ANALYSIS: MORTGAGE SERVICING BY NONBANKS INCREASES DRAMATICALLY SINCE 2008
Banks are unloading mortgage servicing rights, and nonbank servicers are the primary buyers, according to a Bloomberg News analysis today. Banks are selling their mortgage servicing rights as an international agreement known as Basel III phases out their value for meeting capital requirements. The nation's top 14 bank servicers, including Bank of America, Wells Fargo & Co. and JPMorgan Chase & Co., have sold more than $1 trillion of mortgage servicing rights since the beginning of 2012, according to regulatory filings. As a result, nonbanks now service one in every seven mortgages in the U.S., up from one in every 50 in 2008. The CFPB in January enacted regulations that extended rules for banks, many stemming from legal settlements in 2012, to nonbank servicers. "Regulators never anticipated their servicing rules would be dodged by banks simply by selling off their mortgage servicing business to a shadow sector of nonbank companies," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington, D.C. The CFPB last month issued guidance on the new regulations that specifies how loan transfers to nonbanks should be handled. They include a provision that sellers and buyers must hold meetings in a timely fashion to discuss the continuity of service before mortgages are handed over. The CFPB also said that sale contracts must mandate that mortgage documents will be sent to the new servicer. More rules governing nonbanks may be coming, the bureau said. Read more.
U.S. JUDGE DISMISSES FDIC LAWSUIT AGAINST BANKS OVER MORTGAGE BONDS
U.S. District Judge Louis Stanton on Tuesday dismissed a lawsuit by the Federal Deposit Insurance Corp. against banks including Deutsche Bank AG and Credit Suisse Group AG over mortgage-backed securities sold before the 2008 financial crisis, Reuters reported yesterday. Judge Stanton found the FDIC's case, brought in its capacity as receiver for an Alabama bank, was filed too late, citing a recent U.S. Supreme Court decision. A statute relied on by the banking regulator to bring this and similar cases on behalf of banks it seized "did not give the FDIC more time to bring claims that would otherwise have been lost," Judge Stanton wrote. The ruling conflicted with a decision days earlier from another judge in the same court who is presiding over similar mortgage cases brought by the Federal Housing Finance Agency. It could prompt a closely watched appeal if the FDIC seeks to revive the case. The FDIC filed the lawsuit in 2012, accusing the banks of violating federal securities laws in connection with mortgage bonds they issued or underwrote that were then bought for $388 million by Colonial Bank, an Alabama lender that failed in 2009. Bank of America Corp, JPMorgan Chase & Co and Citigroup settled with the FDIC as part of multibillion-dollar global deals negotiated by the U.S. Department of Justice. Read more.
REGULATORS PROPOSE RULE TO REDUCE RISK OF DERIVATIVES
Federal regulators announced yesterday an overhaul of over-the-counter derivatives, a murky Wall Street market that gained infamy during the financial crisis of 2008, the New York Times reported today. The Federal Reserve and the Office of the Comptroller of the Currency, as well as three other agencies, proposed a rule that would apply to the financial instruments, which banks and other financial entities use to speculate or hedge their risks. American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them. But the 2008 crisis revealed how flaws in the market had allowed for dangerous buildups of risk at large Wall Street firms and worsened the run on the banking system. The rule proposed on Wednesday focuses on margin payments, which traders in derivatives make to each other to protect against the risk that they don't get paid what they are owed. Such margin payments add discipline to a high-octane trading activity and make it more likely that derivatives traders can bear losses if one large entity collapses. But the industry, seeking to minimize its costs, has not applied margin requirements evenly across the system. The proposed rule aims to change that. Regulators originally proposed a rule on margin payments in 2011. Because the latest version has significant differences, they chose to "re-propose" the rule, a relatively rare occurrence for new regulations that stem from the Dodd-Frank Act, which Congress passed in 2010 to overhaul the financial system. The regulators made the changes to bring American margin rules in line with new international ones approved in 2013, and in response to public comments. Read more.
EDITORIAL: CREDIT RATING REFORM COMES UP SHORT
The Securities and Exchange Commission recently issued two rules, required by the Dodd-Frank financial reform law, to overhaul the credit rating of mortgage securities, but the new rules are only modest improvements to a process that requires substantial reform, according to a New York Times editorial today. Under one of the rules, sellers of asset-backed securities are required to give investors details about the securities' underlying loans, including the borrowers' credit scores. With that data, investors can presumably make independent judgments about the quality of the securities being offered for sale. But the rule contains a major loophole: Sellers of asset-backed securities do not have to provide detailed loan-level data in many deals where the buyers are big institutional investors, including hedge funds, pension funds and insurance companies. Big investors could demand the data, but they didn't ask for it before the financial crisis. Instead, they put their faith in the securities' ratings and reaped the high yields until the whole scam unraveled. Read more.
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NEW CASE SUMMARY ON VOLO: WORTLEY V. CHRISPUS VENTURE CAPITAL LLC (IN RE GLOBAL ENERGIES LLC; 11TH CIR.)
Summarized by Kathleen DiSanto of Jennis & Bowen, P.L.
The Eleventh Circuit held that the bankruptcy court abused its discretion and applied the incorrect legal standard in denying Joseph G. Wortley's ("Wortley") Rule 60(b)(2) motion to set aside an order denying his motion to dismiss an involuntary chapter 11 case with prejudice and remanded the case with instruction to the bankruptcy court to grant the Rule 60(b)(2) motion and vacate its order approving the sale of Global Energies, LLC's ("Global") assets to Chrispus Venture Capital, LLC ("Chrispus"). The Eleventh Circuit also directed the bankruptcy court to conduct hearings to impose sanctions against Wortley's former business partners, Chrispus, and Chrispus' bankruptcy counsel for withholding email communications essential to Wortley's ability to provide evidentiary support for dismissing the involuntary bankruptcy case as a bad faith filing and his business partners' false deposition testimony with respect to their plan and intentions for filing the involuntary petition.
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NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: BANK DID NOT VIOLATE STAY BY PLACING ADMINISTRATIVE HOLD ON CHAPTER 7 DEBTORS' BANK ACCOUNTS
A recent blog post examines a recent decision by the Ninth Circuit Court of Appeals decision that Wells Fargo did not violate the automatic stay by placing a temporary administrative hold on a chapter 7 debtor's bank accounts.
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