SEC looks to reassure investors

Fri Feb 6, 2009 8:35pm EST
By Toni Reinhold

NEW YORK (Reuters) - Securities and Exchange Commission officials looked to reassure investors on Friday that they would reinvigorate the agency's policing of Wall Street, improve the quality of credit ratings and said they expect to bring more cases against mortgage fraud.

"I like to tell the staff we are going to act like our hair is on fire," newly installed SEC Chairman Mary Schapiro told reporters in Washington, two days after a congressional hearing slammed the agency for not uncovering Bernard Madoff's alleged $50 billion fraud.

Schapiro announced she had already ended a Bush administration program that made it harder for SEC lawyers to negotiate settlements with companies.

The program requiring SEC investigators to get commission approval for settlements "discouraged staff from arguing for a penalty," Schapiro told a conference.

She vowed to minimize red tape impeding investigations.
The SEC was blasted at a House Financial Services subcommittee hearing on Wednesday for not following up on repeated tips over nine years from a former investment manager who thought Madoff's investment operation was suspicious.

New York Democratic Rep. Gary Ackerman told five SEC officials at the hearing, "You have totally and thoroughly failed in your mission."

Prosecutors have said Madoff cost investors some $50 billion through a Ponzi scheme in which money from newer investors was used to pay early investors.

Speaking at the Practising Law Institute's annual conference, SEC Speaks, in Washington on Friday, Schapiro said she was looking for ways to improve how the SEC handles tips and whistleblower complaints.

MISSION FAILURE

The New York Post reported on Friday that Schapiro was looking to replace Linda Thomsen, head of the SEC's enforcement unit.

The SEC declined to comment on the report, which cited unnamed sources saying Schapiro was checking out professionals in various offices of the U.S. attorney, who litigate cases on behalf of the federal government under the attorney general's direction.
Thomsen's unit is responsible for investigating allegations of securities fraud.
Schapiro said the SEC had to play a critical role in reviving financial markets and bolstering investor confidence.

"We have to have a laser-like focus right now on investor protection," she said. "I would like to have a mechanism to have regular contact with the investor community so we can hear the issues they are concerned about."Donald Hoerl, director of the SEC's Denver office, told the conference the SEC had filed about 70 Ponzi cases in the last two years and four since Madoff was charged in December.
"That's not a dramatic upswing in terms of the number of cases. What is different is the magnitude of the Ponzi schemes," Hoerl said. In late January, the SEC charged then-missing fund manager Arthur Nadel with defrauding investors at six Florida-based hedge funds. The agency said Nadel had given investors false information about the funds' returns and overstated the value of the investments by $300 million.
"The magnitude of these schemes serves as a reminder to us we need to continue our focus in this area," Hoerl said.

SUBPRIME'S BADLANDS TARGETED

Rosalind Tyson, regional director of the SEC's Los Angeles office, told the conference the SEC expected to be filing additional actions related to subprime mortgages.

Subprime mortgages given to high-risk borrowers unable to meet standard mortgage requirements helped collapse the U.S. housing market and triggered billions of dollars in losses at financial institutions invested in the U.S. mortgage market.

Tyson said the SEC was looking into mortgage originators, mortgage securitizers, credit rating agencies, and sellers of mortgage-based securities.

One difficulty in subprime investigations was proving fraudulent intent, she said. "Poor business judgment does not equate to fraud."The SEC is looking at whether lenders disclosed risk profiles of underlying loans, valued their portfolios appropriately and made adequate risk disclosures to investors.
The agency under Schapiro is also set to focus on further reform for credit rating agencies, a business SEC Commissioner Kathleen Casey termed an "oligopoly".

"It is crucial for the SEC to foster an environment ... which is unapologetically pro-competitive," Casey told the conference.

Schapiro said one of her priorities would be to improve the quality of credit ratings by addressing conflicts of interest the agencies face as a result of their compensation models.
Credit rating is dominated by Moody's Corp, Standard & Poor's and Fimalac SA's Fitch Ratings, which have been accused of not doing enough due diligence before assigning top ratings to securities that later deteriorated in value.

Credit rating agencies rate debt and preferred stock issues for companies' ability to pay principal, interest or dividends, and investment decisions are made based on those ratings.
Ten rating agencies are registered with the SEC, but Moody's, S&P and Fitch still dominate the industry.
GAPS, OVERLAPS

Elisse Walter, one of the five SEC commissioners who make decisions on federal securities rules, said Congress must address the gaps and overlap in oversight of securities, futures and derivatives markets.
Futures and derivatives are regulated by the U.S. Commodity Futures Trading Commission (CFTC).
Unregulated derivatives have been blamed for contributing to the financial crisis because some were used to speculate on borrowers' credit quality.

Walter did not endorse a merger between the SEC and CFTC, but she said there was significant regulatory overlap between the two agencies.

Walter is a former general counsel of the CFTC and Schapiro is a former chairman of the CFTC. SEC Commissioner Casey favors merging the two agencies.


(Reporting by Karey Wutkowski and Rachelle Younglai in Washington, Bhaswati Mukhopadhyay in Bangalore, Svea Herbst-Bayliss in Boston; Writing by Toni Reinhold; Editing by Tim Dobbyn)

Ponzi schemes

WASHINGTON (Reuters) - The frequency of Ponzi schemes is not increasing but the magnitude of the frauds is, a Securities and Exchange Commission official said on Friday.

The SEC has been under intense scrutiny for not uncovering the alleged $50 billion fraud carried out by former Nasdaq Chairman Bernard Madoff, who is accused of running a massive Ponzi scheme for years.
Donald Hoerl, director of the SEC's Denver office, said the agency has filed about 70 Ponzi cases in the last two years and has filed four cases since Madoff was charged in early December.

"That's not a dramatic upswing in terms of the number of cases," said Hoerl, speaking at the Practising Law Institute's annual SEC Speaks conference. "What is different is the magnitude of the Ponzi schemes."
Ponzi schemes involve frauds in which early investors are paid with money from later investors.
Hoerl said the SEC's recent Ponzi scheme cases involve staggering amounts of money. In late January, the agency charged then-missing fund manager Arthur Nadel with defrauding investors at six Florida-based hedge funds.The SEC said Nadel provided false information to investors about the funds' returns and overstated the value of the investments by $300 million.

"The magnitude of these schemes serves as a reminder to us we need to continue our focus in this area," Hoerl said.He said the schemes follow a typical pattern: They are led by a very charismatic person, they involve secretive and very successful trading programs, and the investment advisers are seldom registered with the SEC.It's "a scheme that's been with us for a very long time," Hoerl said. "It has been a constant part of the SEC's (enforcement) program."

Lawmakers grilled SEC officials earlier this week, chastising them for not paying heed to Harry Markopolos, a former investment manager who repeatedly tried to warn U.S. regulators about Madoff, and for not examining Madoff's firm more aggressively.

(Reporting by Karey Wutkowski and Rachelle Younglai; editing by John Wallace)

The Roles of Government and the FSB

One might see the monetary plan to date as a knee jerk reaction whereby these FED intended to swiftly prop the existing monetary policy. Is it an effort that has been in play for some time. Either way it appears to have no real effect and the intensification of the financial turbulence is evident .

Monetary policy changes and domestic govenenment support has led to a further deterioration in the economic outlook. The Federal aid storyline is of interest commencing with the swiftness of the Bernanke move upon the announcement of a further deterioration of the banking sector and collapse of the mortgage backed securities markets.

Is there a valid concern for those events, the offer made by the government and then sudden withdraw of the offer in favor of a congressional vote and senate affirmation? In other words, was it the right thing to do and properly timed and how much thought was behind it? If there was not a lot of advance thought for such an enormous capital response the question then looms as to what is the connection between the Feds needs to step in with respect to consumers and the mortgage markets and homeowners.

The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements and the Federal Open Market Committee is responsible for open market operations. The Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services. The Federal Open Market Committee has aggressively eased monetary policy. The Federal Reserve's strategy for dealing with the financial crisis and its economic consequences appears to be layered. First, as indications of economic weakness proliferated, the Committee had to respond to offset possible effects of the crisis on credit conditions and the broader economy. Shortly after the turbulence began, The Federal Open Market Committee had aggressively eased monetary policy and cut of 50 basis points in the target for the federal funds rate. The cumulative reductions in the target rate reached 100 basis points--that is, a full percentage point--by the end of 2007.

The Committee continued to respond, as indications of economic weakness proliferated, reducing the target rate by an additional 225 basis points by the spring of this year. In Bernakes own words "The policy response stands out as exceptionally rapid and proactive. "In taking these actions, the objective was to cushion the direct effects of the financial turbulence on the economy. Thereafter it was to also reduce the risk of a adverse perspectives in which economic weakness exacerbates financial stress, which, in turn, leads to further economic damage. The Committee stepped in and took action by discounting the target for the federal funds rate an additional 100 basis points in October. Half of that reduction was excited by a rate cut by six major central banks in October. Now bring on the Bernanke's offer and then withdrawal of the Fed offer for immediate capital infusion and look peripherally at the timing of the BofA acquisition and closing the Countrywide deal that occurs on the eve on the eve of a $9.0 billion restitution plan by Brown and other AG's. Either way the bailout is intended to address the mess with the homeowners and sub prime collapse.

Foreclosures are accelerating if anything since the last Q 2008.

Sub prime lenders hads a variety of bells and whistles allowing them to mitigate risk and successfully accomplish their goals of creating mortgage secondary. For example a Special-Purpose Bankruptcy-Remote Entity will usually exist in tndem with a Federal Saving Bank owned by the sponsor. The terms "single purpose," "special purpose," and "bankruptcy remote" are used in a variety of contexts throughout the structured finance and securitization markets. If the depositor or holder of securities or retained interests do not become subject to a bankruptcy proceeding (or substantively consolidated with an insolvent affiliate), the likelihood that the depositor or holder of securities or retained interests or their creditors will have any incentive to recharacterize the transaction as a secured financing is consequently reduced.

NYT: Both parties move to aid homeowners - The New York Times- msnbc.com

WASHINGTON - Four months after Congress tried to rescue the economy with a $700 billion bailout for the financial industry, Republicans and Democrats are suddenly competing to bail out financially struggling homeowners.

Having spent hundreds of billions of dollars rescuing financial institutions, only to see the economy spiral even deeper into crisis, liberal and conservative economists and lawmakers are pushing to redirect the economic stimulus bill to what they say is the core problem: the housing market.

Senate Republicans are seeking new tax breaks and up to $300 billion in mortgage subsidies to attract homebuyers. Democrats want to spend at least $50 billion on federal programs aimed at reducing mortgage foreclosures.

 
 

Inserted from <http://www.msnbc.msn.com/id/29009397/>

Democrats Support Court Intervention into Loan Mod’s

A bill to give judges authority to alter loan terms for primary residences may be the quickest way to arrest the housing market's collapse. Most Democrats in the House and Senate support that plan. President Barack Obama told Democratic leaders Friday he also backs it, according to a Senate aide who was not authorized to be quoted by name.

But 10 groups representing the lending industry and other businesses are fighting back fiercely. Several have engaged portions of their lobbying machines to stop the legislation. The groups spent $83 million in lobbying on multiple issues in 2008, a figure that shows the power of the banking and investing industry and their business supporters.

One Democratic backer of the bankruptcy proposal, Rep. Maxine Waters of California, said the banking industry "has owned this Congress far too long."

Borrowers who are told to go delinquent before the lender can help!

"Effective immediately, a servicer may begin loss mitigation efforts for any mortgage loan when a payment default is reasonably foreseeable (imminent default) rather than waiting for an actual payment default.

 

Accordingly, a servicer may agree to one or more appropriate and permitted loss mitigation alternatives (e.g., forbearance, a combination of forbearance and a repayment plan, and an Early Workout (discussed in the following section)), if the servicer has determined that a payment default is reasonably foreseeable, and a concession to the borrower in the payment terms is advisable. In determining whether a payment default is reasonably foreseeable, the servicer must evaluate the borrower's financial condition as well as the condition of and circumstances affecting the property securing the mortgage loan. The servicer also must document the basis on which it makes a determination that a payment default is reasonably foreseeable.

 

This new rule allowing earlier intervention applies to all MBS mortgage loans and all whole loans held in Fannie Mae's portfolio.

 

Pre-foreclosure sales, acceptance of deeds-in-lieu of foreclosure, and short payoffs (accepting a payoff for less than the amount owed), will not be permitted loss mitigation alternatives for use with borrowers whose loans are current but are determined to be in imminent default.

 

Following is a list of examples of the types of factors the servicer may consider when evaluating whether or not a payment default is reasonably foreseeable. Factors for consideration include, but are not limited to:

 

• Information received from the borrower (for example, changes in employment

and other income sources, or family medical status);

• The payment history of the borrower(s) (as reported by a credit bureau) on other

indebtedness;

• The loan-to-value (LTV) ratio of the mortgage loan when it was originated;

• An estimate of the current LTV ratio;

• Whether the monthly debt service under the mortgage loan has recently changed

or will soon change;

• The credit score of the borrower(s); and

• The occurrence of a natural disaster (such as a tornado, hurricane, or flood),

terrorist attack or other catastrophe caused by either nature or a person other than

the borrower that:

o the servicer reasonably believes adversely affects the value or habitability

of a mortgaged property; or

o the servicer reasonably believes adversely affects the borrower's ability to

make further payments or payment in full on the mortgage loan.

 

A default is reasonably foreseeable when the servicer is notified or otherwise becomes aware of an event or factors (including those listed above) that is or are expected to cause the borrower to be in default in the near future, generally within 90 days."

Questions and Answers

CAN I QUIT CLAIM MY INTEREST?
A Quit claim or other transfer of the property must be for valuable consideration.
Damn it - great question. You cannot transfer the asset but can have a nominee -why though? Really - great question!