Sunday, January 9, 2011

Public Pension Funds Seek Foreclosure Reviews

Ilaina Jonas of Reuters reports, Public pension funds seek foreclosure reviews:
A coalition of seven major public pension systems, led by New York City Comptroller John Liu, has asked the boards of four of the largest U.S. banks to examine their mortgage and foreclosure practices.

In a letter dated January 6, the pension fund coalition urged the Audit Committees of Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co, and Wells Fargo L& Co to launch independent examinations of their loan modification, foreclosure, and securitization policies and procedures.

"This will help to prevent future compliance failures and restore the confidence of shareholders, regulators, legislators and mortgage markets participants," the coalition said in the letter.

Bank representatives could not be reached for immediate comment on Sunday.

On January 7, in a decision that could slow foreclosures nationwide, Massachusetts' highest court voided the seizure of two homes by Wells Fargo & Co and US Bancorp after the banks failed to show they held the mortgages at the time they foreclosed.

That sent fears through the market as investors worried that decision could threaten lenders' ability to work through hundreds of thousands of pending foreclosures.

The Supreme Judicial Court of Massachusetts' unanimous decision upheld a lower court ruling and was among the earliest cases to address the validity of foreclosures done without proper documentation.

That issue, including the use of "robo-signers" who approved foreclosure documents without reviewing them, last year prompted an uproar that led lenders such as Bank of America, JPMorgan Chase and Ally Financial Inc to temporarily stop seizing homes.

Courts in other U.S. states are considering similar cases, and all 50 state attorneys general are examining whether lenders are forcing people out of their homes improperly.

The pension fund coalition represents more than $430 billion in pension fund investments, including $5.7 billion invested in the four banks.

Liu represents the five NYC pension funds. The coalition also includes the Connecticut Retirement Plans and Trust Funds, the Illinois State Board of Investment, the Illinois State Universities Retirement System, the New York State Common Retirement Fund, the North Carolina Retirement Systems, and the Oregon Public Employees Retirement Fund.

The coalition called for the banks to report the findings of their independent examinations in their 2011 proxy statements this spring.

At the end of the last year, the coalition's combined holdings in each bank included: 97.1 million Bank of America shares valued at $1.3 billion; 226.6 million Citigroup shares valued at $1.1 billion; 40.7 million JPMorgan Chase shares valued at $1.7 billion, and 50.6 million Wells Fargo shares at $1.6 billion.

It's about time public pension funds get involved and use their clout to pressure banks to examine their loan modification, foreclosure, and securitization policies and procedures. I'm not sure anything will come out of this but the foreclosure crisis has sounded the alarm bell and banks need to respond to make sure that measures are in place to prevent this type of abuse from ever happening again.

Finally, I leave you with some thoughts from Graham Turner of GFC Economics, one of the best independent economic consultancy shops for institutional clients:

The rise in interest rates is not sustainable. However, this is very typical of what happened in Japan during the 1990s. The promise of fiscal support/stimulus and an uptick in growth will be a toxic mix for bond markets, causing more of a sell-off. But this in turn will increase the risk of a second crash in housing.

This goes to the heart of the Fed's failure to use QE to control the bond market, and again shows how little the authorities have learnt from either Japan (1990s) or the US/UK (1930s). (The US economy is recovering because of a refi wave, which has now already ended. The Fed has failed to get traction on the housing market from QE2. Eleven out of the 20 cities in the S&P/Case Shiller's 20-city composite hit a new low in October.)

Combine that with Congressional inaction on the Fed deficit, and you have the perfect set-up for a bond market panic. Their only (potential) hope is that the current improvement in the labour market will loop back into a lower delinquency rate and in turn support the housing market. I am sceptical of such a scenario, because of the serious arrears/foreclosure backlog, which is vast.

It is a all a question of balance. Perhaps, just perhaps, if rates had been held at the low levels reached in the Fall of 2010, we might then have had a more durable recovery.

The US is likely to head into trouble just as Ireland/Greece/Spain run into more difficulties. Yesterday's EU Commission Survey showed an extraordinary divergence between Germany on the one hand, and Ireland/Spain/Greece on the other. This single currency is in gettiing deeper into trouble. Bond yields are reflecting this.

My advice is to go with the flow / sell off and look for an opportunity to re-enter fixed income markets in the Spring.
I thank Graham for sharing his thoughts with me and also fear that if yields rise too fast, you'll get a second crash in housing, which means more foreclosures. This underscores the need for promptly reviewing foreclosure rules and policies.

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