BANKING ERRORS: Foreclosure, Without Missing a Payment?

Christine Jackson’s three-bedroom wood-frame home in Indianapolis is in danger of foreclosure. It’s not because she can’t afford her mortgage, but because of a bank error, she said. Jackson is among thousands of homeowners from all walks of life who have complained that the major banks that service their mortgages have made frequent errors in calculating their loans. These errors include slapping unnecessary inspection fees onto accounts, misapplying payments in violation of Fannie Mae and Freddie Mac guidelines and “force-placing” expensive insurance on homes that are already insured.

Questions:

1. Summarize what happened to Jackson.
2. What is an escrow account and how are they suppose to work?
3. In November, the biggest banks and independent servicers agreed in a consent order with federal regulators to allow homeowners to do what?

Source:

Hallman, B. (2012). Foreclosure Lawyer Could Lose Her Home Because of Alleged Bank Error. The Huffington Post.com, January 6 (Retrievable online at http://www.huffingtonpost.com/2012/01/06/foreclosure_n_1189367.html?ref=business)

Mortgage Buybacks

Mortgage Buybacks

According to Standard & Poor’s, the top U.S. banks could face up to $31 billion in losses from buying back bad mortgages. Bank of America Corp and JPMorgan Chase & Co have the most exposure to such potential repurchase obligations, followed by Wells Fargo & Co, Citigroup Inc, US Bancorp and PNC Financial Services Group, according to S&P analyst Vandana Sharma. In partcular, analysts believe that Bank of America has lost so much credibility with investors that the stock’s decline might start feeding on itself.

Question:

1. According to the article, what percentage of losses from mortgage buybacks have the six companies already accounted for?
2. Besides the losses, what reason do analysts propose will lead to decreases in net interest income?
3. Based on Weil’s article, how did Bank of America record the transaction when it purchased Countrywide? 
4. Rewrite Weil’s 1^st paragraph after the “Tipping Point” subtitle, in simple terms, as if you were explaining it to your grandmother or your roommate.

Source:

Staff. (2010). Banks Face $31 Billion Loss on Mortgage Buybacks: Report, Reuters, November 8. (Retrievable online at http://www.huffingtonpost.com/2010/11/04/banks-face-31-billion-los_n_779115.html)
Youtube.com (2010). BofA Under Pressure to Buy Back $47B in Debt (Retrievable online at http://www.youtube.com/watch?v=apMyLwOJ7nU)

Weil, J (2010). Bank of America Edges Closer to Tipping Point: Jonathan Weil, Bloomberg News, Nov. 3.

Citibank under the Microscope

The SEC has probed certain Citigroup Inc debt funds to assess whether the bank made adequate disclosure to investors about the funds’ risk levels. Three California-based brokers, who worked for the then Citigroup unit Smith Barney, concluded the bank did not adequately disclose the funds’ risks and had also mismanaged them, the newspaper said, citing people familiar with the regulatory probe. Citigroup declined to comment in detail, citing the regulatory probe. However, Citi, denied misleading investors in a WSJ report.

Questions:
1. Assume a small business purchased $200,000 of Citigroup debt funds as an investment for its employee pension fund. What journal entry would it make?
2. Assume the same facts as in question 1. If the company still held these funds at March 2008, how would they account for the 77% decline?
3. Assume the same facts as in question 1 & 2. If the company was lucky enough to be offered the share buyback mentioned in the article, how would they record this transaction?

Source:

Staff. (2010). SEC Probes Citigroup Mortgage Debt Funds, Reuters, November 8. (Retrievable online at http://www.huffingtonpost.com/2010/11/08/sec-probes-citigroup-mort_n_780207.html)

Credit Scores Matter: Changes Taking Place

Each financial action a consumer takes may affect their credit score, causing it to constantly change.  The economic downturn has put Americans’ credit scores in the limelight, especially as more homeowners struggle to stave off foreclosure by refinancing or modifying their mortgage loans. Although a large majority of Americans are working to improve their scores, it’s important to understand how credit scoring works – and the factors that cause consumer scores to constantly undergo changes.  As this video shows, the numbers that lenders are looking at are also changing.

Questions:

1. According to the video, what use to be a good credit score?  Do you know your credit score?  How do you stack up, based on the video?
2.  What is the “new” good credit score? Why did it change?  Do you think it is warranted?  Why or why not?
3.  Based on the example they gave in the video, what would a person pay in total dollars for a $150,000 house on a 30 year mortgage if they had a 720 credit score?  How much total interest would they pay over the lifetime of the mortgage?

Source:

CreditCom Staff. (2010). Why are Consumer Credit Scores Constantly Changing? Credit.Com, October 25. (Retrievable online at http://www.credit.com/news/credit-debt/2010-10-25/why-are-consumer-credit-scores-constantly-changing-.html)

CNN Video. (2010). New Magic Number, CNN, October 23. (Retrievable online at www.cnn.com)

Robo-Signers Forge The Foreclosure Mess

Bank of America, the nation’s largest bank by assets, is placing a moratorium on all foreclosure proceedings and sales across the United States, according CNBC and a report on The Wall Street Journal’s Web site. The postponement takes effect Saturday, October 9. JPMorgan and Ally’s GMAC Mortgage unit have delayed foreclosures in 23 states where courts have jurisdiction over home seizures.

 
Questions:
1. What is a “hydra?” Why does Dr. Henning say that the foreclosure mess is going to “become a hydra?” What ethical breaches are part of this story?
2. What is a defective title? Who will be sued for this and why?  What are the potential avenues of liability in this crisis?
3. The article mentions civil suits. Do you think there will be criminal court actions also? Is this fraud?
4. How do you think this story came to the media’s attention?

 

Source:

Fisk, M. C., and K. M. Howley. (2010) Why the Foreclosure Mess Could Last for Years. Businessweek, October 8 (Retrievable online at http://msnbc.msn.com/id/39562824/ns/business-real_estate)

The Lion that Wimpers

MGM Bankruptcy news is still coming in, but at the moment we know that Metro-Goldwyn-Mayer Inc. said it has begun seeking its creditors’ approval on a prepackaged bankruptcy plan in which they will exchange more than $4 billion in debt for equity in a new company that has rights to the James Bond franchise and the upcoming two-part movie series “The Hobbit.” Creditors would hold 95.3 percent of the company after it exits from Chapter 11. Only approved holders of secured debt as of Oct. 4 will be allowed to vote.

Questions:

1. Why do you think that MGM chose bankruptcy over a sale?

2. What is secured debt?

3. According to the video, what were the strategic reasons that MGM has deteriorated over the years? What are some of the risks it has faced?

 

Source:

Staff. (2010). MGM Bankruptcy Details: $4 Billion in MGM Studio Bankruptcy Deal, ThirdAge.com, October 8 (Retrievable online at http://www.thirdage.com/news/mgm-bankruptcy-details-4-billion-mgm-studio-bankruptcy-deal_10-8-2010).

CNN Video (2010). What Caused MGM’s decline?, Oct. 8 ( Retrievable online at  http://www.cnn.com/video/)

The Fabulous Fab is Back in the News

Fabrice Tourre, a controversial personality in the Goldman Sachs Group Inc transaction of 2007, asked a judge to throw out a U.S. regulator’s fraud lawsuit against him.  About two and a half months ago, the bank settled its part of the case for $550 million.

In his filing, Tourre asked that the U.S. Securities and Exchange Commission case be dismissed because the 2007 “Abacus” transaction, which involved collateralized debt obligations (CDOs) tied to subprime mortgages, took place outside the United States.

Questions:

1. What are collateralized debt obligations?

2. Where would CDOs appear in the financial statements of the bank that bought them?

3. Do you think he will prevail in his dismissal of the charges?

4.  How do you think the Goldman Sachs Group reported the $550 million settlement in its financial records?  

Source:

Stempel, J. (2010). Goldman’s Tourre says SEC suit should be dismissed, Reuters, September 30 (Retrieved online at http://www.reuters.com/article/idUSTRE68T3L120100930?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28News+%2F+US+%2F+Business+News%29)

Mortgage Fairs

Given the last year’s trend, is there an end in sight to new record-low interest rates? For example, on July 22, Freddie Mac’s Primary Mortgage Market Survey, which provides a snapshot of national average mortgage rates, reported a national average rate of 4.56% with 0.7 points on a 30-year fixed-rate mortgage. At the same time last year, the rate was 5.2% with 0.7 points. Given these changes and the housing crisis, many are turning to mortgage fair events for additional information.

Questions:

1. Assume that the women in this video has a fifteen-year $175,000 mortgage with a 7.5% interest rate and a monthly payment of $1,622.28. What is the interest portion of her first payment and how much is her principal reduced by with her first payment? If she refinanced this loan for 30 years at the same interest rate, what elements of her mortgage would change? 
2. The woman at the end of the video said that her mortgage was upside down. What does that mean? Why does she need an appraisal?
3. What do you see as the benefits for having mortgage fair events like these?
4. What is a point that is charged on mortgages and how do these affect the homebuyer?
Source:

Fontinelle, A. (2010). All-Time Low Mortgage Rates: Time To Refinance? San Francisco Chronicle, July 26. (Retrievable online at http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/07/26/investopedia45861.DTL)

CNN.com. Free Mortgage Fair Help Draws Crowd (Retrievable online at: http://www.cnn.com/video/#/video/us/2010/07/26/endo.mortgage.help.fair.cnn?hpt=C2)

Bond Rating Under Fire

E-mails and other documents were presented as evidence at a hearing examining the causes of the financial crisis on Capitol Hill on April 23, 2010.  This hearing is part of an 18-month investigation by the Senate Permanent Subcommittee on Investigations, led by Senator Carl Levin. Subcommittee assertions are that the rating agencies were well aware of the risks in the housing market and recklessly used rating models that they knew inflated the grades given to securities.

Questions:

1.  Briefly summarize the level of complexity and problems with Congress to regulate the ratings agencies, as noted by Arturo Cifuentes, former V.P of Moody’s (as shown in the video)?

2. What high profile investment firm was implicated as pressuring the ratings agencies? How do you think Congress can prevent this from happening in the future?

3. In 2007, what percentage of AAA-rated mortgage securities were downgraded to junk status?

Source:

Ellis, Blake. (2010). “How credit watchdogs fueled the financial crisis,” CNN Money.com, April 24 (Retrievable online at http://money.cnn.com/2010/04/23/news/economy/credit_rating_agencies_hearing/index.htm?postversion=2010042411)

Reform Bill Targets Credit Raters

On Thursday, May 13, 2010, the U.S. Senate  took steps to overhaul the credit-rating agency business, which is widely maligned for its role in the 2007-2009 financial crisis.  An amendment by Democratic Senator Al Franken passed for a government clearinghouse to be set up to assign debt rating duties to agencies, with federal regulators developing their own standards of credit-worthiness rather than relying solely on credit rating agency assessments. In a subsequent vote, lawmakers approved a separate amendment by Sen. George S. LeMieux (R-Fla.) that would remove the government’s stamp of approval for a select group of ratings agencies as the standard for credit worthiness.

Questions:

1.  Who are the main credit agencies that controversial bill was aimed at?

2.  This bill is being touted as the biggest overhaul of financial regulation since the Great Depression.  What regulation(s) was enacted during the Great Depression that impacts accountants to this day?

3.  Briefly explain bond ratings and why it is important for an accountant to understand this concept.

Source:

CNBC. (2010) Amending FinReg, May 13 video (Retrieved online at http://www.cnbc.com/id/15840232?video=1493262393&play=1)

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