Public funds: $50 billion here, $50 billion there -- pretty soon you're talking about real money

Wall Street Journal
11-26-07
Schumer's Letter on FHLB Loans
Sen. Charles Schumer, a New York Democrat, urged regulators to examine potential risks posed by a sharp increase in lending by the Federal Home Loan Bank of Atlanta to Countrywide Financial Corp., the nation's biggest mortgage lender. The following is his letter to regulators.
http://online.wsj.com/article/SB119610390093704160.html?mod=googlenews_wsj

November 26, 2007

Ronald A. Rosenfeld
Chairman
Federal Housing Finance Board
1625 Eye Street NW
Washington, DC 20006

Dear Chairman Rosenfeld:

I write to express my serious concern over the lending practices of the Federal Home Loan Bank of Atlanta, specifically in regard to the significant volume of advances made to Countrywide Bank. I am concerned that the loans being pledged by Countrywide to secure these advances may pose a risk to the safety and soundness of the FHLB system as a whole. I urge you to conduct a careful review of FHLB Atlanta's collateral evaluation policies, as well as Countrywide's pledged collateral, in an effort to determine the risk that Countrywide's collateral poses to the FHLB system. During the current market crisis, it is important that the FHLB system perform its critical mission safely without imposing additional risks on an already strained market.

According to the most recent SEC filings, FHLB Atlanta had made $51.1 billion in advances to Countrywide Bank, representing 37 percent of the Bank's total outstanding advances as of September 30, 2007 and far exceeding advances made to the next largest borrower. Countrywide had pledged $62.4 billion of mortgages as collateral for the FHLB advances, representing 78 percent of its total mortgage loans held for investment at the bank.

I find these numbers alarming as reports continue to emerge about how Countrywide's reckless and predatory lending practices were a leading contributor to today's foreclosure crisis. Moreover, it is my understanding that Countrywide's loans held for investment at the bank have been far from immune from the credit deterioration that has resulted from unsound lending.

Countrywide reportedly held $27 billion of "pay option ARMs" as of September 30, 2007, accounting for over one-third of the loans held for investment by the bank. Countrywide's option ARMs were (and may still be) often underwritten with less than full documentation – according to UBS Warburg data prepared for the Wall Street Journal, 91 percent of Countrywide's option ARMs underwritten in 2006 were "low doc." It has been reported that delinquencies on Countrywide's pay option ARMS are skyrocketing, jumping nearly 75 percent in the last quarter.

Given this rapid deterioration in the credit quality of Countrywide's option ARMs, I urge you to conduct a review of the loans that are being held as collateral for FHLB advances in an effort to determine if FHLB Atlanta has adequate collateral to secure these advances. I would also like an explanation of how any second lien mortgages during a time of property price declines could be viewed as adequate collateral for large FHLB advances.

Furthermore, I believe that you should consider preventing any further or continuing overnight advances based on collateral that does not meet the joint financial regulators' guidance on nontraditional and subprime mortgage products (e.g., Interagency Guidance on Nontraditional Mortgage Product Risks and joint Statement on Subprime Mortgage Lending). This quarter, Countrywide reported that 89 percent of their 2006 originations of pay option ARMs did not conform to the joint regulators' guidance, which increases the likelihood that Countrywide is pledging loans deemed predatory by the regulators as collateral for FHLB advances. Importantly, Fannie Mae and Freddie Mac's safety and soundness regulator has specifically prohibited any new direct or indirect investment in loans that do not meet this guidance. As the mortgage crisis threatens to get worse from here, it is critical that the FHFB do the same.

Thank you for your prompt attention to this matter, and I look forward to working with you on these issues in the coming weeks and months. If you should have any questions, please contact David Stoopler on my staff at 202-224-6542.

Sincerely,

Charles E. Schumer

United States Senator

CNN.com
Bush urges Congress to approve war funding before Christmas
Pentagon says Army will have to make major cutbacks if it doesn't get the funds
ttp://www.cnn.com/2007/POLITICS/11/29/bush.war.funding/
WASHINGTON (CNN) -- President Bush on Thursday called on Congress to approve billions of dollars in additional funding for the wars in Iraq and Afghanistan before lawmakers leave for their Christmas break.
President Bush wants Congress to approve his request for war spending before the holidays.
He said the Army will have to shut down bases and start furloughing between 100,000 and 200,000 civilian workers by mid-February if Congress does not clear the funds.
"Pentagon officials have warned Congress that the continued delay in funding our troops will soon begin to have a damaging impact on the operations of this department," Bush said Thursday. "The warning has been laid out for the United States Congress to hear."
Defense Secretary Robert Gates already has ordered the Army and Marine Corps to plan for cutbacks, including civilian layoffs, termination of contracts and reduced operations at bases, The Associated Press reported. A $50 billion war spending bill, which would have required U.S. troops to begin leaving Iraq within 30 days, passed the House but stalled last week in the Senate -- with Republicans balking at the withdrawal provision...