Tuesday, March 24, 2009

SEC’s Probe into Subprime Mortgages Continues

Posted on the Housing Wire by Paul Jackson:

The mortgage industry remains squarely in the sights of a series of investigations by the Securities and Exchange Commission, an SEC commissioner said in Congressional testimony last Friday. The regulator continues to investigate lenders, key issuers of subprime MBS, and credit rating agencies for evidence of illegal activity, SEC commissioner Elisse Walter told members of the House Financial Services Committee.

“The SEC is investigating, among other things, improper accounting, disclosure issues, and insider trading,” she told committee members. In particular SEC officials are looking into how lenders accounted for loan loss reserves, as well as assessing whether lenders have been or continue to book foreclosed property at inflated values.

The SEC’s investigation into all things subprime has been ongoing since march 2007, but Walter’s remarks shed new light on directions the regulator is pursuing in its efforts to leave no stone unturned. Among them: an inquiry into possible understatement of mortgage delinquency and default rates.

That angle of investigation stands out, in particular, because there has long been plenty of ‘grey area’ in terms of how a lender categorizes and reports properties on its books, sources have suggested to HousingWire.

In terms of investment banks, Walter said investigations have centered on material misrepresentation of risk and expsoure, as well as the “possible intentional mispricing of securities and the knowing underwriting of securities based on collateral likely to default.” That last part should give industry participants some reason to pause — after all, numerous state attorneys general have gone after large lenders for so-called ‘predatory lending’ practices over a similar claim.

The SEC has taken nine subprime-related enforcement actions since its investigation into the area began two years ago — hardly a heavy caseload. Walter suggested the SEC needed to beef up its staffing and resources to the House committee.

“The SEC’s examination and enforcement resources are inadequate to keep pace with the growth and innovation in our securities markets,” she said.

Read her complete testimony.

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