%1

UBS AG went to trial yesterday over $2.1 billion in losses that investors incurred on mortgage-backed securities after the collapse of the U.S. housing market, Reuters reported. The non-jury trial in Manhattan federal court stems from a lawsuit being pursued by U.S. Bancorp on behalf of three trusts established for mortgage-backed securities, the type of financial product at the heart of the 2008 financial crisis. Sean Baldwin, the trusts' lawyer, in his opening statement said UBS contractually agreed that the mortgages underlying those securities would meet certain standards. When pervasive defects emerged, the bank refused to buy them back, he said. But Thomas Nolan, a lawyer for UBS, told U.S. District Judge Kevin Castel that the trusts' lawyers were looking at the loans with a "hindsight bias," and the question was whether the loans were seen as defective when they were issued in 2006 and 2007.

Freedom Mortgage of Mount Laurel, N.J., has agreed to pay $113 million to settle government allegations that it failed to comply with Federal Housing Administration requirements for originating and servicing FHA-insured loans, NationalMorgagenews.com reported yesterday. Scores of FHA lenders have entered into similar settlements with the Department of Justice for failing to comply with FHA rules. In the case of Freedom Mortgage, the alleged violations of the False Claims Act occurred from 2006 through 2011, according to the DOJ announcement on Friday. According to industry insiders, HUD’s inspector general and the DOJ are still investigating other companies for False Claim Act violations and could seek settlements from five to 10 lenders over the next six to 12 months. Amid the scrutiny of FHA lenders, some have tightened their underwriting standards while others have stopped making FHA loans altogether after entering into settlements with the DOJ. To counter over-tightening of underwriting standards, the FHA recently proposed revisions to its loan certification requirements in an effort to assure lenders they won't be penalized for minor loan defects or mistakes.

Shelter Growth Capital Partners has been buying homes that were foreclosed on during the financial crisis and later resold to buyers under long-term installment contracts, the New York Times reported today. The firm has bought just over 200 homes from Harbour Portfolio Advisors, a Dallas investment firm that has specialized in selling homes to lower-income buyers through what is known as a contract for deed. In these deals, a seller provides the buyer with a long-term, high-interest loan, with the promise of actually owning the home at the end of it. These contracts, a form of seller financing, have ballooned in recent years as low-income families unable to get traditional mortgages have turned to alternate ways to buy homes. The homes are often sold “as is,” in need of costly repairs and renovations, and many of the transactions end in eviction when buyers fall behind on payments. The market is growing in part because so many would-be home buyers with damaged credit histories cannot get loans. Banks are unwilling to write mortgages to riskier clients after being fined billions of dollars for pushing borrowers into unaffordable subprime mortgages before the crisis.

The regulator of Fannie Mae and Freddie Mac said yesterday that it would allow the government-controlled mortgage finance companies to cut loan balances for thousands of U.S. borrowers who owe more than their homes are worth, Reuters reported. The Federal Housing Finance Agency said the principal reduction program would be a one-time offering for seriously delinquent borrowers to help them with what the agency director said "could well be their final opportunity to avoid foreclosure." About 33,000 borrowers are expected to be eligible for the relief, the agency said. Homeowners have to meet certain criteria to qualify, including having an outstanding principal balance of more than $250,000 and being more than 90 days delinquent on mortgage payments as of March 1. The agency on Thursday unveiled other changes designed to minimize foreclosures, including modifying rules for Fannie Mae and Freddie Mac to sell defaulted loans. The companies must now instruct their debt buyers to evaluate borrowers for loan forgiveness or principal reduction options. Also, debt purchasers can no longer release and walk away from possessed, vacant properties.

Tennessee has temporarily barred a Memphis agency from issuing municipal bonds for housing, saying that it’s suffering from a leadership vacuum while it deals with a high-profile default of debt issued to finance the purchase of two apartment complexes, Bloomberg News reported yesterday. The Memphis Health, Educational and Housing Facility Board hasn’t had an executive director since December and is facing scrutiny over a $12 million bond issue by the Global Ministries Foundation to buy the Warren and Tulane apartments in Memphis. Bloomberg on March 14 reported that the U.S. Department of Housing and and Urban Development cut rent subsidies to more than 1,000 residents because the buildings were infested with roaches and had numerous health and safety violations. The loss of the federal funds caused the securities to default, pushing the price to as little as 21 cents on the dollar.