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DC Waking Up to Escalating Foreclosure Train Wreck: Grayson Calls for FSOC to Examine Foreclosure Fraud as Systemic Risk

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Wow, someone in DC has connected the dots: that the banks’ failure to adhere to contractual and legal requirements in the residential mortgage backed securities market are so extensive and widespread as to constitute systemic risk. Alan Grayson, Congressman from Ground Zero of the foreclosure mess, is calling on the Financial Stability Oversight Council to investigate the escalating foreclosure fraud crisis.

Although the data points we have seen so far could be considered anecdotal, we have evidence that strongly suggests that major RMBS originators, the investment bank packagers, and the bank trustees failed to convey the notes (the borrower IOU, which is critical to having the legal standing to foreclose in 45 states) to the RMBS trusts starting in 2005, perhaps even earlier. And comments from industry insiders suggest this problem is pervasive.

That puts a cloud over the entire US RMBS market, the biggest asset class in the world. This paper was sold as secured; the ability to offset the cost of borrower defaults by seizing and selling his house is critical to the value of the instruments. And if no assets were conveyed to a particular trust by closing, an even uglier possibility exists: under New York law, which was elected by RMBS as governing law for the trust, it would be considered to be “unfunded”, which means it does not exist.

Now the rather sick irony is that this monster screw-up probably affects Fannie and Freddie paper only indirectly; presumably, it will a given that this will be treated as if the government guarantee covers this little mess. The Obama Administration is the last bunch of folks that will look into the fine print to see if Fannie and Freddie ought to eat this liability. I’ll admit I have not looked into the Fannie/Freddie procedures on this one, but I’d have trouble believing their rules would include having the government guarantee extend to operational screw ups that prevent losses on guaranteed mortgages being relieved by foreclosures. I’d have to believe they have putback procedures which will not be applied because the consequences would be too devastating to Team Obama’s best friend, the banking industry. So Frannie and Freddie not pushing the losses related to foreclosures back to the banks would be yet another back door bailout.

Felix Salmon is also on the case and makes some sound observations as to the larger implications:

….the mother of all legal messes has already emerged from the foreclosure crisis, and threatens not only a large chunk of the financial system but also venerable civic institutions, like the courts, which have thus far emerged from the crisis largely unscathed….

Argentina’s sovereign default has been called “the slowest trainwreck in history”, but this one might turn out to be slower, bigger, and much less fair. Millions of people have already lost their houses to lenders who didn’t have the proper paperwork, and it’s unlikely they will ever get any redress. For people who haven’t yet been foreclosed upon, however, it could now be a very long time before they lose their house.

The big-picture consequences here are by their nature unpredictable, as no one has a clue how this might all play out. But I can think of a few themes:

1. Bond investors, who have seen the value of their mortgage-backed debt rise impressively over the past 18 months, could find themselves unable to find any kind of bid at all. The paper will still be cashflowing, but those cashflows will be surrounded by enormous uncertainty, and no one’s going to want to buy them except at extremely deep discounts until the mess is cleared up.

2. Mortgage servicers will go from being assets to being liabilities, and banks which own mortgage servicers could find themselves on the hook for substantial losses.

3. The time from default to foreclosure will become indefinite, and as a result there will be a significant uptick in strategic defaults, especially in states with judicial foreclosures.

4. The “shadow inventory” of houses which aren’t on the market but will eventually be sold once the bank gets around to foreclosing will grow substantially from its already-enormous level.

Yves here. It appears there are four ways this crisis might play out:

1. Congress intervenes to try to wave a magic statutory wand to make many of these problems go away, invoking its authority over national/interstate banks. To the extent industry incumbents admit there is a problem (Tom Adams reports there was amazing denial at an American Securitization Forum conference earlier this week), they immediately say, “Congress will pass a law.” But any Federal statutory remedy will run roughshod over well settled state real estate law and New York trust law. This is big state/Federal rights matter, potentially one of those rare Constitutional battles that the average citizen will care about.

2. The Federal government comes up with a mass refi program of sorts. Even though in theory that might also run afoul of various state law issues, the reason the states are fighting is they see the devastation foreclosures are creating in their cities and towns. It would probably take some to-ing and fro-ing, but state legislatures would be far more inclined to play ball with this solution than the one outlined in point 1. But this is so contrary to how Team Obama operates that I see no will to go down that path, and the odds that the incoming Congress will be even more anti-spending is another not-trivial impediment.

3. Mass deep principal mods. As we indicated, there are programs which are ready to go and only need some tweaking to help servicers make deep mods. With mortgage loss severities at 70% or worse, a 40% principal mod for borrowers, say, is a win for everyone but the servicer. And before readers howl that this is unfair, life isn’t fair. Moreover, lenders restructure loans all the time; it’s normal creditor behavior to rework a loan if the outcome looks to be more profitable than liquidating.

The critical bit is assessing borrower viability. There is no point trying to save borrowers who are so broke they can’t afford payments even with a reduction in principal to, say, the current market value of the house. The and the NACA program provides a platform for handling what has been the sticking point, collecting evidence of borrower income and preparing a budget so a bank can see how much discretionary cash flow he has.

While the banking industry will insist this would be a simply horrid outcome, what would turn the tide is private or attorney general suits in a particular state leading to a mass resolution. That would turn the tide regarding perceived viability.

But mass mods would also leave the servicers with big losses on all the advances of principal and interest they have made to investors, and will force banks to end their phony accounting on second mortgages. It’s entirely plausible this puts some banks back in the TARP, which from my perspective is a good outcome. It would be hard after all the banks’ false claims that all was well and outrageous 2009 bonuses not to seem some pain imposed, at a minimum, the firing of top management for cause (meaning no severance) and the replacement of boards.

4. Continued gridlock. I expect this to be what we see until the pressure hits the breaking point.

Below is the text of the Grayson letter, which is addressed to Timothy Geithner, Shiela Bair, Ben Bernanke, Mary Schapiro, John Walsh (Acting Comptroller of the Currency), Gary Gensler, Ed DeMarco (FHA) and Debbie Matz (National Credit Union Administration):

October 7, 2010

Dear Secretary Geithner and members of the Financial Stability Oversight Council (FSOC),

The FSOC is tasked with ensuring the financial stability of the United States, which includes identifying and addressing possible systemic risks. There is a well-documented wave of foreclosure fraud sweeping the country that presents such a risk. Bank of America and JP Morgan Chase have both suspended foreclosures in 23 states where that fraud could be uncovered and stopped by the courts. Connecticut has suspended foreclosures.

I write to encourage the FSOC to appoint an emergency task force on foreclosure fraud as a potential systemic risk. I am also writing to ask the members of the FSOC to use their regulatory authority to impose a foreclosure moratorium on all mortgages originated and securitized between 2005-2008, until this task force is able to understand and mitigate the systemic risk posed by the foreclosure fraud crisis.

So far, banks are claiming that the many forged documents uncovered by courts and attorneys represent a simple ‘technical problem’ with foreclosure processes. This is not true. What is happening is fraud to cover up fraud.

The mortgage lending boom saw the proliferation of predatory lending and mortgage fraud, what the FBI called at the time ‘an epidemic of mortgage fraud.’ Much of this was lender-induced.

When lenders – many of whom are now out of business – originally lent money to borrowers, they often did so knowing that the terms of the loans could not possibly be honored. They sought fees, not repayment. These lenders put people in predatory loans, they induced massive amounts of fraud, and Wall Street banks misrepresented these loans to investors when they moved through the securitization chain. They were stealing money from investors, and from homeowners.

Obviously these originators and servicers didn’t keep good records of who owed what to whom because the point was never about getting paid back, it was about moving as much loan volume as possible as quickly and as cheaply as possible. The banks didn’t keep good records, and there is good reason to believe in many if not virtually all cases during this period, failed to transfer the notes, which is the borrower IOUs in accordance with the requirements of their own pooling and servicing agreements. As a result, the notes may be put out of eligibility for the trust under New York law, which governs these securitizations. Potential cures for the note may, according to certain legal experts, be contrary to IRS rules governing REMICs. As a result, loan servicers and trusts simply lack standing to foreclose. The remedy has been foreclosure fraud, including the widespread fabrication of documents.

There are now trillions of dollars of securitizations of these loans in the hands of investors. The trusts holding these loans are in a legal gray area, as the mortgage titles were never officially transferred to the trusts. The result of this is foreclosure fraud on a massive scale, including foreclosures on people without mortgages or who are on time with their payments.

The liability here for the major banks is potentially enormous, and can lead to a systemic risk. Fortunately, the Dodd-Frank financial reform legislation includes a resolution process for these banks. More importantly, these foreclosures are devastating neighborhoods, families, and cities all over the country. Each foreclosure costs tens of thousands of dollars to a municipality, lowers property values, and makes bank failures more likely.

I appreciate your willingness to assess possible systemic risks to the country, and would again encourage you to suspend foreclosures until this problem is understood and its ramifications dealt with.

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67 comments

  1. Gerald Wadsworth

    They waved the magic wand a few months ago…

    Senate Shockingly Passes Bill That Could Bail The Banks Out Of Foreclosure-Gate

    Joe Weisenthal | Oct. 7, 2010, 7:37 AM

    The hottest story right now in the banking industry is foreclosure-gate, as various firms like Bank of America, JPMorgan, and GMAC have halted foreclosures upon realizing that the paperwork behind them has been shoddy at best.

    The fallout — which has already invited investigations from state AGs — could throw a major wrench into what’s already been a costly, tedious, and economically damaging process.

    Seemingly out of nowhere, the Senate passed a bill that could get the banks out of this mess.

    Reuters:

    The House had passed the bill in April. The House actually had passed identical bills twice before, but both times they died when the Senate Judiciary Committee failed to act.

    Some House and Senate staffers said the Senate committee had let the bills languish because of concerns that they would interfere with individual state’s rights to regulate notarizations.

    Senate staffers familiar with the judiciary committee’s actions said the latest one passed by the House seemed destined for the same fate. But shortly before the Senate’s recess, Judiciary Committee Chairman Patrick Leahy pressed to have the bill rushed through the special procedure, after Leahy “constituents” called him and pressed for passage.

    What is the bill?

    Ohio Secretary of State Jennifer Brunner told Reuters in an interview that the law would weaken protection of homeowners by requiring many states to accept lower standards for notarizations.

    She said it was “suspicious” that the law unexpectedly passed just as the mortgage industry is facing possible big costs from having filed false or improperly notarized documents.

    Notarizations are made by notaries licensed by individual states. The purpose of notarizations is to attest to the identity of the person whose signature is on a legal document.

    Even the bill’s own House sponsor is stunned by the speed with which this bell went through.

    So now it’s on the President’s desk to sign. ZeroHedge, which brought the story to our attention, is skeptical that he will. But vetos are rare. The path of least resistence is usually to just sign the bill and move on.

    Read more: http://www.businessinsider.com/bank-foreclosure-bill-leahy-2010-10#ixzz11gNHWQ7j

    1. Tao Jonesing

      The fact that a document is notarized does not mean that what the document says is true. Judges would remain free to consider the veracity of the document and any statements sworn to therein. Notarizing a fraudulent document does not bless the fraud, it actually piles the penalty of perjury on top of it. And if a person makes makes a false oath under penalty of perjury, even if that falsehood does not arise to fraud, that person could be nailed for perjury.

      I’m really having a hard time seeing what the fuss is all about. The only complaint that seems to have any merit is the concern about electronic notarization, which would make it easier to fraudulently notarize fraudulent documents. That still doesn’t change the fact that notarizing a document doesn’t bind a court to believe that it’s true when presented with contrary evidence.

    2. Francois T

      Moreover, as per blogger Susie Madrak

      http://susiemadrak.com/?p=7955

      http://www.whitehouse.gov/blog/2010/10/07/why-president-obama-not-signing-hr-3808

      Today, the White House announced that President Obama will not sign H.R. 3808, the Interstate Recognition of Notarizations Act of 2010, and will return the bill to the House of Representatives. The Interstate Recognition of Notarizations Act of 2010 was designed to remove impediments to interstate commerce. While we share this goal, we believe it is necessary to have further deliberations about the intended and unintended impact of this bill on consumer protections, including those for mortgages, before this bill can be finalized.

      Notarizations are important for a large range of documents, including financial documents. As the President has made clear, consumer financial protections are incredibly important, and he has made this one of his top priorities, including signing into law the strongest consumer protections in history in the Wall Street Reform and Consumer Protection Act. That is why we need to think through the intended and unintended consequences of this bill on consumer protections, especially in light of the recent developments with mortgage processors.

      The authors of this bill no doubt had the best intentions in mind when trying to remove impediments to interstate commerce. We will work with them and other leaders in Congress to explore the best ways to achieve this goal going forward.

      Boom! No candy for the bank industry!

      1. LeeAnne

        Re: blogger Susie Madrak

        …the president’s commitment clearly stated.

        Obama’s alleged success on finreg and intentions could not have been stated more clearly had those words come straight from the US Goebbels/Luntz propaganda machine.

        1. LeeAnne

          spcifically this

          “As the President has made clear, consumer financial protections are incredibly important, and he has made this one of his top priorities, including signing into law the strongest consumer protections in history in the Wall Street Reform and Consumer Protection Act.”

          1. Doug Terpstra

            From the president who promised “the most open and transparent administration in history”.

  2. John Drake

    Senate passed the bill in April that saves the banks’ asse(t)s. Bank foreclosure cover seen in bill at Obama’s desk

    By Reuters
    Thursday, October 7th, 2010 — 5:03 am
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    Bank foreclosure cover seen in bill at Obamas desk

    WASHINGTON (Reuters) – A bill that homeowners advocates warn will make it more difficult to challenge improper foreclosure attempts by big mortgage processors is awaiting President Barack Obama’s signature after it quietly zoomed through the Senate last week.

    The bill, passed without public debate in a way that even surprised its main sponsor, Republican Representative Robert Aderholt, requires courts to accept as valid document notarizations made out of state, making it harder to challenge the authenticity of foreclosure and other legal documents.

    The timing raised eyebrows, coming during a rising furor over improper affidavits and other filings in foreclosure actions by large mortgage processors such as GMAC, JPMorgan and Bank of America.

    Questions about improper notarizations have figured prominently in challenges to the validity of these court documents, and led to widespread halts of foreclosure proceedings.

    The legislation could protect bank and mortgage processors from liability for false or improperly prepared documents.
    Story continues below…

    The White House said it is reviewing the legislation.

    “It is troubling to me and curious that it passed so quietly,” Thomas Cox, a Maine lawyer representing homeowners contesting foreclosures, told Reuters in an interview.

    A deposition made public by Cox was what first called attention to improper affidavits by GMAC. Since then, GMAC, JPMorgan and others have halted foreclosure actions in many states after acknowledging that they had filed large numbers of affidavits in which their employees falsely attested that they had personally reviewed records cited to justify the foreclosures.

    Cox said the new obligation for courts to recognize notarizations of documents filed by big, out-of-state companies, would make it more difficult and costly to challenge the validity of the documents.

    The law, the “Interstate Recognition of Notarizations Act,” requires all federal and state courts to recognize notarizations made in other states.

    The law specifically includes “electronic” notarizations stamped en masse by computers. Currently, only about a dozen states allow electronic notarizations, according to the National Notary Association.

    “CONSTITUENTS” PRESSED FOR PASSAGE

    After languishing for months in the Senate Judiciary Committee, the bill passed the Senate with lightning speed and with hardly any public awareness of the bill’s existence on September 27, the day before the Senate recessed for midterm election campaign.

    The bill’s approval involved invocation of a special procedure. Democratic Senator Robert Casey, shepherding last-minute legislation on behalf of the Senate leadership, had the bill taken away from the Senate Judiciary committee, which hadn’t acted on it.

    The full Senate then immediately passed the bill without debate, by unanimous consent.

    The House had passed the bill in April. The House actually had passed identical bills twice before, but both times they died when the Senate Judiciary Committee failed to act.

    Some House and Senate staffers said the Senate committee had let the bills languish because of concerns that they would interfere with individual state’s rights to regulate notarizations.

    Senate staffers familiar with the judiciary committee’s actions said the latest one passed by the House seemed destined for the same fate. But shortly before the Senate’s recess, Judiciary Committee Chairman Patrick Leahy pressed to have the bill rushed through the special procedure, after Leahy “constituents” called him and pressed for passage.

    The staffers said they didn’t know who these constituents were or if anyone representing the mortgage industry or other interests had pressed for the bill to go through.

    These staffers said that, in an unusual display of bipartisanship, Senator Jeff Sessions, the committee’s senior Republican, also helped to engineer the Senate’s unanimous consent for the bill.

    Neither Leahy’s nor Session’s offices responded to requests for comment Wednesday.

    In background interviews, several Senate staffers denied that it would have any adverse effect on the legal rights of homeowners contesting foreclosures, and said the law was intended only to remove an impediment to interstate commerce.

    “SUSPICIOUS” TIMING

    Ohio Secretary of State Jennifer Brunner told Reuters in an interview that the law would weaken protection of homeowners by requiring many states to accept lower standards for notarizations.

    She said it was “suspicious” that the law unexpectedly passed just as the mortgage industry is facing possible big costs from having filed false or improperly notarized documents.

    Notarizations are made by notaries licensed by individual states. The purpose of notarizations is to attest to the identity of the person whose signature is on a legal document.

    For affidavits — sworn statements filed in court cases — the person who made the affidavit also is required to swear under oath before a notary that the affidavit is true.

    In recent depositions in several foreclosure cases, GMAC and other mortgage processors’ employees have testified that they signed large numbers of affidavits without ever appearing before the individuals who notarized them.

    The bill was first sponsored by Aderholt in 2006. He told Reuters in an interview that he proposed it because a court stenographer in his district had asked for it due to problems with getting courts in other states to accept depositions notarized in Alabama.

    Aderholt said organizations of court stenographers supported the bill, but said he wasn’t aware of any backing by banks or other business groups.

    Aderholt said that he hadn’t expected the Senate to pass the bill, and “we were surprised that it came through at the eleventh hour there.”

    (Reporting by Scot Paltrow; Editing by Tim Dobbyn)

    Source: Reuters US Online Report Politics News

    1. Tao Jonesing

      The timing sure seems suspicious, but so does the level of concern being expressed. My prediction is that the Obama administration is going to “look into” the bill and conclude that it is completely innocuous and that the “conspiracy theories” are completely unfounded, at which point experts from both sides of the aisle who are viewed as trusted advisors by even the most extreme constituents on the left and right will agree with the administration. The hubub around this bill is meant to distract from just how dire the real mess is.

      1. marblex

        Preznit Obama won’t sign the bill before the election.

        There. I fixed it.

        Oh, yeah, he “sent it back” to congress which is not in recess, because of the Democrats capitulation to the GOP demand to hold pro forma sessions. Anytime between now and the 10th this congress could override his veto.

        Alternatively, Congress will make some cosmetic changes to the bill and call it revised and resubmit it after the election, at which time Preznit Obama will sign it.

  3. Jim in MN

    So, if all the toxic paper had been properly marked to market in the first place, wouldn’t this systemic crisis be, say, half discounted already?

    Now we have another flock of black swans to further push our fair Republic into the rocks of economic and political collapse. All through corruption and regulatory/policy failure of Biblical proportions.

    If performing residential mortgages turn out to have their titles “shredded via securitization” by this appalling lack of financial controls, it is full stop game over for the USA as we have known it. Yves, I hope you clarify potential impacts beyond the foreclosure and RMBS ones, as there is going to be massive fear and panic by average home”owners” (!?!) at some point very soon.

    So does anyone have title to their house? To my house? To yours? What just happened here???

    “Against stupidity, the Gods themselves, contend in vain.”

  4. F. Beard

    With mortgage loss severities at 70% or worse, a 40% principal mod for borrowers, say, is a win for everyone but the serivcer. And before readers howl that this is unfair, life isn’t fair. Yves

    Perhaps I R insane but isn’t another option just to bailout every American adult, savers and borrowers alike? Both savers and borrowers have been cheated by the banking system so why not bail all of them out? The US Treasury could simply send every US adult a nice fat check. This would:

    1) Allow borrowers to pay down their mortgages to current market price levels.
    2) Compensate savers for years of artificially suppressed interest rates.
    3) Fix the banks in nominal terms.
    4) Fix state property tax revenues.
    5) reflate the economy in general.

    Inflation risk? Then slap leverage restrictions on the banks.

    Of course this idea will be dismissed as loony but I suspect it will seem far less loony as time goes by. Meanwhile, it does make for very interesting times.

    Thanks, Yves, again for sharing your knowledge and expertise. This is fascinating.

    1. Jim in MN

      No you’re not insane. The DC/NY system is insane.

      Another plausible mechanism would be progressive bond haircuts. Take the writedowns, but allow for a tax credit based on income that would protect middle and lower class pensioners and investors. Let the rich and the foreigners eat it.

      You will never, ever, see this discussed as a policy option. Wonder why….

      1. F. Beard

        Let the rich and the foreigners eat it. Jim in MN

        Actually, I don’t think anyone has to “eat it”, except those who are waiting around like vultures to buy assets on the cheap. I mean how does an economy go from prosperity to depression virtually overnight with no physical damage to the economic base?

        1. Jim in MN

          Well, if you mean surplus wealth can be lost without actual suffering, right on. But letting bonds go to market and not administering the bailout dope will mean very large losses from current levels. Bankruptcies, lost fortunes, that kind of thing. Personally I say let ‘er rip else we all reap the whirlwind of lost decades. But I do recognize it is not pain-free. At all.

          We have a massive bar tab and it will be paid, with interest. Sooner is better.

  5. Eating Crow

    Have to feel some level of compassion for those homeowners who are “so broke they can’t make any payments”. To the street with those scofflaws! Presumably they had better jobs when they were marks for control fraud.

  6. Mike M.

    I used to think that one had to be crazy to both build a new home in this climate, or for a consumer to buy one when there are so many incredible deals in the distressed market, but, now I can see why someone would do that: Clear title.

  7. Omitted Kingdom

    I wondered why people in Florida are yelling about Obama doing something. George W Bush and his dimwit US Labor Secretary Elaine Chao missed their monthly jobs creation target every month for 8 years. No one in the FIRE economy paid attention? Then they’re idiots and deserve to be destitute and on food stamps. Jobs underpin the mortgage fiasco. This is a Republican fiasco.

    When will the FIRE economy corner and question the CEOs who shipped jobs offshore? That’s one private sector confronting another, and no government involvement. I think CEOs should be hauled in front of Congress to state how many jobs they’ve sent offshore, for wage arbitrage, but that’s just me.

    Someone else online I read the state of Florida gerrymandered its districts to allow Republican favoritism, and the Republican state senators are hand in glove with Florida banks. Suddenly all the yelling about Obama to “fix it” made more sense, like the literal elephant in the room got skipped over.

  8. petrograd

    For those waiting for the second shoe, this is it–it’s dropped. And whocouldanode, it would all go back to shady mortgage backed securities.

  9. Cedric Regula

    I think this will increase the number of strategic defaults on non-recourse mortgages. Anyone fence sitting because of a potential black market on their credit, should be able to find an out if title is messed up. Jacoby&Meyer is probably setting up Robo-Remedy at this very moment.

    Then why pay your mortgage while they are trying to figure out if they want to forclose on you or not, and whether it is your property even tho you pay your mortgage.

    RMBS is toast as far as I can see.

  10. GT

    Hi Yves,

    if what you write:
    “That puts a cloud over the entire US RMBS market, the biggest asset class in the world. The paper was sold as secured paper; the ability to offset the cost of borrower defaults by seizing and selling his house is critical to the value of the instruments. And if no assets were conveyed to particular trusts by closing, an even uglier possibility exists: the trusts under New York law, which was elected by RMBS as governing law for the trust, would be considered to be “unfunded”, which means they don’t exist. ”
    holds up in any meaningfull way, this can indeed develop into a very interesting situation. I can very well see most of the European banks which have invested in RMBS suing for fraud or at least fraudulent neglect of due dilligence. In which case you have banks pitted against other banks.
    Even (in many aspects retroactive) changes in the law, may very well prevent US courts from intervening, this however is not necessarily true for European courts.

    1. PQS

      Yeah – isn’t the purpose of PMI to provide the banks with recourse in case you don’t pay your mortgage?

      Don’t tell me: PMI is all underwritten by AIG….

        1. Tim

          Yes PMI, but more importantly, there was insurance for the Mortgage Pools within the securitization structure. So the arguments I have seen, ie: Neil Garfield and others, the insurance paid out upon initial default. Where’d that money go?

          1. CaitlinO

            PMI doesn’t pay in cases of fraud. Were any mortgages/refinancings in 2005 to 2007 made without fraud at some level?

  11. PQS

    My takeaway from the shenanigans in Congress and this bill that Obama will now not sign:

    Don’t tell me Congress can’t get things done when the right people are askin.

  12. Maju

    I think this illegal foreclosures scandal, added to the public health and economic scandal of the Gulf of Mexico oil spill, added to the financial mega-Ponzi-scheme scandal of 2007, added to all the domestic and foreign policy scandals of the recent past (most under Bush Jr., including the many doubts about who is actually behind 9/11) are a turning point in US history not seen in more than a century.

    It is a very decadent and sad situation, something, I understand, unimaginable only 10 years ago. People who understand are all in a state of shock, and many just do not want to understand at all (comprehensible to some extent because they are trying to defend their own sanity, their faith in people and their so much cheered national institutions: their patriotic and democratic pride, now shattered).

    And worse of all is that there is no opposition. Obama rose presenting himself as such alternative but he has failed miserably: he either has no control of the situation or he does not mind being accomplice of this disgrace.

    So what is the solution? Brace yourselves because in this kind of situation a military or otherwise authoritarian “savior” often appears in the scene. That’s what happened in Russia after the Yeltsin period of degeneration, and in many other places, specially when there is no revolutionary alternative (and at the moment there’s not yet such thing in the USA or anywhere in NATOplus, except possibly Greece).

    However I would not be surprised if this kind of autocratic ‘solution’ was what they have got in mind since at least 9/11/2001. So, like Putin in Russia, it is no solution but just posturing while concentrating power more and more in the hands of the oligarchs.

    Whatever the case, beware.

  13. Kurt

    I’m not an expert in any of this, but if the fraud was as extensive as it appears to have been, I don’t see why it would only affect houses in foreclosure.

    I bought a house in 2006 and at the same time sold one which had been paid off. Because I paid for the new one with the proceeds of the old one, I have about 90 percent equity in the new one. I’m also gainfully employed and live in a relatively remote part of the country where asset prices neither rose nor shrank as much as the national average. So I’m basically in zero risk of default. But the mortgage I took out in 2006 certainly was grist for the securitization mill, so when I do pay it off, why won’t my title be worthless, too?

    1. prostratedragon

      This nagging question hit me today. Just how many secure titles are there among mortgage-financed purchases, at least of existing houses, that were made during 2005 to 2008 in which the loans were securitized? And are there any other ramifications for borrowers who have been and expect to continue making their payments? (Non-mortgager, myself.)

  14. killben

    Yves,

    Does deep principal mod mean that the next house on sale in the neighborhood is likely to be at the same deep discount?

  15. bill turner

    Two big problems MERS and the Trusts

    1. I believe if the courts rule against MERS in a number of pending State cases for standing as “Nominee;” MERS will fold up leaving clouded title throughout the country and the MBS market without a bid. MERS is a computer server shell, with no notes. If the bond market finds out MERS has no legal standing, which a few have already (Kansas, Maine etc) the gig is up in the MBS market. No bid. It is like StateStreet or BONY holding your stock in street name but your actual stock (bearer w/ a POA) was destroyed and scanned. Can you trade a copy of a stock certificate?

    2. Also, the 2006-2008 Trusts (now closed) never assigned the collateral in the securities when they should have, per the PSA; They left it in MERS’s name, bad idea. (see above).

    Now, no title insurer in their right mind will insure a MERS assigned mortgage and note.

    1. recaldo

      b/c there was a court case in Florida(recently) which brought up these issues and the judge ruled in the homeowners’ favor.

      I actually don’t understand what is going on. I understand there was deficient paperwork/process. However, was there anything sinister to this? Did services skirt the paperwork to get around something(e.g. was there intent of some sort). Was there a reason for this besides sheer laziness?

      1. Chris

        Foreclosure mills (Fishman and Shapiro) have been involved in outright fraud. The paper work is shoddy like you said. In many instances they’ve forged the paperwork, and forged the signatures of the borrower.

        So now Pandora’s box has been opened, and it will be interesting to see who gets frog marched and who doesn’t. I’m hoping many, many banking executives get jailed, and a whole bunch of lawyers. Of course, that still leaves D.C. intact, but as we know The Oligarchy isn’t accountable because they’re Special.

    2. CaitlinO

      Tanta at CalculatedRisk wrote about it in November of 2007 and NakedCapitalism has been on it for years. It’s just the main stream media who is acting shocked, shocked to discover there’s a red headed bastard at the family reunion.

      There ought to be a Pulitzer given out for this story and it sure shouldn’t go to the NYT or WSJ.

  16. Ron

    No sense of the numbers when the subject of cram downs is mentioned, how about 10 to 15 million homes? Any concept of time for the the mortgage industry to cull the good from the bad apples nor would the homeowner own anything but a mortgage note at the end of the day without a dime of equity in the home that probably needs considerable maintenance like a new roof or heating system the so called lucky homeowner would still be underwater at the end of this long and thoughtless process due just to selling cost. America is is total denial regarding its favorite financial asset!

  17. Rick Halsen

    @ F. Beard 10/07………..1:47PM

    “The US Treasury could simply send every US adult a nice fat check. This would:

    1) Allow borrowers to pay down their mortgages to current market price levels.
    2) Compensate savers for years of artificially suppressed interest rates.
    3) Fix the banks in nominal terms.
    4) Fix state property tax revenues.
    5) reflate the economy in general.”

    You know, you just gave almost a semi-brilliant idea there, F. Beard.

    They could do this alright and kinda still avoid massive price inflation. How, you ask? Well they could issue/helo- drop special ‘bucks’. Special color-coded and digi-coded bucks that they could only be spent on certain things like mortgages, power bills, certain food items, etc. Yes, what I’m implying here is ‘Obama Bucks’. Everybody’s happy except for maybe the Chinese.

    Just think of it. Public-direct QE lard without the calories or weight gain.

    How do we sign up and convey this to Congress/Prez? I’m there, baby.

    RH

    1. F. Beard

      Just think of it. Public-direct QE lard without the calories or weight gain. RH

      Indeed. To the extent that homeowners are underwater on their mortgages is the extent to which the economy is short of real money. Banks used 20-30 to 1 leverage to inflate housing debt beyond being serviceable. So our choices are 1) liquidate debt to match the money supply or 2) increase the money supply to match the debt. I suggest that 2) would be much easier.

      BTW, debt forgiveness is Biblical (Deuteronomy 15, Leviticus 25) and that was commanded before fractional reserve lending was invented, I’d bet. But since savers are also cheated by the government backed counterfeiting cartel, they should be bailed out too.

      But hey, go ahead and laugh. I’m enjoying watching a fundamentally dishonest money and banking system that loots the poor, implode. Still, as a patriotic American, I feel I must try to help in my little way.

      And BTW, a way to prevent price inflation would be to abolish fractional reserve lending. Since 95% (rough guess) of the money supply is debt from thin air then that should be massively deflationary.

  18. Rick Halsen

    Oh and btw, this not getting signed by Obama has Rahm written all over it.

    “Never let a serious crisis go to waste when you can use it to get other things done…..” to paraphrase The Big R and all that.

    RH

  19. curlydan

    Of the possible outcomes, I’d say #3 is likely with one alteration–some large percent (50%) of principal mods reductions will be covered by the govt and sent to the banks–and even a little something for the 2nd mortgage holders because Wells is still TBTF.

    The squeals of “the financial system at the abyss” will be heard and obeyed.

  20. Robespierre

    Yves don’t really like your solution. It does not uncover the fraud created on the RMBS and therefore it saves once again the perpetrators. Enough is enough let the chips fall where they may and rebuild from there.

    1. Yves Smith Post author

      Pray tell where did I present a solution? I mapped out four broad paths down which this situation could travel.

      The reason I signal 3 as most likely is that is the one the attorneys driving the litigation want to see. But I see the most probable as more gridlock (4) followed by 3, but with 1 also very possible.

      1. Robespierre

        You are correct. I interpreted as “your solutions” when you meant them as what may happen. Still, however, how can any of those pats fix this?
        “RMBS originators, the investment bank packagers, and the bank trustees failed to convey the notes (the borrower IOU, which is critical to having the legal standing to foreclose in 45 states)”

  21. Barbara Ann Jackson

    Foreclosure fraud, among other things causes people to become harmed for not cooperating with unlawful property confiscation. Foreclosure fraud enables things like repetitive, illegal property flipping; illegitimate homelessness, underhanded evictions; it enables unscrupulous foreclosure mill lawyers (especially when judges abet deceit) to deceptively hold auctions and make insider bids to acquire properties, and causes blighted neighborhoods.

    I paid my NON-SUBPRIME mortgage for 7 years prior to abusive marriage. When a foreclosure mill lawyer fraudulently foreclosed via a defunct lender’s identity, the courts castigated me for opposing the foreclosure mill lawyer’s red flag use of the defunct lender’s identity, and Bankruptcy “lift stay” motions and “proof of claim” documents under Wells Fargo’s name.

    Years later, the foreclosure lawyer used the non-existent lender’s identity, to carry out a ‘simulated’ auction (in my absence), and an inside bid was made on my home. The foreclosure lawyer had the property deed recorded into the name of the non-existent lender, and 3 months later, the newspaper showed Freddie Mac as paying the non-existent lender over $86,000. At the end of the year, I discovered that Wells Fargo had gotten in on the foreclosure sham by filing a false IRS form 1099-A for my property when I received an IRS tax bill.

    It’s not simply loss of my home that ‘eats my lunch’, it’s such things as horrible, horrible YEARS of judicial abuses, privacy invasions, danger for my safety, blackballed from LAW employment, and other reprisals to which I am yet subjected, due to APPALLING LAND GRAB racketeering (AKA) foreclosure. And, it is similar appalling injustices of which I know have happened to other people, merely because they also lawfully sought their rights to DUE PROCESS OF LAW. I will not cease speaking out / I’m not an Internet troll. I am doing every lawful thing I know, because I simply want MY LIFE BACK. *http://www.lawgrace.org/2010/09/30/important-facts-about-foreclosure-and-mortgage-fraud/

    1. Chris

      Sweetheart, it’s time for we the victims the rise up and have our Bastille Day. America needs a Democratic Socialist revolution, with all the current players and stooges swept aside into the annals of history.

      1. Doug Terpstra

        “Clarity about the aims and problems of socialism is of greatest significance in our age of transition. Since, under present circumstances, free and unhindered discussion of these problems has come under a powerful taboo, I consider the foundation of this magazine [blog] to be an important public service.” (Albert Einstein, 1949)

  22. JonF

    Unless you bought a house that was a foreclosure your title is probably OK. There’s a lot of hasty and misleading explanation in this article. Securiization itself does not affect a title in any way. It certainly does not “shred” one!
    The problem comes from when a mortgage is foreclosed on by parties who may not have the proper documentation allowing them to do so. Then the title may be uncertain for the next buyer.

  23. Mike

    State real property law (including the evidence and procedure laws accompanying it) is one of the last bastions of true federalism left in this country. We’re talking about bodies of law that have largely been in place for more than 150 years, based on common law principles that have existed for centuries. If the banksters and their cronies in Congress think they can dismiss all that with some half-assed legislation citing the Commerce Clause, they’re going to have a major legal battle with the states on their hands.

  24. Glen

    I think it’s safe to assume that everybody in DC knows what’s going on and has know since at least 2008.

    The problem is that unlike the S&L crisis where we had the Keating 5, I’d hazard a guess that this time it would be the Keating 50 or 500.

  25. Gordon

    The example of one of the great lawgivers in history, Solon, just might provide a roadmap for leading us out of our present situation. As Plutarch describes Solon, he was “the only one not implicated in the troubles, that he had not joined in the exactions of the rich, and was not involved in the necessities of the poor. . ..” His solution might be dubbed the “73% solution.” See http://www.thenagain.info/Classes/Sources/Plutarch-Solon.htm. Following on Yves’ point 3, striking a grand bargain with RMBS investors, servicing banks, struggling homeowners, counsel for such homeowners, and law enforcement officials to write down the principal to 73% just might be enough for a leader to earn a place on the frieze of the Supreme Court. See http://www.supremecourt.gov/about/north&southwalls.pdf.

  26. Karmic Guru

    Banks sinned like crazy against the society and NOW their KARMA is catching up with them.

    I know there are a lot of innocents involved in this MESS but as for Banksters and their Zombie Banks this is a poetic justice. Their own innovations (securitizations, CDOs, SIV etc) have become ‘Frankensteins’ and coming back home!

    We all suspected that ALL these Zombie banks are STILL INSOLVENT but now and here afterwards the ‘extend and pretend’ and delay and pray’ circus won’t work!’

  27. Doc Holiday

    Re: cloud over the entire US RMBS market

    But, but, but, Moody’s, Fitch and S&P rate everything AAA+ no matter what — I just don’t see what the problem is and people like Buffett seem to be making lots of honest mistakesmoney, so… what cloud? The RMBS market is strong like bull testosterone — I see no problem that viagra can’t make better! This will all blow away as soon as the wall street mafia pays a few more bucks to the press, Congress, Obama… and anyone in the loop that needs some grease — no big deal …. eat more Gulf shrimp — it may full of shit, but life goes on.

  28. NYT

    Yves
    How come the only lawyers we seem to hear from are the ones acting for the homeowners. With so much at stake how come those who bought MBS arent scrutinizing this and trying to find any loophole which will allow them to claim back their losses from the banks?

    1. Yves Smith Post author

      1. The industry is in denial. Tom Adams was just at an American Securitization Forum conference. No one, and I mean NO ONE, was wiling to talk about this.

      2. To the extent they think there is a problem, they assume Congress will fix it

      3. The servicers continue to advance principal and interest payments until 100% of the loan balance has been paid.

      4. If they start suing, they show they believe there is a problem. RMBS will trade down, recovery takes years and is uncertain. No reason to do anything till RMBS trade down in a serious way. Better to sell than sue if you are really worried.

  29. bob goodwin

    First of all Yves, thanks for putting so much effort into this beat. It is the next inning of a long game, but a very interesting inning.

    My first impulse on this whole thing is to say “screw the banks they deserve this”. And they do. But unlike the bail-outs and balance sheet fraud, this issue has very different legal ramifications. What I do not know is if there is a good analog in history. My best analog is the shoddy title documents that occur in many developing countries, and the informal extra-legal processes that have served to keep land utilization working. I think I have read that the best outcomes have occurred when the government formalized local traditions, rather than allowing manipulation in the courts of questionable historical documentation. Granted this is not a great analog, but I see a serious problem with allowing titles to fail in the long wrong, regardless of the source of the problem.

    So I suspect that governments will eventually create a shortcut for banks to foreclose on homes. The politics are going to get dicey, because of the anger over the banks, and an increasinly probable shift in the electorate. But the same stroke of the pen that can free the titles can also free the mortgage mods.

    And even though it is a bit ugly, it has the dual benefits of probably being inevitable, and also strengthening the rule of law (as opposed to bail outs and balance sheet fraud which arguably undermine the rule of law.)

    1. Dave C

      That banks are scrambling to assemble documentation says they are sloppy, not criminal. The borrowers who stop paying the loan they contracted for, and fight the bank to keep without paying are the criminals, many of whom took out equity appreciation loans and now wish to leave the banks holding the bag while they walk away with piles of cash. Quit talking like the banks did this in a vacumn. There’s plenty of stupidity, ignorance and fraud to go around.

      1. Yves Smith Post author

        Dave,

        With all due respect, you are dead wrong. You are either a shill or don’t read closely. I am sorry to be rude, but I have little patience with uninformed and/or disingenuous comments.

        This isn’t about “assembling documents.” It’s about a widespread, institutionalized practice of document FABRICATION and FORGERIES that goes well beyond the affidavit problem that the banks have ‘fessed up to We’ve written about it extensively here.

        This is from Ella on a related post:

        An affidavit is a legal document which can substitute for live witness testimony in court. All testimony in court is governed by the rules of evidence or by statute. All testimony requires that the witness swears to tell the truth, is competent and has personal knowledge of the facts they are testifying about. An affidavit is no different, in most if not all jurisdiction, the affiant swears to tell the truth by being placed under oath by the notary, the affiant states in the affidavit that they were sworn, are competent and that they have personal knowledge of the facts in the affidavit. The notary attests to the oath of the affiant and that the affiant is who they claim to be.

        If a witness lies in court or in an affidavit then they could be charged with perjury. Perjury is lying to the court.

        The affidavit issue is being portrayed in the MSM at a paper work problem. Lying to the court is not a paper work problem. Attorneys are prohibited from making a material misrepresentation to the court of fact or law. Further, attorneys in most jurisdictions have an affirmative duty to report known perjury by their clients to the court.

        The problem with the affidavits is perjury on behalf of the affiants and possibly the notaries depending on the notaries’ knowledge that the affiants had not reviewed the files, the promissory notes, the mortgages, or the records of default.

        Further, you can reasonably argue that the entities pursuing foreclosure (banks or servicers) have perpetrated a fraud on the court by submitting perjured affidavits. If the attorneys representing the entities have knowledge of the fraud or are preparing questionable documents then they may also be involved and subject to penalties.

        At the heart of any trial or hearing is the determination of the truth of the matter. It is the very purpose of the rules of evidence and what law and fact is presented to the court. If the affiants lied, as it appears, then the truth of whether they owned the note and held the mortgage and the borrower was in default is at issue. Courts, Attorneys General, and bar associations need to serious consider actions that will assure compliance with the rule of law.

        This country cannot stand as a democracy if there is one set of law for the banks, corps, elites and another set of law for the rest of us. Perjury and fraud on the court is very serious matter. It is not a mere paper work problem.

        Forgeries and fabrications, if proven to be intentional (and the institutionalized pattern says they have to be) is a fraud, hence criminal.

        By contrast, not paying your bills is civil. We don’t have debtors’ prisons in the US.

  30. Dave C

    The problem I see with mass modifications, is that millions of people currently paying their mortgages will suddenly stop to take advantage of the program, collapsing home values, and putting most mortgage lenders out of business. It would be years before anyone would be crazy enough to lend money because the govt protections are so one sided that lending risks shut down the market, destroying the larger economy. The “protections” Obama talks about are helping deadbeat borrowers rip off well meaning legitimate banks. To what end?

  31. Opinionated Bloviator

    Moral Hazard, the gift that keeps on giving. Mortgage payments, Meh, Wall Street got Bailed Out, I want one to. Congress Bailed Out Wall Street crooks, F*ck em, I’m not going to pay my mortgage either. It’s the BAILOUTS that are driving this crisis. Now add mortgage fraud, 20%+ unemployment and the ‘it’s not fair mindset’ into the mix. Real Estate collapse? Yes we will, we have a long way to fall until we hit rock bottom here.
    Here’s a little science factiod for you – Did you know that FAIRNESS is a hardwired behaviour, all the higher mammals and even the higher birds, punish those who cheat and scam, gorrillas and the higher apes even murder chronic cheaters.
    TO WHAT END? The United States will be forced in the very near future to choose between the TBTF banks and the continued existence of the United States as a functional political entity – they won’t be able to have both. The United States of Argentina or PANEM. Pick one.

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