Buried in Fine Print: $57B of FHA Loans Big Banks May Have to Eat

Below is an article by Kate Berry which was published on October 7, 2013 in the American Banker.

The nation’s four largest banks are holding $57 billion of seriously delinquent loans that they’ve been slow to move into foreclosure over concerns that the Federal Housing Administration, the government mortgage insurer, will refuse to cover the losses and hit them with damages, according to industry sources.

The banks — Bank of America (BAC), Citigroup (NYSE:C), JPMorgan Chase (JPM), and Wells Fargo (WFC) — have assured investors in the footnotes of quarterly filings that the loans are government-insured and therefore pose no threat to their bottom lines, even if they end up in foreclosure. What’s more, the banks have used these supposedly iron-clad government guarantees as a pretext for continuing to classify the loans as performing and for holding no reserves against them.

The FHA insures home loans issued by banks and other mortgage lenders to low-income and first-time home buyers. Those buyers pay the FHA insurance premiums to cover potential losses. In the event that an FHA-backed loan goes into foreclosure, the lender has the right to file a claim for reimbursement of losses.

However, the FHA’s guarantee does not apply if lenders are found to have violated underwriting or servicing standards, or to have engaged in misconduct. Banks can also be held liable for treble damages under the False Claims Act if they are found to have “falsely certified” that mortgages met all FHA requirements.

As a result, the banks face hefty losses if the loans go into foreclosure because there is no guarantee that the FHA will cover them, asserts Rebel Cole, a former Federal Reserve Board economist who is now a professor of finance and real estate at DePaul University in Chicago.

In the last year, the Department of Housing and Urban Development, which oversees the FHA, has forced four banks to pay a total of $1.5 billion under the False Claims Act on FHA loans that defaulted. More settlements are expected soon.

“The banks say they are certain of repayment on these distressed assets, but that’s simply not true,” says Cole.

To be sure, even if all $57 billion of loans went into foreclosure, losses to the FHA and banks would likely be substantially less, thanks to recoveries on the properties. The FHA’s overall recovery rate was 42% of the principal value in the second quarter.

Some lenders acknowledge that they will likely end up eating losses on defaulted loans held on their balance sheets and settlements related to past claims. They are also likely to try to avoid the risk of getting hit with damages by forgoing the FHA claims process and absorbing some losses themselves.

“There’s a distinct possibility that they [banks] do not file all claims and just self-insure [absorb losses] on those loans,” says Melissa Klimkiewicz, an attorney at BuckleySandler. “Lenders may err on the side of not filing claims where there is uncertainty because of the potential for HUD action or treble damages.”

For their part, lenders bristle at the claim that they’re intentionally keeping loans out of foreclosure. Even Ed Pinto, a resident fellow at the American Enterprise Institute and a sharp FHA critic, attributes the backlog of delinquent FHA loans to efforts by consumer groups to slow foreclosures, and to the unreasonably long time it takes to complete a foreclosure in states such as New York, New Jersey and Florida, where foreclosures are processed through the courts.

“Servicers are engaged in vigorous, robust loss mitigation efforts and that’s one of the reasons foreclosures are taking longer and so many loans are still on (banks’) books,” says Phillip Schulman, a partner with the Washington office of K&L Gates, who represents several banks currently in negotiations with HUD.

“You can’t file a claim until the house is in foreclosure or has [been the subject of] a short sale. It’s a lengthy process, and foreclosure is the last option we look at,” adds Jerry Dubrowski, a spokesman for B of A.

Moreover, it is not as if the FHA — whose own financial health is in question — is pressuring the banks to file claims. Like any insurer, the FHA wants to avoid paying claims, so it is providing incentives to mortgage servicers when they modify loans, offer a forbearance of past due mortgage payments or provide other alternatives to foreclosure. The FHA’s goal is “to reduce the number of full claims against the insurance fund,” a 2012 Government Accountability Office report on its finances said.

Some bank critics say they have intentionally held off from filing claims in the wake of their scandal involving the ‘robo-signing’ of foreclosure documents. That episode led to $25 billion national settlement between state attorneys general and the nation’s five largest servicers. Critics suggest the banks are now unable to foreclose on FHA loans because they do not have proper documentation, and therefore cannot file claims with the FHA.

“It’s like saying you’ll be reimbursed for expenses when you’ve lost the receipts,” says Reuben Guttman, who specializes in False Claims Act cases against banks at Guttman, Buschner & Brooks PLLC.

Most banks define delinquent FHA loans as those 90 days or more past due but still accruing interest. B of A has $21.4 billion of delinquent FHA loans on its books, while Wells has $19 billion, Citi has $4.2 billion and JPMorgan Chase has $3.3 billion. The banks also have on their books more than $8.6 billion of “nonaccrual” delinquent loans on which the FHA is no longer covering interest. Almost $7 billion of those loans are held by JPMorgan Chase.

DePaul’s Cole says that the numbers are misleading, however.

Bank of America, for example, lists only a fraction of its $23 billion in defaulted FHA loans as nonaccrual. But in a footnote to its second quarter filing with the Securities and Exchange Commission, B of A says the FHA, as the insurer, has stopped paying interest on $17 billion of the defaulted loans. Cole insists those also should be listed as nonaccrual.

Some observers suggest that the loans could sit on the four banks’ balance sheets until they settle existing disputes with the FHA over their underwriting. B of A and Citibank have already negotiated settlements over False Claims Act violations with the FHA or are in the midst of doing so.

The settlements are to resolve claims involving an unknown amount of previously filed FHA claims that could date back a decade or more. After the legal claims involving these mortgages are cleared up, the banks will be able to file new claims for loans still on their balance sheets.

“At some point there is going to be a settlement and it will include the loans held on their balance sheets, and at that point they will be able to file claims,” said one attorney who represents a bank currently in settlement talks.

In all, 10 FHA lenders are currently in negotiations with HUD and the Justice Department, David A. Montoya, HUD’s Inspector General, told legislators last month. The FHA’s servicing review teams have found widespread violations of servicing practices, and the expectation is that the FHA will be reimbursed for claims it has already paid, Montoya said.

“Given the sheer volume of loans involved and high error rates identified in underwriting, settlements and favorable court actions may result in significant recoveries by the government from each of the 10 lenders,” Montoya told a House subcommittee on Sept. 10.

Any recoveries, of course, would help the FHA bolster its own finances. Though the FHA says it has already set aside reserves to cover losses, the agency remains undercapitalized and had to tap the Treasury Department for a bailout last month.

“There’s no question that HUD is stepping up its enforcement efforts and that’s a euphemism for collection efforts,” says Schulman, the K&L Gates attorney.

The FHA has more than $32 billion in reserves, but it faces an estimated $70 billion in future payouts on loans originated just from 2007 through 2009, according to the 2012t from the Government Accountability Office. In all, the FHA has roughly 686,000 seriously delinquent loans, representing $106 billion in total principal balances for all lenders. These distressed assets continue to be a major drag on the housing market, distorting the supply of homes for sale because so many remain stuck in the foreclosure process.

Last year, the U.S. Attorney for the Southern District of New York, the Justice Department, HUD’s general counsel and HUD’s Office of Inspector General settled civil fraud cases with three large banks: Deutsche Bank’s Mortgage IT unit for $202.3 million, CitiMortgage for $158.3 million and Flagstar Bank for $132.8 million. Each of those settlements involved the lender’s admission that they submitted what are called “false annual certifications” to HUD. A spokesman for Citi says because of its past settlement, it has continued to file new claims and expects the FHA to pay for all losses.

In addition, B of A agreed last year to pay roughly $1 billion to resolve allegations of misconduct for loans originated by Countrywide Financial, which it bought in 2008. That settlement helped FHA patch a $688 million budget shortfall.

B of A in particular has dramatically whittled down its backlog of delinquent FHA loans. From the fourth quarter of 2012 to the second quarter of this year, B of A sold off $8 billion in mortgage servicing rights, essentially unloading soured FHA loans to nonbank servicers Nationstar Mortgage (NSM) and Ocwen Financial (OCN). Those servicers now have the authority to file claims with the FHA once loans go through foreclosure.

Of the four lenders, Wells appears to be the most resistant to a settlement.

The bank is locked in a bitter legal dispute with Preet Bharara, the U.S. Attorney for the Southern District of New York, and HUD over allegations of widespread FHA underwriting violations going back a decade.

Wells has claimed it received a broad release from False Claims liability as part of the $25 billion national mortgage settlement, but regulators have disputed that claim in court.

Wells “believes it acted in good faith and in compliance with FHA and HUD rules,” a spokesman said in an email. “We look forward to presenting facts to vigorously defend against this action.”
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The $14 Million Mystery Whistleblower

Where did all the dollars go? Despite the US federal closure, the SEC is paying an anonymous whistleblower $14 million nor has it disclosed the scheme. More information is needed, says Reuben Guttman.

WASHINGTON, DC — On the first day of the federal government shutdown, the United States Securities and Exchange Commission was sufficiently open for business to announce that a $14 million bounty would be given to an undisclosed whistleblower who reported an undisclosed scheme by an unnamed defendant.

The real story is not what was said, but what was not said.

I suppose that this is just one of these cases where the real story is not what was said, but what was not said. In thinking through what would be an appropriate analogy, I tried — but failed – to recall a time when a US prosecutor issued a press release saying “undisclosed criminal placed in prison for 15 years for undisclosed crime against undisclosed victim.”

Compliance programmes

Compliance enforcement is about deterrence by highlighting conduct that merits punishment. A compliance programme works when those contemplating crossing the boundaries into the areas of illegal activity see that others are punished for similar conduct. Surely, the public parade of insider trading prosecutions in the United States must have sent a message of deterrence to at least a few people willing to share tidbits of insider information with their friends and relatives.

Of course the other premise of transparency in enforcement is that where citizens understand what types of conduct violate the law, they have a perspective to evaluate questionable activity in their environment in order to determine whether the alleged misdeeds should be reported to regulatory authorities. Undoubtedly, transparency is also of value to defense lawyers who need information to counsel their clients on compliance with the law.

The US SEC doesn’t have the resources to make sure that publicly traded companies are not paying gratuities to officials in the farthest reaches of the globe.

None of this has anything to do with the merits of a bounty programme. In an era where multi-national corporations, some larger than small countries, transact business across the globe, regulators need help to enforce compliance with the law. The United States Food and Drug Administration will most likely never have the resources to monitor the 3,000 drug trials being conducted in China. The US SEC, with one examiner to every $12 billion in assets that it oversees, will never have the resources to make sure that publicly traded companies are not paying gratuities to officials in the farthest reaches of the globe in order to secure more business. The United States Environmental Protection Agency will certainly never have the resources to monitor supply chains in China, India and Bangladesh to ensure that components shipped into US markets are not contaminated with toxic materials.

Challenges of compliance enforcement

It is precisely because of the contemporary challenges of compliance enforcement that whistleblowers have become central to the compliance enforcement process. They come with diverse backgrounds, technical skills, language proficiencies and cultural sensitivities. They are a resource that regulators need to tap.

Those who criticize the bounty system argue that corporate internal compliance programs should be left to their own devices. The cold truth is that internal compliance programs do not work when the wrongful conduct permeates the corporation and officials at the highest levels are bonused based on revenue streams generated from unlawful conduct. Enron, Tyco and WorldCom undoubtedly all had compliance programs.

The concept of paying the bounty has integrity.

A bounty system rewards whistleblowers who have taken the time, worked with competent counsel, and enlisted appropriate experts to put together presentations to regulators that jump start cases. When the system works, as it has with the US government’s collection of $4 billion last year under the US False Claims Act, the compliance enforcement system is greatly enhanced. No doubt, there is room for improvement but the concept of paying the bounty has integrity.

Improving the system

Now to the question of improving the system. The SEC’s whistleblower programme is to some degree in its early stages. As they say in the United States, the jury is still out on whether it will be as successful as other bounty programs, including the False Claims Act, provided for by US law.

There may be in certain circumstances rationale for not disclosing the identity of an SEC whistleblower. One can imagine a situation where the whistleblower is not a US citizen and is outside the protective reach and enforcement of US anti-retaliation laws. On the other hand, when announcing these awards, the SEC should be clearer in divulging the name of the defendant and the scheme that lead to the resolution. This “lessons learned” component is central to compliance enforcement.

Once the government reopens for business, maybe this is something it should think about.

Reuben Guttman practices with Guttman, Buschner & Brooks PLLC in Washington DC.

Powerful Whistleblower Attorney: US Protection and Bounty System Helps Root Out Financial Scandal

This article was written by Lianna Brinded, Business Editor for the International Business Times on September 25, 2013.

One of the world’s most prominent whistleblower attorneys tells IBTimes UK about the differences between US and UK whistleblower protection.

The only way to prevent and root out large scale financial and company scandals is by installing bounty programmes and protection systems that reward those who risk their careers to flag up wrongdoing, says one of the world’s most prominent whistleblower attorneys.

In the US, there are a number programmes, such as ones with the US Internal Revenue Service (IRS) and the Securities Exchange Commission (SEC) coupled with the protection through the Dodd-Frank Act, since 2010.

The programmes allow whistleblowers to not only be rewarded for information, depending on the significance of information and how much it results in recovery for the government or shareholders, but also protects them employer retaliation, such as dismissal or being investigated themselves.

However, the UK lags behind rewarding or protecting whistleblowers.

Reuben Guttman is one of the world’s most prominent whistleblower attorneys and a co-founder of Guttman, Buschner & Brooks PLLC in Washington DC. He has served as counsel in some of the largest recoveries under the False Claims Act and has recovered billions of dollars for the government from fraudulent mortgage assignments and a number of pharmaceutical firms.

In 2012, he represented one of the four main whistleblowers in a case against GSK that returned over $3bn to the government and here he speaks with IBTimes UK exclusively.

China’s Pharmaceutical Bribery Scandal is ‘Tip of the Iceberg’

Chinese authorities are cracking down on its pharmaceutical sector after officials revealed that four China-based senior executives at British drugmaker GlaxoSmithKline had channelled millions of pounds in bribes through travel agencies and consultancies.

Reuben Guttman is one of the world’s most prominent whistleblower attorneys who practice with Guttman, Buschner & Brooks PLLC in Washington DC. He has served as counsel in some of the largest recoveries under the False Claims Act and has recovered billions of dollars for the government from fraudulent mortgage assignments and a number of pharmaceutical firms.

In 2012, he represented one of the four main whistleblowers in a case against GSK that returned over $3bn to the government and here he speaks with IBTimes UK exclusively.

(Source: International Business Times at http://www.ibtimes.co.uk/articles/508530/20130924/gsk-china-pharmaceutical-scandal-bribery-whistleblower.htm)

See the full interview. . .

Patients suffer from drug industry’s chronic greed

By Reuben Guttman and Traci Buschner who practice with Guttman, Buschner & Brooks PLLC in Washington DC.

Commentary: Give Big Pharma a dose of strong regulatory medicine

Pfizer is paying the U.S. government and a number of states more than $450 million to resolve allegations that its subsidiary, Wyeth Pharmaceuticals, unlawfully marketed the immunosuppressant drug, Rapamune.

The two Pfizer (NYSE:PFE) whistleblowers who initiated the case, Marlene Sandler and Scott Paris, were pharmaceutical sales representatives who raised concerns through a lawsuit filed under the Federal False Claims Act that their company actively marketed Rapamune for purposes not approved by the FDA and paid kickbacks to doctors in order to increase sales.

The resolution of the Rapamune case is one more settlement in a long procession of cases brought against the pharmaceutical industry for unlawfully marketing drugs. Last year, GlaxoSmithKline (NYSE:GSK) paid (LSS:UK:GSK) more than $3 billion to resolve allegations of misbranding and kickbacks with regard to a number of drugs including the blockbuster asthma and COPD drug, Advair.

Meanwhile, Abbott Labs (NYSE:ABT) paid a total of $1.6 billion to resolve civil and criminal allegations with regard to marketing derelictions of its drug Depakote. And, as recently as April, Amgen (NASDAQ:AMGN) paid almost $25 million to settle claims that it had paid kickbacks to induce sales of its anemia drug, Aranesp.

These are only some examples; over the last decade, almost every major pharmaceutical manufacturer has been sanctioned either civilly, criminally, or both for unlawfully marketing their drugs.

More than money

Unfortunately, these cases are remembered for the money. The press thrives on resolutions that break new monetary barriers of recovery. The lawyers bask in this success of high-profile settlements. The regulators make claims at least hinting that compliance enforcement works.

Somewhere lost in the discussion is the patients.

Today, there are countless people whose drug regimens have been dictated at least in part by marketing agendas and not medical necessity. There are the elderly in nursing homes who are easy prey for the industry because they too often lack the ability to ask questions about their treatment, let alone provide the truly informed consent to allow it to occur. Too often they are placed on drugs because of protocols implemented by intermediary long-term care pharmacies, which are incentivized with payoffs by the pharmaceutical industry.

Then there are the children whose doctors are either on the payroll of the industry or have been influenced by paid industry opinion leaders. With doses of anti-psychotics and anti-epileptics touted as mood stabilizers, too many children are dosed with drugs to change behaviors that in yesteryear would have been dealt with through less-invasive means.

Finally, there are patients, like those on Rapamune, who have life-threatening illnesses and must make decisions based on truthful information. They are in no position to distrust their physicians or the pharmaceutical industry that makes their drugs. On the edges of life itself, to do so would be to question those who provide any hope of recovery. This is what the industry marketers know.

Checkup and testing

Unlawfully marketing drugs is not just about the government or third-party payers paying for unnecessary products. It is about disseminating misinformation to those who have a window of time and opportunity to make critical medical decisions.

If our physician had committed the same derelictions, and paid fines to resolve civil and criminal penalties, it is a safe bet that we would be looking for another doctor. Yet we do not have the same choice, given the relatively limited number of companies that manufacturer drugs, which when used for proper purposes and in a proper manner can be life-changing, if not life-saving.

Pfizer has paid its fine to the Department of Justice and to the states. It is now time for Congress to take a hard look at the conduct of the pharmaceutical industry. Oversight by the FDA is not sufficient. A systemic marketing violation impacting thousands of patients is an exponential train wreck.

In this country, a train wreck warrants an investigation by the National Transportation Safety Board. There needs to be a similar board, perhaps a Pharmaceutical Safety and Investigation Board, which looks at derelictions like the one that occurred with regard to Rapamune and makes a full disclosure to the medical community.

The tragedy of the Rapamune case, and cases like it, is not the lost dollars to the government but the dissemination of misinformation through unlawful marketing that skews medical decision-making. For this injury, money alone does not set the record straight.

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