Wall Street banks are facing fresh high-level scrutiny of their role in the credit crunch as New York’s attorney general opens an investigation into the packaging of mortgage loans into securities.

Eric Schneiderman has called for meetings with several major institutions including Bank of America, Morgan Stanley and Goldman Sachs, according to reports in the US. The attorney general is not commenting on the investigation, which is believed to be in its very early stages.

The banks and others have been blamed by politicians for worsening the financial crisis by encouraging the sale of high-risk financial instruments tied to mortgages. Schneiderman is reportedly interested in discussing the securitisation of mortgage loans and other mortgage related practices with the bankers.

Schneiderman was appointed attorney general last November and follows Andrew Cuomo and Eliot Spitzer, both of whom led crackdowns on Wall Street. This month he reached a $90.8m (£55.9m) settlement with UBS over the “fraudulent and anti-competitive” sale of municipal bonds.

The inquiry comes as banks continue to struggle with the legal fallout from the credit crisis. Civil suits have been filed by federal and state regulators since the financial crisis erupted in 2008 and private shareholders have also filed cases against the banks.

In a sign of ongoing public anger towards the industry, eight people were arrested during protests outside JP Morgan Chase’s annual meeting in Columbus, Ohio, where demonstrators, greeted by a heavy police presence, chanted “make banks pay” and wielded placards with slogans such as “Chase gets rich, we lose homes, jobs and services”.

Last year the Securities and Exchange Commission, the US financial regulator, levied a $550m on Goldman Sachs over claims the investment bank misled investors in collateralised debt obligations linked to subprime mortgages. It was the largest ever fine on a Wall Street bank.

Banks packaged thousands of home loans into bonds known as mortgage-backed securities during the housing boom and sold them to investors around the world. Many of these bonds were given triple-A credit ratings, a grade supposedly denoting a safe investment, even though they were backed by high risk loans. The collapse of the US property market triggered a massive collapse in the value of the bonds, often to junk status.

US officials have alleged banks, including Goldman Sachs, deliberately misled investors by encouraging them to invest in mortgage-backed securities they knew to be junk. The allegations are also being investigated by the SEC and the Justice Department.

Schneiderman, like his predecessors, has a powerful legal tool at his disposal: the 1921 Martin Act. The act gives the prosecutor sweeping powers of investigation, allows him to subpoena any document he wants, and makes it easier for the attorney general to bring prosecutions. It was most extensively used by Spitzer after the stock market crash at the turn of the millennium.

During his election campaign Schneiderman pledged to tackle Wall Street over the credit crisis.

“The mortgage fraud crisis is devastating working families in every corner of New York State – it’s upending our economic recovery upstate and downstate,” he said.

The broad nature of Schneiderman’s investigative powers make it uncertain where his investigations may lead but the attorney general has said he is interested in scam lenders and foreclosure practices as well as Wall Street investments.

According to the New York Times, Schneiderman recently issued subpoenas to two investment firms linked to a paperwork-processing firm. The firm, Pillar Holdings, handled nearly 40% of all foreclosure cases filed in New York.

The inquiry is believed to be unrelated to efforts by attorneys-general from all 50 states to reach a multibillion-dollar settlement with banks over allegations of improper foreclosure practices. Securities and Exchange Commission Banking Financial crisis Morgan Stanley Bank of America Goldman Sachs Dominic Rushe guardian.co.uk © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds

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ST. PETERSBURG — J. Thomas Wood is showing just how tough it can for a lender to foreclose, even on a homeowner who hasn’t made a payment in more than three years.

In 2006, when his condo in Bayway Isles was valued at $261,000, Wood refinanced for $180,000. It didn’t seem to matter to Countryside Home Loans that he was in bankruptcy at the time.

“I wondered why they’d give us a loan in the first place,” said Wood, a retired art teacher.

Now, investors in the package of mortgages that included Wood’s want the condo . Wood has kept the foreclosure at bay with several challenges right out of the “stay in your home” playbook. He argues that:

• He wasn’t told he was getting an adjustable rate loan when he refinanced, even though he …

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Washtington, DC, United States (ProPublica) – by Paul Kiel — ProPublica

Hosts of federal agencies and regulators, along with the 50 state attorneys general, are hard at work on laying out new rules for banks and mortgage servicers. Those rules will likely require servicers to transform their approach to handling homeowners facing foreclosure.

Are you a homeowner who’s struggling to pay your mortgage? Are you seeking a loan modification through the government program? We want to hear from you.

But this wouldn’t be the first time the government tried to lay down the law. The administration’s mortgage modification program has a 170-page handbook of servicer guidelines. What’s been missing is enforcement. Servicers have broken the rules without fear of any penalties.

Will things be different this time?

The answer to that so far is…maybe. On two different tracks, government officials are developing rules that, they say, will have clear penalties attached. But crucial details remain unclear, including when these reforms will go into effect.

There have been lots of headlines lately about one of the two tracks, the negotiations to settle claims related to the largest servicers’ foreclosure abuses. The state attorneys general, together with a number of federal agencies, sent the servicers a proposal last week. The document was obtained and posted by American Banker.

The terms would require the servicers to review each struggling homeowner for a modification and provide one when doing so would bring a higher return to investors. But they go much further than that. Over 27 pages, the terms describe how a servicer should behave — just about the opposite of how they have behaved over the past couple years . It would be a different world for the homeowner seeking a modification.

In the world we live in, if you’re a customer of one of the biggest servicers, you call in to a 1-800 number and are connected with a poorly trained employee [8] who knows nothing about your file, can’t tell you why you haven’t yet received an answer after months of waiting, but then says you should fax your documents (again) to another 1-800 number, where they will likely be lost.

In the world imagined by these proposed terms, you’re never in the dark. You submitted your documents through the online portal provided by the servicer, and you can track your modification application’s progress there the whole time. The servicer responds to all your submissions and queries within a strict time frame — certainly no longer than a month. And if you do choose to call your servicer, you just ring up your specially designated contact, a well-trained employee who has handled your case from the beginning.

But this mortgage mod paradise would happen only if the terms were enforced. And there are a number of question marks. The proposed settlement says that servicers breaking the rules would face “monetary penalties,” but it doesn’t say what they are. And while enforcement would ultimately be in the hands of both the attorneys general and the newly formed Consumer Financial Protection Bureau, the proposal essentially leaves the details of how violations would be handled for a later date.

ne detail that’s been under discussion but that doesn’t actually appear in the draft settlement is language making it clear that homeowners could go to court to stop a foreclosure if the servicer violated the agreement. One ongoing issue with the administration’s Home Affordable Modification Program is that this right isn’t apparent. The program is based on contracts between servicers and the Treasury Department, but homeowners aren’t explicitly included, creating an additional legal hurdle for homeowners who go to court to address a violation of the program’s rules. “Some level of accountability from private individuals often changes corporate behavior,” Alys Cohen, of the National Consumer Law Center.

Another open question is when the settlement will happen — and when the changes will actually go into effect. The proposed terms are just the first move by the government — and there are already plenty of signs that servicers see a lot they don’t like. Speaking earlier this week, Iowa Attorney General Tom Miller said he hoped to come to an agreement within two months. The settlement also relies on the CFPB, which was formed by last year’s financial reform bill and is still in its ramp-up stage. It won’t gain many of its authorities until July .

Even after an agreement is struck, some requirements likely won’t kick in immediately, said sources familiar with the discussions. Given the sweeping changes envisioned by the proposal, servicers might be given as long as a year to meet some of the terms.

Meanwhile, while these negotiations are occurring, federal regulators are pursuing servicer reforms on a separate, but related, track. They’re considering issuing new regulations that would affect all servicers, not just the largest, and are likely to incorporate aspects of the final terms of the settlement agreement. Draft outlines produced by the two big banking regulators, the Federal Reserve and the Office of the Comptroller of the Currency, show many similarities to the proposed settlement terms. Regulators have an unambiguous authority to financially penalize banks when they break federal rules.

A person involved in the rulemaking process said the regulators hoped to produce their proposed rules by the middle of this coming summer and have them in place by the end of the year. Along with banking regulators, the CFPB and a number of federal agencies are also involved.

With the new federal rules in place, homeowners would have a much better shot at getting fair treatment from their servicer, said Kathleen Keest of the Center for Responsible Lending. (The Sandler Foundation is a major funder of both the Center and ProPublica, which operate independently of each other.)

Currently, if a servicer is threatening to wrongfully foreclose [19] =on a homeowner, the homeowner’s options to stop it are limited. First, it’s often not clear where to go to complain. For the biggest banks, the homeowner can file a complaint with their regulator, the OCC, but dozens of homeowners have told ProPublica that hasn’t been effective. The OCC has often been criticized for going easy on the banks [20]. The Treasury Department has also set up a help hotline for homeowners, but since the program is voluntary and servicers face no penalties, its authority is decidedly limited.

Once new servicing regulations are actually in place, said Keest, homeowners would be able to complain to the CFPB or their own state’s attorney general about servicer abuses. (One of the CFPB’s central purposes [16] is to be a center for consumer complaints.) Both would have the authority to enforce the new federal rules. Instead of the bank-”coddling” OCC, she said, “You’re going to a regulator whose job is to protect the consumers and not the banks, and where the states can act as a back-up.”

That’s the idea, at least. It all depends on the possible settlement and future new federal regulations.

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Washington, DC, United States (AHN) – Officials of American mortgage giants Fannie Mae and Freddie Mac denied Wednesday they caused the foreclosure crisis, instead blaming mortgage services and law firms that they contract.

The executives told Congress that since the two companies do not service loans the responsibility for managing payments by borrowers on home loans or foreclosing mortgages that have defaulted is with the mortgage servicers and loan firms.

Fannie Mae Executive Vice President for Credit Portfolio Terence Edwards said the mortgage servicers are the primary front-line operators who have contact with the borrowers. Fannie Mae pays them service fees to work with borrowers during the duration of the loan.

However, acting Comptroller of the Currency John Walsh disputed Fannie Mae and Freddie Mac’s explanation, countering that the companies’ policies contributed to the foreclosure problem. In particular, he identified the large number of documents used by Fannie Mae and Freddie Mac in their mortgage foreclosure processes.

Walsh said large national bank servicers, namely Bank of America, Citibank, JPMorgan Chase, HSBC, PNC, Wells Fargo and U.S. Bank, have similar deficiencies in their foreclosure processes, which the OCC and other banking regulators are reviewing.

The Treasury Department spent in 2008 $135 billion on Fannie Mae and Freddie Mac after the federal government seized the two firms to cover their losses on soured mortgage loans. In mid-November, President Barack Obama nominated North Carolina Banking Commissioner Joseph Smith Jr. to head the agency that has supervisory power over Fannie Mae and Freddie Mac.

Smith will replace Edward DeMarco, who headed the Federal Housing Finance Agency since August 2009. The agency is in the midst of preparations to overhaul the two mortgage lending giants.

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