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At the state level, the attorney general’s office announced it had closed two firms that allegedly charged consumers upfront fees for nonexistent loan-modification services. The closed firms are U.S. Foreclosure Relief and H.E. Servicing. Principals George Escalante and Cesar Lopez, and legal representative Adrian Pomery were also barred from working in real estate, and ordered to make $1 million in restitution through the sale of frozen assets, including jewelry and cars.

And the U.S. Attorney’s office in Los Angeles reported a fourth defendant in a mortgage scam, Terral Toole of Lake Elsinore, was sentenced Monday to more than seven years in prison after pleading guilty in a scam that netted $4 million in proceeds for homes that were not for sale.

Small consolation for those scammed, but still …

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By Jill Replogle

Civil Justice Research & Education Project

SACRAMENTO–Financial institutions, including several banks that received taxpayer bailouts, spent almost $4.01 million on lobbying in Sacramento in the first three quarters of the year as they sought to blunt legislation to rein them in.

That represents a slight dip from the $4.5 million they spent on lobbying here during the same periods in 2007 and 2008. But the spending shows that two and a half years after the mortgage industry began its plunge, banks and their trade groups are willing and able to assert their sway within the Capitol.

The industry successfully blunted and blocked several bills intended to provide consumer protections and halt abuses that led to the worst recession since the Great Depression.

“The consumer is totally outgunned,” Rep. Jackie Speier (D-Hillsborough), who was chair of the Senate Banking Committee before being elected to Congress in 2008, said in a recent interview.

Altogether, the financial services industry including banks, insurance companies, firms that offer high-interest loans and others spent $14.8 million on lobbying in the first nine month of 2009.

With several banks and subprime lenders defunct or swallowed into other institutions, spending by the financial services and insurance sectors declined but only by $750,000 from the prior year. The 2009 spending was equal to 2006 levels, and well above sums spent at the start of the decade.

Banks, insurance companies and others in the financial services sector continue to spend heavily on lobbying.

In the session that drew to a close in September, consumer groups engaged in major battles over legislation with banks including Bank of America and trade groups including ones representing banks and mortgage brokers.

Banks that received billions in federal tax-funded bail-outs spent hundreds of thousands on lobbying:

• Bank of America’s lobbying tab of $291,345 for the first nine months of the year exceeded the $219,227 it spent on lobbying in 2008, and $137,312 it spent in 2007.
• Wells Fargo’s $108,000 lobbying cost was only a slight dip from the $109,651 it spent in the same period last year.
• Citigroup’s $272,652 was slightly above the $267,530 it spent in the first nine months of 2008.

They fought over bills to restrict risky lending practices, halt foreclosure scams, increase consumer protections and give individuals the right to sue brokers, lenders and mortgage servicers for breaking the law.

One bill sought to prohibit banks and other recipients of taxpayer bailout money from using it for holiday parties, bonuses and lobbying. It failed.

Several measures endorsed by Gov. Arnold Schwarzenegger, by far the state’s biggest recipient of banking industry campaign donations, were designed to stem the tide of foreclosures. Critics say his plan isn’t working.

Banking lobbyists spent busy summer days shuttling between committee hearings and the offices of legislators and regulators. Their general message has changed only slightly since 2007 when the housing bubble popped. It had been: Don’t mess with a good thing. Now, the message is: Don’t make things worse.

“The amazing thing is that through good times and bad, [the legislators] are still willing to listen to them,” said Paul Leonard, California director for the Center for Responsible Lending.

Financial industry targets lending restrictions

One of the financial industry’s targets was Assembly Bill 260 by Assemblyman Ted Lieu (D- Torrance). Lieu’s bill was designed to ban some of the riskiest lending practices that contributed to the subprime mortgage fiasco. Schwarzenegger signed it into law last month.

The bill seeks to prohibit lenders and brokers who offer subprime loans from “steering” clients toward higher cost loans. It also bans negative amortization loans, in which the borrower’s payment is less than the accrued interest. In these loans, the difference is added to the loan, causing the balance to increase.

Many of these loans are targeted at lower-income borrowers or those deemed less credit-worthy by traditional measures.

The measure limits prepayment penalties for most subprime loans and restricts mortgage broker compensation, including so-called “yield spread premiums.” Yield spread premiums are rewards paid by lenders to brokers for negotiating a loan with an interest rate above the par rate.

While supported by consumer groups and unions, the bill faced opposition from the mortgage and real estate industries, whose lobbyists argued that increased regulation will make it even harder for struggling home owners to get loans.

“I think it’s worthwhile to ask whether we need to layer more regulations onto residential loans,” said Mike Belote, a lobbyist for the California Mortgage Association.

The mortgage and real estate industries also opposed language in the bill requiring “that the mortgage broker place the economic interest of the borrower ahead of his or her own economic interest.”

“We understand fiduciary duty and we understand getting the borrower the best loan we can,” said Belote, [but] “I think it subjects brokers to more litigation which they don’t need.”

The industry won a concession in July, when Lieu stripped out the private right to action, which would have allowed individuals to sue brokers or lenders for violating the law. Lieu said he did so to avoid veto by Schwarzenegger. The governor vetoed similar legislation in 2008.

“I would love to have a private right to action but I need the governor’s signature,” Lieu said.

Some consumer advocates pushing for tougher restrictions were lukewarm toward the bill, saying it doesn’t go far enough.

“What more do we need to happen in the world to get people to realize we need stronger protection in place?” asked Kevin Stein, associate director of the California Reinvestment Coalition.

Consumers win one, banks weren’t opposed

Another contentious issue on the California legislature’s banking agenda involved mortgage loan modification.

Two bills, one by Sen. Ronald Calderon (D-Montebello) and another by Assemblyman Pedro Nava (D-Santa Barbara), sought to make real estate agents and others, including attorneys, who assist in modifying mortgage loans, wait to get paid until after they’ve done the work. As more and more Californians face foreclosure on their homes, a booming industry has developed to help people change the terms of their mortgage loans.

Many financial services firms engaged in the business are the same ones that helped buyers get into the bad loans in the first place. While much of the industry is legitimate, a growing force, including consumer interest groups, Attorney General Jerry Brown and the State Bar say scams are rampant.

Representatives of the real estate and mortgage business agree, but say licensed agents who follow the rules should be allowed to charge upfront as usual.

“The bad guys are breaking the law now; they don’t need a new law to break,” Stan Wieg, staff vice president of the California Association of Realtors, said at a Senate Committee on Banking, Finance and Insurance hearing this summer.

For most of the year, the California Association of Realtors opposed both bills, saying advance fee contracts approved by the Department of Real Estate should be able to stand. One of the Capitol’s most potent lobby forces, the Realtors have spent $3.3 million on lobbying since 2007, and more than $2.2 million on campaign donations.

Consumer advocates, who contend that advance fees should not be permitted, had urged Schwarzenegger to sign Nava’s measure, AB 764.

“It’s ridiculous that you actually need this industry at all,” Leonard said. “You shouldn’t need to have to pay someone to refinance a loan that should be in the mortgage servicers’ interest anyway.”

By the time lawmakers cast their final votes of the year, Realtors were supporting Calderon’s SB 94. A late amendment had softened the measure.

Schwarzenegger vetoed Nava’s bill, and signed Calderon’s, saying:

Although I support the prohibition of individuals charging advance fees for mortgage loan modifications, I do not agree with the provision of this [Nava] bill that will only allow fees to be collected if a modification is successful. This could adversely affect legitimate businesses that provide loan modification services. As such, I am signing SB 94 that accomplishes this prohibition against advance fees without unnecessarily harming legitimate companies.

State regulators continue to field complaints from consumers who say they’ve been ripped off by scam artists posing as loan modification specialists. The California Department of Real Estate had about 800 investigations into potential scams pending as of the summer, compared to fewer than 10 in June 2008, said Tom Pool, the Department’s public information officer.

Brown had received 2,500 complaints as of October, up from 200 in 2008. The attorney general has filed suits against 21 individuals and 14 companies for loan modification fraud in July. Brown and some others say they believe Calderon’s measure will curb abuses.

Effort to curb lenders’ new gambit stumbles

A third thorny issue involves reverse mortgages–what many consider the new hot way to make a buck in the mortgage industry.

Officially called Home Equity Conversion Mortgages, reverse mortgages are growing fast as baby boomers age, and lenders and brokers seek out new, lucrative products in the post-subprime world.

Two bills, AB 329 by Assemblyman Mike Feuer (D-Los Angeles) and SB 660 by Sen. Lois Wolk (D-Davis), were designed to protect senior citizens, the recipients of these loans.

Lobbyists representing companies that offer reverse mortgages sought to water down both the bills. By the end of the session, lawmakers approved Feuer’s bill, which requires additional disclosures to borrowers, and Schwarzenegger signed it into law.

Feuer’s bill will require lenders to hand prospective borrowers a written warning about the implications of obtaining a reverse mortgage. Once it takes effect on Jan. 1, the bill also will require lenders to give prospective borrowers a checklist of issues to be discussed with a reverse mortgage counselor. The checklist will have to be signed by the counselor and prospective borrower and provided to the lender before a loan application could be approved.

AB 329 will prohibit lenders from compensating counseling agencies for their work, and prohibit reverse mortgage lenders from certain types of “cross-selling,” for example, referring clients to insurance agents to purchase an annuity or other financial or insurance product.

Lenders blocked Wolk’s measure.

Banks had opposed Wolk’s inclusion of language stating that the lender or broker “owes the prospective borrower a duty of honesty, good faith, and fair dealing,” saying it would leave them vulnerable to lawsuits.

“The banking lobbyists are frantic,” Prescott Cole of California Advocates for Nursing Home Reform said during the summer as he lobbied for Wolk’s bill. Wolk’s bill narrowly escaped death in July at a hearing before the Assembly Committee on Banking and Finance, then stalled the following month in the Senate.

Dustin Hobbs, communications director for the California Mortgage Bankers Association, said the language in Wolk’s bill was too vague and could lead to costly court battles over what constitutes fiduciary duty for lenders.

“We encourage our members to deal honestly with our customers, but it’s not something you want established in legislation in a vague fashion,” Hobbs said.

California Advocates for Nursing Home Reform, the AARP, Aging Services of California, California Alliance for Retired Americans and Consumer Attorneys of California backed the measure.

Wolk questioned why the mortgage industry shouldn’t be subject to the same the fiduciary duties that are already codified in other parts of the law, including the section of California’s insurance code that addresses business with seniors.

“It applies to the insurance industry. Why shouldn’t it apply to the banks?” said Wolk.

Reverse mortgages can be useful for some older people. They provide a way for homeowners aged 62 and older to turn equity in their homes into hard cash for immediate needs. The loans come due when the homeowner dies or sells the house.

These loans have grown rapidly in recent years, sparking concern over the industry’s regulation. The U.S. Government Accountability Office issued a report noting concerns about “potentially misleading” marketing claims and “inappropriate cross-selling,” and warned that HUD counselors may not be complying with federal reverse mortgage counseling requirements. Here is a Washington Post report on the GAO’s study.

The report said more than 2,700 lenders make reverse mortgage loans, and most entered the business since 2008. The number of reverse mortgages negotiated has grown from 157 loans in fiscal year 1990 to more than 112,000 in fiscal year 2008.

Reverse mortgages sometimes are offered to elderly people as a way to pay for annuities, which the AARP says can be “very risky, and generally not wise.” Deferred annuities, which delay payments for years and include high penalties for getting out early, are particularly egregious, said Cole.

“Insurance companies are talking seniors into buying these deferred annuities when they’re 80-years old,” Cole said. Such investments perhaps are appropriate for younger adults, but likely would never pay off during elderly people’s lifetimes.

The boom in reverse mortgages has come with a slew of loan bailouts. The Federal Housing Association insures reverse mortgages, paying lenders back when they fail to recover an investment. Borrowers are charged an insurance premium that goes into the FHA fund to pay off lenders.

The FHA fund took on $381.3 million in reverse mortgages in 2008, according to an investigation by Consumer Reports. (link) With demand growing, the FHA has requested an additional $800 million in taxpayer money for 2010 to cover expected losses.

“The lender will not lose a nickel on this,” Cole said.

Consumers could gain some victories

Measures to stem foreclosures fared somewhat better in the legislative jungle. Schwarzenegger signed the Foreclosure Prevention Act into law in February.

The law is designed to give troubled borrowers additional time to work out a loan modification before the locksmith arrives. The measure exempts lenders and mortgage servicers who implement a “comprehensive loan modification program.”

Hundreds of exemptions have been granted while only a handful have been denied. Housing advocates say the plan has been ineffective in stopping foreclosures.

Foreclosures were up 22% during the first quarter of 2009 compared to last year. The percentage of loan modifications has gone up since last year, but has dropped off since January 2009.

Pool, the Department of Real Estate’s public information officer, said California’s feeble housing environment leaves panicked homeowners vulnerable to individuals and firms ready to make a buck off the weak.

“That’s really a target-rich environment for con artists,” he said.

Still, Pool said putting restraints on potentially-risky loan products doesn’t make for a safer lending environment.

“The industry is much smarter than the rest of us,” he said, “so they always come up with new products that skirt regulations.”

The bill that perhaps struck most bluntly at the financial industry’s influence in this era of the banking bailout is Assemblyman Nava’s AB 1075.

The bill sought to prohibit state banks and credit unions that are receiving taxpayer assistance funds from using the money for holiday parties, executive bonuses or lobbying.

That bill never made it to the Assembly floor for a vote. It stalled in an Assembly committee. There, it likely will remain there.

(Replogle is attending UC Berkeley School of Communications, where she is seeking her masters degree in journalism. She was an intern at Civil Justice Research & Education Project. For more details on the banking lobby, please see the first part of this series. jillrep@gmail.com)

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That may seem ugly. But Freddie Mac lost $25.3 billion the year before.

Freddie Mac is a government-sponsored entity responsible for maintaining a stable housing market. The federal government stepped in to keep it afloat when the housing market went bust. Whether or not the worst is over, there still is plenty of bad stuff, as its latest filing with the Securities and Exchange Commission shows.

Here is a link to the full Freddie Mac filing, though we at ProtectConsumerJustice.org have culled through it, so you don’t have to. The filing is not for the faint of heart, especially for Californians.

There is, for example, a warning that there will be “a variety of factors” that “will continue to place downward pressure on our financial results in future periods, and could cause us to … request additional draws from Treasury under the Purchase Agreement.”

Then there is this:

Key factors include the potential for continued deterioration in the housing market and rising unemployment, which could result in additional credit-related expenses and security impairments, adverse changes in interest rates and spreads, which could result inmark-to-market losses … While the housing market has experienced recent modest home price improvements beginning in the second quarter of 2009, we expect home price declines in future periods. Consequently, our provisions for credit losses will likely remain high during the remainder of 2009.

And this:

There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following our conservatorship, including whether we will continue to exist.

And this:

Home prices nationwide increased an estimated 0.3% in the third quarter of 2009 (and an estimated 0.9% during the nine months ended September 30, 2009) based on our own internal index. However, many regions and states suffered significant home price declines in the last two years. The percentage decline in home prices in the last two years has been particularly large in the states of California, Florida, Arizona and Nevada, which comprised approximately 25% of the loans in our single-family mortgage portfolio as of September 30, 2009.

And this:

Certain states experienced much higher unemployment rates, such as California, Florida, Michigan and Nevada, where the unemployment rate reached 12.2%, 11.0%, 15.3% and 13.3%, respectively, at September 30, 2009. Loans originated in these states comprised approximately 26% of the loans in our single-family mortgage portfolio as of September 30, 2009. Many financial institutions continued to remain cautious in their lending activities during the third quarter of 2009. Although there was overall improvement in credit and liquidity conditions during the third quarter, credit spreads for both mortgage and corporate loans remained higher than before the start of the recession.

Matters continue to deteriorate. In August, mortgage lender Taylor, Bean & Whitaker Mortgage Corp., or TBW, filed for bankruptcy. Freddie Mac estimates that its net potential exposure related to the loan repurchase obligations was approximately $500 million as of the end of September.

As has been know for some time, Freddie faces federal investigations by the U.S. Justice Department in Virginia. The Securities and Echange Commission issued subpoenas to Freddie Mac and some employees early this year. The entity also is fending off serious lawsuits brought by pension funds and others. Here is one of the Freddie Mac lawsuits.

There are certain common allegations. Freddie and its executives were paid exorbitant salaries and bonuses tied to Freddie Mac’s short-term performance. Some employees intentionally misled investors into believing that its mortgage portfolios were sounds, its underwriting criteria were the gold standard and its capitalization was sufficient.  The reality was that Freddie’s mortgage portfolios were at tremendous risk because of exposure to the subprime market. Several news accounts have focused on the suits, including this one in the New York Times.

Before all the unpleasantness of the housing bust, Freddie Mac was a major lobby force in Washington, spending $5.8 million as it headed down in 2007-2008, as the Center for Responsive Politics notes. It had a more modest presence in California, spending $235,705 on lobbying during this decade in Sacramento and attempting to convince lawmakers and staffers over pastries that it knew what it was doing. Freddie’s presence in Sacramento ended last year.

–Dan Morain

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