Cities increasingly holding lenders responsible for maintaining foreclosures

With cash-strapped cities lacking the funds (or really the responsibility) to maintain foreclosed units, some are getting quite serious about chasing down the scofflaws -- even if that means threatening an East Coast banker with a crime. And the few billions that the stimulus plan offered cities to clean up derelict housing? A veritable drop in the bucket. From a Wall Street Journal story (subscription required):

Officials at a Citigroup Inc. office in St. Louis placed a call to this desert town recently. The bank had caught word that Indio was coming after the lending giant with fines and threats of criminal charges. The offense: an algae-infested swimming pool at 79760 Eagle Bend Court.

Citigroup wound up in charge of the foreclosed home, one of thousands of such properties it was managing across the country. But last year, Indio passed a law that allowed it to charge banks with a criminal misdemeanor if they allowed a home to fall into disrepair...

The hard-line approach is part of this town's attempt to gain leverage over some of the nation's largest lenders. A couple of years ago, Indio was a real-estate bonanza. Old date farms were closing down, sprouting subdivisions in their places. Today it's a different scene with one in 10 houses either in default or foreclosure...

Lenders say that such repairs and upkeep are part of the normal course of business, and that Indio's ordinance hasn't prompted any special actions. A Washington Mutual spokesman said local real-estate agents send in photos of bank-owned properties so the lender can watch for disrepair from afar. A Fannie Mae spokeswoman said the lender's first goal is to "stabilize neighborhoods." New York Mellon said its role as trustee didn't merit citations from Indio.

Even before the mortgage crisis erupted in full, big cities like Cleveland and Buffalo had fashioned laws of their own to browbeat banks into taking care of urban blight. Now some small towns are also taking matters into their own hands.

Indio's neighbors Palm Springs, Desert Hot Springs and Cathedral City each pushed ahead with laws much like Indio's. The town's own ordinance was fashioned off a 2007 law from Chula Vista, a city south of San Diego which began fining lenders up to $1,000 a day for unsightly or dangerous code violations such as broken windows...

City officials say they ginned up a campaign to notify the banks about the new law, but few took action. "The banks were trying to test us to see if we were serious about this," says Jason Anderson, a code-enforcement officer in Indio.

Countrywide, one of the biggest lenders in the area, initially just tried to make the problem go away by writing checks, say city officials. Instead of attending to the upkeep on the properties, they'd ask, "How big was the fine?" Mr. Anderson recalls.

City officials say Countrywide has since become one of the most proactive lenders, contracting local real-estate agents to monitor properties and paying for gardeners to handle the upkeep. "There's considerable financial incentive for the bank" to maintain properties, a Countrywide spokesman said...

Government about to file charges against subprime lending fraud

While it lasted, working as a mortgage broker was a sure-fire way to make good money without the need for a license or even a high school diploma. Of course what went along with that was a great deal of fraud, and it looks like we're about to hear of various indictments being handed out to the scofflaws. From an AP story via MSNBC.com:

The top federal prosecutor in Los Angeles indicated Thursday that charges are coming soon from a sweeping investigation of banks and subprime lenders for their role in the U.S. mortgage crisis.

"I think we are going to see some fairly dramatic results in the near future," U.S. Attorney Thomas O'Brien told The Associated Press. "Mortgage fraud is an extremely important issue to me and to the people of this district."

A grand jury is investigating at least three mortgage lenders — Countrywide Financial Corp., New Century Financial Corp. and IndyMac Bancorp Inc.

Thirty-four lawyers currently are looking at mortgage fraud and other white-collar crimes, now one of O'Brien's top priorities.

The government is pursuing a "surgical approach" in its investigations and hopes to streamline its prosecutions by seeking indictments with only three or four counts, instead of spending several years seeking additional charges.

Union for construction workers going after homebuilders

L.A. Land blogger Annette Haddad has a post regarding a picket of KBHome's headquarters in Westwood today by the Laborer's International Union of North America. So why where they picketing? Because they're angry that the jobs lost by their 500,000 members are largely the result of homebuilders pushing unaffordable loans during the height of the housing boom, leading to its resulting bust:

The union, whose members were among the first hit by the recessionary effects of the housing downturn, protested builders' practices outside KB Home's Westwood headquarters today. On hand were several homeowners living in a KB development in Buckeye, Ariz., who said they are underwater -- owing more on their mortgages than their homes are currently worth -- and are facing foreclosure as their monthly payments ratchet higher and prices slide.

The LIUNA has produced a report in conjunction with a new group called The Alliance for Homebuyer Justice -- which you can find here in .pdf format -- which uses homeowners in Arizona as an example of predatory lending between 2004 and 2006, with loans expected to rest through 2001 and unleashing yet another wave of defaults and foreclosures.

So what does LIUNA want? Under the "What Needs to be Done" section of the report:

HUD should completely repeal the 1983 amendments to RESPA that allowed builders and other businesses to make referrals to affiliated businesses (I also wrote about this for my freelance article on builder incentives for the L.A. Times last month);

Bank of America, which acquired Countrywide, should discontinue the lending relationships that Countrywide had with the builders' mortgage operations;

Congress should pass the Emergency Home Ownership and Mortgage Equity Protection Act, allowing bankruptcy judges to modify harmful mortgages (such as by reducing the principal to the actual value of the home or changing an ARM to a fixed rate);

Rather than merely paying lip service to preventing foreclosures, as Countrywide did, Bank of America must start actually doing it (i.e., loan modifications).

Of course LIUNA also has its own agenda, to which it openly admits at the end of the report, including the right to organize unions, being paid a living wage, better training for workers, open access for homebuyers to affordable mortgages from independent sources and home prices that are targeted to what the community can afford.

FBI investigates Countrywide for securities fraud

Countrywide is one of 15 sub-prime lenders under investigation for potential securities fraud related to statements about its financial position and the quality of loans in its portfolio. From a Wall Street Journal article:

The Federal Bureau of Investigation is probing subprime lender Countrywide Financial Corp. for possible securities fraud, according to law-enforcement officials and finance-industry executives.

The inquiry involves whether company officials made misrepresentations about the company's financial position and the quality of its mortgage loans in securities filings, four people with knowledge of the matter said. It is at an early stage, they emphasized...

Fifteen other subprime companies also are under scrutiny by federal agents and prosecutors in a broad look at the subprime industry sparked by huge losses on residential mortgages and the securities used to fund them. The investigations are examining mortgage-origination fraud, conflicts of interest and undisclosed relationships within the industry, and the practices used to package mortgage-backed securities for sale to investors...

Federal investigators are looking at evidence that may indicate widespread fraud in the origination of Countrywide mortgages, said one person with knowledge of the inquiry. If borne out, that could raise questions about whether company executives knew about the prospect that Countrywide's mortgage securities would suffer many more defaults than predicted in offering documents.

Another potential issue facing the company is whether it has been candid in its accounting for losses. People familiar with the matter said that Countrywide's losses may be several times greater than it has disclosed...

Countrywide also is the subject of a class-action, securities-fraud civil lawsuit by various government pension funds and their managers, including the city and state of New York. The lawsuit identifies more than 25 firms that helped Countrywide package and sell mortgage-backed securities, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Lehman Brothers Holdings Inc. The firms have denied any wrongdoing...

There is no indication that Bank of America, now conducting due diligence at Countrywide, is having second thoughts about completing the acquisition. In fact, people familiar with the matter said Bank of America is rushing to close the Countrywide acquisition as quickly as possible, perhaps in August.

• The News: The FBI is probing Countrywide for possible securities fraud, say law-enforcement officials and finance-industry executives.

• At Issue: The probe could raise questions about whether executives knew Countrywide's mortgage securities might suffer many more defaults than predicted in offering documents.

• Full Disclosure: People familiar with the matter said Countrywide's losses may be much greater than it has said.