Residential MBS Working Group (MBS Fraud Task Force)

As of last week the Residential Mortgage-Backed Securities Working Group tasked with investigating mortgage fraud is official. The new office is part of the Administrations Financial Fraud Enforcement Task Force (FFETF) and was first announced by President Obama in his State of the Union speech last Tuesday.

US Attorney General Eric Holder said that the goal of the group will be to hold accountable any institutions that violated the law; to compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing and to help turn the page "on this destructive period in our nation's history."

At the press conference last week Attorney General Holder along with Housing and Urban Development (HUD) Secretary Shaun Donovan, Securities and Exchange Commission (SEC) Director of Enforcement Robert Khuzami and New York Attorney General Eric T. Schneiderman, outlined the mechanics of the working group which will bring together the Department of Justice (DOJ), several state attorneys general and other federal entities to investigate those responsible for misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities.

Schneiderman said, "In coordination with our federal partners, our office will continue its steadfast commitment to holding those responsible for the mortgage crisis accountable, providing meaningful relief for homeowners commensurate with the scale of the misconduct, and getting our economy moving again. The American people deserve a thorough investigation into the global financial meltdown to ensure nothing like it ever happens again, and today's announcement is a major step in the right direction."

The group will consist of at least 55 DOJ attorneys, analysts, agents, and investigators from around the country including the 15 civil and criminal attorneys and 10 FBI agents already employed in the FFETF unit. This team will join existing state and federal resources investigating similar misconduct under those authorities.

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Fannie and Freddie Principal Reductions Would Cost Taxpayer $100 Billion

The Federal Housing Finance Agency said that as of June 30, Fannie Mae and Freddie Mac guaranteed nearly 3 million mortgages on single family homes that are underwater, or worth less than the loans they secure.

Nearly 80 percent of the Fannie Mae and Freddie Mac borrowers with negative equity were current on their payments, said FHFA Acting Director Edward J. DeMarco.

"FHFA estimates that principal forgiveness for all of these mortgages would require funding of almost $100 billion," according to DeMarco in a Jan. 20 letter the FHFA posted on its website today.

DeMarco, whose agency was created by Congress to minimize losses at Fannie Mae and Freddie Mac and is independent of President Barack Obama's administration, has maintained that principal forgiveness would increase the size of the government's bailout of the companies, which have cost taxpayers more than $153 billion since they were taken under government control in 2008.

The agency compared the cost of principal forgiveness to the companies' current practice of forbearance, which allows delinquent borrowers to defer payments.

"Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac (FMCC) substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action," he said.

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Mortgage Loan Compliance | FHA’s New $50 Billion Dollar Bailout

The FHA doesn't issue mortgages, but instead insures lenders against defaults. However in November 2011, an independent audit of FHA's finances found that losses from mortgage defaults had depleted the agency's reserve fund to 0.24%, or $2.6 billion, during fiscal 2011. This leaves the agency well below the Congressionally-mandated 2% level. (The ratio measures the net worth of the reserve fund compared with the value of the loans FHA has insured.) In 2006, the reserve fund stood at 7%.

According to the report, the percentage of loans in the FHA's portfolio with three missed payments or more rose to 9.3% in November, up from 8.4% in August.

At the time, the agency's auditor warned that if home prices continued to drop, FHA could run through the remainder of its reserves, forcing it to either seek a bailout from the Treasury Department or further increase the premiums it charges borrowers. Such a bailout could cost billions.

Joseph Gyourko, a Real Estate Professor at the University of Pennsylvania's Wharton School and author of a report entitled "Is FHA the Next Big Housing Bailout?.", argues that the FHA is so undercapitalized that it would need at least $50 billion, even if the housing markets don't deteriorate further. But even by more conservative measures, the agency would need at least $20 billion to meet the capital requirements mandated by Congress.

"It's highly likely that the FHA will need a taxpayer bailout over the next three to five years," said Gyourko.

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