Mirabile Dictu! SEC is Taking a Hard Look At Bad Mortgage Practices « naked capitalism

Tuesday, February 8, 2011

Mirabile Dictu! SEC is Taking a Hard Look At Bad Mortgage Practices

While it is far too early to break out any champagne, the Powers That Be seem to be taking notice of the continuing train wreck in courtrooms all over the US as far as banks’ ability to foreclose is concerned. Apparently, the American Securitization Forum’s “Drive on by, nothing to see here” mantra is becoming less and less convincing with every passing day.

It’s worth nothing that only the Financial Times seems to be carrying this story (yours truly did check on key word variants in Google News and came up empty-handed). They also deem it to be worthy of front page placement. This is only an isolated sighting, but one of the features of the runup to the financial crisis was an ongoing news disparity between the Financial Times and US business press, particularly the Wall Street Journal. The FT would pick up on stories that seemed important and were too often either completely ignored or reported by the American financial outlets only in in a selective manner. So if we see more bypassing of inconvenient news by the usual suspects in the US, take heed.

What is particularly interesting is that the SEC seems to be targeting specifically the sort of abuses that we have chronicled at length on this blog: failure to convey mortgages to the securitization trusts in accordance with the pooling and servicing agreements (which were part of the offering documents); whether robosiging is inconsistent representations made to investors (this frankly is a novel angle, I’m impressed the SEC is considering it), as well as an issue that has gotten more attention in the media, that investors appear to have been mislead on a widespread basis about the quality of mortgages in late vintage subprime mortgage bonds.

Note that we’ve been surprised at the complacency of investors regarding the losses banks are taking on the issue of standing in courts all over the US. The securitization industry has desperately been trying to spin this as “deadbeat borrowers trying to get a free home” when the overwhelming majority of people in court are either convinced that they are the victim of servicing abuses, are fighting the dubious and pervasive practice of banks trying to break a bankruptcy stay (all creditors are supposed to take a time out while the borrower works out a bankruptcy plan with the court), or really just want a mod, but are having to cudgel the bank in court instead. Investors have been filing a few cases, but peculiarly on the (we think) not so attractive representations and warranties issue, in which the investors argue that the mortgages in the securitization pools were far worse than they were told, and the lousy quality of those mortgages (as opposed to the economy taking a big hit) is the reason they have suffered losses.

Even though the banks clearly put a lot of dubious loans into the deals, it is difficult and costly to win these rep and warranty cases, which means these case are typically settled early on, and for not very large amounts compared to the amount at issue). The issue of failure to convey mortgages properly to the trust seems more of a slam dunk, but we wonder whether investors are loath to advance a legal theory that strikes at the heart of the mortgage industrial complex. After all, if they win, they have just established that they were sold non-mortgage backed securities. Nevertheless, the news that the SEC is taking this matter to heart may embolden some of the fence-sitters.

From the Financial Times:

US securities regulators investigating the role of banks in the mortgage crisis are homing in on the question of whether investors were misled about the home loans used to back securities…

Kenneth Lench, chief of the SEC’s structured products unit, said at a conference in Washington on Friday that issues of interest to the commission include whether investors were properly informed about underwriting and foreclosure practices and the quality of mortgages used to back securities…

Mr Lench highlighted areas that could be of concern: “Were representations relating to the transfer or documentation of mortgages into the loan pools accurate? Did activities such as ‘robo-signing’ contradict those representations? Were disclosures to investors regarding the quality of the loans in the pools accurate?”…

Mr Lench said his unit was working with “legacy” cases from the financial crisis as well as new ones stemming from the “rippling effect of the unfolding crisis”.

25 Comments:

rjs says:

February 8, 2011 at 4:55 am

re: (yours truly did check on key word variants in Google News and came up empty-handed)

off topic, but i just had one of those; when the benchmark revision to unemployment was announced last year, it was big news; even bloomberg produced interactive charts to show how many jobs disappeared in the revision…but this year you do a google news search on that or the birth-death model and all you get are articles such as birth & death certificates in india…

it was mentioned at CR, but all he did was revise his charts…at any rate, total employment reported for last march was revised downward by 378,000, and the year end number down by 452,000…

attempter says:

February 8, 2011 at 6:01 am

The issue of failure to convey mortgages properly to the trust seems more of a slam dunk, but we wonder whether investors are loath to advance a legal theory that strikes at the heart of the mortgage industrial complex. After all, if they win, they have just established that they were sold non-mortgage backed securities.

They too have an interest in this version of extend and pretend, which is why we’re not likely to see the big breakthrough in court anytime soon, not on its own.

Our best bet is a political campaign to convince the people that the banks are illegally foreclosing without the note in order to prop up their utterly insolvent balance sheets and keep this con game going. (And that all of this massive fraud is being performed with conscious government connivance. Any quasi-legitimate state or local government ought to be thinking about telling people to jubilate the mortgage but keep paying the property tax.)

DanJS says:

February 8, 2011 at 10:35 am

>jubilate the mortgage<

Interesting verb… but what is the legal definition?

Or are you simply suggesting that all mortgages be forgiven in a "biblical" year of jubilation?
- attempter says:
  
  February 8, 2011 at 11:20 am
  
  I’m suggesting we forgive ourselves any notion that we owe anything to those who wage vicious war on us.
  
  So I think the Biblical connotation is closest, but more of a secular political version. I do want the people to get Old Testament on them.
  
  But it’s also true that legally we can owe nothing to the banks, since on the contrary they must restitute every cent they’ve stolen, trillions more than we’ll ever actually be able to recover.
  
  And, as has been abundantly documented on this blog, seldom can anyone in particular document that he’s the legitimate party to foreclose. So in that case, even the dead-enders among bankster flacks who want to argue that “the debt is still owed, to somebody“, are left with nowhere to go, since this mysterious somebody cannot be located.
  
  That takes us back to where I started – in that case we owe it to ourselves to simply repudiate such invalid and in any case unassignable debts.
  
  Besides, isn’t that in the spirit of the banksters’ own ethos? As a piece linked here a few weeks ago from Mandelman Matters said, the pro-bankster talking point that it’s bad that somebody has “gambled” and “wins” a free house makes no sense. It’s the banksters themselves who turned all of life into a gamble, who perverted democracy and law and society, civilization itself, to that evil end.
  
  So if we’re all conscripted gamblers, let’s seize our winnings wherever we find them.
  
  We shouldn’t treat our own families and communities that way, of course. That’s why I say we need to redeem the land toward rebuilding our local and regional polities and economies, starting with relocalized food production. And it’s toward that end that I specified that we should renounce the bank debt but stay in the house and continue paying property tax, while we work to revamp our local governments. We do owe debts to our communities. That’s what citizenship is about.
  
  But we owe nothing but determined war against those, the banksters and all neoliberals/corporatists, who have launched unprovoked war upon us as a people and seek to eradicate all vestige of society and citizenship. Rejecting any such relationship there is also part of being a citizen.
  - F. Beard says:
    
    February 8, 2011 at 1:07 pm
    
    The problem with debt forgiveness is that the savers will object. How about a huge and equal bailout of the entire population instead? In the US, that could be accomplished with debt and interest free United States Notes created by the US Treasury.
    
    At the same time as the bailout, reserve requirements on the banks should be raised to compensate for the amount of new base money in the system. Ideally, they should be raised to 100% to put the banks out of the counterfeiting business, the cause of our troubles.
    
    After the debt is cleared we need to implement genuine reform in money creation. That should include separate government and private money supplies, imo.
    - attempter says:
      
      February 8, 2011 at 4:30 pm
      
      Those could be OK if we actually had a system which had any intent at all other than to strip us bare and enslave us.
      
      But since we have a terminal kleptocracy, we can assume that begging it for any reform is a complete waste of time and effort. Every week we have new proofs. We just saw the predicted sham conclusions of the FCIC. Today this new SEC sighting is the great white hope. Tomorrow it’ll either disappear or reveal itself to be a sham as well. Those so inclined can spend the rest of their lives chasing will-o-wisps that way.
      
      I want to find things we can do for ourselves. Organizing homeowner unions toward bottom-up jubilation, and citizen councils to take over local and regional governments, and to (informally at first) move into the responsibility vacuums left over by the retreat of fiscally imperilled state and local governments, thereby constituting new authority on the ground, are things we can possibly do.
      
      Reforming Wall Street and Washington by begging for change at the top is not.
  - Anonymous Comment says:
    
    February 8, 2011 at 10:20 pm
    
    Re: “…we owe it to ourselves to simply repudiate such invalid and in any case unassignable debts.
    
    Besides, isn’t that in the spirit of the banksters’ own ethos?”
    
    Um… Are you saying that you think that the bankster’s dubious behavior should be our moral compass? Or worse that we should do as they have done?
    
    And based on that moral compass [the banksters] you can somehow justify to yourself and others, getting a free house?
    
    Cause if that’s what you are saying, I feel a little apprehension that someone who would essentially steal a house, would somehow be able to now be the beacon of some new communistic culture where all recently purchased houses are free and the free-housers are in charge of the commons. Not my idea of a utopia. No offense.
    
    Whether or not the banks messed you over and tricked you into getting a house you could not afford, someone once owned that house who was not a bank, and someone will hopefully one day own that house who is also not a bank. And you, by refusing to pay your fair share are breaking down the chain of what legitimate behavior can hope to gain. Ever heard of an escrow account. The money you pay can go into an account that ensures that your mortgage payments go to the right person. It’s not like they can never be found, it’s just that that information is not known at this time. True, the information is not known for dubious reasons, but that does not mean it doesn’t rightly exist.
    
    But no worries, the bankers do it, and they’re our guides. Is that it? Cuz if so I am really scared for us.
    
    But maybe you never intended to pay it all off, so this is just a lucky break in your eyes? Which is further sad because it shows that people are milking the system from every angle.
    
    Peace and good luck with the compass.
    - attempter says:
      
      February 9, 2011 at 4:14 am
      
      I don’t know what your moral compass tells you to do when you and your people are under murderous assault. Mine tells me to fight back with every weapon available.
      
      And I can’t fathom what, according to your compass, constitutes the people’s “fair share”. My fair share is the same as that of every human being – the freedom to autonomously and/or cooperatively work using the bounteous plenty of the Earth. No one but a criminal has ever tried to set up barriers against this most basic of human rights by enclosing things no one can ever rightfully own and forcing human beings to work for a “boss”, for a “wage”.
      
      I specifically said we need to recognize and deal with the enemy as an enemy, and with friends as friends. I’m sorry if that sounds like too intricate a maneuver to you, but history shows it can be done.
      
      As for the houses, your desire to propagate the bank-dominated land dispensation, and your inability to envision any way for humanity to evolve beyond such a rotten system, demonstrate the kinds of attitudes that are part of the problem.
      
      I don’t want to find ways to continue under a “reformed” bank tyranny. I want to break free of that tyranny completely. I think such a jubilee, by breaking the banks from the bottom up, would be a big step toward that.
    - F. Beard says:
      
      February 9, 2011 at 5:29 am
      
      Cause if that’s what you are saying, I feel a little apprehension that someone who would essentially steal a house, Anonymous Comment
      
      Fractional reserve bankers are essentially government backed counterfeiters. They are thieves of purchasing power. If the banks lent rather than created money then your moral objections would be relevant. Under the current system, they are not.
      
      would somehow be able to now be the beacon of some new communistic culture where all recently purchased houses are free and the free-housers are in charge of the commons. Not my idea of a utopia. No offense. Anonymous Comment
      
      My idea of utopia includes a money system that is completely ethical. We don’t have that today by a long shot. Instead, at best, we have government backed competitive counterfeiting.
    - Anonymous Comment says:
      
      February 9, 2011 at 1:09 pm
      
      So, for some strange reason, there is not a ‘reply button that I ma finding to your comments – the two that replied to me.
      
      I am not saying that everything is great and we should just go along like atomatons. But why should anyone think that a free house is the solution… that is still part of the problem. Pe
      
      Sure they messed you/us/the economy over, but that does not mean we should use their behavior as justification for our own. You may not agree [obviously] but the attitude you are taking is only gonna make things worse. Jus’ saying.
    - Anonymous Comment says:
      
      February 9, 2011 at 5:20 pm
      
      I guess the main-main thing I am trying to say [sorry about my previous typre-os. I was distracted, plus I am occasionally dislexic.]… is… Is that is in response to this terrible travesty of law that has taken place in our modern society, if we choose to use the law-breaker’s behavior as a metric for ourselves and what we should do next… we will lose ourselves to the selfishness and greed that overtook those who corrupted the system, one document at a time.
      
      There is more at stake in this that you realize for our country. More than just individual houses and the banks getting their come-uppance, and whether or not someone mails in the keys or just stays and not pays. It’s about the rule of law. Either you believe in it or you don’t. If it looks like a grey area, that’s because you have the wrong glasses on, IMO.
      
      Just think of it this way… If one is trying to gain by the crimes of others, what does that make them? And, is that the direction we want to take ourselves out of this crisis? It’s seems like a lot of people have discovered they quite like living in the grey area. Take off the glasses and you will see it’s pretty much shadow and light.
      
      Are you gonna let the shadow side get you? Just because you don’t pay them, doesn’t mean that they haven’t won by corrupting your mind to think like them. Think about it?

JR says:

February 8, 2011 at 8:58 am

Yves,

Don’t hold your breath.

I have had several conversations over the past 3 years, with teams of senior folks at the SEC on misrepresentations in MBS, CDO and quarterly filings – often the calls were initiated by them. Sometimes I would get a call from them to follow-up and there would be a couple of new folks on the call asking me to run through facts again. It was like Groundhog’s Day, either they don’t talk to each other or there are too many lawyers in that Soviet style bureaucracy…

I expect them to follow-up in the same manner they did when I went in in 2003 to discuss accounting shenanigans at Fannie Mae (I met w folks from corporate counsel, accounting, enforcement… At a single meeting)… They didn’ follow-up on an accounting scandal that makes Madoff look like chump change.

sgt_doom says:

February 8, 2011 at 4:57 pm

Gee whiz, I could of sworn I’ve seen this exact same posting again and again and again.

To think that any of the crooks over at the SEC would take valuable time away from their six-figure porn watching.

Difficult to accept, I’m afraid.

Ina Deaver says:

February 8, 2011 at 9:47 am

Given their history at this juncture, nothing will result but a settlement agreement admitting no wrongdoing, paying a very paltry sum that equals a tiny fraction of the costs of the investigation (let alone the damages), declaring the behavior in question is “resolved,” and agreeing not to prosecute (on behalf of the US) for the behavior underlying the settlement.

It’s laundering money, pretty much.

john bougearel says:

February 8, 2011 at 11:42 am

I am surprised that the SEC even has a structured products division. MBS, CDOs and the like do not trade on publicly traded exchanges….so I would think that structured products would be beyond their jurisdiction.

Blurtman says:

February 8, 2011 at 11:43 am

Is it possible that one’s mortgage payment stream is going to a trust that was not assigned one’s mortgage nor the promissory note? If so, that could be interesting. Perhaps shareholders in the entities that actually possess the paper should lobby for assignment of the revenue stream to their bank. Think of it, unrecognized assets and revenue. Go for it!

KnotRP says:

February 8, 2011 at 11:50 am

As always, Blazing Saddles has an appropriate quote:

Governor William J. Le Petomane: Holy underwear! Sheriff murdered! Innocent women and children blown to bits! We have to protect our phoney baloney jobs here, gentlemen! We must do something about this immediately! Immediately! Immediately! Harrumph! Harrumph! Harrumph!

Anonymous Comment says:

February 9, 2011 at 5:21 pm

That’s exactly how I feel. Sad that it has to be – if.

Leftback says:

February 8, 2011 at 12:09 pm

We may avoid a Banana Republic outcome if the law were to be enforced.

F. Beard says:

February 8, 2011 at 5:04 pm

Reforming Wall Street and Washington by begging for change at the top is not. attempter

I’m not begging for anything; I’m just brainstorming a solution to the problem.

But I applaud your efforts; some won’t see the light till they feel some heat.

By all means, “jubilate in place”. Let the bloody bankers scream for a bailout of the entire population when they realize it would save them too.

attempter says:

February 9, 2011 at 5:43 am

I’m all for the idea of bailing out every citizen. If they can print for the Bailout and all the rest of the corporate welfare, they can certainly print for that.

And it’s a no brainer that we must take our money creation back from the parasites.

http://attempter.wordpress.com/2010/12/04/lets-take-back-our-money/
- F. Beard says:
  
  February 9, 2011 at 6:04 am
  
  Nice site you have. I like much of your thinking.
  - attempter says:
    
    February 9, 2011 at 3:48 pm
    
    Thanks. Come back anytime.

scraping_by says:

February 8, 2011 at 5:29 pm

“Note that we’ve been surprised at the complacency of investors regarding the losses banks are taking on the issue of standing in courts all over the US.”

The hallmark of a financial mania is that buying and selling all out of proportion to the intrinsic value of the item being bought and sold. Most of the investors didn’t care if they were trading mortgages, securities on mortgages, derivatives of securities, or derivatives of derivatives. It was a supply-side bubble with little or no stain of reality.

This came up in the IMF article over the weekend. The idea that widespread deadbeat borrowers in the lower 95% were responsible for the party ending was tarted up with graphs and polysyllables. The end of the cash flood into that closed system ran it down, not profligate working people hitting the wall. Outside the traders, nobody got ahead.

There were probably a few squareheads who really cared what was upholding the security, buy and hold types who thought of it as a long term cash stream. Whether they were the majority of buyers, they weren’t the majority of action. The action types are watching the banks eat losses like the rest of us, from the outside.

F. Beard says:

February 9, 2011 at 1:44 pm

Sure they messed you/us/the economy over, but that does not mean we should use their behavior as justification for our own. Anonymous Comment

If “free” houses result from the workings of the legal system; then so be it. Those that live by a strict interpretation of the law (the banks) and show no mercy may in term be denied consideration.

Fractional reserve lending in a government enforced monopoly money supply cheats both savers AND borrowers. A free house for the borrower only partially addresses the injustice but it is better than nothing.

If the savers are opposed to a general bailout (which would compensate them too) then they are risking hurting only themselves.

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