SEC expands mortgage probe: sources

NEW YORK/WASHINGTON Fri Dec 17, 2010 5:22pm EST

A view shows a Bank of America branch in Charlotte, North Carolina January 19, 2010. REUTERS/Chris Keane

A view shows a Bank of America branch in Charlotte, North Carolina January 19, 2010.

Credit: Reuters/Chris Keane

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NEW YORK/WASHINGTON (Reuters) - Securities regulators have broadened their inquiry into the mortgage industry, asking big banks about the early stages of securitizing home loans, two sources familiar with the probe said.

The Securities and Exchange Commission launched the new phase of its investigation by sending out a fresh round of subpoenas last week to big banks including Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co, Goldman Sachs Group Inc and Wells Fargo & Co, the sources said.

Months ago, the SEC began looking into the banks' foreclosure practices following allegations that mortgage servicers were using shoddy paperwork to evict delinquent borrowers from their homes.

Now the SEC is looking at how the lenders packaged up mortgages for sale to investors, said the sources, who requested anonymity because the probe is not public.

Questions from the SEC include information about the role of so-called "master servicers" -- specialized firms that oversee the selection and maintenance of the large pool of home loans that go into every mortgage-backed bond.

In many cases, Wall Street banks that underwrite mortgage-backed securities either own their own master servicing firms or are closely aligned with one.

The Justice Department, banking regulators and the attorneys general in all 50 U.S. states are also probing potential wrongdoing.

The state of Arizona sued Bank of America on Friday, accusing the bank of misleading consumers about its home loan modification process.

TRUSTS AND TRANSFERS

One of the sources said the SEC is seeking information about the role banks had in mortgage securitization. The regulator is also looking at the role trustees for the trusts that issued the mortgage-backed securities had in monitoring the performance of the underlying loans.

The SEC is looking at whether loans were properly transferred to the trusts that issued the securities, the source said.

The renewed look at the securitization process is an extension of the SEC's preliminary probe into the mortgage mess. The SEC's regional offices are all looking at some aspect of the foreclosure crisis.

The SEC had no comment.

Separately, the SEC is still investigating banks, credit rating agencies and individuals in connection with the 2007-09 subprime crisis. Those investigations center around potential misrepresentations to investors about the value of the mortgage-backed securities that helped fuel the crisis.

The agency has filed some high-profile cases, including one against former Countrywide Financial chief Angelo Mozilo and another against Goldman Sachs.

Banking regulators, including the Federal Reserve, are reviewing lenders' foreclosure practices and are expected to reveal their findings in January.

In particular, the Fed is concerned about investors accusing lenders of misrepresenting the loans that underpin mortgage securities, and demanding repayment.

That has already happened with Bank of America, which has started negotiating with a group of angry mortgage investors, including BlackRock Inc.

Bank of America, Citigroup, JPMorgan and Goldman had no comment. Wells Fargo said it is "always working with regulators and others who are interested in its servicing business" but declined to comment on whether the bank had received a subpoena.

(Additional reporting by Elinor Comlay and Joe Rauch; editing by John Wallace and Tim Dobbyn)

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Comments (4)
Downtowner wrote:
When will the investigation delve into the heart of the matter? The nether world connection between the investment banks, implementors of warehouse lines, and hundreds of thousands of mortgage brokers who perpetrated a fraud upon every borrower in this country. Then, banks collected on the CDS’s, took TARP money and gave out huge bonuses, leaving us all broke, persecuted and losing our homes.

Dec 17, 2010 12:42pm EST  --  Report as abuse
robertsgt40 wrote:
Too little, too late. The SEC(sic) knew about Madoff 10yrs before it did anything. Just another lapdog of finance and Wall Street. And Reuters knows it. You play your part well.

Dec 17, 2010 3:47pm EST  --  Report as abuse
FAIRTAXBILL wrote:
Beware of BIG BANKS! Join & support small community banks or credit unions! You will be glad you did!

Dec 17, 2010 5:09pm EST  --  Report as abuse
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