Tuesday, November 27, 2007

Continued Borrowing of Countrywide Results in a Call for a Review

Continued borrowing by the Countrywide at the Federal Home Loan Bank of Atlanta has caused Senator Charles Schumer to call for a review of the lending to Countrywide. There is an article in yesterday's WSJ related to this issue. Text in bold is my emphasis. From the WSJ:

Sen. Charles Schumer, a New York Democrat, urged regulators to examine potential risks posed by a rapid increase in lending by the Federal Home Loan Bank of Atlanta to Countrywide Financial Corp., the nation's biggest mortgage lender by volume.

In a letter sent yesterday to Ronald Rosenfeld, chairman of the Federal Housing Finance Board, which regulates the 12 regional home-loan banks, Sen. Schumer said he is concerned that mortgages pledged by Countrywide to secure its borrowings "may pose a risk to the safety and soundness of the FHLB system as a whole." He called for a review of the Atlanta bank's policies for evaluating collateral and of the loans pledged by Countrywide to secure its advances.

The home-loan banks were created by Congress in 1932 to prop up failing banks and provide money for housing. They borrow money through global bond issues on the strength of investors' belief that the U.S. government would rescue them in a crisis. The banks have taken on a larger-than-usual role over the past few months in providing funds for mortgages. They have stepped up their secured loans, known as advances, to mortgage lenders to fill a void created in August, when investors' fears of default shut off mortgage lenders' ability to raise money through commercial paper or other short-term borrowings.

As of Sept. 30, Countrywide owed the Atlanta bank $51.1 billion, 77% more than the $28.8 billion it owed three months earlier. Although it is based in Calabasas, Calif., Countrywide deals with the Atlanta home-loan bank because Countrywide owns a savings bank based in Alexandria, Va., part of the Atlanta bank's territory.

"Countrywide is treating the Federal Home Loan Bank system like its personal ATM," Sen. Schumer wrote in a press release.

Daris Meeks, a spokesman for Mr. Rosenfeld of the finance board, declined to comment on the senator's letter. Last week, Mr. Meeks said the finance board carefully monitors lending and collateral policies of the home-loan banks. Christopher McEntee, a spokesman for the Atlanta bank, also declined to comment. Officials of that bank last week said they had remained prudent in their lending.

Sen. Schumer, a member of the Senate Banking Committee, said he was concerned about the quality of the collateral partly because many of the loans held as investments by Countrywide are so-called pay-option adjustable-rate mortgages, or option ARMs. These loans allow borrowers to make minimal payments in the early years, resulting in far-higher ones later.

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