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GSEs Complete 1.1 Million Permanent Loan Mods

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 APRIL 2012

The Mortgagee Review Board (MRB) for the U.S. Department of Housing & Urban Development (HUD) has announced that it is immediately and permanently withdrawing approval for AmericaHomeKey Inc. (AHK) to originate and underwrite new

The Securities & Exchange Commission (SEC) has charged the senior-most executives at Thornburg Mortgage Inc. with hiding the company’s deteriorating financial condition at the onset of the financial crisis. The plan backfired and Thornburg lost 90 percent of its value in just two weeks. The SEC charges that Thornburg Mortgage Chief Executive Officer Larry Goldstone, Chief Financial Officer Clarence Simmons, and Chief Accounting Officer Jane Starrett schemed to fraudulently overstate the company’s income by more than $400 million and falsely record a profit rather than an actual loss for the fourth quarter in its 2007 annual report. In actuality, Thornburg was facing a severe liquidity crisis and was unable to make ontime payments for substantial margin calls it received from its lenders in the weeks leading up to the filing of its annual report on Feb. 28, 2008. On May 1, 2009, TMST Inc., formerly known as Thornburg Mortgage Inc. and its subsidiaries, filed for Chapter 11 bankrupt-

suant to reverse repurchase (repo) agreements. The repo agreements required Thornburg to maintain a degree of liquidity and subjected the company to margin calls if the value of its ARM securities serving as collateral for its loans fell below designated thresholds. Thornburg was generally required to pay cash to reduce its loan amount or pledge additional collateral to the lender either the same day or the day following a margin call. In the weeks leading up to Thornburg’s annual report filing, the company received more than $300 million in margin calls that severely drained its liquidity. Thornburg was late in meeting the margin calls from at least three lenders and received a reservation of rights letter from one confirming that Thornburg was in violation of its lending agreement and could be declared in default at any time. Unwilling to disclose these events and the extent of the liquidity crisis, Thornburg executives improperly determined that more than $400 million in market value losses related to its ARM securities were temporary and therefore did not need to be recognized in the company’s income statement. The SEC alleges that Goldstone, Simmons, and Starrett engaged in a scheme to deceive Thornburg’s auditor and investors into believing that Thornburg had successfully met all margin calls. Keeping the extent of its margin call crisis quiet and relying on the cooperation and forbearance of its lenders, Thornburg was able to make the final payment on its margin calls approximately 12 hours before filing its annual report. Knowing that its reprieve from outstanding margin calls was only temporary and additional margin calls were likely in light of Feb. 27 news that a large European hedge fund holding substantial mortgagebacked securities like Thornburg’s ARM securities was about to collapse, Thornburg filed its annual report at 4:00 a.m. local time on Feb. 28. The executives’ urgency to file the annual report before the negative impact of the hedge fund’s collapse was evident in an e-mail that Simmons sent to Starrett saying that he gave Thornburg’s SEC reporting manager “a 6:00 a.m. Thursday deadline to file the K. I do not want there to be any issues based on Thursday activity.” According to the SEC’s complaint, Thornburg’s financial condition and liquidity immediately continued to deteriorate after filing its annual report. By 6:00 a.m., Thornburg began to receive additional margin calls that exceeded its available liquidity by 7:30 a.m. Nevertheless, even as Thornburg’s stock price dropped in the hours and days following the annual report filing, Goldstone and Simmons continued to publicly project the same false financial condition they had presented in the annual report, and they encouraged


AmericaHomeKey Cited by HUD for FHA Violations

SEC Charges Three Thornburg Mortgage Execs With Accounting Fraud

cy protection in U.S. Bankruptcy Court for the District of Maryland. According to the SEC’s complaint filed in federal court in New Mexico, even though Thornburg was violating lending agreements by failing to make on-time payments, the executives were unwilling to disclose the severity of their liquidity crisis to investors and Thornburg’s auditor. For example, in a Feb. 25 e-mail from Starrett to Goldstone and Simmons, she said, “We have purposefully not told [our auditor] about the margins calls.” Goldstone, Simmons, and Starrett scrambled to satisfy all outstanding margin calls and then timed the filing of the annual report to occur just hours later in order to precede additional margin calls and avoid full disclosure. As Goldstone had earlier stated to Simmons and Starrett in an e-mail, “We don’t want to disclose our current circumstance until it is resolved.” The intention was “to keep the current situation quiet while we deal with it.” The SEC alleges that the plan by Goldstone, Simmons, and Starrett to never disclose the delayed margin call payments fell through when they were unable to raise cash quickly enough to meet more margin calls received soon after filing the annual report. When Thornburg began to default on this new round of margin calls, it was forced to disclose its problems in 8-K filings with the SEC. By the time the company filed an amended annual report on March 11, its stock price had collapsed by more than 90 percent. Thornburg never fully recovered and filed for bankruptcy in May of 2009. “The truest test of corporate executives’ commitment to full and accurate shareholder disclosure comes not during times of soaring profits and doubledigit growth, but when companies are under financial stress and shareholders have the greatest need for accurate information,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “These Thornburg executives flunked that test by issuing a series of misleading statements and halftruths to conceal Thornburg’s rapidly deteriorating situation.” The SEC has now filed financial crisisrelated enforcement actions against 98 individuals and entities, including more than 50 chief executive officers, chief financial officers, and other senior corporate officers. According to the SEC’s complaint against the Thornburg executives, the company was based in Santa Fe, N.M., and considered the nation’s secondlargest independent mortgage company after Countrywide. In addition to its lending business that focused on jumbo and super-jumbo loans, and adjustable-rate mortgages (ARMs), Thornburg purchased and held ARM securities and also securitized ARM loans. In order to finance its mortgage business and investment-related activities, Thornburg needed constant access to financing, which included money borrowed from various lenders pur- 

The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, completed more than 2.1 million foreclosure prevention actions since the start of conservatorship including 1.1 million permanent loan modifications. These actions, designed to help borrowers stay in their homes, are detailed in the Federal Housing Finance Agency’s Q4 2011 Foreclosure Prevention and Refinance Report. The report also shows that after nine months, fewer than 20 percent of the GSE loans modified in the four quarters ended March 31, 2011, had missed two or more payments, an improvement over prior years. With this report, FHFA releases new state data sets and launches an interactive Fannie Mae and Freddie Mac State Borrower Assistance Map, showing the number of loans owned or guaranteed by Fannie Mae and Freddie Mac, delinquencies, foreclosure prevention activities, real estate-owned (REO) properties, and refinances in each state. In addition, the report now includes a graphic showing Delinquent Loans by State and Profiles of Key States, with detailed information about states with the biggest five-year decline in house prices and the highest number and rate of seriously delinquent loans. Other findings in the Q4 2011 Foreclosure Prevention and Refinance Report:  The GSE’s cumulative Home Affordable Refinance Program (HARP) refinancings increased 10 percent in the fourth quarter of 2011.  Half of all borrowers who received loan modifications in Q4 of 2011 had their monthly payments reduced by over 30 percent, and one-third included principal forbearance.  Serious delinquency rates for Fannie Mae and Freddie Mac loans remain below industry levels and continue to decline.  Florida had the highest number of serious delinquencies at the end of the fourth quarter.  California had the largest number of completed foreclosure prevention actions since the beginning of conservatorship in 2008.

mortgages insured by the Federal Housing Administration (FHA). In addition, the MRB is imposing $268,000 in penalties against the Dallas-based mortgage lender for repeated and serious violations of FHA requirements. “When we begin to see a pattern of failure to apply our standards, we will act to protect FHA’s financial health as well as consumers,” said Acting FHA Commissioner Carol Galante. “We expect lenders to meet our requirements, not just to protect the safety of our insurance fund but to make certain they don’t set up borrowers to fail by putting them into mortgages they ultimately can’t sustain.” Among more than a dozen violations of FHA standards, the MRB found AHK:  Failed to adequately document the source and/or adequacy of borrowers’ funds used for closing;  Failed to correctly calculate or adequately document borrowers’ income;  Failed to verify the stability of borrowers’ income;  Failed to ensure borrowers were eligible for an FHA-insured mortgage loan;  Failed to ensure the property met eligibility requirements;  Failed to comply with HUD’s property flipping requirements, including a case involving a property purchased for $14,100 that was resold approximately three months later for $125,000; and;  Charged borrowers unallowable fees. Ginnie Mae also terminated AHK as an approved issuer, though AHK was not an active participant in the Ginnie Mae program having never issued Ginnie Mae securities in the past.