Solemn Remembrance of Those Lost Aboard Shuttle Columbia

Like countless persons across the world, I watched in quiet disbelief as thousands of pieces of debris streaked across the vast Texas sky the morning of February 1, 2003.
 
Unlike what had transpired in 1986 during the launch of the shuttle Challenger, this time the shuttle Columbia was re-entering earth’s atmosphere.  Traveling at Mach 19 at an altitude of 200,000 feet, the shuttle was only a dozen or so minutes from touching down at the Kennedy Space Center – where family and support personnel waited.  Sadly, that landing never happened.
 
What also made this morning different for me was that I had taken over the White House Office of Cabinet Affairs only 10 days earlier.  The Office served as a policy-coordinating body across the White House policy councils, in addition to its primary function as an early warning system for events transpiring across the Executive branch – including NASA.
 
Watching the events unfold on television, I knew to quickly head to the office as I did most Saturdays and not surprisingly my phone went off en route to the White House.  I arrived at 10:00 and already meetings and conference calls related to the disaster were being scheduled.
 
There was no doubt that all aboard were lost – a point made crystal clear to us later that morning.  A human simply cannot withstand the tremendous physical forces from a rapid deceleration of that magnitude.  We also learned quickly that few nations have the capability to shoot down anything traveling at that altitude and speed, thus ruling out the possibility of an act of terror.
 
All we knew was that something had gone horribly wrong.
 
White House Chief of Staff Card entered my West Wing office early that afternoon and told me I was going to be the main point of contact for the White House for this tragic event and for the soon-to-be-announced accident investigation board.  I wasn’t quite sure what that meant at the time but Mr. Card instructed me to get the NASA chief of staff on the phone.
 
That is when I first met Courtney Stadd – an impassioned public servant who had dedicated his life to the US space program.  Courtney was amazingly patient with me and explained in great detail what protocols were already being invoked, as were dictated post-shuttle Challenger accident.  Courtney was laser-focused on the families of the astronauts, as was all of NASA.  Throughout the months-long ordeal of the accident investigation, Courtney worked diligently behind the scenes, focused at all times on the well-being of the families of the fallen astronauts.
 
Following a Homeland Security Council meeting that afternoon, a second meeting was held early in the evening among the various offices within the Executive branch, as we heard more about the soon-to-be-announced Columbia Accident Investigation Board and a memorial service at the Johnson Space Center later that week.
 
While it was not discussed that day, we also learned that, this time, the mindset of the public was questioning the American space program and, specifically, whether or not the risk of space flight was worth the reward.  That was in stark contrast to the mindset post-Challenger accident, when the public was eager for the shuttle to fly safely again as soon as possible.  This new mindset ultimately led us to chart a new course for NASA – a policy announced in January 2004.
 
But that was much later, as more immediate matters took precedent.
 
At the invitation of NASA, I attended the memorial service of Astronaut David Brown of Virginia.  I had never met Mr. Brown, but you could not help but be in awe of his accomplishments, which were many.  He was by training a medical doctor and was the first Navy flight surgeon to become a fighter pilot.  He was also a college gymnast and had somehow managed to remain single.  The similarities between the two of us were few and far between, yet as I sat only three feet from his flag draped coffin, I learned we were only a couple of months apart in age and both not yet married.  And as I heard others tell his life story during the memorial service at the Arlington National Cemetery Chapel, I felt a sense of deep regret that I never had the opportunity to meet him.
 
Following the service, the coffin was placed atop a horse-drawn caisson for the mile long walk to his final resting place near the marble amphitheater.  As we got closer, the crowd was 10 deep and I recall my amazement at seeing so many school kids who, I suspect, were there as part of a school trip.  Here they stood by the hundreds, heads draped and hands over heart as the cortege moved slowly toward Mr. Brown’s final resting place.  Many of them wiped away tears and occasionally cried aloud.  Otherwise, there was compete silence except for the occasional plane landing at nearby Reagan National Airport.
 
America buried many heroes that day and this is only one of many stories to be told of sacrifice and duty to Country which in this instance includes India and Israel.  I would hope that Americans remember them all, and on this — the 9th anniversary of Shuttle Columbia’s tragic accident — pay eternal solemn respect to the crew of her final mission: Commander Rick Husband, Commander William McCool, Commander Michael Anderson, Payload Specialist Ilan Ramon, Mission Specialist Kalpana Chawla, Mission Specialist Laurel Clark, and Mission Specialist David Brown.  The words of President Reagan spoken many years ago are a fitting tribute to each of them: May God cradle you in His loving arms.

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FHFA Answers Conflict of Interest Charges against Freddie Mac

The
Federal Housing Finance Agency (FHFA) issued a statement late Monday refuting a
story
from ProPublic and NPR
that a complicated investment strategy utilized by Freddie Mac had influenced
it to discourage refinancing of some of its mortgages.  FHFA confirmed that the investments using
Collateralized Mortgage Obligations (CMOs) exist but said they did not impact
refinancing decisions and that their use has ended. (the NPR Story)

Freddie Mac’s charter calls for
it to make home loans more accessible, both to purchase and refinance their
homes but the ProPublica story, written by Jesse
Eisinger (ProPublica) and Chris Arnold (NPR) charged that the CMO trades “give Freddie a powerful incentive to do
the opposite
, highlighting a conflict of interest at the heart of the company.
In addition to being an instrument of government policy dedicated to making
home loans more accessible, Freddie also has giant investment portfolios and
could lose substantial amounts of money if too many borrowers refinance.”

Here,
in a nutshell, is what the story (we are quoting from an “updated” version)
says Freddie has been doing.  

Freddie
creates a security (MBS) backed by mortgages it guarantees which was divided
into two parts.  The larger portion, backed
by principal, was fairly low risk, paid a low return and was sold to investors.  The smaller portion, backed by interest
payments on the mortgages, was riskier, and paid a higher return determined by
the interest rates on the underlying loans. 
This portion, called an inverse floater, was retained by Freddie Mac.

In
2010 and 2011 Freddie Mac’s purchase (retention) of these inverse floaters rose
dramatically, from a total of 12 purchased in 2008 and 2009 to 29.  Most of the mortgages backing these floaters had
interest rates of 6.5 to 7 percent.

In
structuring these transactions, Freddie Mac sells off most of the value of the
MBS but does not reduce its risk because it still guarantees the underlying
mortgages and must pay the entire value in the case of default.  The floaters, stripped of the real value of
the underlying principal, are also now harder and possibly more expensive to
sell, and as Freddie gets paid the difference between the interest rates on the
loans and the current interest rate, if rates rise, the value of the floaters
falls. 

While
Freddie, under its agreement with the Treasury Department, has reduced the size
of its portfolio by 6 percent between 2010 and 2011, “that $43 billion drop in
the portfolio overstates the risk reduction because the company retained risk
through the inverse floaters
.”

Since
the real value of the floater is the high rate of interest being paid by the
mortgagee, if large numbers pay off their loans the floater loses value.  Thus, the article charges, Freddie has tried
to deter prospective refinancers by tightening its underwriting guidelines and
raising prices.  It cites, as its sole
example of tightened standards that in October 2010 the company changed a rule
that had prohibited financing for persons who had engaged in some short sales
to prohibiting financing for persons who had engaged in any short sale, but it
also quotes critics who charge that the Home Affordable Refinance Program
(HARP) could be reaching “millions more people if Fannie (Mae) and Freddie
implemented the program more effectively.”

It
has discouraged refinancing by raising fees. 
During Thanksgiving week in 2010, the article contends, Freddie quietly
announced it was raising post-settlement delivery fees.  In November 2011, FHFA announced that the
GSEs were eliminating or reducing some fees but the Federal Reserve said that “more
might be done.”

If
Freddie Mac has limited refinancing, the article says, it also affected the whole
economy which might benefit from billions of dollars of discretionary income generated
through lower mortgage payments.  Refinancing
might also reduce foreclosures and limit the losses the GSEs suffer through defaults
of their guaranteed loans.

The
authors say there is no evidence that decisions about trades and decisions
about refinancing were coordinated.  “The
company is a key gatekeeper for home loans but says its traders are “walled
off” from the officials who have restricted homeowners from taking advantage of
historically low interest rates by imposing higher fees and new rules.”

ProPublica/NPR says that the
floater trades “raise questions about the FHFA’s oversight of Fannie and
Freddie” as a regulator but, as conservator it also acts as the board of
directors and shareholders and has emphasized that its main goal is to limit
taxpayer losses.  This has frustrated the
administration because FHFA has made preserving the companies’ assets a
priority over helping homeowners.  The
President tried to replace acting director Edward J. DeMarco, but Congress
refused to confirm his nominee. 

The
authors conclude by saying that FHFA knew about the inverse floater trades
before they were approached about the story but officials declined to comment on whether the
FHFA knew about them as Freddie was conducting them or whether the FHFA had
explicitly approved them.”

The
FHFA statement
said that Freddie Mac has historically used CMOs as a tool to
manage its retained portfolio and to address issues associated with security
performance.  The inverse floaters were
used to finance mortgages sold to Freddie through its cash window and to sell
mortgages out of its portfolio “in response to market demand and to shrink its
own portfolio.”  The inverse floater
essentially leaves Freddie with a portion of the risk exposure it would have
had if it had kept the entire mortgage on its balance sheet and also results in
a more complex financing structure that requires specialized risk management
processes.  (Full FHFA Statement)

The
agency said that for several reasons Freddie’s retention of inverse floaters ended in
2011 and only $5 billion is held in the company’s $650 billion retained
portfolio.  Later that year FHFA staff
identified concerns about the floaters and the company agreed that these
transactions would not resume pending completing of the agency examination.

These
investments FHFA said did not have any impact on the recent changes to
HARP.  In evaluating changes, FHFA
specifically directed both Freddie and Fannie not to consider changes in their
own investment income in the HARP evaluation process and now that the HARP
changes are in place the refinance process is between borrowers and loan
originators and servicers, not Freddie Mac.

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Consumer Advocacy Group Weighs in on AG Settlement

Rumors have been circulating for some
time that the Obama Administration is pressuring the 50 state attorneys general,
the Justice Department and the Department of Housing and Urban Development to
settle with major banks over issues relating to errors in servicing and
foreclosure abuses including the robo-signing uproar.  The settlement has been controversial and several
attorneys general including those in California, Delaware, and New York have opted
out of the settlement and/or launched independent lawsuits of their own,
claiming the settlement is not sufficient to the offense.  The rumors have intensified over the last few
days based on a theory that the President hopes to announce the settlement
during his State of the Union Address tonight.

Today the Center for Responsible Lending
which has been an early and outspoken critic of mortgage lending came out in
favor of the settlement saying, while it isn’t perfect, it would represent an important
step forward in addressing foreclosure abuses

“The settlement would include key reforms to clean up unfair mortgage
servicing practices,” the statement from the Center said.  “It would also provide an important template
for ways banks can use principal reduction to reduce unnecessary foreclosures
and put the country back on a path to economic recovery.”

While the Center admits that not all
details of the settlement are available as yet, but based on current
information, the key reforms include:

  • The
    elimination of robo-signing as banks would agree to individually review
    foreclosure documents according to the law.
  • Adoption
    of practices that would improve communication with services and end servicer
    abuses including fairer treatment for homeowners who are late on mortgage
    payments.
  • More
    sustainable loan modifications including a requirement that banks “get serious”
    about reducing principal balances.
  • While
    the state AGs would be prohibited by the settlement from pursuing further
    actions against the banks, the Center said that nothing in the settlement would
    prevent homeowners from suing on an individual basis nor would the settlement
    shield the banks from prosecution for criminal activities or from claims based
    on mortgage securities violations, fair lending suits or claims against the
    Mortgage Electronic Registration System.
  • The
    settlement would be enforceable in court by an independent monitor.

The Center said that its research
indicates that the country is only about half-way through the mortgage crisis,
but the proposed settlement would wrap up a year-long investigation into
robo-signing and other abuses and is “crucial to containing the damaging
effects of foreclosures on our economy.” 
It stresses, however, that additional policy actions on multiple fronts
is a necessary addition to the settlement.

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Florida Loan Officer Sentenced in FHA Fraud Case

A Florida loan officer has been
sentenced to four-and-a-half years in prison and ordered to pay $9.2 million in
restitution
to the Department of Housing and Urban Development (HUD) for his
role in a mortgage fraud scheme that targeted the Federal Housing
Administration (FHA). Alejandro (“Alex”) Curbelo of Miami had pleaded guilty to
one count of conspiracy to commit wire fraud in April.  In addition to 54 months of incarceration he must
serve three years of supervised release.

According to documents filed in the U.S.
District Court in Miami, from approximately February 2006 through July 2008
Curbelo, then a loan officer for Great Country Mortgage Bankers in Miami,
assisted in the sale and financing of condominium units at Dadeland Place and
Pelican Cove on the Bay.   He assisted borrowers to obtain loans who were
unqualified due to insufficient income, high levels of debt, and outstanding
collections. 

Curbelo admitted that he conspired with
others to create and submit false applications and other documents to FHA on
behalf of the borrowers and to offering cash back to the borrowers as an
incentive for them to purchase the units. 
The closing costs were paid on behalf of the borrowers by interstate
wire which enabled the wire fraud charges. 

After the loans closed the unqualified
buyers
failed to meet their required payments and defaulted on their
loans.  HUD, which insured these loans,
was required to take title to the units after foreclosure and pay lenders the outstanding
balance of the loans.  The fraud cost HUD
more than $9.2 million.

The case was investigated by the HUD
Office of Inspector General as participants in the Miami Mortgage Fraud Strike
Force and the Finance Fraud Enforcement Task Force.

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Think Tank Measures FHA Progress

The American Enterprise Institute’s
(AEI) FHA Watch, a monthly on-line
publication tracking operations of the housing agency, just released its sixth
edition which makes clear the agenda of the conservative think tank.

Watch starts out by
quoting a Federal Reserve estimate that about one-third of the 11.1 million
underwater mortgages in the U.S. are FHA insured, a number which would account
for nearly half of FHA’s 7.4 million outstanding loans.  The Institute concludes that, since about 72
percent of outstanding FHA loans are of post 2009 vintage, about 1.5 million
recent loans must be underwater. 

“This comes as no surprise,” Watch
says, “since the FHA continues to combine minimal down payments (average of 4
percent) with slowly amortizing thirty-year loan terms. As a result, earned
homeowner equity (the combination of down payment and scheduled loan amortization)
amounts to less than 10 percent after four years, or about enough to sell a
home at the break-even point if home prices stay steady. However, prices have
declined nationally about 7 percent since mid-2009, with lower-priced homes
declining even more. When combined with borrowers’ low FICO scores and high
debt-to-income (DTI) ratios, the result is a continuation of the FHA’s
destructive lending-lending that has resulted in 20-25 percent of recent
borrowers facing a 10 percent or greater likelihood of foreclosure.”

In addition to the opening statement, Watch spotlights the following topics:

  • Insolvency: FHA’s Position Worsened in May, with an
    Estimated Current Net Worth of $22.11 Billion and a Capital Shortfall of $41-61
    Billion.
  • Delinquency: Total Delinquency Rate Increased in May to
    16.23 Percent Because of Increase in Both Thirty- and Sixty-Day Delinquencies;
    Serious Delinquency Rate Ticked Up to 9.43 Percent.
  • Underwater
    Loans: FHA Is Responsible for 1.5
    Million New Underwater Loans.
  • Best Price Execution:
    The Government Mortgage Complex’s Ginnie Brands Demonstrate Continued
    Pricing Dominance over Fannie Mae.
  • The Road Map to FHA Reform: Specific Steps to Reform and the Status
    of Each

The last category sets forth AEI’s goals
for program reform and fiscal reform, steps for accomplishing each, and a
report card on the progress made by FHA and Congress toward the goals.  AEI’s goals for Program Reform are:

  1. Stepping back from markets that the private
    sector can serve to gradually return to a “traditional”10 percent home purchase
    market share.
  2. Stop
    knowingly lending to people who cannot repay their loans.
  3. Help
    homeowners establish meaningful equity.
  4. Concentrate
    on homebuyers who truly need help purchasing their first home.

The only recent improvement acknowledged
by AEI in this area occurred in February with a proposed rule that limits
seller concessions to the greater of 3 percent of the loan or $6,000.  More than a dozen other steps have not been
acted on by the agency.

The Institute has set the following
goals for FHA to achieve in the area of fiscal reform:

  1. Utilize generally accepted accounting
    principles and set rigorous disclosure standards;
  2. Establish and maintain loan loss and unearned
    premium reserves;
  3. Establish and maintain a minimum capital
    requirement of 4 percent of amortized risk in force;
  4. Fund a countercyclical premium reserve.

AEI found that FHA had made a small
amount of progress in this area by requiring application of SEC disclosure
standards to the FHA’s insurance programs and funds and by taking steps toward
retaining an independent third party to conduct a safety and soundness review
under generally accepted accounting standards. 
There was no acceptable progress on the six remaining steps.

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