U.S. Trustee Kelly Beaudin Stapleton asked the Delaware bankruptcy court Monday to appoint an examiner to look into suggestions of possible fraud at American Home Mortgage Holdings Inc., Bankruptcy Law360 reported yesterday. Stapleton also asked the court to reject Allen & Overy LLP’s application to counsel the bankrupt lender, saying the firm is marred by potential conflicts of interest. Allen & Overy represents Citibank in some matters unrelated to the American Home bankruptcy, but Citicorp was also the underwriter for the mortgage lender’s May public offering that’s currently at the heart of securities class actions, Stapleton said. Given that potential conflict of interest, Stapleton said she needed to know more about the nature of the firm’s representation of Citibank, the percentage of its gross revenues derived from representing the bank and whether the bank had put any restrictions on the firm’s ability to take positions adverse to it.

Bank of America NA was critical of bankrupt American Home Mortgage Holdings Inc. and its affiliates for disclosing the purchase price of two loans and allegedly giving potential buyers leverage in buying other loans, Bankruptcy Law360 reported yesterday. The bank, as the mortgage lender’s administrative agent, filed court papers on Friday asking a Delaware bankruptcy court to stop American Home from disclosing further details of its sale of mortgage loans from Broadhollow Funding LLC and Melville Funding LLC. Loans from the special-purpose entities, formed by American Home to acquire the company’s mortgage loans with proceeds from subordinated notes, were auctioned off in September. The entities, along with American Home unit American Home Mortgage Servicing Inc., filed an adversary suit against BofA last week for allegedly reneging on swap agreements in which the American Home affiliates are entitled to more than $25 million.

As the nationwide probe into the credit rating industry’s alleged role in the subprime collapse widens to examine potential anti-competitive conduct, Connecticut’s attorney general has subpoenaed the three major ratings agencies, Bankruptcy Law360 reported on Friday. Connecticut Attorney General Richard Blumenthal issued subpoenas to McGraw-Hill Cos. Inc.’s Standard & Poor’s, Moody’s Corp.-helmed Moody’s Investors Service and Fimalac SA-owned Fitch Ratings on Oct. 10. Blumenthal said that he hoped to gather information so he could determine whether the companies had exploited their dominant positions to unfairly raise prices or block competition in their concentrated market for assessments of corporate, financial, mortgage and other borrowers’ abilities to repay loans. “Assuring debt ratings are honest and untainted is vital to investors, companies and government. I will vigorously and aggressively enforce Connecticut’s antitrust laws if my investigation uncovers evidence of anticompetitive activity,” he said.

Members of the Federal Reserve’s consumer advisory panel urged the board yesterday to ban prepayment penalties and other potentially abusive lending practices that have come under fire amid the current housing crisis, Dow Jones Newswires reported. Specifically, a large portion of the council said the Fed should require lenders to make sure a borrower has the ability to repay a mortgage loan over the life of the loan, not just at the introductory interest rate. “There has to be a point where you are looking out at if these borrowers can sustain payment on their homes,” said Patricia Hasson, president of Consumer Credit Counseling Service of Delaware Valley Inc. Wachovia Corp.’s (WB) Mark Metz said any repayment standard placed on lenders should be aimed at aligning the interests of borrowers and lenders and not curtail available credit. Council members also advocated the Fed take other steps, including requiring lenders have borrowers - specifically those with subprime loans - make escrow payments for property taxes and costs tied to buying a house.

Economists are now saying that troubles in the mortgage market could cost a total of up to $400 billion to financial firms and investors, the New York Times reported today. That is far more than the roughly $240 billion cost, adjusted for inflation, of the savings and loan crisis of the early 1990s, according to estimates of the combined financial toll of that crisis on both the federal government and private sector. The loss in total real estate wealth is expected to range from $2 trillion to $4 trillion, depending on how far home prices fall, according to several economists. That would be significantly less than the losses suffered by investors in the stock market collapse earlier this decade, which erased more than $7 trillion, or about 40 percent, of market value. The Joint Economic Committee of Congress estimates that the lost of real estate wealth just from foreclosures on subprime loans will be about $71 billion. An additional $32 billion would be lost because foreclosed homes tend to drive down the prices of other houses in the neighborhood.

Subprime mortgages aren’t the only challenge facing Countrywide Financial Corp. as some loans classified as prime when they were originated are now going bad at a rapid pace, the Wall Street Journal reported today. These loans are known as option adjustable-rate mortgages, or option ARMs. In 2009-2011, monthly payments on $229 billion of option ARMs will readjust. An analysis prepared for the Wall Street Journal by UBS AG shows that 3.55 percent of option ARMs originated by Countrywide in 2006 and packaged into securities sold to investors are at least 60 days past due. That compares with an average option-ARM delinquency rate of 2.56 percent for the industry as a whole and is the highest of six companies analyzed by UBS.

Collateralized debt obligations are starting to shut off cash payments to investors in lower-rated bonds as credit-rating agencies downgrade the securities they own, the New York Times reported today. Cutting off the cash flow, which is governed by rules and mathematical formulas that vary by security, is expected to accelerate in the months ahead. With such a re-evaluation, owners of collateralized debt obligations — investment banks, hedge funds, insurance companies and public pension funds — may be forced to write down mortgage investments beyond the billions they have already written off.

Many investors who were hoping to quickly flip their investments are now left with homes that can no longer be sold for more than the mortgage debt, leaving them, according to lenders and real-estate agents, to make the decision to walk away from their properties and ultimately send their homes into foreclosure, the Wall Street Journal reported yesterday. In many cases, these investors can’t even find tenants willing to pay enough rent to cover hefty mortgages. According to an August study by the Mortgage Bankers Association, defaults on mortgages where the owner doesn’t live in the house are a major driver of the defaults in Florida, Nevada, California and Arizona — four of the states with the fastest rising rates of seriously delinquent loans. “There is a real incentive for both lenders and borrowers alike to do a workout and avoid foreclosure. Lenders are not good at being homeowners,” says Fred Witt, national director of real estate tax services, at Deloitte Tax LLP in Phoenix.
See Also: Bankruptcy Lawyers New York

The Mortgage Bankers Association predicted that the nation’s mortgage business won’t halt its current slide anytime soon with mortgage originations expected to fall 18 percent next year and decline another 6 percent in 2009, the Associated Press reported today. The gloomy mortgage outlook is driven by the shrinking flow of cash to lenders from increasingly risk-averse investors, as well as slower overall economic growth. Total mortgages written are expected to decline nearly 15 percent this year to $2.31 trillion from $2.73 trillion last year. Originations are expected to fall at a slightly steeper 18 percent next year, then begin to decline at a slower 6 percent rate in 2009. The erosion is expected to ease as a projected 5 percent rise in mortgages for people buying homes in 2009 partially offsets an expected 18 percent drop-off that year in mortgages for homeowners who refinance.

In a sign that Bush administration officials are more concerned about the underlying problems in the credit markets than previously stated, Treasury Secretary Henry M. Paulson Jr. and other top Treasury officials are pushing Wall Street firms and the mortgage industry to come up with solutions, the New York Times reported yesterday. The plan announced yesterday involves no money from taxpayers, and it was negotiated primarily between the banks themselves. However, it highlighted Paulson’s growing effort to marry two competing goals of the Bush administration: to stabilize the battered markets for mortgages and housing, but to avoid a government bailout that might encourage investors to take even bigger risks in the future — what economists call “moral hazard.” Paulson is scheduled to deliver a speech on homeownership, mortgage markets, and the U.S. economy today at 11 a.m. ET.