Moody’s hit for role in mortgage crash

Last Friday the Department of Justice (DOJ), along with Attorneys General in 21 states, resolved a federal investigation into Moody’s Analytics’ role in the financial crisis.

While mortgage lenders and investment banks certainly played a leading role in the mortgage meltdown, credit-rating agencies were a strong supporting role. The DOJ investigation looked into allegations that Moody’s was rating mortgage-backed securities and other financial products higher ratings than was merited, out of fear that rating realistically would lead financial institutions to take their business elsewhere.

Rating the same institutions that pay them is a huge conflict of interest, but Moody’s has long claimed their ratings are based on strict credit rating standards. However, the DOJ investigation concluded Moody’s was using an extremely lenient ratings standard.

The problem stems back to 2001

Problems were evident even in back in 2001, when Moody’s introduced an internal rating tool that utilize the company’s established rating standards. The company failed to announce changes in rating models and standards to the public, allowing them to mislead investors.

As it turns out though, several banks and lenders were well aware of Moody’s skewed rating system.

The Justice Department’s investigation uncovered internal communications from 2007 showing senior management were aware that mortgage-backed security ratings were not quite right. And by not quite right, I mean green-lighting seriously inaccurate ratings that contributed to investors believing securities were low-risk (which history has proven to be untrue).

Moody’s to pony up $864M

The DOJ announced the case settlement comes in around $864 million, with about half going to federal civil penalty and the rest divided up among the 21 states in involved in the investigation. While this is a relatively large chunk of money, others involved in the mortgage meltdown didn’t get off so easy.

For similar allegations, Standard & Poor (S&P) ended up shelling out a bit over a billion.

Moody’s apparently sees very little problem with their role in the financial crisis. In a press release the company stated, “Moody’s stands behind the integrity of its ratings, methodologies and processes, and the settlement contains no finding of any violation of law, nor any admission of liability.”

In spite of this, they company will adhere to compliance measures for five years, which they note is “final and is not conditioned on court approval.” While they can act like they’re just being good guys playing along with the DOJ, some lawmakers are calling for changes in how we deal with conflict of interests for credit-rating businesses.

Lawmakers call for change

Senator Al Franken suggests creating an independent agency that would assign rating jobs, effectively reducing the threat of lost business for inaccurate ratings.

Regardless of the steps taken to minimize problems in the future, the fact remains that many lax standards allowed companies to get away with some pretty shady dealings.

We need to not just look at how to prevent this, but also which practices we allow to remain in place. An independent agency overseeing ratings is certainly a step in the right direction, but businesses must also create and maintain an internal culture of integrity if we want to avoid another meltdown.

#MoodysFine

A shift in FHA’s condo requirements

At last year’s National Association of Realtors (NAR) Conference and Expo, Federal Housing Administration (FHA) Principal Deputy Assistant Secretary Edward Golding announced a shift toward a lower owner-occupancy rate requirement on condominiums, something NAR has long fought for.

Today, the FHA issued a mortgagee letter signed by Golding, lowering the owner-occupancy requirement for existing condominiums from 50 to 35 percent, effective immediately.

But there are some strings…

The FHA says the requirements are necessary in order to “maintain the stability of the Mutual Mortgage Insurance Fund” (MMIF). However, lowering the requirement to 35 percent does not threaten the MMIF if other requirements are met, such as “higher reserves, a low percentage of association dues in arrears, and evidence of long-term financial stability (as evidenced by financial documents).”

For proposed, under construction (including existing projects less than 12 months old), or gut rehab conversions, the FHA will allow a minimum owner-occupancy percentage of 30 percent of the declared units.

NAR calls this a big step

Jon Boughtin, Public Issues Media Manager, Media Communications at NAR tells The Real Daily, “NAR still believes the 35 percent owner-occupancy requirement should apply to all condos, and we’ll continue to make that case as FHA moves forward with the rulemaking process that’s currently underway, but from our perspective this is a big leap forward.”

“We’ll also continue to work with them to address transfer fees, commercial space requirements, and other pending issues related to condo approval,” Boughtin added.

NAR President Tom Salomone asserted, “NAR has been fighting for changes to FHA’s condominium rules for years, and the mortgagee letter announced will bring some much needed relief to the market.

Condominiums will have a much easier time getting certified by FHA, and Realtors® will have more options for clients looking to purchase a condo with an FHA mortgage.”

“This is a big win for NAR, and while we believe all condominiums should have the rules applied to them equally, we also believe FHA has heard the concerns of Realtors® and is moving in the right direction,” Salomone concluded.

#FHAcondos

Would you pay for an insurance policy on your car if it didn’t cover you in any way shape or form, rather covered your lender’s loss if you get in an accident? Of course not, that’s ludicrous, but mortgage lenders have long done it on homes with most barely batting an eye at the tiny line item.

Lender Paid Mortgage Insurance (LPMI) is an insurance policy a homeowner can’t collect on, rather protects the bank in the event that the property is lost to say a fire, which is exactly what happened to Rolling Lazzarone’s home in Reno three years ago which is still no more than a concrete slab.

Lazzarone’s Attorney, Ken McKenna tells News 4, “Nobody knows about LPMI. It’s fraud.”

Fraudulent or not, they must disclose

Whether fraudulent or not, Wells Fargo is being sued for failing to disclose the LPMI policy when Lazzarone bought his house, contending that he is not the only homeowner who never signed a disclosure, paying on an insurance policy on the bank, and when a homeowner attempts to talk to the insurance company, no details can be given because it’s the bank’s policy, not the homeowner’s.

In this instance, the homeowner said they hadn’t heard of LPMI until recently, and according to the Wells Fargo website, the homeowner pays the LPMI through a higher interest rate on their mortgage. The Federal Homeowners Protection Act was passed by Congress to require that if LPMI is tacked on to a loan, the borrower must be informed first, particularly since they cannot collect on the policy.

Lawsuit seeks punitive damages

McKenna says banks are skirting the disclosure laws, and is seeking punitive damages to make a statement. “The problem in this case and we believe in a lot of cases is the LPMI is being taken out, by the bank, but the person who’s buying the home doesn’t even know its happening.”

Lazzarone equates LPMI to double dipping. “If the bank forecloses on your house, they get the property, but they also get the value of that insurance policy; a policy the customer has been paying for.”

The grenade: loan mods

“I think it speaks to the core of why you don’t see anybody getting loan mods the past 6-7 years,” he added. “Why would I refinance you if I’m going to get my money back, collect all your payments and then I get to sell your property?”

What you need to do for your clients

Despite legalities, a troubling premise remains: “If the average joe was to call up tomorrow and ask, ‘Do I have LPMI on my property,’ can they find out? I don’t think so,” said Lazzarone.

As a real estate professional, you should at a minimum be aware of LPMI, and at a maximum, make sure your clients are being informed of it up front, maybe even go check on a few that have already closed. LPMI may not be illegal, but some see it as double dipping – will this court case change the direction of this fee that is not consumer-centric?