2008 Preview: Subprime Proposals
Submitted by: Subodh Mishra, Publications
As the 2008 proxy season looms, a growing number of U.S. companies are finding themselves in the crosshairs of investors troubled by their involvement in, or exposure to, the subprime mortgage crisis that has roiled capital markets.
A number of labor funds are targeting homebuilders with mortgage lending operations as well as financial firms whose investments in mortgage-backed securities have resulted in deep losses. Shareholder proposals at those firms include calls to establish committees to review lending operations, as well as those to establish new policies on dealings with ratings agencies.
“Anyone who said [subprime lending] didn’t relate to shareholder value now looks silly,” noted AFL-CIO Associate General Counsel Damon Silvers, alluding to efforts by social activists in recent years to curb “predatory” lending practices.
To date, the AFL-CIO has not filed any subprime-related proposals, though labor federation officials suggest the focus on the issue may change in the coming months.
“As annual meetings approach, and more information is available … that suggests certain people weren’t doing their jobs in a way that cost investors a lot of money, we’re going to see a focus on those people,” Silvers warned in a December interview.
The CtW Investment Group, the investment arm of the Change to Win labor coalition, announced it would target the five members of financial giant Citigroup’s audit committee as well as the chair of Merrill Lynch’s nominating and governance committee following the release of fourth quarter 2007 results that included write-downs in the billions for subprime losses.
“Citigroup and several other major banks were at the epicenter of the mortgage meltdown,” CtW Investment Group Executive Director William Patterson noted in a statement. “This proxy season, the [group] will be working to hold individual directors at these companies accountable for their performance.” (For more on this story, please see the “Risk Management” section of this week’s edition of Risk & Governance Weekly.)
Other labor funds, meanwhile, are addressing subprime-related concerns via shareholder proposals. The Laborers’ International Union of North America, or LIUNA, has filed resolutions at a half dozen companies that call for enhanced disclosure of lending practices, according to RiskMetrics records. Companies including the Ryland Group and Beazer Homes are not providing sufficient information on their mortgage practices for shareholders to adequately monitor risk, LIUNA argues.
The labor fund cites a March 2007 Business Week article noting that federal investigators have opened a broad criminal probe into “lending practices, some financial transactions, and other dealings” at Beazer Homes to underscore the need for additional disclosures. The resolution to the Atlanta-based homebuilder calls on its board to report within 90 days of the annual meeting on lending practices and to specifically discuss the following:
The extent of the company’s mortgage originations in subprime, Alt-A, jumbo, and “exotic” mortgages including piggybacks/second mortgages, interest only loans, negative amortization loans, and low/no documentation loans, as well as what percentage of its mortgage originations may be classified as such mortgages;
Which of the company’s geographic markets are most reliant on those mortgages;
The identity of the purchasers that buy the company’s mortgage loans in the secondary market;
What percentage, if any, of the purchased loans have early payment default provisions that may require the company to buy back those loans as well as the time frame for those obligations; and
How many non-performing loans the company expects it will have to repurchase during the current and upcoming fiscal year.
Beazer asked the Securities and Exchange Commission for permission to omit the proposal, but the company’s “no action” petition was denied. (For more on the SEC staff decision, please see the Dec. 14, 2007, edition of Risk & Governance Weekly.)
Homebuilders are not the only ones being targeted over disclosures related to subprime mortgages. Financial institutions also are being called on to provide more details on their exposure to mortgage-backed securities. Many Wall Street firms were forced to write down assets valued in the billions of dollars during the second half of 2007 and into 2008 due to their exposure to high-risk loans.
LIUNA is asking Lehman Brothers, Washington Mutual, and Bear Stearns to report on mortgage originations and mortgage securitizations as “subprime, Alt-A, or other non-agency loan types.” The resolved clause of the resolution at Lehman’s also calls on the company to discuss the long-term strategic and financial implications of its decision to reduce resources and capacity in the subprime area and what the firm anticipates will be its “ultimate realized losses related to the mortgage securities crises.”
Compliance Committees Sought
About a half dozen companies, meanwhile, are being targeted by an Amalgamated Bank proposal calling for the establishment of a mortgage lending compliance committee. The committee would be composed of independent directors who would “conduct a thorough review of the [c]ompany's regulatory, litigation, and compliance risks with respect to its mortgage lending operations…” The committee would report findings and recommendations, as well as progress made, within six months of the 2008 annual meeting.
“As companies … face increasing regulatory pressure over their compliance and lending practices, we believe instituting a compliance committee will enable the company to safeguard shareholder value in the new legal and regulatory climate,” noted Scott Zdrazil, Amalgamated Bank’s director of corporate governance.
Pennsylvania homebuilder Toll Brothers, which in early December reported its first quarterly loss in more than two decades due to the weakened housing market, obtained SEC permission to exclude the measure. Zdrazil tells RG&W that the proposal remains outstanding at a number of firms, and has generated good discussion on how to strengthen compliance-related oversight.
Credit rating agencies also have been targeted over the subprime mortgage crisis. Both Moody’s and McGraw-Hill, parent company of Standard & Poor’s, have received proposals that call for the board to adopt policies to bar the employment of any individual who worked for a client within the past year. The proposal also calls for the lead analyst for a given client to be rotated every five years and for the audit committee to be “directly and fully responsible” for managing potential conflicts of interest with clients and to conduct internal audits to ensure compliance with the policy.
“As [regulators] investigate the role that credit rating agencies have played in the current mortgage and credit crisis, we believe that corporations like Moody’s and McGraw-Hill should be proactive in limiting both real and perceived conflicts of interests with their clients,” noted Jennifer O’Dell, LIUNA’s assistant director for corporate affairs. “We believe this duty falls squarely on the shoulders of the audit committees of these corporations.”
Lawmakers also have questioned the role of the ratings agencies, arguing that they gave high ratings to bonds backed by risky mortgages and failed to downgrade those ratings until markets began to collapse.
McGraw-Hill did not responded to requests for comment, while a Moody’s spokesman told R&GW that the company would comment only if the proposal showed up in the proxy.
Companies with subprime losses also are feeling heat in other ways. Proxy access proposals have been filed at lender Countrywide Financial, E*TRADE Financial, JP Morgan Chase, and Bearn Stearns, proponents say.
The Ryland Group, a Calabasas, Calif.-based homebuilder, has received an advisory vote on compensation proposal filed by TIAA-CREF. So far this year, the company is facing four shareholder proposals, according to RiskMetrics records, compared with just two last year and three in 2006.
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