NewYork Times News: Sun trust sold $98.6 billion b
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Posted On: 04/13/2013 3:30:03 PM
NewYork Times News: Sun trust sold $98.6 billion bad loan to FNMA and Freddie during the three years ended 2008.
Note to New S.E.C. Chief: The Clock Is Ticking
By GRETCHEN MORGENSON
Published: April 13, 2013
AFTER receiving unanimous support from the United States Senate, Mary Jo White was confirmed last week as the new head of the Securities and Exchange Commission. At her swearing-in, she praised S.E.C. officials for “vigorously enforcing the securities laws.”
Doubts remain, however, about how potent the S.E.C.’s enforcement has been, especially in the aftermath of the mortgage mania. So Ms. White has some work to do.
She surely has a long list of ideas for her S.E.C. stewardship. Here’s hoping that one priority is to determine, and ramp up, investigations and whistle-blower complaints that are approaching their five-year statute of limitations. For a lot of cases involving questionable practices and disclosures arising from the mortgage bust of 2008, time is running out.
A February ruling by the Supreme Court made this crystal clear. In a case called Gabelli v. S.E.C., the court ruled that the commission has no more than five years from the occurrence of a fraud to file enforcement actions. It cannot wait until it uncovers a violation to start that clock.
How many S.E.C. cases are up against that five-year limit? Outsiders have no way of knowing. But one whistle-blower complaint involving potentially misleading disclosures by SunTrust Banks, a regional bank holding company in Atlanta, serves as an example. Filed with the S.E.C. more than a year ago by a former SunTrust employee, it appears to be languishing even though time’s a-wasting.
The SunTrust whistle-blower complaint, which I reviewed, contends that company financial filings of recent years misrepresented the bank’s exposure to risky no-documentation mortgages that it underwrote from 2006 to 2008. Many were sold to Fannie Mae and Freddie Mac, the taxpayer-backed mortgage finance giants.
Shareholders have not been aware, the complaint says, that many mortgages SunTrust was selling to Fannie and Freddie in this period were so-called liar loans, with little to no documentation of borrowers’ income or assets. The bank maintained that it had little exposure to low-documentation loans, the complaint says.
As with many whistle-blower complaints, the person filing this matter asked not to be identified. Aegis J. Frumento, a lawyer at Stern Tannenbaum & Bell who represents the whistle-blower, said the plaintiff is an experienced mortgage underwriter at SunTrust who was disturbed by dubious practices at the bank.
Michael McCoy, a SunTrust spokesman, declined to comment on the whistle-blower’s allegations, saying the bank was unaware of the complaint. He said in a statement that the bank’s policy was to use Fannie’s and Freddie’s guidelines when underwriting loans that would be sold to them. Nevertheless, the complaint details how it says some SunTrust mortgage sales representatives manipulated an automated loan underwriting system to gain Fannie’s and Freddie’s approval for mortgages that did not meet those companies’ standards. These loans, sold mostly to Fannie, were called Agency Shortcut mortgages.
SunTrust sales representatives entered fabricated income and asset figures into the bank’s exclusive version of Fannie Mae’s Desktop Underwriting system, the complaint says. Fake numbers, it says, would generate automatic approvals for unqualified borrowers, “at the same time preventing underwriters from exercising proper oversight.”
That oversight was thwarted because once the system’s approvals kicked in, the complaint contends, underwriters in SunTrust’s due diligence department could not stop the loans from being sold to Fannie or Freddie. There was no turning off the assembly line.
The complaint contains several internal SunTrust documents to support its allegations. One is a promotional piece for sales reps that explains the Agency Shortcut mortgage. “It’s a SISA (Stated Income/Stated Asset) at full doc pricing,” it says. Translation: undocumented loans carried the same interest rate as a fully documented version.
Because of fabrications, the complaint says, Fannie Mae’s system recognized these loans as fully documented. But according to the complaint, the Agency Shortcut mortgage waived property inspections and did not require the borrower to sign the document that allows the Internal Revenue Service to provide a prospective lender with a borrower’s income. In addition, borrowers of these loans could have a debt-to-income ratio of up to 64.99 percent, an onerous level.
SunTrust terminated the Agency Shortcut program in April 2008, the complaint says. Two months before, Fannie Mae limited the number of times a sales rep could enter information on a single borrower, according to the complaint. This might have been in recognition that its underwriting system was being gamed by repeated efforts to gain a loan approval.
The complaint contends that SunTrust originated “tens of billions of dollars” in Agency Shortcut mortgages. It is unclear how many of these loans landed at Fannie or Freddie; Suntrust’s financial filings say the bank sold $98.6 billion in total loans to Fannie and Freddie during the three years ended 2008.
Support for the whistle-blower’s descriptions of lax lending at SunTrust seems apparent from the boatload of loans sold to Fannie and Freddie during the mortgage mania that the bank has had to buy back. Such repurchases are typically done with loans that failed to meet standards — like borrower quality — or other characteristics promised to the purchasers at the time of the sale.
Over the last three calendar years, according to its financial statements, SunTrust has repurchased $2.235 billion of mortgages, the bulk from Fannie. Fannie requests these repurchases, and documents show that Suntrust’s constituted the fifth-largest amount among lenders at the end of 2012. It ranked not far below the much larger JPMorgan Chase .
And at the end of 2012, SunTrust said it had $655 million in repurchase requests outstanding. Mr. McCoy, the spokesman, said the bank’s buybacks reflected its heavy concentration of lending in Georgia and Florida during the bubble.
“We sold a higher percentage of loans to Fannie Mae than did some of our competitors,” he said, “so it also stands to reason that our demands from Fannie Mae could be higher than some peers.” The loan types that included the Agency Shortcut have accounted for just 20 percent of the bank’s buybacks, he said.
It is unclear, of course, what might come of this whistle-blower complaint. The S.E.C. declined to comment.
The statute-of-limitations clock, meanwhile, is ticking. “I’m sure the S.E.C. takes the Gabelli decision seriously,” Mr. Frumento said. “The logic of the ruling is that the S.E.C. is supposed to know when there have been securities law violations because that’s their job. I think the S.E.C. may end up being too late to file a lot of cases that it is now sitting on. But not this one, yet.”
Note to New S.E.C. Chief: The Clock Is Ticking
By GRETCHEN MORGENSON
Published: April 13, 2013
AFTER receiving unanimous support from the United States Senate, Mary Jo White was confirmed last week as the new head of the Securities and Exchange Commission. At her swearing-in, she praised S.E.C. officials for “vigorously enforcing the securities laws.”
Doubts remain, however, about how potent the S.E.C.’s enforcement has been, especially in the aftermath of the mortgage mania. So Ms. White has some work to do.
She surely has a long list of ideas for her S.E.C. stewardship. Here’s hoping that one priority is to determine, and ramp up, investigations and whistle-blower complaints that are approaching their five-year statute of limitations. For a lot of cases involving questionable practices and disclosures arising from the mortgage bust of 2008, time is running out.
A February ruling by the Supreme Court made this crystal clear. In a case called Gabelli v. S.E.C., the court ruled that the commission has no more than five years from the occurrence of a fraud to file enforcement actions. It cannot wait until it uncovers a violation to start that clock.
How many S.E.C. cases are up against that five-year limit? Outsiders have no way of knowing. But one whistle-blower complaint involving potentially misleading disclosures by SunTrust Banks, a regional bank holding company in Atlanta, serves as an example. Filed with the S.E.C. more than a year ago by a former SunTrust employee, it appears to be languishing even though time’s a-wasting.
The SunTrust whistle-blower complaint, which I reviewed, contends that company financial filings of recent years misrepresented the bank’s exposure to risky no-documentation mortgages that it underwrote from 2006 to 2008. Many were sold to Fannie Mae and Freddie Mac, the taxpayer-backed mortgage finance giants.
Shareholders have not been aware, the complaint says, that many mortgages SunTrust was selling to Fannie and Freddie in this period were so-called liar loans, with little to no documentation of borrowers’ income or assets. The bank maintained that it had little exposure to low-documentation loans, the complaint says.
As with many whistle-blower complaints, the person filing this matter asked not to be identified. Aegis J. Frumento, a lawyer at Stern Tannenbaum & Bell who represents the whistle-blower, said the plaintiff is an experienced mortgage underwriter at SunTrust who was disturbed by dubious practices at the bank.
Michael McCoy, a SunTrust spokesman, declined to comment on the whistle-blower’s allegations, saying the bank was unaware of the complaint. He said in a statement that the bank’s policy was to use Fannie’s and Freddie’s guidelines when underwriting loans that would be sold to them. Nevertheless, the complaint details how it says some SunTrust mortgage sales representatives manipulated an automated loan underwriting system to gain Fannie’s and Freddie’s approval for mortgages that did not meet those companies’ standards. These loans, sold mostly to Fannie, were called Agency Shortcut mortgages.
SunTrust sales representatives entered fabricated income and asset figures into the bank’s exclusive version of Fannie Mae’s Desktop Underwriting system, the complaint says. Fake numbers, it says, would generate automatic approvals for unqualified borrowers, “at the same time preventing underwriters from exercising proper oversight.”
That oversight was thwarted because once the system’s approvals kicked in, the complaint contends, underwriters in SunTrust’s due diligence department could not stop the loans from being sold to Fannie or Freddie. There was no turning off the assembly line.
The complaint contains several internal SunTrust documents to support its allegations. One is a promotional piece for sales reps that explains the Agency Shortcut mortgage. “It’s a SISA (Stated Income/Stated Asset) at full doc pricing,” it says. Translation: undocumented loans carried the same interest rate as a fully documented version.
Because of fabrications, the complaint says, Fannie Mae’s system recognized these loans as fully documented. But according to the complaint, the Agency Shortcut mortgage waived property inspections and did not require the borrower to sign the document that allows the Internal Revenue Service to provide a prospective lender with a borrower’s income. In addition, borrowers of these loans could have a debt-to-income ratio of up to 64.99 percent, an onerous level.
SunTrust terminated the Agency Shortcut program in April 2008, the complaint says. Two months before, Fannie Mae limited the number of times a sales rep could enter information on a single borrower, according to the complaint. This might have been in recognition that its underwriting system was being gamed by repeated efforts to gain a loan approval.
The complaint contends that SunTrust originated “tens of billions of dollars” in Agency Shortcut mortgages. It is unclear how many of these loans landed at Fannie or Freddie; Suntrust’s financial filings say the bank sold $98.6 billion in total loans to Fannie and Freddie during the three years ended 2008.
Support for the whistle-blower’s descriptions of lax lending at SunTrust seems apparent from the boatload of loans sold to Fannie and Freddie during the mortgage mania that the bank has had to buy back. Such repurchases are typically done with loans that failed to meet standards — like borrower quality — or other characteristics promised to the purchasers at the time of the sale.
Over the last three calendar years, according to its financial statements, SunTrust has repurchased $2.235 billion of mortgages, the bulk from Fannie. Fannie requests these repurchases, and documents show that Suntrust’s constituted the fifth-largest amount among lenders at the end of 2012. It ranked not far below the much larger JPMorgan Chase .
And at the end of 2012, SunTrust said it had $655 million in repurchase requests outstanding. Mr. McCoy, the spokesman, said the bank’s buybacks reflected its heavy concentration of lending in Georgia and Florida during the bubble.
“We sold a higher percentage of loans to Fannie Mae than did some of our competitors,” he said, “so it also stands to reason that our demands from Fannie Mae could be higher than some peers.” The loan types that included the Agency Shortcut have accounted for just 20 percent of the bank’s buybacks, he said.
It is unclear, of course, what might come of this whistle-blower complaint. The S.E.C. declined to comment.
The statute-of-limitations clock, meanwhile, is ticking. “I’m sure the S.E.C. takes the Gabelli decision seriously,” Mr. Frumento said. “The logic of the ruling is that the S.E.C. is supposed to know when there have been securities law violations because that’s their job. I think the S.E.C. may end up being too late to file a lot of cases that it is now sitting on. But not this one, yet.”
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