A U.S. regulator should scrutinize billions of dollars of loans that have helped keep troubled mortgage lender Countrywide Financial afloat in recent months, a leading senator said on Monday.
In a letter to the regulator of the Federal Home Loan Bank system, Sen. Charles Schumer said Countrywide, the largest U.S. mortgage lender, may be abusing the program.
At the end of September, Countrywide had borrowed $51.1 billion from the Federal Home Loan Bank system -- a government-sponsored program.
"Countrywide is treating the Federal Home Loan Bank system like its personal ATM," Schumer, a New York Democrat who heads the housing panel of the Senate Banking Committee, said in the letter. "At a time when Countrywide's mortgage portfolio is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk."
News of Schumer's letter, first reported by the Wall Street Journal, helped trigger a selloff in the stock market and pushed the yield on the 10-year Treasury to 3.81%, its lowest level in nearly four years.
Shares of Countrywide closed down 10.5 percent at $8.64 on Monday. Last Wednesday the shares closed below $10 for the first time in more than five years.
Schumer wrote Ronald Rosenfeld, chairman of the Federal Housing Finance Board, who oversees the system of 12 regional banks that offer financing to mortgage lenders like Washington Mutual and World Savings Bank, which was bought by Wachovia in May 1996.
Countrywide has done its borrowing through the Atlanta Home Loan Bank. Both Rosenfeld's office and the Atlanta bank declined to comment on the Schumer letter.
The Home Loan Bank system raises money by issuing bonds guaranteed by all their members and which investors give a preferred status because of an implied government backing.
For Countrywide, the Home Loan Banks have offered a source of relatively cheap and steady funding in recent months as its own bonds are now trading at junk status.
Countrywide increased its FHLB borrowing from $28.83 billion in the three months between mid-year and the end of September.
The California-based lender has put up about $62.4 billion of mortgages as collateral for its $51.1 billion in FHLB borrowing.
The home loan banks were created by Congress in 1932 to prop up failing banks and provide money for housing.
However, in recent months, these banks have been providing funds for mortgage lending by proving secured loans, or "advances," to mortgage lenders to fill a void created in August, when investors' fears of default risk shut off mortgage lenders' ability to raise money through commercial paper or other short-term borrowings in the capital markets.
Schumer also asked the regulator to consider preventing any further or continuing overnight advances based on collateral that does not meet the guidance issued earlier this year by the Federal Reserve Board—and adopted by other federal financial regulators such as the Office of Thrift Supervision and the Federal Deposit Insurance Corporation—concerning exotic home loans.
Incorporating the joint regulators' guidance would effectively prevent the FHLB banks from accepting the highest-risk varieties of mortgages — including the option ARMs that Countrywide made its specialty — as collateral to secure advances.
This could provide further incentive for banks like Countrywide to modify their riskiest loans to safe, affordable and sustainable loan products for their borrowers.