Directors Disappoint by What They Don't Do

FAIR GAME

" Directors Disappoint by What They Don’t Do" By Gretchen Morgenson – Pub. New York Times - May 11, 2013*

Ms. Morgenson:

I'm surprised you didn't include the classic example of ‘Directors Disappointing’ provided by the Board of Directors at Countrywide Financial.

Shouldn't that board have been suspicious of, and more reluctant to approve, Angelo Mozilo's serial changes to his optioned stock liquidation program? Should that board of directors have been less willing to approve and extend the significant corporate 'stock buyback' program, contemporaneous to Mozilo's option sales? And, should that board have recognized it was a buyback program which gave artificial price support to Mozilo's significant sales of his optioned stock? Should the board of directors at Countrywide have been more curious about Countrywide’s mortgage sales (origination) procedures, the risks of mortgage application falsification, and the non-verification of assets and income of mortgage applicants? Should the Countrywide Board of Directors have questioned, and perhaps even requested, the independent audit details for the quality classifications of Countrywide's mortgage investment portfolio. Should the Countrywide Board of Directors have wondered why Stanford Kurland, Angelo Mozilo's heir apparent, abruptly resigned from Countrywide in 2006? (1) An interesting point, Stanford Kurland is a long time friend (and confidant?) of BackRock CEO, Laurence Fink.

It seems Countrywide board members like Kathleen Brown(2) and Henry Cisneros(3) should have had the financial sophistication to be more concerned about what was happening, in general, in the mortgage market, and, in specific, more concerned about what was happening at Countrywide Financial.(4)

Maybe, that board of directors subscribed to former Citibank CEO, Chuck Prince’s business theory. You may recall what Chuck Prince said about the mortgage bubble, ". . . as long as the music is playing, you've got to get up and dance".(5)

But, I think it’s appropriate to ask, should a board of directors be dancing, or should it be calling the tune?

Footnotes:

1. “Kurland left his job as president and chief operating officer of Countrywide in September 2006, just as the housing market began its descent. The previous year, in 2005, he was paid $19.2 million and made an additional $13.7 million by exercising stock options, according to Reuters. See, “Former Countrywide No. 2 Sees Opportunities in Troubled Mortgages” By Matthew Padilla - pub. Orange County Register - June 10, 2008 - at: http://mortgage.ocregister.com/2008/06/10/former-countrywide-no-2-sees-opportunities-in-troubled-mortgages/

Also see: “Inside the Trillionaires’ Club at BlackRock” By Shawn Tully – CNNMoney - August 17, 2009 From “Lesson No 2 When Investments Get Complex, Do Your Homework” at: http://money.cnn.com/2009/08/12/news/companies/blackrock_trillionaires_club.fortune/http://

In late 2006 the company developed a model that put a lower, more realistic number on the incomes subprime borrowers were claiming on their "no doc" loans. The projections were shocking: BlackRock figured that when the loans reset to their new, higher rates in a couple of years, most borrowers would be spending more than half their real incomes on mortgage payments. Foreseeing an avalanche of defaults, BlackRock dumped subprime bonds in early 2007 when the prices were still lofty.

And see, "Those Valley Boys" at: http://www.scribd.com/doc/141134898/Those-Valley-Boys%20http://

2. Kathleen Brown is the sister of, then State of California Attorney General, now California Governor, Jerry Brown. See: Kathleen Brown, Wikipedia: http://en.wikipedia.org/wiki/Kathleen_Brown

3. Henry Cisneros was the Director of The Department of Housing and Urban Development (HUD) during Clinton's first term as president. In that position he was very instrumental in the implementation of Clinton’s Affordable Housing Initiative which is credited with ‘putting enforcement teeth” into Jimmy Carter’s Community Reinvestment Act. see Henry Cisneros, Wikipedia: http://en.wikipedia.org/wiki/Henry_Cisneros

4. “The Tragedy of Countrywide Financial and Angelo Mozilo” By Gary Jacobson pub. Muckety June 28, 2008, at: http://news.muckety.com/2008/06/26/the-tragedy-of-countrywide-financial-and-angelo-mozilo/3712

5. Citigroup Chief Still Bullish on Buy-Outs By Michoyo Nakimoto and David Wighton - pub. Financial Times - July 9,2007. See the quote, at: http://www.ft.com/intl/cms/s/0/80e2987a-2e50-11dc-821c-0000779fd2ac.html#axzz2T5N8MHGw

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”

Additional background: Shortly after being inaugurated into his second term as U.S. President, Bill Clinton discusses his Affordable Housing Initiative in a PBS NewsHour interview. “Bill Clinton: Laying the Foundation for The House of Cards”:

The Looming Rentcropper Society

In addition to the problems mentioned in Institutional Home Buying Bubble (see post below) there are few other reasonable concerns about the programs that facilitate such institutional bulk purchases.

In addition to the operational difficulties, the operational overhead, and the lack of ‘scalability’ in the bulk ownership and the property management of single family homes – which are presumably geographically disbursed - some commenters have mentioned a few other un-intended negative consequences which might flow from federal government sponsored, and large bank sponsored, programs for the bulk sale of Real Estate Owned (REO) and foreclosed single family properties.  To read about some of the other (somewhat predictable) unintended negative consequences of the bulk sales of single family homes to institutional owners read the articles named and hyperlinked below.

Resources:
Our Coming Rentcropper Society By Yves Smith posted on NakedCapitalism 8/21/2012, at: http://www.nakedcapitalism.com/2012/08/our-coming-rentcropper-society.html#Td4eh6HzCh0JProP.99

Our Coming Rentcropper Society: Private Equity Firms Buying-up Blocks of Foreclosures Nationwide By HiPointDem posted on DemocraticUnderground 8/24/2012, at: http://www.democraticunderground.com/10021191182

Foreclosure Bulk Sales Program Allows Banks and Hedgefunds to Buy Low After Selling High By David Dayen posted on FDL March 21, 2012, at: http://news.firedoglake.com/2012/03/21/foreclosure-bulk-sales-program-allows-banks-and-hedge-funds-to-buy-low-after-selling-high/

FHA Moving Forward with Bulk REO Sales By Greg Fielding from 8/27/2012 post on Bay Area Real Estate Trends, at: http://bayarearealestatetrends.com/2012/08/27/fhfa-moving-forward-with-bulk-reo-sales/

Smoke, Mirrors and The Shadow Inventory

The Wall Street Journal “Smart Money” Will Short Sales Hit Home Prices?  By Anna Maria Andriotis - pub. August 22, 2012

 Why is there a ‘shadow inventory’ of homes?

  

In last quarter of 2008, U.S. banks and their lobbyists pushed the U.S. Congress to force the Financial Accounting Standards Board (FASB) to postpone the implementation of mark-to-market accounting (FAS #157).* The FASB eventually acquiesced.  So, after the acquiescence, banks and other collateralized mortgage obligation [CMO] investors can continue to carry these investments at origination value, rather than at the investment’s current market value.

 

But, if a bank or other mortgage investor forecloses, renegotiates the mortgage, or sells the home (the collateral) the new ‘book value’ of the investment is based upon the new selling price (or mortgage value) - as determined by the terms of the new deal (auction, renegotiation, or sale).

 

By not foreclosing, renegotiating, or formally taking back properties (REO) banks and other mortgage investors can, to some extent, manage what  their losses appear to be, and hopefully offset the losses - they recognize - against other revenue, over time.

  

Key-words-search: “Congress Helped Banks Defang Key Rule” By Susan Pulliam & Tom McGinty WSJ 6/3/2009 | Professor Adam Levitin Congressional testimony “Federal Regulators Don’t Want to Know” YouTube | Zombie Banks | Japan Lost Decade (Please note that, at the beginning of Japan’s lost decade our current Treasury Secretary, Timothy Geithner was living and working in Japan as a Treasury Department attaché in the U.S. Embassy.)

 

*  See, FAS #157 [mark-to-market accounting] and scroll down to the section heading: Effect on subprime crisis and Emergency Economic Stabilization Act of 2008 , at http://en.wikipedia.org/wiki/Mark-to-market_accounting

 

Federal Regulators Don't Want To Know


Zombie Accounting and The Shadow Inventory

I recently watched a U.S. House of Representatives Judiciary Committee Hearing on C-SPAN. The hearing, which was held on December 15, 2010, was titled “Mortgage Services and Foreclosure Practices”.1 The testimony and the questions and answers in the hearing provided a significant amount of interesting information about the processes, and the legal and practical issues surrounding the mortgage servicing industry, and the Mortgage Electronic Registration System (MERS).

Because I followed the history of Congress’s involvement in pressuring the Financial Accounting Standards Board (FASB) to delay the implementation of FAS #157 in early 2009.2 I found a question, which was asked by Congressman Bobby Scott (D. VA) troubling.

At approximately 1 hour 36 minutes into the hearing Congressman Scott asked, in essence, if there was anything in “accounting standards” that might provide incentives for mortgage investors and mortgage servicers not to agree to short sales and to prefer alternatives that might be less advantageous for all parties.

I was surprised by the question because of Congress’ significant role in pressuring the FASB for a delay in FAS #157 and I was also bit surprised that none of the witnesses could directly answer the question - from an accounting standards perspective. In general, the witnesses only discussed the mis-alignment of incentives, where mortgage pooling and servicing agreements provide ongoing revenue for servicers when a short sale is not agreed to and a foreclosure is delayed.3

Footnotes: 
1. The December 15, 2010 House Judiciary Committee “Mortgage Services and Foreclosure Practices” hearing may be seen at:  http://www.c-spanvideo.org/program/297095-1
2. See a Wall Street Journal article titled, Congress Helped Banks Defang Key Rule By Susan Pulliam and Tom McGinty pub. 6/3/2009 at: http://online.wsj.com/article/SB124396078596677535.html Also see, For Your Reading Pleasure By Jack Ciesielski pub. in the Analyst’s Accounting Observer 2/25/2010 at: http://www.accountingobserver.com/PublicBlog/tabid/54/EntryId/12583/For-Your-Reading-Pleasure.aspx
3. Under the typical mortgage securitization “Pooling and Servicing Agreements” mortgage investors agree to pay mortgage servicers fees for arranging: home inspections, arranging broker ‘opinion of value’, preparing and filing documents, general documentation, notifications, forced insurance fees, and etc.