Monday, October 3, 2011

FHFA warns Basel III may increase mortgage rates

-Housingwire

Basel III will increase capital requirements for big banks, resulting in higher mortgage rates, the Federal Housing Finance Agency said.

The FHFA made that assertion in a paper released this week on proposed mortgage servicing compensation rules.

Basel III capital requirements were designed with the intent of ensuring systemically significant banks possess enough capital to cover future risks.

Because capital requirements are going higher, FHFA says "some of the largest originators, who are market leaders in setting mortgage rates, will need to either raise the mortgage rates offered to borrowers while reducing servicing released premiums paid in order to compensate for any incremental capital required, or accept lower returns."

Corporate borrowing costs – especially in Europe – also will feel the headwinds of stricter regulations spawning from Basel III, Standard & Poor's noted this week.

"The Basel III regulations, due to come into force in stages between 2013 and 2018 are likely to result in a repricing and even a rationing of credit for corporates globally, and change the behavior of lenders and borrowers," S&P said in its report. "Yet, European corporates will feel the effect more harshly than their U.S. counterparts because they typically rely more heavily on banks for funding relative to capital market sources, the report states."

The  global Basel III requirements for systemically important banks also is catching heat for going against the American capitalistic grain.

In his own push back against Basel III, Christopher Whalen with Institutional Risk Analytics, punched holes in the  regulatory structure.

"I think we can all agree that the statist, anti-democratic construction of Basel III is out of step with traditional ideas of American democracy and free enterprise," Whalen wrote. "The world of Basel III is all about top down management of the economy, the sort of socialist claptrap that was introduced into the U.S. political mainstream after the two world wars. Banks are, in fact, run like most other businesses, from the branch level up to the head office, but the deterministic world of Basel III is entirely European in outlook."

Whalen seems to see Basel III as a contradictory construct that  will  actually create a system riddled with greater risks.

"Americans need to reject new era concepts such as market efficiency and fair value accounting, two of the key pillars of the Basel III world that encouraged the growth of opaque OTC markets in mortgage securities and derivatives," Whalen said.  "In good times, Basel III was an enabler for bad banking practices and excessive leverage. Now we are seeing the very same global bureaucrats who fomented the financial bubble rush around setting new, incomprehensible rules that we call Basel III.”

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Wall Street's New Watcher

-The Wall Street Journal

Two weeks after moving into a skyscraper near Wall Street to start assembling a muscular new agency overseeing banks and insurers in New York, Benjamin M. Lawsky got a surprise during an introductory meeting with a midlevel manager: His power was even broader than he thought.

The 41-year-old former federal prosecutor, who spent the last four years as Andrew Cuomo's confidant and adviser in the New York attorney general's office, learned that he had greater latitude to pursue criminal fraud cases than he initially knew.

As the head of the New York State Department of Financial Services, which officially opens its doors Monday, he says he plans to use that authority to put the new agency on the map.

Since the June meeting, Mr. Lawsky has been contacting Federal Bureau of Investigation agents, lawyers and other trusted allies from his past as part of his plans to "exponentially" increase the criminal division from the current handful of employees, he says. But he adds that he will use the power of his new office judiciously.

"I'm strategically aggressive," says Mr. Lawsky, who went after a slew of banks, securities firms and top executives while working in the attorney general's office.

Mr. Lawsky, who is paid $127,000 a year, won't say what the criminal-enforcement unit will investigate first, though he is eager to join forces with state and federal prosecutors to bring cases. That seldom happened before New York lawmakers combined the state's banking and insurance regulators in March to create the new agency.

New York's Department of Financial Services will instantly become one of the highest-profile financial regulators in the nation. The 1,700-person agency will oversee 3,900 banks, insurers, mortgage brokers, loan servicers and New York-based outposts of foreign banks. Those companies have about $5.7 trillion in combined assets.

Few people on Wall Street will talk publicly about Mr. Lawsky, except in an optimistic, hopeful tone. "He's approachable," says Thomas Workman, president and chief executive of the Life Insurance Council of New York, a trade group.

However, some executives and lawyers who represent them are worried that Mr. Lawsky will behave more like a prosecutor than a regulator. As an assistant U.S. Attorney, Mr. Lawsky foiled a plot to smuggle rocket-propelled grenade launchers into the U.S., solved cold-case murders committed by Asian mobsters, and took down an insider-trading ring.

Mr. Lawsky is remembered on Wall Street for his relentless scrutiny, while working as Mr. Cuomo's special assistant, of bonuses paid by U.S. financial firms that got bailout money. He played a key role in an ongoing lawsuit against former Bank of America Corp. Chief Executive Kenneth D. Lewis, in which Mr. Lawsky publicly asked tough questions about the role of the Federal Reserve and Treasury Department in the 2008 takeover of Merrill Lynch & Co. He was also a behind-the-scenes force in extracting more than $60 billion in repayments to investors whose cash was frozen in auction-rate securities.

"Ben is a formidable adversary on the other side of the table," says Mary Jo White, a former U.S. Attorney in New York who hired Mr. Lawsky. Ms. White, now a partner at law firm Debevoise & Plimpton LLP, represents Mr. Lewis in the civil-fraud case. He has denied any wrongdoing.

Lobbyists and trade groups resisted when the new agency's authority was being hashed out in Albany earlier this year. One of the biggest fears was that the Department of Financial Services could be as mighty as the New York attorney general's office. In response, some of Mr. Lawsky's powers were slightly tempered.

Still, working as the agency's acting head this summer, Mr. Lawsky snarled Goldman Sachs Group Inc.'s agreement to sell its Litton Loan Servicing subsidiary until he got a promise that Goldman, Litton and the buyer promise not to process foreclosure documents without reviewing case files and adhere to other business practices. The sale was completed in August, but Mr. Lawsky is pressing numerous other mortgage firms to make the same pledges.

"It was a potentially significant problem," says H. Rodgin Cohen, a partner at Sullivan & Cromwell LLP who represented Goldman in the Litton sale. Mr. Lawsky wasn't "a bully," and "he wanted to get it done."

Mr. Lawsky, a Pittsburgh native, is a marathon runner and fan of composers Gustav Mahler and Richard Wagner. His sixth-floor office includes a Pittsburgh Steelers "terrible towel" and a framed photograph with Gov. Cuomo on Wall Street. He said he doesn't mind being seen as tough "if it keeps the people we regulate on their toes."

The financial industry has a huge impact on New York's struggling job market and economy. As a result, Mr. Lawsky's top priority is to "do what it takes to get the (financial) industry thriving again," he says.

In an email, Gov. Cuomo, a Democrat who took office in January, wrote: "Ben is smart and effective, and he brings a balanced and fair approach to the job. He knows we need to keep New York a center of finance but at the same time aggressively protect consumers."

Preet Bharara, the U.S. Attorney for the Southern District of New York, says working with Mr. Lawsky as a federal prosecutor showed that he is "not timid." At the same time, Mr. Lawsky is "not a bomb-throwing guy," adds Mr. Bharara, who is still friends with Mr. Lawsky.

After Tropical Storm Irene hit New York in late August, Mr. Lawsky traveled the state to help residents file insurance claims. After a crowd in the New York City borough of Staten Island shouted that one insurer had warned it would take 10 days for appraisers to arrive, Mr. Lawsky called executives at the company. The appraisers drove up within two hours.

Although Mr. Lawsky said he is solely focused on his new job, political experts, friends and former colleagues believe Mr. Lawsky is poised for a dramatic political climb.

Already, Mr. Lawsky stands in for Gov. Cuomo at some events. On Sept. 8, Mr. Lawsky gave an emotional speech at Stony Brook University to commemorate the tenth anniversary of the Sept. 11 terrorist attacks on the World Trade Center. "Planes no longer scare me, but they inspire me," said Mr. Lawsky, who watched the second plane hit from his apartment-building rooftop in Manhattan. "They remind me I am trying to seek justice for people."

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House Is Gone but Debt Lives On

-The Wall Street Journal

LEHIGH ACRES, Fla.—Joseph Reilly lost his vacation home here last year when he was out of work and stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it.

In June, he learned otherwise. A phone call informed him of a court judgment against him for $192,576.71.

It turned out that at a foreclosure sale, his former house fetched less than a quarter of what Mr. Reilly owed on it. His bank sued him for the rest.

The result was a foreclosure hangover that homeowners rarely anticipate but increasingly face: a "deficiency judgment."

Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale. The economics of today's battered housing market mean that lenders are doing so more and more.

Foreclosed homes seldom fetch enough to cover the outstanding loan amount, both because buyers financed so much of the purchase price—up to 100% of it during the housing boom—and because today's foreclosures take place following a four-year decline in values.

"Now there are foreclosures that leave banks holding the bag on more than $100,000 in debt," says Michael Cramer, president and chief executive of Dyck O'Neal Inc., an Arlington, Texas, firm that invests in debt. "Before, it didn't make sense [for banks] to expend the resources to go after borrowers; now it doesn't make sense not to."

Indeed, $100,000 was roughly the average amount by which foreclosure sales fell short of loan balances in hundreds of foreclosures in seven states reviewed by The Wall Street Journal. And 64% of the 4.5 million foreclosures since the start of 2007 have taken place in states that allow deficiency judgments.

Lenders still sue for loan shortfalls in only a small minority of cases where they legally could. Public relations is a limiting factor, some debt-buyers believe. Banks are reluctant to discuss their strategies, but some lenders say they are more likely to seek a deficiency judgment if they perceive the borrower to be a "strategic defaulter" who chose to stop paying because the property lost so much value.

In Lee County, Fla., where Mr. Reilly's vacation home was, court records show that 172 deficiency judgments were entered in the first seven months of 2011. That was up 34% from a year earlier. The increase was especially striking because total foreclosures were down sharply in the county, as banks continued to wrestle with paperwork problems that slowed the process.

One Florida lawyer who defends troubled homeowners, Matt Englett of Orlando, says his clients have faced 20 deficiency-judgment suits this year, up from seven during all of last year.

Until recently, "there was a false sense of calm" among borrowers who went through foreclosure, Mr. Englett says. "That's changing," he adds, as borrowers learn they may be financially on the hook even after the house is gone.

In Mr. Reilly's case, "there's not a snowball's chance in hell that we can pay" the deficiency judgment, says the 39-year-old man, who remains unemployed. He says he is going to speak to a lawyer about declaring bankruptcy next week, in an effort to escape the debt. The lender that obtained the judgment against him, Great Western Bank Corp. of Sioux Falls, S.D., declined to comment.

Some close observers of the housing scene are convinced this is just the beginning of a surge in deficiency judgments. Sharon Bock, clerk and comptroller of Palm Beach County, Fla., expects "a massive wave of these cases as banks start selling the judgments to debt collectors."

In a paradox of the battered housing industry, trying to squeeze more money out of distressed borrowers contrasts with other initiatives that aim instead to help struggling homeowners, including by reducing what they owe.

The increase in deficiency judgments has sparked a growing secondary market. Sophisticated investors are "ravenous for this debt and ramping up their purchases," says Jeffrey Shachat, a managing director at Arca Capital Partners LLC, a Palo Alto, Calif., firm that finances distressed-debt deals. He says deficiency judgments will eventually be bundled into packages that resemble mortgage-backed securities.

Because most targets have scant savings, the judgments sell for only about two cents on the dollar, versus seven cents for credit-card debt, according to debt-industry brokers.

Silverleaf Advisors LLC, a Miami private-equity firm, is one investor in battered mortgage debt. Instead of buying ready-made deficiency judgments, it buys banks' soured mortgages and goes to court itself to get judgments for debt that remains after foreclosure sales.

Silverleaf says its collection efforts are limited. "We are waiting for the economy to somewhat heal so that it's a better time to go after people," says Douglas Hannah, managing director of Silverleaf.

Investors know that most states allow up to 20 years to try to collect the debts, ample time for the borrowers to get back on their feet. Meanwhile, the debts grow at about an 8% interest rate, depending on the state.

Mr. Hannah expects the market to expand as banks "aggressively unload" their distressed mortgages in the next year, driving up the number of deficiency judgments being sought.

They are pretty easy to get. "If the house sold for less than you owe, the lender wins, plain and simple," says Roy Foxall, a real-estate lawyer in Fort Myers on Florida's west coast.

Mr. Foxall says five deficiency suits were filed against his clients this year, and he couldn't poke any holes in any of them. Lenders typically have five years following a foreclosure sale to sue for remaining mortgage debt.

Mr. Englett, the Orlando lawyer who has handled 27 such suits for homeowners in the past 21 months, says he didn't get the bank to waive the deficiency in any of the cases, but did reach six settlements in which the plaintiff accepted less.

Florida is among the biggest deficiency-judgment states. Since the start of 2007, it has had more foreclosures than any other state that allows deficiency judgments—more than 9% of the U.S. total, according to research firm Lender Processing Services Inc.

A loan-deficiency suit can yank borrowers back to a nightmare they thought was over.

Ray Falero, a truck driver whose Orlando home was foreclosed on and sold in August 2010, says he thought he was hallucinating when, months later, he opened the door and saw a sheriff's deputy. The visitor handed him a notice saying he was being sued for $78,500 by the lender on the home purchase, EverBank Financial Corp., of Jacksonville, Fla.

"I thought I was done with this whole mess," he says.

Mr. Falero, 37, says he was about nine months behind on his loan when the bank foreclosed. Before it did, he bought another home in Minneola, Fla., where he now lives and where he says he is up to date on mortgage payments. Like Mr. Reilly, Mr. Falero says he didn't swell the foreclosed-on loan through refinancing or home-equity borrowing.

EverBank won a deficiency judgment on Mr. Falero's Orlando loan. Mr. Falero and his lawyer are fighting to reduce the amount owed. EverBank declined to comment on his case.

Credit unions and smaller banks are the most aggressive pursuers of deficiency judgments, a review of court records in several states shows.

At Suncoast Schools Federal Credit Union in Tampa, Jim Simon, manager of loss and risk mitigation, says the institution has a responsibility to its members, and that means trying to recoup losses by going after loan deficiencies. He calls such legal action the credit union's "last arrow in the quiver."

The biggest banks appear to have stayed largely on the sidelines as they deal with the foreclosure-paperwork mess. One big bank, J.P. Morgan Chase & Co., "may obtain a deficiency" judgment in foreclosure cases but will "often waive" the leftover debt when a homeowner agrees to a so-called short sale of a house for less than is owed on it, a bank spokesman says.

Among the hardest-hit spots in Florida is Lehigh Acres, a 95-square-mile unincorporated sprawl of narrow, cracked-pavement streets about 15 miles inland from Fort Myers.

Lehigh Acres was carved out of scrub land and cattle farms in the 1950s by a Chicago businessman, Lee Ratner, who had made a fortune on d-CON rat poison, says Gary Mormino, a history professor at the University of South Florida in St. Petersburg. Before he died, Mr. Ratner sold prefabricated houses to families hungry for a slice of paradise.

Decades later, Lehigh Acres (population 68,265) attracted people eager to cash in on the housing boom, even though it is distant from the sugary white beaches on the Gulf of Mexico. Speculative investors bought more than half of homes sold in Lehigh Acres in 2005 and 2006, Bob Peterson, a real-estate agent, estimates.

Many of those stucco homes now stand empty, priced at about a third of the value they had at the peak of the housing boom, which was often around $300,000.

In the first seven months of this year, courts entered 42 deficiency judgments in Lehigh Acres, for a total of $7 million, up from 26 judgments for $4.6 million in the same period of 2010, according to a Wall Street Journal analysis of state-court records.

Fifth Third Bancorp, of Cincinnati, filed for the largest share of deficiency judgments in Lehigh Acres last year. The bank declined to comment.

"It's eerily quiet around here," says Jon Divencenzo, who bought a house in Lehigh Acres at a May foreclosure sale for $50,000. Some nights, he says, the only sounds are rustling pine trees and the idling car engines of former homeowners circling the block to glimpse what they lost.

The hard-hit area reveals a sharp contrast in homeowners' attitudes toward deficiency judgments.

Julia Ingham invested in four Lehigh Acres properties in June 2005, hoping to "drum up some real money for retirement."

All have since been foreclosed on by lenders, says the 62-year-old retired programmer for International Business Machines Corp.

A credit union, after selling one of the foreclosed houses for less than the debt on it, obtained a deficiency judgment against Ms. Ingham for $181,059.54. She worries she could face such judgments on the other properties, too.

Ms. Ingham says when she bought them, she misunderstood how much her investments put her on the hook for. Her builder, she says, promised she could invest $10,000 in four properties and then flip them for a profit. Ms. Ingham says deficiency judgments punish borrowers who were taken advantage of by lenders and builders.

Catherine Ortega, who owns a Lehigh Acres home around the corner from one of Ms. Ingham's foreclosed homes, says banks should leave people like her former neighbor alone. "Those people have suffered enough," she says.

In July 2005, Mr. Reilly took out a $223,000 mortgage to build a vacation home here, about 160 miles from his primary home in Odessa, Fla. He was laid off just as construction was being completed.

Mr. Reilly says he is current on the loan on his primary residence but couldn't afford the vacation home's $1,200-a-month loan payment. Great Western Bank, which is owned by National Australia Bank Ltd., foreclosed on his house in Lehigh Acres in July 2010.

Mr. Reilly, who was a mortgage broker before his layoff, says he knew that deficiency judgments were possible after a foreclosure but didn't expect to face one because he doesn't have any financial assets, and you can't get "blood from a stone."

Alfredo Callado, who lives next door to Mr. Reilly's former house, is unsympathetic. Like Ms. Ortega, Mr. Callado is troubled by the crime that a neighborhood full of empty houses attracts. He started watching over Mr. Reilly's former house to ward off thieves who steal air conditioners from vacant properties.

Mr. Callado, sitting on a lawn chair in his driveway, says lenders should use deficiency suits to punish defaulting homeowners for the damage they do to neighborhoods, including driving down property values.

"You have to make them pay for what they do to those of us left behind," he says.

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Tuesday, September 27, 2011

The World's Most Incredible Bridges

-Yahoo! Travel

Starting with simple logs from fallen trees or a few stones strategically placed across a stream, bridges and humans have had a long history. Many are designed exclusively for people on foot or on bike; others are for use by cars, boats or trains. Some bridges connect continents; others are known more for their histories and the cultural interest they inspire.

“Few man-made structures combine the technical with the aesthetic in such an evocative way as bridges” wrote David J. Brown, a bridge historian and author of Bridges: Three Thousand Years of Defying Nature. With the help of Brown, and Judith Dupré, a structural historian and bridge expert, we’ve searched the globe for incredible specimens of architecture that span physical obstacles — better known as bridges.

The Singapore Helix Bridge, Singapore

The almost 1,000 foot long curved Singapore Helix Bridge connects Singapore's Youth Olympic Park with the new Marina Bay Sands integrated resort. Designed by architecture firms the Cox Group and Architects 61, and international engineering firm Arup, the Singapore Helix is the world's first bridge in the form of an interlocking double helix, and also utilizes lights to highlight its unique structure, Brown said. The bridge has viewing platforms, and also serves as a gallery.

The Singapore Helix Bridge, Singapore

Ponte Vecchio, Florence, Italy

Florence’s Ponte Vecchio (which means “Old Bridge”), crosses the Arno River, and is an inhabited bridge, common in Europe during the Middle Ages when merchants and residences occupied the space. “The Ponte Vecchio is more than a bridge. It is a street, a marketplace, a public square, and an enduring icon of Florence,” Dupré writes. Today, she said, the bridge houses gold shops and, on the top level, the “secret” Vasari Corridor that Renaissance nobility once used to cross between the Pitti and Vecchio palaces. The bridge is considered to be the first segmental arch bridge built in the West, according to the Encyclopaedia Britannica and “is an outstanding engineering achievement of the European Middle Ages.” Built in 1345, it required fewer piers than the Roman semicircular-arch design, as the shallower segmental arch offered less obstruction to navigation and freer passage to floodwaters. Its design is generally attributed to Taddeo Gaddi, better known as a painter and pupil of Giotto. During World War II, it was the only bridge in Florence spared from destruction by German bombs, because Hitler took a fancy to it.

Ponte Vecchio, Florence, Italy

Sundial Bridge, Redding, CA

Spanish architect and engineer Santiago Calatrava's Sundial Bridge stretches across the Sacramento River in Redding, California, linking the two campuses of Turtle Bay Exploration Park. Opened in 2004, the bridge for pedestrians and bicyclists also serves as a gateway to the Sacramento River Trail system, and its soaring backward-leaning mast with cables stretched like the strings of a harp, is a working sundial, said David J. Brown, a bridge historian and author of Bridges: Three Thousand Years of Defying Nature. The bridge is also environmentally sensitive to its setting. The free-standing construction allows the bridge to avoid impacting the nearby salmon-spawning habitat, as there are no supports in the water, yet its glass-bottom encourages public appreciation of the river, according to Turtle Bay Exploration Park. The Sundial Bridge is one of about fifty -- and the first built in the United States -- designed by Calatrava, writes Brown.

Sundial Bridge, Redding, California, United States

Leonardo's "Golden Horn" Bridge, Aas (near Oslo), Norway

Designed in 1502 by Leonardo da Vinci to span the “Golden Horn,” the famous waterway in Istanbul that separates Europe and Asia, the stone bridge was never built because the Turkish sultan feared that it was not technically feasible. A scaled down, laminated wood and stainless steel version based on the famous artist’s original plan is now a footbridge near Oslo, Norway. “For 500 years the beauty and symbolism of this graceful bridge remained an obscure drawing in one of Leonardo’s notebooks, until it was brought into being in Norway in 2001 by the contemporary artist Vebjorn Sand,” according to the website of The Leonardo Bridge Project, a global public arts project. Built in collaboration with the Norwegian transportation ministry, the bridge was the first civil engineering idea by Leonardo to be realized.

Leonardo's 'Golden Horn' Bridge, Aas (near Oslo), Norway

Millau Viaduct, Millau, France

Rising above the clouds, the Millau Viaduct is the tallest road bridge in the world, said Brown, a bridge historian and author of Bridges. With its loftiest pier higher than the Eiffel Tower, it was financed by the same company that built the famous French monument. Conceived by engineer Michel Virlogeux and designed by architect Sir Norman Foster, the cable-stayed bridge (in which the deck is supported from towers by a series of cables), comprises seven concrete piers and a steel deck, and spans more than one-and-a-half miles across the valley of the river Tarn near Millau in southern France. Completed in 2004 after only three years' construction, the Millau Viaduct was created to have the "delicacy of a butterfly," said Foster in news reports. "A work of man must fuse with nature. The pillars had to look almost organic, like they had grown from the earth," said the English architect, who was interviewed by a regional paper and quoted in a BBC news report.

Millau Viaduct, Millau, France

Ponte Sant' Angelo, Rome, Italy

Ponte Sant’Angelo spanning the Tiber in Rome, one of the eight stone bridges the Romans are known to have built over the Tiber between 200 B.C. and A.D. 260, is the most celebrated of the six “massive beauties” still in use, said Judith Dupré, author of Bridges. “The Romans perfected the masonry arch,” she said, allowing them to span much greater distances than previously. “Much of Roman engineering genius is underwater, hidden from view, but their inventions — including the cofferdam, cutwater piers that divide water current, and pozzolano, a type of waterproof concrete—are still used today,” Dupré said. Ponte Sant’ Angelo, originally named for Hadrian, the emperor who reigned during its construction, leads to his mausoleum, Castel Sant’ Angelo, a popular tourist attraction in Rome.

Ponte Sant' Angelo, Rome, Italy

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Senate leaders announce bipartisan agreement to avert government shutdown

-The Washington Post

Senate leaders agreed to a deal Monday evening that is almost certain to avert a federal government shutdown, a prospect that had unexpectedly arisen when congressional leaders deadlocked over disaster relief funding.

After days of brinkmanship reminiscent of the budget battles that have consumed Washington this year, key senators clinched a compromise that would provide less money for disaster relief than Democrats sought but would also strip away spending cuts that Republicans demanded. The pact, which the Senate approved 79 to 12 and the House is expected to ratify next week, is expected to keep federal agencies open until Nov. 18.

“It will be a win for everyone,” said Majority Leader Harry M. Reid (D-Nev.).

Minority Leader Mitch McConnell (R-Ky.) called the plan “a reasonable way to keep the government operational.”

Aides to House Speaker John A. Boehner (R-Ohio) said he will support the compromise.

The spending battle marked the third time this year that congressional acrimony has brought the government to the edge of calamity. In April, Boehner and President Obama reached a deal on funding for 2011 about 90 minutes before a government shutdown was to begin. On Aug. 2, just hours before the deadline, Congress gave final approval to legislation lifting the government’s borrowing authority, averting a partial shutdown and the potential for a default on the federal debt.

Although this week’s fight ended with days, rather than hours, to spare, it drained many in Congress, who thought it was a senseless fight. Reid summed up the feeling of many lawmakers when he quoted Sen. Johnny Isakson (R-Ga.), who said there was too little money in dispute to raise the specter of a shutdown and to halt payments to those affected by natural disasters.

“Let’s fight when there’s something to fight about,” Reid quoted Isakson as saying during a speech on the Senate floor.

At issue was a dispute over how to fund disaster relief, a concern that was heightened in late August after an earthquake struck central Virginia and Hurricane Irene caused flooding in the Northeast.

Although Democrats said the Federal Emergency Management Agency needed more funding, they agreed to accept a Republican plan to spend $3.65 billion in disaster relief money, $1 billion of which would have gone toward the budget for the current fiscal year, which will end Friday. Republicans, concerned about adding to the budget deficit, refused to support the funding without $1.6 billion in accompanying cuts. Their largest target was an auto loan program popular with Democrats, leading to the standoff.

The showdown between the two sides was averted on Monday, when FEMA said it could make ends meet through the end of the week. That led to an agreement that calls for the agency and other government disaster relief programs to forgo the $1 billion in proposed funding for this week. Beginning Saturday and running to Nov. 18, FEMA can begin to tap the remaining $2.65 billion for ongoing efforts.

With the House out of session this week, the Senate approved a resolution that will keep the government open through next Tuesday. The House is expected to approve that extension in a voice vote Thursday, which does not require all members to be present, and then approve the longer-term bill next Tuesday.

Some lawmakers from hard-hit states are unhappy with the compromise, saying that it would result in a slight delay in processing aid to victims, and that the overall total of FEMA funding wouldn’t be enough to account for the damage caused by the disasters.

“They would delay the process by punting back to the House,” said Sen. Roy Blunt (R-Mo.). The deal “also stripped $1 billion in disaster relief and provides less emergency funding for Missourians in the wake of record flooding and tornadoes,” he added.

The debate over the budget bill turned on sharp — and familiar — political lines that scuttled earlier talk that the two parties were going to tone down their attacks.

Republicans, particularly House conservatives, said they were unwilling to add to the federal deficit, even for disaster funding, and accused Democrats of overspending. Democrats used the debate to portray Republicans as “holding hostage” relief checks for those struck by tornadoes, flooding, forest fires and droughts, focusing much of their criticism on House Majority Leader Eric Cantor (R), who represents Mineral, Va., the epicenter of the earthquake.

Although the agreement lifts the imminent specter of a government shutdown, it will not resolve the fight over how much FEMA needs to help disaster victims and whether that money must be offset with spending cuts.

The White House has said FEMA will need $4.6 billion for the next fiscal year — a figure many Democrats say underestimates the agency’s needs.

Democrats will push to fully fund FEMA’s request and perhaps broaden it during negotiations over spending for the rest of the year, but they were split Monday over what the compromise would mean for future funding battles.

“This is a very big and important move. It says we met each other halfway. We saved the jobs,” said Sen. Barbara Boxer (Calif.), referring to the the auto loan program. “We figured out a way to fund FEMA that was acceptable to them. It’s a template. We have to figure out how to meet each other halfway here.”

Sen. Patrick J. Leahy (Vt.), whose state was hit hard by flooding from Hurricane Irene, said the deal would solve the disaster issue — but only temporarily.

“I’m concerned about the fact that we give blank checks to Iraq and [Afghanistan] and we don’t want to take care of America for Americans,” he said. “It’s wrong, it’s foolish and it will come back to haunt us.”

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Freddie Mac Loan Deal Defective, Report Says

-The New York Times

Freddie Mac used a flawed analysis when it accepted $1.35 billion from Bank of America to settle claims that the bank misled it about loans purchased during the mortgage boom, according to an oversight report scheduled for release on Tuesday.

The faulty methodology significantly increased the probable losses in Freddie Mac’s portfolio of loans, according to the report, prepared by the inspector general of the Federal Housing Finance Agency, which oversees the company. Freddie Mac and Fannie Mae were taken over by the government in 2008 so additional losses would be shouldered by taxpayers.

The report also noted that the settlement with Bank of America in December was completed over the objections of a senior examiner at the agency. Freddie Mac officials did not want to jeopardize the company’s relationship with Bank of America, from which it continues to buy loans, the report concluded.

The agency official who questioned the loan review methodology contended that Freddie Mac’s analysis greatly underestimated the number of dubious loans bought from the Countrywide unit of Bank of America from 2005 to 2007. The deal between Freddie Mac and the bank resolved claims associated with 787,000 loans, some of which were repurchased by the bank, and cannot be rescinded.

“An effective mortgage repurchase process is critical in limiting the enterprises’, and ultimately, the taxpayers’ exposure to credit losses resulting from the financial crisis,” said Steve A. Linick, the inspector general who oversaw the report. “F.H.F.A. and Freddie Mac must do more to ensure that high-dollar settlements of repurchase claims are accurately estimated and in the best interests of taxpayers.”

When selling loans to Freddie Mac and Fannie Mae, Countrywide and other originators vouched that the mortgages met certain quality standards or characteristics, like accurately representing a borrower’s income or the appraised value of a property. These promises require mortgage originators to buy back at full value those loans that do not meet the standards.

Companies often review loans for possible buybacks after experiencing large numbers of defaults. Not all defaults, of course, occur after misrepresentations.

The inspector general’s report does not specify how much additional money Freddie Mac could have received from Bank of America had it used a more effective analysis. But the senior examiner who questioned the deal told the inspector general’s staff that Freddie Mac’s faulty process could cost the company “billions of dollars of losses.”

A Freddie Mac spokesman, Douglas Duvall, declined to comment, but said that it continued to believe its deal with Bank of America was “commercially reasonable based upon our internal evaluation and judgments.”

Because of the faulty methodology, Freddie Mac failed to review 100,000 loans from 2006 for possible irregularities, the report said. As of June 2010, some 93 percent of foreclosed mortgages from 2005 and 2006 had not been analyzed, eliminating “any chance to put ineligible loans back to the lenders for those years.”

The report also noted that 300,000 foreclosed loans originated from 2004 to 2007 and owned by Freddie Mac were not reviewed for possible claims. These loans have a combined unpaid principal balance exceeding $50 billion, the report said.

Freddie Mac’s review process was faulty, according to the report, because it did not change its analysis to account for new types of mortgages issued during the housing boom. These included mortgages that had rock-bottom interest rates initially — known as teaser rates — lasting three years to five years before adjusting upward.

The loan review analysis used by Freddie Mac focused on mortgages that went bad within two years, because historically that had been the period during which defaults related to possible loan improprieties were most likely to occur. Reasoning that the new types of mortgages with artificially low initial rates would probably lengthen the period before large numbers of defaults occurred, the senior agency examiner urged Freddie Mac’s management in June 2010 to review loans that experienced problems well after two years, the report said.

The company declined to change its methodology. At a July 2010 meeting of Freddie Mac’s credit risk subcommittee, a company manager told housing finance agency staff that loan repurchase reviews were “not the highest and best use of his limited resources,” the report said. Freddie Mac officials also disagreed with the concerns expressed by the senior examiner at the agency, the report said, “partly because they believed a change to a more aggressive approach to repurchase claims would adversely affect Freddie Mac’s business relationships with Bank of America and other large loan sellers.”

A few months later, the deal was made with Bank of America. As they considered the merits of the deal, Freddie Mac’s directors were told that it would improve the company’s “ongoing relationship with Bank of America.”

The $1.35 billion buyback deal was done despite questions about its review process from the company’s internal auditors, the inspector general’s report said.

Randy Neugebauer, a Texas Republican who leads the oversight and investigations subcommittee of the House Financial Services Committee, said: “After reading the I.G.’s report, I am concerned that F.H.F.A. is not exercising independent judgment. The American taxpayers deserve better than business as usual, especially when they have already spent $160 billion to keep Freddie and Fannie afloat.”

The report also noted that superiors at the agency declined to help the senior examiner prod Freddie Mac to expand its review process. One of those superiors, a senior manager who was not identified, told the inspector general that he had not opened the attachment to an e-mail from the senior examiner outlining problems with the company’s methodology.

Responding to the inspector general’s report, the agency said it continued to believe that the Bank of America settlement was “appropriate and reasonable.” But the agency agreed that it lacked policies and procedures where “an examiner has a safety and soundness concern” but encountered resistance in pursuing it. The agency said it would soon issue such policies.

The Federal Housing Finance Agency has suspended all future mortgage repurchase settlements affected by the methodology underlying Freddie Mac’s loan review process.

Last June, Freddie Mac’s internal auditors advised the company that its controls regarding the loan review process were “unsatisfactory” and said that “opportunities for increasing the repurchase benefit justify an expansion of our sampling approach” after the second year of the loan, the report said. A company official told the Freddie Mac directors that a more in-depth loan review could generate as much as $1 billion in additional revenue.

Two months ago, Freddie Mac began a more rigorous review of foreclosed, interest-only loans. In late August, it told the housing finance agency staff that the study showed 15 percent of the sampled loans — a higher figure than that in the Bank of America settlement — contained defects that might result in buybacks among originators.

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