans and "limit taxpayer exposure."

The mortgage finance company and its smaller rival Freddie Mac were taken over during the financial crisis as losses on subprime mortgages threatened insolvency.

Given the crucial role the two play in U.S. housing finance, owning or guaranteeing about half of all mortgages, the government has pledged unlimited funds to keep the firms afloat through the end of 2012. Combined, they have cost taxpayers around $169 billion.

The plan to put them into a government conservatorship was meant to be temporary, although it is likely to be years before a long-term replacement structure takes shape. Both the Obama administration and Congress want to eventually wind them down.

Their regulator estimates that the bailout could reach about $193 billion through 2014, with dividend payments taken into account.

Fannie Mae said credit losses, which include expenses related to the foreclosed properties it holds on its books as well as on its derivatives, increased in the third quarter to $4.5 billion from $3.9 billion in the second quarter.

Freddie Mac, the second-largest source of U.S. mortgage finance, said last week it lost $4.4 billion in the third quarter and needed to borrow an extra $6 billion from the federal government.

Fannie Mae has now reported losses in 16 of the last 17 quarters. It reported a profit of $73 million in the fourth quarter of last year, but that was largely attributed to a one-time payment from Bank of America.

Fannie Mae and Freddie Mac were created by Congress to encourage homeownership. They buy mortgages from lenders and repackage them as securities for investors, with a guarantee, to ensure a steady source of home loan funds.

The two firms, along with the Federal Housing Administration, now back about nine out of 10 new home loans.

(Reporting by Margaret Chadbourn; editing by Bob Burgdorfer)

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SEC widens CDO probe, negotiating settlements: report (Reuters)

(Reuters) – The U.S. securities regulator is widening its probe into mortgage-bond deals that ushered in the financial crisis, and is pushing for a settlement of more than $200 million with Citigroup, the Wall Street Journal said, citing people familiar with the matter.

The Securities and Exchange Commission officials are in advanced talks with Citigroup to settle civil charges related to a $1 billion mortgage-bond deal called Class V Funding III, the Journal said.

The SEC is especially looking into whether investors in some deals were properly warned that firms betting against the housing market had a role in choosing what mortgage-linked assets went into the deals, the people told the paper.

The agency is also negotiating a parallel settlement with Credit Suisse, which acted as collateral manager on the deal, the Journal said.

However, the Swiss bank likely would not face any charges related to the collateralized debt obligations (CDOs) it created and marketed, a person told the Journal.

SEC spokesman John Nester declined to comment to Reuters on the Journal report. Citigroup and Credit Suisse declined to comment to the Journal.

The regulators are also examining whether investors were misled in deals created by Japanese bank Mizuho Financial Group Inc, the Journal said.

The SEC's inquiry into Mizuho still is months from completion and might not result in charges being filed against the company, according to the paper.

The companies could not immediately be reached by Reuters for comment outside regular U.S. business hours.

In a similar case involving a CDO, Squared CDO 2007-1, JPMorgan paid $153.6 million to settle with the SEC in June.

Goldman Sachs Group Inc last year paid $550 million to settle a similar SEC case over another CDO, Abacus.

A CDO is a type of derivative product whose value and payments are derived from an underlying portfolio, often bonds or mortgages.

(Reporting by Sakthi Prasad in Bangalore; Editing by Vinu Pilakkott)

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Fannie Mae loss widens; asking taxpayers for $2.8B (AP)

NEW YORK – Government-controlled mortgage company Fannie Mae said Friday that its second-quarter loss widened as it continues to seek loan modifications to help reduce defaults amid the ongoing difficulties in the housing and mortgage markets.

Fannie Mae also made $2.3 billion in dividend payments to the U.S. Treasury during the period, which reduces the amount it will be asking taxpayers for to $2.8 billion from $5.1 billion.

Fannie's rescue has been one of the most expensive government bailouts. The amount of money it has received from the Treasury to stay afloat is set to rise to $104.8 billion when accounting for the latest request. Fannie has paid back $14.7 billion to the Treasury in dividends as of the end of June.

Fannie Mae, based in Washington, D.C., and sibling Freddie Mac, based in McLean, Va., were created by Congress to buy mortgages from lenders and package them into bonds that are resold to global investors.

They own or guarantee about half of all mortgages in the U.S., or nearly 31 million home loans worth more than $5 trillion. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.

The government took over the companies in September 2008 after massive losses on risky mortgage bonds threatened to topple them. The government then put them into conservatorship, a legal arrangement under which the companies' government regulator controls their financial decisions.

In the second quarter ended June 30, Fannie Mae lost $5.18 billion, or 90 cents per share. That compares with a loss of $3.13 billion, or 55 cents per share, a year earlier.

Revenue climbed 16 percent to $5.24 billion from $4.5 billion.

Net interest income, or money earned from deposits and loans, increased 18 percent to $4.97 billion from $4.21 billion.

The quarter included $6.1 billion in credit-related expenses tied to the company's pre-2009 book of loans. Fannie anticipates future loan defaults and related charge-offs tied to this book of business will occur over several years. But there is a bright spot, as these loans are becoming a smaller percentage of its guaranty book of business, declining to 34 percent at quarter's end as compared with 39 percent of its guaranty book of business as of Dec. 31, 2010.

The problem with many of the loans from the pre-2009 book of business is that they were obtained when home prices were rising and people thought they could afford the mortgages that came with them. Home prices peaked during the third quarter of 2006, Fannie said.

Since that time the U.S. economy has fought to regain its footing after a recession. This economic uncertainty, combined with high unemployment levels and low levels of consumer confidence, has pushed home prices down. Many homeowners now struggle to pay for their mortgages, while others feel stuck in their homes due to the supply that's on the market.

Fannie Mae said Friday that it aims to lower its credit losses while keeping as many families as possible in their homes and protecting property values.

"We remain the largest source of liquidity for the U.S. mortgage market, and we are committed to creating long-term value by helping to build a stable, sustainable housing market for the future," President and CEO Michael J. Williams said in a statement.

Fannie completed more than 80,000 single-family loan workouts in the quarter, with more than 59,000 of them involving loan modifications, repayment plans and forbearances.

The single-family foreclosure rate of 1.20 percent on an annualized basis was less than the 1.52 percent from a year ago. But Fannie said that it is taking more time to cycle through foreclosures, which is increasing its credit-related expenses and hurting its single-family serious delinquency rates. The company predicts these delays will hurt the overall recovery of the housing market because it will take more time to get rid of the distressed home supply that is out there.

Fannie Mae said 47 percent of its new single-family book of business includes loans bought or guaranteed since the start of 2009. The company anticipates loans acquired in 2009, 2010 and the first half of this year will be profitable over their lifetime, but said it is still too early to tell what will happen.

Its shares slipped a penny to 30 cents in morning trading Friday.

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