Congressional Oversight Panel Report - HAMP Program and Conflicts of Interest

On October 14, 2010, the Congressional Oversight Panel released its October Oversight Report, Examining Treasury's Use of Financial Crisis Contracting Authority. This report reviews the use of private companies by TARP, which is a public program created by Congress to stabilize the American economy. Private companies were employed through procurement contracts and "financial agency agreements."

The report considers in detail the agreements with Fannie Mae and Freddie Mac for the Home Affordable Modification Program (HAMP) [page 75]. The report notes that the largest TARP financial agreements were those with Fannie Mae and Freddie Mac to provide administration and compliance services for Treasury's foreclosure mitigation programs. The report states that "these agreements raise significant concerns..." as [b]oth Fannie Mae and Freddie Mac have a history of profound corporate mismanagment...and both companies have fallen short in aspects of their performances..." [page 6]. The November, 2010 report is to pursue this topic further.

Dual Role

In February, 2009, Treasury entered into financial agency agreements with Fannie Mae and Freddie Mac to administer and enforce compliance with HAMP. The report notes that these roles are distinct from Fannie Mae and Freddie Mac's role as guarantors of the mortgages. Fannie Mae and Freddie Mac were placed into conservatorship on September 6, 2008 by the Federal Housing Finance Agency (FHFA). In connection with this conservatorship, Treasury agreed to provide financial support to Fannie Mae and Freddie Mac by way of certain preferred stock purchase agreements [fn. 310, page 76].

"Complicated Legal Relationship"

The report states that [e]ven though Fannie Mae and Freddie Mac have a complicated legal relationship with the government" as a result of having been placed into conservatorship, "they became the government's financial agents" for HAMP administration and compliance for the Treasury Department.

"Discussion of Conflicts of Interest"

The report notes actual or potential financial conflicts of interest of Fannie Mae and Freddie Mac with their duties owed to Treasury under HAMP. The Panel's prior report noted that the dual role - as "doers" of mortgage mortgage modifications for loans they own or guarantee and "overseers" of Treasury's mortgage modification program - "may present competing interests or diminish the overall effectiveness of Fannie Mae's and Freddie Mac's ability to modify mortgages, engage in HAMP administration or oversight, or both."

The report discusses the argument that this structural conflict is an "immitigable conflict because the interests are not aligned." [page 85].

"Conclusion"

The report concludes that the concerns raised "suggest that Fannie Mae and Freddi Mac are not performing satisfactorily under their financial agency agreements" for the HAMP program.

Bankruptcy Technical Corrections Act of 2010

On September 29, 2010, the House of Representatives passed H.R. 6198, the "Bankruptcy Technical Correction Act of 2010" and referred it to the Senate Judiciary Committee. HR 6198 was introduced by Rep. John Conyers (D-MI) on September 23, 2010. The bill would make technical corrections to the Bankruptcy Code and bankruptcy-related crime statutes in Title 18. The bill "does not alter substantive rights" but only fixes spelling errors, incorrect cross-references, and minor language disagreements, many of which were enacted in the 2005 BAPCPA.

Insurer of Mortgage Backed Securities Sues Countrywide

A recent case provides some insight into the world of insurance obtained by subprime mortgage companies to back their mortgage backed securities. The insurance was purchased by the mortgage companies to enhance the credit worthiness of the mortgage-backed securities.


Businessweek reported yesterday about the civil action filed on September 28, 2010 in the New York state trial court, by Ambac, the insurer of mortgage backed securities issued by Countrywide entities. The insurer, Ambac Assurance Corp. alleges that Countrywide fraudulently induced Ambac to insure bonds backed by improperly made loan. Ambac alleges that the "secret of Countrywide's short-term success-and long-term demise-has become clear," - it abandoned its underwriting standards and condoned fraud by its employees and others.

Its reported that Ambac's division that wrote the policies was placed in rehabilitation in March, 2010 by Wisconsin's insurance commissioner.

Securitization

The lawsuit involves twelve Countrywide sponsored residential mortgage securitization transactions that closed between 2004 and 2006, involving second mortgages. The twelve transaction contained 268,000 loan that served as collateral for about $16.7 billion in securities. Certain of the classes of securities were insured by Ambac. Ambac alleges that to date, over 35,000 loans with an aggregate principal balance of more than $1.95 billion has defaulted or been charged off and as a result, Ambac has been forced to make more than $466 million in claim payments to Countrywide.

Ambac alleges that its review of the defaulted mortgage shows that over 97% of the loans reviewed breached Countrywide's representations regarding the quality of the mortgages and conformance to Countrywide's purported underwriting guidelines. Pursuant to the agreement, Ambac demanded that Countrywide cure the breaches or substitute or repurchase the "breaching loans." Countrywide is alleged to have refused to do so.

Predatory Lending

Ambac further alleges that Countrywide engaged in "predatory and abusive lending practice in marketing its products to borrowers who could not afford them." It alleges that "Countrywide enticed borrowers to borrow beyond their means by promoting loans with low introductory 'teaser' interest rates while obfuscating the steep increase in monthly payments that would occur when these teaser rates reset at higher levels."

Vicarious Liability

Ambac alleges that Bank of America is liable for its damages as Countrywide's successor. Bank of America acquired all of Countrywide's assets through an all-stock merger on Ju