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NOVEMBER 2010
The Securities & Exchange Commission (SEC) has charged a pair of employees at Boston-based State Street Bank and Trust
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NATIONAL MORTGAGE PROFESSIONAL MAGAZINE
SEC charges two State Street employees with misleading sub-prime mortgage info
Company with misleading investors about their exposure to sub-prime investments. The SEC’s Division of Enforcement claims that John P. Flannery and James D. Hopkins marketed State Street’s Limited Duration Bond Fund as an “enhanced cash” investment strategy that was an alternative to a money market fund for certain types of investors. By 2007, however, the fund was almost entirely invested in sub-prime residential mortgage-backed securities (RMBS) and derivatives. Yet despite this expo-
accountable those who violated the law and harmed investors through subprime investments.” According to the SEC’s order instituting administrative proceedings against Hopkins and Flannery, they played an instrumental role in drafting a series of misleading communications to investors beginning in July 2007. Flannery was a chief investment officer who no longer works at State Street. Hopkins was a product engineer at the time, and is currently State Street’s head of product engineering for North America. According to the SEC’s order, the misleading communications to
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being known to both HUD and the lenders with the authority to self insure mortgages. HUD believes five years is a reasonable “seasoning” period for a particular mortgage loan to either perform or go into default and for the Department to ascertain whether origination errors were made. In addition, this five-year period is not considered a burden to lenders who might otherwise face the possibility of indemnifying insurance claims made on long-ago endorsed mortgage loans. The proposed rule will also require those mortgagees with delegated lender insurance authority to continually maintain an acceptable claim and default rate, both to gain this special lender status as well as to preserve it. HUD proposes that all new unconditional direct endorsement lenders who have the authority to self-insure mortgages must demonstrate a default and claim rate at or below 150 percent for the previous two years. This standard would apply to the state/states where the lender does business, rather than a national default/claim average. The present regulation defines an acceptable claim and default as at or below 150 percent of either: (1) The national average rate for all insured mortgages; or (2) if the mortgagee operates in a single state, the average rate for insured mortgages in the state. The current regulation may make it easier for a single-state lender to meet the acceptable standard if that lender operates in a state that has a high default rate. In contrast, a mortgagee would be disadvantaged by having its claim and default rate compared to the national average if the mortgagee operates in states with comparatively high default rates, even if the mortgagee is in full compliance with FHA requirements and otherwise eligible for “Lender Insurance” approval. HUD believes the proposed methodology will more accurately reflect mortgagee performance by evaluating each mortgagee based on its actual area of operations. FHA will continually monitor lender performance rather than conduct an annual review of each “Lender Insurance” mortgagee. The FHA will also consider the two-year default and claim performance of either entity in the case of acquisition or merger without requiring these entities to seek a waiver. FHA, at its own discretion (without any judicial or administrative action) also clarifies that it has the authority to immediately withdraw a lender’s ability to selfinsure mortgage loans. For more information, visit www.hud.gov.
sure to sub-prime securities, the fund continued to be described as less risky than a typical money market fund and the extent of its concentration in subprime investments was not disclosed to investors. The SEC charged State Street in a related case earlier this year and the firm agreed to settle the charges by repaying fund investors more than $300 million. “Hopkins and Flannery misled State Street’s investors about the risks and credit quality of a fund concentrated in subprime bonds and other subprime investments,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “The SEC is committed to identifying and holding