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Mnuchin's Reverse-Mortgage Woes Blemish Record of Treasury Pick

Image: Mnuchin's Reverse-Mortgage Woes Blemish Record of Treasury Pick

(AP/Carolyn Kaster)

Tuesday, 13 Dec 2016 01:04 PM

When Donald Trump announced his choice for Treasury secretary last month, he called Steven Mnuchin a “world-class financier,” citing business successes like his profitable turnaround of a California bank.

But soon after Mnuchin sold OneWest Bank last year, problems emerged that may tarnish his record there. The U.S. Department of Housing and Urban Development opened an investigation into foreclosure practices in a division that handles loans to senior citizens. Accountants determined the unit’s books were a mess. Eventually, the bank’s new owner, CIT Group Inc., discovered a shortfall of more than $230 million.

“I want to express our disappointment,” CIT Chief Executive Officer Ellen Alemany told investors in July. “We have a new management team in place, and they’re making good progress in implementing practices to strengthen the controls and procedures.”

The old management team had included Mnuchin. He stepped down as CIT’s vice chairman in March. When he left, less than a year into a three-year employment contract, he received about $10.9 million in severance, according to public filings -- an amount consistent with what he would have been entitled to if he had been fired. He remained on the board until this month.

Mnuchin’s Take

Three people with knowledge of the departure say it wasn’t related to the troubled unit, Financial Freedom. Rather, they say, Mnuchin was part of a group of more than a dozen executives who left as Alemany prepared to take over and install her own team.

Mnuchin, who declined to comment through a spokesman, may have personally received about $380 million in sale proceeds and dividends from OneWest, according to Bloomberg calculations.

CIT said last month that the accounting issue probably won’t be cleaned up by the end of the year and that it has begun talks to resolve the HUD investigation. Meanwhile, it has been trying to sell the unit. Matt Klein, a spokesman for the New York-based company, said CIT “will continue to implement enhancements to strengthen controls and practices of the legacy Financial Freedom business.” A HUD spokesman declined to comment.

While Mnuchin can count on the support of the Republican majority in the Senate for confirmation, Democrats have signaled a tough fight. Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee in charge of vetting and confirming Treasury Department appointments, described Mnuchin’s leadership at OneWest as “profiting off the victims of predatory lending.”

Celebrity Pitchman

During the go-go years of the mortgage boom, Financial Freedom was one of the country’s biggest providers of reverse mortgages. These government-backed loans allow Americans over 62 to borrow against the value of their homes. Borrowers don’t have to pay interest and can stay in the homes until they die. Then a sale of the property can be used to repay the debt.

The loans were often marketed aggressively, especially before the housing collapse. Financial Freedom commercials featured celebrity pitchman James Garner. Sometimes, lenders encouraged a borrower to remove a spouse under the age of 62 from the home’s title, setting the stage for a potential foreclosure on an elderly widow or widower when the borrower died, according to 2012 report by the Consumer Financial Protection Bureau.

“The reverse mortgage is an icky business,” said Christopher Whalen, head of research at Kroll Bond Rating Agency in New York, noting that big banks like Wells Fargo & Co. stopped selling the product in recent years.

Financial Freedom was part of Pasadena, California-based IndyMac Bancorp, one of the most reckless lenders in the housing bubble a decade ago. IndyMac collapsed and was seized by the Federal Deposit Insurance Corp. in 2008.

Buying IndyMac

Enter Mnuchin, 53, a former Goldman Sachs Group Inc. executive who later ran a hedge fund and financed Hollywood blockbusters. He led a team of investors, including George Soros and John Paulson, that bought the remains of IndyMac in 2009 with the help of billions of dollars’ worth of government incentives.

Read more: A Businessweek profile of Steven Mnuchin

Mnuchin renamed the bank OneWest. He slowed reverse-mortgage lending and completely stopped making new loans in 2011. From then on, Financial Freedom operated as a servicer, working on behalf of investors like Fannie Mae that owned the loans. 

Financial Freedom would collect on loans when they came due, often in the event of a death, and foreclose if necessary. It has carried out 16,220 foreclosures since 2009, or about 39 percent of the country’s reverse-mortgage foreclosures, according to HUD data obtained by the California Reinvestment Coalition, a nonprofit group that monitors banks.

An early alarm about Financial Freedom’s practices sounded in 2013, when Matthew A. McDonald, an executive at another servicer, Walter Investment Management Corp., filed a whistle-blower complaint claiming his Tampa, Florida-based employer was bilking the government of tens of millions of dollars. 

Curtailed Interest

Here’s how the scheme worked, according to McDonald: The loans are backed by insurance from the Federal Housing Administration, an arm of HUD. If a loan comes due, servicers must meet deadlines to complete tasks like getting an appraisal and starting the foreclosure process. If they miss the deadlines, they aren’t entitled to earn interest from the FHA while waiting for the agency to pay its claim, a process that can take years. In industry parlance, the interest payments are “curtailed.”

McDonald said Walter routinely missed deadlines and then falsely claimed it met them in order to maximize FHA compensation. The government eventually took up his case and settled with Walter for $29.6 million. Walter didn’t admit or deny wrongdoing. 

McDonald said in his complaint that Financial Freedom was doing the same thing, though he didn’t have any first-hand evidence. Given the size of Financial Freedom’s loan portfolio, which was much greater than Walter’s, he estimated that the overbilling could have amounted to more than $200 million. 

Around the time it settled with Walter last year, HUD issued the first of several subpoenas relating to curtailment of interest at Financial Freedom. Then, in February, CIT disclosed that its auditors found a “material weakness in internal controls” at the unit.

That led to the discovery of the $230 million shortfall. As CIT Chief Financial Officer Carol Hayles explained on a conference call, Financial Freedom hadn’t been accurately tracking how much interest it was entitled to from FHA insurance claims and had overestimated how much it would get. 

Aggressive Timeline

In a roundabout way, the possibility that Financial Freedom might have been foreclosing too slowly to meet federal deadlines bolsters the case OneWest executives have made in defending their record. At a hearing in California last year, Joseph Otting, OneWest Bank’s CEO at the time, portrayed the lender as merely carrying out the government insurance program’s aggressive timeline.

“The vast majority of criticism of our servicing practices are really criticisms of the regulations,” he said at the hearing. “We share the frustrations of those who criticize the outcomes that are the direct result of HUD requirements.”

That argument doesn’t satisfy critics like Sandy Jolley, who battled Financial Freedom over her parents’ reverse mortgage and later became a consultant to other borrowers.

Financial Freedom seems bent on foreclosing on borrowers as fast as possible, sometimes without justification, Jolley said in an interview. After she tried unsuccessfully in court to void the loan on her mother’s Thousand Oaks, California, home, Financial Freedom in 2010 tried to foreclose by falsely claiming that the mother no longer lived there, Jolley said. At the time, her mother was widowed, in her 80s and suffering from Alzheimer’s disease.

Financial Freedom completed the foreclosure in 2013, Jolley said, after her mother died. CIT declined to comment about the case.

“When you have nowhere to turn, and you are being wrongfully threatened with foreclosure and displacement from your home, that stress can be overwhelming,” Jolley said. “You don’t know what is going to happen to you tomorrow. What are they going to do to you?”

 

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When Donald Trump announced his choice for Treasury secretary last month, he called Steven Mnuchin a "world-class financier," citing business successes like his profitable turnaround of a California bank.
treasury, risk, reverse, mortgage
1309
2016-04-13
Tuesday, 13 Dec 2016 01:04 PM
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