Schumer Urges Federal Home Loan Bank System To Stop Extending Advances Backed By Predatory Mortgages Peddled By Lenders Like Countrywide

Schumer Urges Federal Home Loan Bank System To Stop Extending Advances Backed By Predatory Mortgages Peddled By Lenders Like Countrywide

Atlanta-Based Federal Home Loan Bank Upped Cash Flow to Countrywide by 77 Percent In Third Quarter; Troubled Mortgage Lender Accounts for 40 Percent of All Advances By Atlanta Bank

Collateral Posted By Countrywide Could Include Risky 'Option-ARM' Loans That Are Experiencing Rapidly Rising Delinquencies

Senator Urges Stricter Collateral Guidelines to Reduce Exposure to Risky Mortgages and Encourage Banks to Modify More of Their Unaffordable Loans

With Countrywide Financial Corp. increasingly turning to the Federal Home Loan Bank (FHLB) system for cash advances to stay afloat as other liquidity sources shun the company, U.S. Senator Charles E. Schumer (D-NY) urged the overseer of the federally-supported bank network to probe the underlying risk of Countrywide's collateral and to issue new, system-wide regulations to reduce the banks' exposure to risky or predatory loans.

"Countrywide is treating the Federal Home Loan Bank system like its personal ATM," Schumer said. "When Congress created these banks, it never intended for them to be used to prop up mortgage lenders that specialized in deceiving borrowers. At a time when Countrywide's mortgage portfolio is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk."

As the Wall Street Journal reported Monday, Countrywide has increasingly relied on the FHLB system for cash flow as the mortgage market downturn continues to batter one of the industry's top peddlers of high-risk home loans. While other banks have also increasingly relied on the FHLB system, none have done so with more haste than Countrywide. Through the first three quarters of this year, Countrywide's advances from the Atlanta-based FHLB bank had soared 81 percent, to a total of $51 billion. That represents nearly 40 percent of FHLB Atlanta's total advances, according to the bank's latest SEC filing—a potentially dangerous level of exposure considering Countrywide's track record in poor underwriting and predatory lending practices in recent years. Countrywide's stock has plummeted 80 percent since the start of the year and just this August, Countrywide had to tap into an emergency $11.5 billion line of credit.

To secure its advances from FHLB Atlanta, Countrywide has posted $62 billion worth of loans as collateral. Schumer pointed out that there is adequate reason for worry that Countrywide's collateral poses a higher risk than other banks. As of September 30, over one-third of the loans held for investment by Countrywide Bank were payment-option adjustable-rate mortgages ("option ARMs"), one of the most exotic varieties of risky home loans in the industry. Also, according to published reports, a startling 91 percent of option ARMs the company originated in 2006 and 2007 were low-documentation. Moreover, the company reported that 89 percent of their 2006 originations of option ARMs did not conform to the joint banking regulators' guidance, which increases the likelihood that Countrywide is pledging loans deemed unsuitable or predatory by the regulators as collateral for FHLB advances. Also, delinquencies on Countrywide's option ARMS are skyrocketing, jumping nearly 75 percent in the last quarter alone.

In a letter to the chairman of the Federal Housing Finance Board (FHFB)—the regulatory agency for the 12 FHLB banks—Schumer urged the agency to study whether Atlanta's exposure to Countrywide's collateral poses an undue risk to the FHLB system. He also called for the regulator to consider preventing any further or continuing overnight advances based on collateral that does not meet the guidance issued earlier this year by the Federal Reserve Board—and adopted by other federal financial regulators such as the Office of Thrift Supervision and the Federal Deposit Insurance Corporation—concerning exotic home loans. Incorporating the joint regulators' guidance would effectively prevent the FHLB banks from accepting the highest-risk varieties of mortgages—including the option ARMs that Countrywide made its specialty—as collateral to secure advances. This could provide further incentive for banks like Countrywide to modify their riskiest loans to safe, affordable and sustainable loan products for their borrowers.

Earlier this year, FHFB officially informed the home loan banks of the joint federal guidance, but did so on a non-binding basis. This has essentially left it up to the individual FHLB banks to determine its own policies on what does and does not qualify as adequate collateral. Schumer said the standards should be tightened and made uniform.

The FHLB system was chartered by Congress in 1932 to support neighborhood banks by serving as a lender of last resort. Today, the 12-bank system services approximately 8,000 member institutions.

A copy of Schumer's letter to FHFB Chairman Ronald Rosenfeld appears below.

November 26, 2007

Ronald A. Rosenfeld
Chairman
Federal Housing Finance Board
1625 Eye Street NW
Washington, DC 20006

Dear Chairman Rosenfeld:

I write to express my serious concern over the lending practices of the Federal Home Loan Bank of Atlanta, specifically in regard to the significant volume of advances made to Countrywide Bank. I am concerned that the loans being pledged by Countrywide to secure these advances may pose a risk to the safety and soundness of the FHLB system as a whole. I urge you to conduct a careful review of FHLB Atlanta's collateral evaluation policies, as well as Countrywide's pledged collateral, in an effort to determine the risk that Countrywide's collateral poses to the FHLB system. During the current market crisis, it is important that the FHLB system perform its critical mission safely without imposing additional risks on an already strained market.

According to the most recent SEC filings, FHLB Atlanta had made $51.1 billion in advances to Countrywide Bank, representing 37 percent of the Bank's total outstanding advances as of September 30, 2007 and far exceeding advances made to the next largest borrower. Countrywide had pledged $62.4 billion of mortgages as collateral for the FHLB advances, representing 78 percent of its total mortgage loans held for investment at the bank.

I find these numbers alarming as reports continue to emerge about how Countrywide's reckless and predatory lending practices were a leading contributor to today's foreclosure crisis. Moreover, it is my understanding that Countrywide's loans held for investment at the bank have been far from immune from the credit deterioration that has resulted from unsound lending. Countrywide reportedly held $27 billion of "pay option ARMs" as of September 30, 2007, accounting for over one-third of the loans held for investment by the bank. Countrywide's option ARMs were (and may still be) often underwritten with less than full documentation - according to UBS Warburg data prepared for the Wall Street Journal, 91 percent of Countrywide's option ARMs underwritten in 2006 were "low doc." It has been reported that delinquencies on Countrywide's pay option ARMS are skyrocketing, jumping nearly 75 percent in the last quarter.

Given this rapid deterioration in the credit quality of Countrywide's option ARMs, I urge you to conduct a review of the loans that are being held as collateral for FHLB advances in an effort to determine if FHLB Atlanta has adequate collateral to secure these advances. I would also like an explanation of how any second lien mortgages during a time of property price declines could be viewed as adequate collateral for large FHLB advances.
Furthermore, I believe that you should consider preventing any further or continuing overnight advances based on collateral that does not meet the joint financial regulators' guidance on nontraditional and subprime mortgage products (e.g., Interagency Guidance on Nontraditional Mortgage Product Risks and joint Statement on Subprime Mortgage Lending). This quarter, Countrywide reported that 89 percent of their 2006 originations of pay option ARMs did not conform to the joint regulators' guidance, which increases the likelihood that Countrywide is pledging loans deemed predatory by the regulators as collateral for FHLB advances. Importantly, Fannie Mae and Freddie Mac's safety and soundness regulator has specifically prohibited any new direct or indirect investment in loans that do not meet this guidance. As the mortgage crisis threatens to get worse from here, it is critical that the FHFB do the same.
Thank you for your prompt attention to this matter, and I look forward to working with you on these issues in the coming weeks and months. If you should have any questions, please contact David Stoopler on my staff at 202-224-6542.

Sincerely,

Charles E. Schumer
United States Senator

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