Morgenson Sort of Acknowledges Problems with Residential MBS Rights to Foreclose

Gretchen Morgenson has written an uncharacteristically cautious piece, “One Mess That Can’t Be Papered Over,” which in a rather abstract manner, discusses the issue we’ve been harping on for over a month, that the trusts that were established to hold the promissory notes for residential real estate loans and the related liens (the mortgage) may in fact not have taken the steps necessary for them to have ownership.

The story only gives a rather hazy account of the issues, and also pulls its punches as to the implications. It does signal the problems could be serious for specific deals, but pointedly steers clear of suggesting they are widespread.

While it’s good to see a recognized writer acknowledge these issues, I’m puzzled as to the sketchy description and the pulled punches. It might simply have been vagaries of deadlines, however, that Morgenson couldn’t confirm as many details as she needed to to run a more definitive piece.

I wish the story line were clearer. The issue, as we’ve indicated, that some, and we have reason to believe many, residential backed mortgage securitizations failed to take the measures stipulated in the governing contract, the pooling and servicing agreement, for the trust to obtain the promissory notes. As we explained earlier:

The pooling and servicing agreement, which governs who does what when in a mortgage securitization, requires the note to be endorsed (just like a check, signed by one party over to the next), showing the full chain of title, and the minimum conveyance chain is A (originator) => B (sponsor) => C (depositor) => D (trust). The note, which is the borrower’s IOU, is the critical document in 45 states. The mortgage, which is the lien, is a mere accessory to the note and can be enforced only by the proper note holder (the legalese is “real party of interest”).

The wee problem is that this apparently never done (I’ve been told one person trying to track down a particular note found it, at Countrywide. The guy who wandered down the corridor to produce it from his files claimed that Countrywide kept all the notes on its deals, and would send them out on request when someone needed them in a foreclosure. If this is true, it indicates there are pervasive and not readily remedied problems. The required endorsements were never done).

Why is this serious? The cure for the mortgage documents puts the loan out of eligibility for the trust. In order to cure, on a current basis, they have to argue that the loan goes retroactively back into the trust. This is the cure that the banks have been unwilling to do, because it is a big problem for the MBS. So instead they forge and fabricate documents.

There are actually two impediments. The first is that the note had to go through parties specified in the pooling and servicing agreement, in recent deals, at least two between the originator and the trust. Why so many moving parts? Because the investors wanted to make sure no creditor of the originator could later come back and demand the loans back, in case the originator failed close to the date of a securitization. In other words, the investors sough “bankruptcy remoteness” and they also wanted no exposure to claims by the FDIC. So the parties in between the originator and the trustee had to be independent (this independence was often nominal; all it took was one independent director) for the sales to be deemed “true sales” (crucial to establishing bankruptcy remoteness).

A second issue was timing. All the notes were supposed to be conveyed to the trust by closing. However, it did have a period post closing for clean-up, which effectively extended the time frame for any particular note to 90 days after closing (for some deals, the post closing period was only 60 days). After that, the exceptions permitted were very limited. And these trust were almost always were governed by New York law. New York law was selected because it is very well settled, but the flip side is it is also particularly unforgiving. New York trusts can operate only as stipulated.

Some of these ideas are included in the Morgenson piece, but I’m not certain this is at all clear to someone who lacks the full picture.

The notes, as Morgenson indicates via a quote from a real estate lawyer, normally remedy breaks in the conveyance chain. But that presupposes we are only looking at real estate law considerations. When you look at the additional complications created by the mortgage securitization, messing up the conveyance chain creates problems that look insurmountable. She eventually gets to the real issue:

For example, the common practice of transferring a promissory note underlying a property to a trust without identifying it, known as an assignment in blank, may run afoul of rules governing the structure of the security.

“The danger here is that the note would not be considered a qualified mortgage,” said Robert Willens, an authority on tax law, “an obligation which is principally secured by an interest in real property and which is transferred to the Remic on the start-up day.” If, within three months, substantially all the assets of the entity do not consist of qualified mortgages and permitted investments, “the entity would not constitute,” he said…

What if a loan originator failed to provide documentation substantiating that what’s known as a “true sale” actually occurred when mortgages were transferred into trusts — documentation that is supposed to be provided no longer than 90 days after a trust is closed? Well, in that situation, a true sale may not have legally happened, and that doesn’t appear to be a problem that can be smoothed over by revisiting and revamping the paperwork.

“The issue of bad assignment has many implications,” said Christopher Whalen, editor of the Institutional Risk Analyst. “It does question whether the investor is secured by collateral.”

In other words, were the loans legally transferred into the trust, and, if not, do the trusts lack collateral for investors to claim?

A mortgage securitzation lawyer, via e-mail, went through some of the ways this might play out:

It’s clear the parties intended a transfer. But it appears that they did not document the transfer. Based on the agreement, they described how the transfer should take place and then didn’t do it, apparently. Unfortunately, while this might have been the intention of the parties, they can’t produce any real, documented evidence that this mortgage is owned by the trust. I’ve provided affidavits that state that the requirements for a mortgage to be part of the trust are clear in the documents, that mortgages can’t be added to the trust after start up (as servicers have tried to argue), and that I see no evidence that this trust owns this loan.

On one hand, the problem is easily cured – the party who is the documented owner of the loan could foreclose (the original lender). The problem with this is that the proceeds of the foreclosed property, including the recoveries intended to reimburse the servicer for advances, would have no mechanism for getting back into the trust.

If the original lender foreclosed, took title and liquidated the loan, accountants would have an issue with how the proceeds could possibly end up back with the trust. The result would be a total loss for the trust for that loan.

The servicer’s attorneys have no desire to go this route – it terrifies them.

The servicer’s attorney’s could argue for some sort of documentary exception – that a mistake was made and the intention was for the trust to own the mortgage – an appeal to equity or fairness. Unfortunately, in many cases, they already submitted an affidavit stating that they had proper title and full right to foreclose in the name of the trust. So going this route would expose them to perjury.

The appeal to equity or fairness, given the intent of the parties to the trust and the relatively minimal harm to the borrower, seems like a logical route – except that a number of judges would argue that fairness might dictate a fair outcome for the borrower, such as a real modification. And you still have the issue of the possible damages and legal expenses for a wrongful foreclosure action.

The big argument people make against this approach is that the borrower is just a deadbeat who has failed to pay their mortgage, so there’s no reason why the borrower should be entitled to some sort of gain or benefit. While this may be true, real estate law is pretty clear – the party holding title is the one who should foreclose. Otherwise, someone else could come along after the improper foreclosure and be the actual title holder and sue the borrower for foreclosure and loan repayment again. The borrower is entitled to protection against this.

Most people assume that the parties followed the terms of the trust agreement – it’s so basic and fundamental to all MBS. It is hard to grasp that they screwed this up. As a result, it takes some work to pull through everything and see what actually happened. Without the mortgage documents showing the current title, combined with the affidavits from the foreclosure attorney, I wouldn’t have believed it myself.

As we’ve been saying, this is going to be difficult to resolve. Yet the powers that be keep acting as if they keep up the “nothing to see here” talk, this problem will abate. That is as likely to succeed as putting a band-aid on a gunshot wound.

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  1. attempter

    On one hand, the problem is easily cured – the party who is the documented owner of the loan could foreclose (the original lender). The problem with this is that the proceeds of the foreclosed property, including the recoveries intended to reimburse the servicer for advances, would have no mechanism for getting back into the trust.

    If the original lender foreclosed, took title and liquidated the loan, accountants would have an issue with how the proceeds could possibly end up back with the trust. The result would be a total loss for the trust for that loan.

    The servicer’s attorneys have no desire to go this route – it terrifies them.

    Every time I read something like this my first gut thought is to doubt there’s anyone in the system who isn’t willing to break any and every rule and law.

    But then I figure that a massive criminal conspiracy within the system must still run up against the same inertial obstacles revolutionaries have often complained about – that existing professional cadres, no matter what the personal intent of their members, are still as a group committed to certain ways of doing things. It’s their professional culture, and even as intentional criminals they must still often feel the need to dot the i and cross the t.

    And then the system is supposed to be set up to maximize the loot flow upward and minimize leakage at the lower levels. Having a fundamentally perverted but still mechanically functional rule of law and process of bureaucracy is supposed to help effect this.

    I’m understanding better why the Nazis were always as punctilious as possible about “legality” for all their crimes.

    So with any luck the half-baked kleptocracy, having run its crimes so far out ahead of its “laws”, will be unable to fix this mess even with its own pseudo-legal contraptions, and will sustain a mortal blow here.

    1. DownSouth

      In his essay “Love, Law and Civil Disobedience” Martin Luther King made the same observation as to how the Nazis were always so careful to make their crimes “legal.” “We must never forget,” King wrote, “that everything that Hitler did in Germany was ‘legal.’ It was illegal to aid and comfort a Jew, in the days of Hitler’s Germany.”

      As Yves’ security lawyer acquaintance said: “It is hard to grasp that they screwed this up.” The criminal bankster cartel ran its crimes “far out ahead of its ‘laws’,” as attempter put it.

      A friend of a friend of mine was the warden of the prison in Pecos, Texas. One day I had lunch with the two, and I will never forget something the warden told me. “You have to understand the criminal mind,” he said. “The criminal begins by thinking he’s a normal human being. Then he gets the notion that he’s 6’8 and bullet-proof. Then there’s the phase where he thinks he’s 7 foot tall and can jump over 10-story buildings, that’s right before he gets to thinking he’s 8 foot tall, invisible and can walk through 10-story buildings.”

      Each time someone with a criminal mind gets away with something, he feels empowered to get away with even more flagrant misdeeds.

      So in lieu of what the warden said, none of this seems surprising at all.

    2. DownSouth

      An alternate explanaton is that the criminal bankster cartel doesn’t have complete and total control of the law-making apparatus. Not yet at least.

      It’s like Orwell wrote in his 1941 essay “England Your England”:

      Where are the rubber truncheons, where is the castor oil? The sword is still in the scabbard, and while it stays there corruption cannot go beyond a certain point. The English electoral system, for instance, is an all but open fraud. In a dozen obvious ways it is gerrymandered in the interest of the monied class. But until some deep change has occurred in the public mind, it cannot become completely corrupt. You do not arrive at the polling booth to find men with revolvers telling you which way to vote, nor are the votes miscounted, nor is there any direct bribery.

      1. attempter

        We’ve already seen thugs at the polls “challenging” mostly minority voters. The goal there is clearly to intimidate perceived Democratic voters from showing up at all.

        We can expect that to escalate radically, with the thugs orechestrated by both kleptocratic parties, if there’s ever a serious alternative party.

      2. Doug Terpstra

        “You do not arrive at the polling booth to find men with revolvers telling you which way to vote, nor are the votes miscounted, nor is there any direct bribery.”

        I have to agree with Attempter here. Absent the revolvers, perhaps, we clearly have passed that point. Recall Bush v. Gore and the Baker/GOP-staged riot in Dade County; also the related SCOTUS crime in 2000, and again in 2009, legalizing bribery (about as direct as it can get) in Citizens Untied.

    3. Koshem Bos

      “With luck,” luck has nothing to do with it. The law has become immoral after Bush v Gore and Citizen United. It is almost a Soviet Union law where violation of the law by the powerful is wide and unchecked.

      If one looks differently, the election of Obama, as candidate and as president, was forced by Wall Street and the upper middle class in the guise of change with clear intention to change nothing.

      In short, we are trapped by illegality and fakery with no obvious escape.

      1. attempter

        Maybe “luck” isn’t the best term, though it’s just a term of expression, and we shouldn’t be quibbling about terms.

        The point is that as an historical rule circumstances have to break a certain way, beyond the conscious efforts of any combatant, for the underdog to win.

        That’s why it’s so wrongheaded and cowardly (or intentionally demoralizing and defeatist) the way so many claim in various ways, “we shouldn’t even try, the odds are so stacked against us”, or conversely demand that those calling for action provide a total prospectus for how actions will mathematically lead to victory.

        That’s not how it works. The people always need a little help from – luck, fate, circumstance, the force of history, God, however one conceives it.

        But in fact those opportunities occur far more often than the people have roused themselves to seize the opportunity. That’s why it’s so imperative to try, to fight, no matter how bad the odds look at a given time.

        1. DownSouth

          Finally, the method of nonviolence is based on the conviction that the universe is on the side of justice. It is this deep faith in the future that causes the nonviolent resister to accept suffering without retaliation. He knows that in his struggle for justice he has cosmic companionship. This belief that God is on the side of truth and justice comes down to us from the long tradition of our Christian faith. There is something at the very center of our faith which reminds us that Good Friday may reign for a day, but ultimately it must give way to the triumphant beat of the Easter drums. Evil may so shape events that Caesar will occupy a palace and Christ a cross, but one day that same Christ will rise up and split history into A.D. and B.C., so that even the life of Caesar must be dated by his name. So in Montgomery we can walk and never get weary, because we know that there will be a great camp meeting in the promised land of freedom and justice.
          –Martin Luther King, Jr., “Nonviolence and Racial Justice”


          And yet the universal conviction proved wrong—-stupendously wrong. Human freedom had not died under totalitarian rule.


          For Havel, this understanding that action properly begins with a predisposition to truth—-often considered a merely private or personal endowment—-has practical consequences that are basic to an understanding of political power:

          “Under the orderly surface of the life of lies, therefore, there slumbers the hidden sphere of life in its real aims, of its hidden openness to truth. The singular, explosive, incalculable political power of living within the truth resides in the fact that living openly with the truth has an ally, invisible to be sure, but omnipresent: this hidden sphere.”

          Havel is describing, in words that anticipated the fall of the Soviet Union before that event had occurred, a secular variant of what Gandhi had called “truth force.” [or as MLK intoned, “God is on the side of truth and justice.”] If Michnik’s words anticipated the sudden rise of Solidarity, Havel’s bore fruit in the rise of the resistance movement in Czechoslovakia called Charter 77 and in the “velvet revolution” that put an end to communist power in Czechoslovakia.
          –Jonathan Schell. The Unconquerable World

  2. Nathanael

    So some much bigger questions.

    If the trust never constituted, under NY law, isn’t *everything done by the trust* a fraud — including the issuance of the MBS, which is then securities fraud?

    And therefore, can’t the MBS investors sue to request repayment of their initial investments (assuming they haven’t gotten the principal back yet)? (Sue the trustees, I assume.)

      1. freepressmyass

        wow, really glad to see that Daliy News article.
        First time I’ve seen mentioned banks trying to foreclose on homes that have been paid in full.
        Nost egregious is the pretending going on with our corporate shills.

        I personally read in 2004, that the FBI’s investigation into the subprime mortgage complaints revealed rampant fraud. Then Bush shut it down.

        So, anyone expressing surprise or calling it a paperwork glitch is a lying bastard. This whole thing is deliberate.

  3. heavyjetcaptain

    “A second issue was timing. All the notes were supposed to be conveyed to the trust by closing.”

    I agree. But even judges like Judge Eileen Hollowell, who recently sanctioned Saxon $5,000 for submitting a false POC and MRS in a Chapter 13 case, feel this argument is irrelevant, at least as far as the struggling homeowner is concerned.

    And the regulatory agencies (IRS, SEC)? We all know they will do nothing about it because both parties are utterly controlled by the banksters and are being told to sweep this under the rug as quickly and quietly as possible. Wait until after the elections, then the politicians know there will be no consequences for openly bailing out these white collar criminals.

    – – – – – – – – – – – – – – Footnotes – – – – – – – – – -8
    Debtor argues that any assignment of the Note after the “cutoff date” of the PSA would be ineffective because it would violate REMIC and the PSA terms. (Resp’t’s Resp. to Mot. 2, DE #40.) However, an assignment [*14] to the Pool is not necessarily ineffective after the “cutoff date.” As noted by the court in Samuels: “Even if this direct assignment were somehow violative of the PSA, giving rise to unfavorable tax, regulatory, contractual, and tort consequences, neither the PSA nor those consequences would render the assignment itself invalid.” 415 B.R. at 22.
    – – – – – – – – – – – – End Footnotes- – – – – – – – – – – –

    In re Tarantola, 2010 Bankr. LEXIS 2435, at **13-14 (Bankr. D. Ariz. decided July 29, 2010).

    1. svsm

      The tax consequences for completing these transfers now appear to be huge. Also, if they attempt to complete these transfers now, can the investors be forced to accept a non-performing asset?

    2. Yves Smith Post author

      The decisions still vary by judge and jurisdiction, and Arizona has been banker friendly. Also, I don’t know whether the defendant in that case brought any New York trust law experts to testify. Trust law in other states is more forgiving, and it does not appear from the language you cited, that the judge knew the NY trust law impediment, which in effect meant all the parties wanted the terms of the agreement adhered to strictly.

      And this was also before the widespread bank improprieties got any press. The usual approach banks took in these cases was to say, in effect, “I’m a bank, that’s a deadbeat. Who are you going to believe?” That gets you less far than it once did.

      1. heavyjetcaptain

        The Arizona case cites Samuels, which is a Massachusetts case. I hope you are right, though. Maybe the courts will start to look at things differently once this information gets out into the MSM. Without blogs like NC, none of this information would have ever made it to the MSM. Sadly, the MSM is still trying to figure out the difference between a Warranty Deed and a Deed of Trust.

  4. Richard Kline

    Yves: “Why so many moving parts? Because the investors wanted to make sure no creditor of the originator could later come back and demand the loans back, in case the originator failed close to the date of a securitization. In other words, the investors sough “bankruptcy remoteness” and they also wanted no exposure to claims by the FDIC.” This, to me, has been the heart of why securitization of mortgages has functioned as a crime by intent. One can think of valid reasons for assembling mortgage trusts. The intended and quite straightforward function of _securitization_ of such trusts has seemed to me to: a) permit a security holder a right to collect a revenue stream while b) having no liability whatsoever to the one obliged to provide revenue. This is the magic of capitalism at work, Version ‘Financial Innovation,’ all profit, no liability. Is anyone surprised that the process was quickly exploited to venality beyond the far perimeter of sanity? As the borrower on the mortgage, someone holds the lien obligating you to pay but they have no liability to you for anything in the origination, anything in the service performance, or anything substantially affecting the loan performance. It’s a ‘debt slavery instrument,’ is what it is, this securitization thing.

    Mortgage securitization counselor: “If the original lender foreclosed, took title and liquidated the loan, accountants would have an issue with how the proceeds could possibly end up back with the trust. The result would be a total loss for the trust for that loan.

    The servicer’s attorneys have no desire to go this route – it terrifies them.

    The servicer’s attorney’s could argue for some sort of documentary exception – that a mistake was made and the intention was for the trust to own the mortgage – an appeal to equity or fairness. Unfortunately, in many cases, they already submitted an affidavit stating that they had proper title and full right to foreclose in the name of the trust. So going this route would expose them to perjury.”

    Let’s all sing along: ” . . . Betweeen the Devil and the deep bluuuuuuuue sea! *HAHAHAHAHAHAHAHHHHAAAA*” Couldn’t happen to a better bunch. Kind sorry thing for all those ‘investors’ who purchased MSB paper for their high returns. But then, this commerce thing isn’t all upside I hope somebody told them.

  5. pierre

    I don’t want to speculate what is going on inside Morgenson’s (normally well researched) brain. Generally across media, though, everything has been said but no one is taking the firm stand of “the entire enchilada is corrupt and broken”. It is a game of chicken. If, in fact, the entire MBS market is fraudulent, the consequences are staggeringly severe. People might stop paying their mortgage, investors will bankrupt the banks and our tax money will have to bail them out – again. The US financial system will be a laughing stock of the world – Wall Street will be toast, and probably bring down most of the Europeans as well. It will be 2008 all over again but worse.

    I betcha neither Morgenson or other investigative reporters want to be betting their careers on this. It is very clear that while reporters can bring down Presidents, they can’t bring down Wall Street. No one can. So far.

  6. fiscalliberal

    Yves – thanks again for providing background on this topic. Now, as the rich rogue attourneys smell the blood in the water, your readers are going to be able to enjoy the show. Nothing better then a den of thieves getting their just due and part of their losses will be going into rouge attorneys pockets.

    Get a god supply of popcorn – the show could get interesting

  7. Wild Bill

    Shopping for jurisdiction is one of the key ways the TBTF banks are ruining our country. We all know how they shopped for the Office of Thrift Supervision so they could run the off-balance sheet portion of the scam. And we’re all aware of how Kent Conrad holds power: His state is the one that allows usurious interest rates on credit cards.

    You know the New York Assembly will clear up the trust problems by enacting a law written by Rodgin Cohen. Hell, he writes national policy, it’s nothing for him to pen a state law. Nobody has more power in NY than the trusts — they’re laughing at this.

    And as soon as the lame duck session gets back, they’ll pass that national electronic notarization that Obama vetoed, then decide which state will harbor the lowest-level protection for consumers and establish their national center.

    And there’s not a damn thing you, I or we can do about it.

    1. DownSouth

      Wild Bill said: “And there’s not a damn thing you, I or we can do about it.”

      That sort of cynicism and pessimism, which only leads to surrender, is self-fulfilling.


      Loss of hope, rather than loss of life, is the factor that really decides wars, battles, and even the smallest combats. The all-time experience of warfare shows that when men reach the point where they see, or feel, that further effort and sacrifice can do no more than delay the end, they commonly lose the will to spin it out and bow to the inevitable.
      –Liddell Hart


      The social question began to play a revolutionary role only when, in the modern age and not before, men began to doubt that poverty is inherent in the human condition, to doubt that the distinction between the few, who through circumstances or strength or fraud had succeeded in liberating themselves from the shackles of poverty, and the labouring poverty-stricken multitude was inevitable and eternal. This doubt, or rather the conviction that life on earth might be blessed with abundance instead of being cursed by scarcity, was prerevolutionary and American in origin: it grew directly out of the American colonial experience.
      –Hannah Arendt, On Revolution


      Rage is by no means an automatic reaction to misery and suffering as such; no one reacts with rage to an incurable disease or to an earthquake or, for that matter, to social conditions that seem to be unchangeable. Only where there is reason to suspect that conditions could be changed and are not does rage arise. Only when our sense of justice is offended do we react with rage, and this reaction by no means necessarily reflects personal injury, as is demonstrated by the whole history of revolution, where invariably members of the upper classes touched off and then led the rebellions of the oppressed and downtrodden.
      –Hannah Arendt, Crises of the Republic


      If it’s inevitable, just relax and enjoy it.
      –Clayton Williams, Texas Republican gubernatorial candidate, in a statement
      comparing rape to the weather.


      [The Chicago School] is saying that people behave according to individual advantage and are not much swayed by appeals to ideology, religion, culture, altruism, or other ideas in the mind (beyond individual utility). What Chicago is doing is spreading this particular idea with all the power of a modern religious movement.
      –Robert H. Nelson, Economics as Religion

      1. john

        Wild Bill is right about where the next act is likely in this farce, but the hands up fatalism is embarrassing! Come on, Bill get Wild: have some coffee! To add one of my favorite quotes to DownSouth’s:

        “For no society of men whatever can preserve its unity and continue to exist, if the criminal element is not punished, since, if the diseased member does not receive proper treatment, it causes all the rest, even as in our own physical bodies, to share in its affliction … because when the wrong doers have power they become more daring, and corrupt the excellent also by causing them to grow dejected and to believe that they will obtain no benefit from right behavior. For wherever the insolent element has the advantage, there inevitably the decent element has the worst of it; and wherever wrong doing is unpunished, there self restraint also goes unrewarded … for it is not by any characteristic of birth that what is friendly is distinguished from what is hostile, but it is determined by mens habits and actions, which if they are good, can make that which is alien like unto itself, but if bad can alienate everything, even that which is alien.” Julius Caesar from 49 BC before his moral rot set in.

        1. DownSouth


          Great quote.

          Just to put it in historical context:

          During the third and second centuries before Christ a Roman oligarchy organized a foreign policy and a disciplined army, and conquered and exploited the Mediterranean world. The wealth so won was absorbed by the patricians, and the commerce so developed raised to luxurious opulence the upper middle class. Conquered Greeks, Orientals, and Africans were brought to Italy to serve as slaves on the latifundia; the native farmers, displaced from the soil, joined the restless, breeding proletariat in the cities, to enjoy the monthly dole of grain that Caius Gracchus had secured for the poor in 123 B.C. Generals and proconsuls returned from the provinces loaded with spoils for themselves and the ruling class; millionaires multiplied; mobile money replaced land as the source or instrument of political power; rival factions competed in the wholesale purchase of candidates and votes; in 53 B.C. one group of voters received ten million sesterces for its support. When money failed, murder was available: citizens who had voted the wrong way were in some instances beaten close to death and their houses were set on fire. Antiquity had never known so rich, so powerful, and so corrupt a government. The aristocrats engaged Pompey to maintain their ascendance; the commoners cast in their lot with Caesar; ordeal of battle replaced the auctioning of victory; Caesar won, and established a popular dictatorship. Aristocrats killed him, but ended by accepting the dictatorship of his grandnephew and stepson Augustus (27 B.C.). Democracy ended, monarchy was restored; the Platonic wheel had come full turn.


          After the breakdown of Roman democracy in the class wars of the Gracchi, Marius, and Caesar, Augustus organized, under what in effect was monarchial rule, the greatest achievement in the history of statesmanship—-that Pax Roman which maintained peace from 30 B.C. to A.D. 180 throughout an empire ranging from the Atlantic to the Euphrates and from Scotland to the Black Sea. After him monarchy disgraced itself under Caligula, Nero, and Domitian; but after them came Nerva, Trajan, Hadrian, Antonius Pius, and Marcus Aurelius—-“the finest succession of good and great sovereigns,” Renan called them, “that the world has ever had.” “If,” said Gibbon, “a man were called upon to fix the period during which the condition of the human race was most happy and prosperous, he would without hesitation name that which elapsed from the accession of Nerva to the death of Marcus Aurelius. Their united reigns are possibly the only period of history in which the happiness of a great people was the sole object of government.” In that brilliant age, when Rome’s subjects complimented themselves on being under her rule, monarch was adoptive: the emperor transmitted his authority not to his offspring but to the ablest man he could find; he adopted this man as his son, trained him in the functions of government, and gradually surrendered to him the reins of power. The system worked well, partly because neither Trajan nor Hadrian had a son, and the sons of Antoninus Pius died in childhood. Marcus Aurelius had a son, Commodus, who succeeded him because the philosopher failed to name another heir; soon chaos was king.
          –Will & Ariel Durant, The Lessons of History

          1. wunsacon


            So, on the one hand, you say “don’t give up hope”. But, on the other, you’re comparing us to Rome. And I ask you: no matter how many generations of scientists contributed to our technology today, are Americans wiser than Romans?

            No, you don’t have to respond to my despondent rhetoric. ;-) Anyway, thanks to you and John for the historical banter.

          2. DownSouth


            There are a rather large group of “evolutionary” biologists and psychologists out there (Sahlins, Alexander, Dawkins, Blackmore, Tooby, Cosmides, Buss) who, as David Sloan Wilson observes, believe that “everything that has taken place since the advent of agriculture counts for nothing.” As Wilson explains:

            The second basic fact that we must understand from an evolutionary perspective is that moral systems include an open-ended cultural dimension in addition to an innate psychological dimension. Our genetically evolved minds make it possible to have a moral system, but the specific contents of moral systems can change within groups and vary widely among groups, with important consequences for survival and reproduction. Far from leading to the caricature of genetic determinism that limits the capacity for change, our innate psychology creates a capacity for change by setting in motion a process of cultural evolution.


            [T]he basic genetic architecture of the human mind has probably not changed much since the advent of agriculture approximately ten thousand years ago. As we have seen, when evolution is interpreted too narrowly as genetic evolution, all of recorded history becomes a mystery from an evolutionary perspective, something that happened but cannot be explained. The best we can do is try to understand how the stone-age mind is likely to react to the strange new world for which it is not prepared. An expanded view of evolution allows us to interpret recorded history as a fossil record of cultural evolution in action.
            –David Sloan Wilson, Darwin’s Cathedral

            A much more poetic explanation, in the tradition of the old historical and institutional school, is given by Will and Ariel Durant:

            In the debate between ancients and moderns it is not at all clear that the ancients carry off the prize. Shall we count it a trivial achievement that famine has been eliminated in modern states, and that one country can now grow enough food to overfeed itself and yet send hundreds of millions of bushels of wheat to nations in need? Are we ready to scuttle the science that has so diminished superstition, obscurantism, and religious intolerance, or the technology that has spread food, home ownership, comfort, education, and leisure beyond any precedent? Would we really prefer the Athenian agora or the Roman comitia to the British Parliament or the United States Congress, or be content under a narrow franchise like Attica’s, or the selection of rulers by a praetorian guard? Would we rather have lived under the laws of the Athenian Republic or the Roman Empire than under constitutions that give us habeas corpus, trial by jury, religious and intellectual freedom, and the emancipation of women? Are out morals, lax though they are, worse than those of ambisexual Alcibiades, or has any American President imitated Pericles, who lived with a learned courtesan? Are we ashamed of our great universities, our many publishing houses, our bountiful public libraries? There were great dramatists in Athens, but was any greater than Shakespeare, and was Aristophanes as profound and humane as Moliere? Was the oratory of Demosthenes, Isocrates, and Aeschines superior to that of Chatham, Burke, and Sheridan? Shall we place Gibbon below Herodotus or Thucydides? Is there anything in ancient prose fiction comparable to the scope and depth of the modern novel? We may grant the superiority of the ancients in art, though some of us might still prefer Notre Dame de Paris to the Parthenon. If the Founding Fathers of the United States could return to America, or Fox and Bentham to England, or Voltaire and Diderot to France, would they not reproach us as ingrates for our blindness to our good fortune in living today and not yesterday—-not even under Pericles or Augustus?

            We should not be greatly disturbed by the probability that our civilization will die like any other. As Frederick asked his retreating troops at Kolin, “Would you live forever?” Perhaps it is desirable that life should take fresh forms, that new civilizations and centers should have their turn. Meanwhile the effort to meet the challenge of the rising East may reinvigorate the West.

            We have said that a great civilization does not entirely die—-non omnis moritur. Some precious achievements have survived all the vicissitudes of rising and falling states: the making of fire and light, of the wheel and other basic tools; language, writing, art, and song; agriculture, the family, and parental care; social organization, morality, and charity; and the use of teaching to transmit the lore of the family and the race. These are the elements of civilization, and they have been tenaciously maintained through the perilous passage from one civilization to the next. They are the connective tissue of human history.


            The heritage that we can now more fully transmit is richer than ever before. It is richer than that of Pericles, for it includes all the Greek flowering that followed him; richer than Leonardo’s, for it includes him and the Italian Renaissance; richer than Voltaire’s, for it embraces all the French Enlightenment and its ecumenical dissemination. If progress is real despite our whining, it is not because we are born any healthier, better, or wiser than infants were in the past, but because we are born to a richer heritage, born on a higher level of that pedestal which the accumulation of knowledge and art raises as the ground and support of our being. The heritage rises, and man rises in proportion as he receives it.

            History is, above all else, the creation and recording of that heritage; progress is its increasing abundance, preservation, transmission, and use. To those of us who study history not merely as a warning reminder of man’s follies and crimes, but also as an encouraging remembrance of generative souls, the past ceases to be a depressing chamber of horrors; it becomes a celestial city, a spacious country of the mind, wherein a thousand saints, statesmen, inventors, scientist, poets, artists, musicians, lovers, and philosophers still live and speak, teach and carve and sing. The historian will not mourn because he can see no meaning in human existence except that which man puts into it; let it be our pride that we ourselves may put meaning into our lives, and sometimes a significance that transcends death. If a man is fortunate he will, before he dies, gather up as much as he can of his civilized heritage and transmit it to his children. And to his final breath he will be grateful for this inexhaustible legacy, knowing that it is our nourishing mother and our lasting life.

          3. Doug Terpstra

            Great stuff, DownSouth, powerful glass-half-full perspective on our modern ‘plight’. I know you appreciate the Reverend MLK’s related outlook in keeping hope alive and realizing our power—power to imagine, envision, and “see” the promised land even if we don’t see it with these eyes:

            “When our days become dreary with low-hovering clouds of despair, and when our nights become darker than a thousand midnights, let us remember that there is a creative force in this universe, working to pull down the gigantic mountains of evil, a power that is able to make a way out of no way and transform dark yesterdays into bright tomorrows. Let us realize the arc of the moral universe is long but it bends toward justice.”

            “I’ve seen the promised land. I may not get there with you. But I want you to know tonight, that we, as a people will get to the promised land.”

    1. mindful

      Are separate financial statements issued for the MBS trust, or are they incorporated into another entity’s financial statements? Either way, if financial information for the trusts were given a clean opinion, it sounds as if some CPA firms may be at risk. If nothing else, it is probably fair to say that severe internal control deficiencies existed with the trusts, or with the sponsors of those trusts. If those trusts were subject to Sarbanes-Oxley, so much the worse.

      1. losses are ok?

        not all deals required an audit. and when there is provision for one, it is generally (but not always) at the request of a majority of the holders and at their expense. Under the rubric of “be careful what you ask for” the investors need to decide what their end game is. If there is a sizable putback to the originators/sponsors, then the game will play out differently. The “nothing to see here” mantra is logical to the players who are more concerned with not having to face the music. (ok, I am done with cheesy cliches!)

        We have to keep repeating a different mantra, fraud is fraud and organized fraud onto our court system is not acceptable and there are consequences. We as a society cannot forgive it or ignore it or excuse it simply because it is the easier choice.

        What a shame it all is.

    2. ArmchairRevolutionary

      This says something about the quality of candidates available to the people. Alex Sink, a major participant in the mortgage mess, versus Rick Scott, CEO of Columbia/HCA when it was indited for massive medicare fraud. Criminal versus criminal for the governorship of Florida.

  8. Moshi

    You may find these resources useful: This is a link to a very complete paper analyzing the procedural issues and presented to the American Bankruptcy Institute in 2009

    I also found this summary by Max Gardner to be very useful and technically specific on the issues associated with endorsement of mortgages in blank:–a-bakers-dozen.

  9. Tale of Woe

    When ‘Martha Stewart’ Morgenson starts to acknowlege some problems that’s a good thing. From here – she has that cloying corporate-scribe talent, refusing to be a good reporter reporter lest it offend the kleptocracy.

  10. Siggy

    This Foreclosure Fraud is about due process. People should be going to jail!

    I read Morgenson’s pieces with interest and I frequently find that damaging observations must be inferred. Why? Getting sued is not a walk in the park. Can’t say that I blame her or her editor. If she were to write more explicitly, would that effort cloud any potential prosecution? Possibly.

    What’s important to me is did the piece give me enough information to understand the topic? Usually it’s quite sufficent. What matters to me is do I want information or a polemic? I want information and what I discern from all of the material available, here and elsewhere is that there is very serious trouble in the MBS space.

    Now should that trouble bring down a large bank, that would be more than Schadenfreude for me; one hopes that the dissolution of the failing bank/s will be undertaken by way of a conservatorship, the removal of the current management, shareholders get nothing, unsecured creditors get nothing and secured creditors get a big haircut and there is the sale of what’s valuable to entirely new ownership. In that hope I shall not hold my breath.

    The Banking Behemoths are not inherently too big to fail, it’s that banking industry sees their failure as being terribly incovenient and a direct threat to profits. What I see is this inexorable march from monopolistic competition to oligoply to cartel all in the presumption that the enterprise is scalable and it’s simply more cost effective to be very big.

    And now comes B of A, there shall no longer be free checking accounts. Question; is that checking account a bailment or a loan? If the bank uses the checking account funds to fund loans, that checking account is a loan and you, dear checking account holder, are entitled to some compensation, would interest interest you? Now if it’s a bailment then, you dear checking account holder, are entiteld to pay a fee for the safekeeping and clearing of your funds. That implies that the bank can’t lend against your checking account balance. What hubris, B of A wants it both ways.

    Are you surprised? Why??

    1. Dr. Pitchfork

      “And now comes B of A, there shall no longer be free checking accounts. Question; is that checking account a bailment or a loan?…What hubris, B of A wants it both ways.”

      How quaint this all sounds. Some BAC spokes-snake was saying the other day that checking accounts were never really “free” in the first place, because before Frankendodd, they had always counted on getting fees out of you. I guess the legal status of your money, and the meaning of basic terms like “free,” is whatever the hell they want it to be, on any given day. Subject to revision.

      Ditto with the issue of standing on these MBS. Legal standing is based on certain criteria. Except where it isn’t.

    2. freepressmyass

      I believe nixijng the free checking accounts was in the Financial Reg legilstion.
      What the banksters want, the bankster get.

      Next time Obma and the Dems pat rhemselves on the back for passing more shit like Fin Reg, remember who they really took care of/

  11. ella

    From Seattle. A look at how the big boys act when their commercial real estate assets fall below the purchase price.

    …. “Fitch also predicted the Goldman Sachs affiliate will default when the huge, interest-only loan Whitehall took out in 2007 matures in 18 months and all the principal — about $900 million — must be paid back.

    Fitch’s somber assessment came a few months after Key Bank, which services the mammoth mortgage, put the loan on its “watchlist,” citing the big drop in occupancy.”

    The full article is an excellent read.

  12. AR

    “The servicer’s attorneys have no desire to go this route – it terrifies them.”

    Aren’t the servicers intentionally inducing foreclosures, as you wrote in ‘Wall Street Journal Runs Inaccurate Piece on Antiforclosure Laywers’ on 10/21?

    I get the impression that the accelerating rate of foreclosures is a mopping-up operation, in accordance with schedules written into PSAs, if this FDN post is accurate:

    …those involved with the securitization of mortgage loans analyzed the loans in the pool, in advance, and determined (a) that certain mortgage loans would default; (b) when they would default; and (c) knowing this, they undertook measures to cover the realized losses ahead of time. At least that is what they told the investors.

    From what your securitization lawyer wrote: “the proceeds of the foreclosed property, including the recoveries intended to reimburse the servicer for advances, would have no mechanism for getting back into the trust.” it would seem the perfect ‘screw-up’ for enabling the perps to abscond with those proceeds before anyone can figure out what happened. All it takes is the same kind of fabricated documents they’re already cranking out.

    Reading the Rondolino order of dismissal shows just how upside-down this all is. At first the foreclosures flowed smoothly, because the judges assumed the foreclosing parties had standing, without reading the plaintiffs’ paperwork or looking into the facts to ascertain standing. Then a few defense attorneys challenged plaintiffs’ standing and the LNAs (which lacked the required attachments), which led to the massive fabrications of robo-signed documents and the PR campaign to paint all foreclosees as deadbeats, and that the facts were true, but the paperwork just sloppy. So, we are supposed to believe that hundreds of thousands of mortgage notes were merely lost, and that robo-signers are just the way banks do normal business. We’re not supposed to question why there is a need to fabricate documents that serve to deprive people of their property rights without due process?

    Read Judge Rondolino’s order of dismissal to understand how brazen the foreclosing plaintiffs are in fabricating documents asserting standing that post-date the filing of the case, and expect the judge not to notice the discrepancy. This, to me, shows how criminal this entire enterprise is: the ineptly fabricated forgeries presented in court show their contempt for the rule of law.

    The most chilling thing to me is that ‘they’ expected to get away with bamboozling the judges with their fake paperwork, covering up their original swindle, in hundreds of thousands of instances, without anyone noticing. They expect to be able to bully everyone in the courts and the executive into giving them a pass. So far they are mostly getting the pass.

  13. mark

    What would it cost to find out if a mortgage has some issues with the transfer of ownership? If my home is not being foreclosed, is there any point in knowing? Would there be any value in checking now (just in case they start going back to cover their errors)?

  14. TC

    Opportunity abounds for affecting a profound turn recapturing the stabilizing power of the American System of Political Economy, and this once and for all. One powerful minority in Congress whose voice brought the War of 1812 is the same powerful minority whose sway amidst a terribly weak adversary surely could offer everyone a face-saving way out (with all due process investigating criminal acts, of course). Yet most profitable in every way for everyone, too, this course assures.

    National Bank ==> Investments transforming physical economy’s efficiencies ==> State-of-the-art platform on which private investment grows. H.R. 3400 is the spirit of things.

    Pretend as some may the best of history is not easily washed away.

    Those decrying Glass-Steagall are at best behaving like a spoiled child or at worst insane.

  15. Jay

    Whenever I read an article about mortgage foreclosure-gate, the text always mentions the fact that the borrower is a deadbeat anyway. Even in an article where the rule of law is touted as being more important than the borrower not paying what was agreed to, the article still has to mention that virtually all borrowers caught up in this mess are not living up to their obligations.

    I have a bone to pick with that incessant comment and I will pose it in the form of a question: Since the Reagan era, what percent of GDP growth has gone to return on capital and what percent has gone to labor?

  16. Jackrabbit

    I wonder if, as is often the case, the cover up will turn out to have been worse than the crime. Fraud often turns on intent. A huge number of document forgeries seems to be hard to explain away.

  17. ronald

    What is the chance that the investors buying MBS got what they thought they were paying for?

    If the bad documentation is so prevalent, when will see investors (and the GSEs?) starting suing to make the intermediaries eat the MBS?

    Especially the GSEs . . . aren’t the chances great that they were sold bogus stuff? IIRC, Sen Kaufman has held that they entire mortgage market was based on fraud.

  18. Cedric Regula


    The thing that amazes me is how come the trust fund administrators didn’t know that the promissory note and mortgage paperwork never showed up in the mail within the 90 days, which my understanding is an IRS rule for establishing REMICS? This seems like blatant security and tax fraud to my untrained legal mind.

    I’ve also read that the “sponsor”, meaning the iBank that did the loan packaging, needed the “bankruptcy remote” path in order to get the coveted AAA rating from the rating agencies. How do they absolve themselves of any responsibility in verifying that the trust was set up properly? I’m assuming they have some hand in putting the stuff there, and probably are the trust administrators in at least some cases.

    How can this be????

  19. svsm

    I think the question of “intent” is an important one and would love to see a legal opinion and any case history that covers this. If a contract unambiguously calls for the fully executed wet signature notes to be transferred, and the New York trust laws deem that the fully executed paperwork had to be transferred to the trust in 90 days, and those specific, unambiguous actions were not taken, can they argue intent?

    IANAL but it seems to me that if a specific action is called for in a contract and applicable law, and that action is not taken by one of the parties, “I meant to do it” isn’t a valid legal excuse. I thought “intent” covered contractual language that was ambiguous or in some way contrary to the established intent of that contract. The transfer of fully executed paperwork requirements was neither ambiguous nor contrary to the intent of the contract. One party failed to meet it’s obligations.

    Any thoughts?

    1. Jackrabbit

      Failing to fulfill the contract would mean the Trust “failed to constitute” and that could be the basis for forcing mortgage buybacks. Failing to convey the Notes doesn’t, in and of itself, constitute fraud. Was it the INTENT that the notes not be conveyed so that investment was not secured? Without further evidence, proving that would be difficult.

      However, large-scale forgeries make it MUCH easier to prove fraud. Why didn’t they get the Notes, or true copies? It seems plausible (at least) that it was because the Servicer’s knew that the notes had not been properly conveyed, which would imply that: 1) they KNEW that the Trust were not legally constituted, 2) they KNEW that foreclosures were being performed illegally.

      The failure to convey the notes could be financially costly to the banks/servicers, but the “cover up” (forgeries) could send people to jail.

      PS: I’m not a lawyer.

      1. Jackrabbit

        I think I should add that there is a second grouping of fraud that I haven’t dealt with above (and Gretchen did not mention). As pointed out by Felix Salmon of Reuters, the Banks knew that the quality of a substantial number of loans did not meet the standard that was being sold to investors. The Banks had an obligation to inform potential investors of such information but they didn’t (and that would constitute fraud).

        In my view, the combination of these two: 1) failure to provide investors with information that they were obligated to provide, and 2) fabricating documents on a massive scale (I don’t see any valid reason for this except to cover up the failure to convey the Note) are damning. Then add the large number of loans that homebuyers were directed to simply because they would make more money for the mortgage banker, and you have fraud throughout the process.

        One could even say, I think, that for title insurance companies to write insurance based on a warranty or indemnification from a bank, where there is a reasonable expectation that he bank will not be able to make good on such an obligation, is likely to be fraudulent.

        PS I’m not a lawyer.

        1. Cedric Regula

          Let me give it a try.

          MBS=Mortgage Backed Secuity

          US=Unsecured Security

          They sold MBS.

          Go straight to jail. Do not pass GO.

  20. Victor

    I usually agree with you, Yves, but not on this one — I think you’re being dogmatic. There are really two issues here: 1. the issue of who actually owns the homes; 2. the issue of illegal and possibly criminal behavior. It’s sheer folly to roll both up into one ball and attempt to resolve both issues as though they were the same.

    The first issue is easily resolved as long as there is no serious dispute between or among different parties as to who actually owns each home. A homeowner who’s failed to keep up with his mortgage clearly has no claim. So, as long as no more than one lender, bank, bondholder, whatever has any sort of documentation backing up their claim, and there is no other institution with conflicting documentation, then ownership should be clear and foreclosure should proceed.

    The second issue should be settled in the courts in the same way as any other legal issue would be settled. Anyone who broke the law should be tried in court.

    When we get bogged down in technical issues such as this (and YES it IS a technical issue), we take our eyes off the main issue, which is the idiocy of making people homeless for no good reason. The failed banks and other financial institutions should have been nationalized in the first place, the mortgages should have been taken over by the government and then renegotiated on the basis of a realistic assessment of what the houses were worth and what the owner could afford to pay.

    1. DownSouth

      “I usually agree with you, Yves….”

      I seriously doubt that.

      Someone who parrots the Bankster talking points as faithfully as you do would have little chance of finding common ground with Yves on pretty much any issue.

      1. Victor

        Actually I’m much farther to the left than Yves. If you don’t believe me, check out my blog:

        However, I see no point in getting bogged down in a mess that will do no one any good and, if prolonged, could do everyone a great deal of harm. No one in default is going to get their house back as a result of any action taken by the courts over this issue.

    2. ronald


      If the proper documents do not exist and we are left with intent, is the homeowner not at risk of being foreclosed on by someone else later? After all, there have been banks that re-sold mortgages to more than one buyer (to buff up crashing balance sheets), doesn’t the “technical issue” have major repercussions? With so much fail in the chain of ownership, aren’t errors likely, also?

      Will the courts, or the millionaire gasbag punditry, show individual “deadbeat” homeowner the same deference, when poor and homeless, that homeowner is foreclosed upon again by some well-heeled and well-connected foreclosure mill?

      (sincere question, not a flame, IANAL. :) )

      1. Cedric Regula

        Do you want all those Gordon Geckos out there and their highly paid lawyers looking for ways to exploit “technical” loopholes and make a boatload of money? For our own good of course.

        1. Victor

          “If the proper documents do not exist and we are left with intent, is the homeowner not at risk of being foreclosed on by someone else later?”

          Good point. Imo, amyone with a claim to any particular house should be required to file that claim prior to a given deadline. If conflicting claims exist, then there is certainly a problem that would need to be worked out via the courts. But this seems likely only in a relatively few cases. In most cases, I’m assuming (and I could be wrong), there is only one claimant, aside from the homeowner.

          As far as Gordon Gekko and his ilk are concerned, if any of them did something illegal, then then should be held accountable for that and required to pay a stiff fine or do jail time.

    3. pebird

      Yes, having a proper signature that a critical event (transfer of ownership) actually occurred is just a technicality.

      If it happens in a small number of cases, OK, it was an error. But you have to ask yourself, why do this as a normal business practice?

      Why would you want basically unsigned documents all over the place? Maybe because you wanted to wait to assign mortgages after you knew which ones would fail? Maybe so you could use the same loan in more than one security? Maybe so you could …? Who knows?

      The question is NOT the homeowner – but where and when the mortgage was securitized. What if your security expected to have mortgage X in its portfolio, but mortgage X got allocated to a different portfolio and you got stuck with Y, because Y foreclosed? Not that the banks would favor one portfolio over another, would they?

      No, the banks wouldn’t do that, we can trust their process.

      Give me a break.

      1. micr line

        pebird thats fucking genius!

        it would be another idea banks could take from computer science… delay the accomplishment of a task until it is most advantageous for the system to process it…but in all other respects act as though the resource is there and available.

        or in this case, set up ‘virtual ownership’ that doesnt become ‘real’ until you can decide which would make the most money or lose the least for the owner. hilarious.

        i really liked your theory here.

    4. Siggy


      You are very naive to believe that this is about a mere technical issue. Foreclosure Fraud is about the abrogation of due process. Where a mortgage loan has been pooled and securitized there is a process that establishes ownership of the loan. If that process is not followed, the trust that houses the loans and is the instrument of revenue distribtution has no standing because it cannot demonstrate ownership. It’s more than mere possession, there must be acknowledged and notarized assignment and subsequent recordation. If you can’t grasp this fact, well then, you are either very naive or a shill for the banksters.

      This due process thing is very serious and symptomatic of the cancer of corruption that pervades our political economy.

      What will you do should it come to pass that that the house you bot has a clouded title, who will protect you from the claim of any party who might file suit just to obtain a go away settlement?

      As I think about it, I don’t think you are naive, I think you are malicious in your comments here.

      1. Victor

        Siggy, I think you completely misunderstand me. Sure, the banksters would like to see this whole mess go away, but that’s NOT what I’m arguing. If all foreclosures were to be indefinitly postponed, they’d be upset, but if they were put on trial for fraud, with the possibility of doing jail time, THAT would hit them where they live and THAT would change their behavior for sure. Since it seems as though fraud of some sort is behind the mess, then a congressional investigation is in order and indictments are in order. This is what I’m arguing for, so please don’t accuse me of coddling the banksters.

        “If that process is not followed, the trust that houses the loans and is the instrument of revenue distribtution has no standing because it cannot demonstrate ownership.”

        You sound more like a bureaucrat than a social reformer. If there is no dispute between banks and/or bond holders over ownership, and the homeowner has in fact defaulted on his mortgage, then it makes sense to let the foreclosure process go forward AND investigate the bank CEO and his cohorts for possible fraud. This is a worst-case scenario for the banksters, because it forces them to take personal responsibility for their acts and/or failures to act. It’s important to distinguish between the banks as institutions and the (possibly corrupt) individuals who run them. We may, at least for the time being, need the institutions, but the individuals can be and in many cases should be replaced.

        “This due process thing is very serious and symptomatic of the cancer of corruption that pervades our political economy.”

        I fully agree. But the solution is not to cut off our nose to spite our face by throwing our economy once again into turmoil, but to go after those individuals responsible for the spread of this cancer. If the foreclosures can’t be carried out, the resulting legal actions will collapse our economy and the only winners will be the lawyers.

        “What will you do should it come to pass that that the house you bot has a clouded title, who will protect you from the claim of any party who might file suit just to obtain a go away settlement?”

        This is a valid point, certainly, but there are reasonable ways of dealing with it. Indefinitely postponing foreclosures does nothing to lift the cloud and nothing to help the homeowner in the long run. As I wrote earlier, I think a deadline should be set for all claimants to come forward and state their claims. In the great majority of cases, it’s unlikely there will be any dispute, because only someone with documentation (however flawed) will be in a position to make a claim. Where disputes arise, they can be worked out in court, just as with any other such dispute.

  21. hoofin

    I honestly think these issues all get worked out by principles of equity.

    Since neither side (borrower or lender) is coming in with totally clean hands, it isn’t clear what the resolution will be. Each state has a different court system.

    The notion that people are going to get free houses is a little silly, and I think anti-foreclosure people are not very responsible if they keep dangling that out as a carrot.

    1. john

      While I agree that the “free house” meme out there is not useful, “principles of equity” hardly apply in a legal system that depends on money for access as ours largely now does. I’m just some schmoe from a state school who set up shop in New York: when I don’t get a signature, or date or “technicality” right in the forms I fill out for the City or the State or the IRS or SIF or Unemployment Office, I pay penalties and fines and loose coverage etc. If I were to be as cavalier in meeting the commitments I’ve made in the contracts I write and sign as the banks, I’d be sued into oblivion if not thrown in jail.

      The very existence of bureaucracies that interface with the economy favors wealthy interests because of the cost of administering “technicalities”. To say that the errors of the beneficiaries of massive bailouts, even if that is now their only real wealth, should be forgiven for forgeries and failures to perform to the terms of contracts they wrote themselves seems to overlook that these institutions had agency in their decision to either not address these “technicalities” or simply not worry about them. The “deadbeats”, on the other hand, had no agency in dynamiting the economy and rendering themselves unemployed and thus unable to pay their debts, nor in destroying the value of their homes.

      If I as a business man committed the kinds of document fabrications and contractual failures the banks have systematically engaged in I would go to jail. That’s what the problem is here: there is now in America a Corporate justice system in which well intentioned individuals like yourself will argue that forging documents or ignoring basic contractual obligations are a “technicality” that offenders should be allowed to repair; then there is a citizen’s justice system where the same “technicality” will get you thrown in jail. If you don’t have access to corporate council this can ruin you’re whole life, while corporations are immortal.

      1. F. Beard

        The “deadbeats”, on the other hand, had no agency in dynamiting the economy and rendering themselves unemployed and thus unable to pay their debts, nor in destroying the value of their homes. john


      2. DownSouth

        john said: “I’m just some schmoe from a state school who set up shop in New York…”

        Maybe so, but given the brilliance of that rebuttal, I’d say any client would be lucky to have you represent them.

    2. micr line

      there are tens of thousands of people living in free houses, they are called ‘the employees of goldman sachs, morgan stanley, AIG, the bear stearns people that moved to JP Morgan’, and on and on and on.

      if they had to play by the same rules as ‘real people’, they would be screamed at by talk show hosts for being ‘welfare queens’. going to the grocery store with a WIC card would get them shameful looks and tsk tsk from who knows who. trying to survive another night in a shitty apartment with the gunfire on the street and the drug dealers down the hall. then get up and go to work another day, dont be 2 minutes late or youre fired, dont talk, remember to smile and say ‘thank you’ and ask if they have a membership card and tuck in your shirt, because we have secret shoppers who can record that stuff and youll be fired.

      and the goldman sachs employees are going home at night to a walled suburb in their new cars and bitching about how much they pay in taxes and how it all goes to deadbeats and losers, and they fall asleep watching ‘mad men’ and dreaming about the good old days.

  22. anon48

    Seems to me the mortgage securitization lawyer who was quoted in the article provided the most reasonable outcome-
    “The appeal to equity or fairness, given the intent of the parties to the trust and the relatively minimal harm to the borrower, seems like a logical route – except that a number of judges would argue that fairness might dictate a fair outcome for the borrower, such as a real modification.”

    Loan mods would be a reasonable way to respond/correct the massive screw up that has taken place.
    Further quote from the same attorney-
    “And you still have the issue of the possible damages and legal expenses for a wrongful foreclosure action.”

    Puts leverage directly in the hands of the struggling borrower to help negotiate a significant loan mod that, if successful on a large scale, results in a reduced loan that is:
    a) More realistic relative to the actual value of the home
    b) More realistic relative to the borrower’s ability to repay
    c) Incentivizes the borrower to get back in the game and get back on track (assuming the borrower has the capacity to service the debt)
    d) If successful at the macro level then this would help stabilize the real estate market and economy.

    (Side note: gives the borrower the option of deciding whether to pursue legal action against foreclosing parties or getting additional concession on loan mod if foreclosing process in not yet complete. Those borrowers already evicted should still have still legal recourse to pursue wrongful foreclosure actions).

    1. micr line

      ok that misses the whole point.

      the synthetic CDO market was much larger than the ‘cash cdo’ (real house) market.

      every real mortgage had 1 loan owner, but dozens of people gambling whether that loan would default or stay afloat.

      if you ‘modify loans’ and ‘help people stay in houses’, you are 1. making the original deal value go down, and 2. making it so it is not counted as ‘in default’.

      so you see, what is good for the homeowner, is bad for dozens of well spoken men in nice suits. no default = no gambling payoff for those betting against. but lowering the cash value of the house = no gambling payoff for those betting for it. it is just dozens of guys arguing about who lost less, instead of half a dozen guys paying off half a dozen other guys, and the government bailing out a bunch of the at the same time.

      if you just screw the homeowner, only one person loses money, and they are too poor to lobby congress.

      1. anon48

        “the synthetic CDO market was much larger than the ‘cash cdo’ (real house) market. every real mortgage had 1 loan owner, but dozens of people gambling whether that loan would default or stay afloat. if you ‘modify loans’ and ‘help people stay in houses’, you are 1. making the original deal value go down, and 2. making it so it is not counted as ‘in default’.”

        Really, my understanding is that there were many different CDS tripwire payoff events. If you read ECONned you would have learned that the protocol for CDS insurance for CDO’s was not approved by ISDA until 2005. CDS insurance for CDO’s that held the subprime mortgages didn’t exist before then. In fact, the book goes into great detail about how the use of CDS’s was abusive beyond belief, to the point where in some instances it was set up to fail(e.g. Magnetar).

        There’s a good chance that, unfortunately, many of the CDS protection buyers have already been paid. Further, it’s become quite apparent to most by this time how the ability to purchase naked CDS -the equivalent of purchasing insurance coverage without having an insurable interest- which is illegal, was a huge incentive for criminal intent.

        The book goes into great detail about how some of the pools were set up to fail so that the CDS buyers could hit the jackpot. If you think that there’s still a large amount of CDS protection coverage on these CDO pools that will payoff for naked CDS protection holders, you’re living in dreamland.

        If and when this gets settled, via law changes or otherwise, if there is some sort of massive loan mod program put in place, part of that deal will be that there will be no significant payoff for the remaining naked CDS holders. Please do yourself a favor and read the book ECONned- it’s a fascinating, enlightening and emotional roller coaster of a ride. It could really help you.

  23. LJR

    Response from a Banker:

    You ungrateful louts!

    We bankers worked hard to give the great unwashed masses one helluva “going into bankruptcy” party that lasted for almost four years! We gave a bunch of worthless lumpens an opportunity to live in a house well beyond their means. Now that we have to separate them from the houses and herd them back into the flea infested tenements appropriate to their life’s station, some bottom feeding lawyers have the gall to suggest we don’t have a “legal” right to foreclose. Well I’ll be gob-smacked if that’s not enough to make a grown man cry. As GWB responded when asked about what the Constitution might have to say he retorted, “It’s just a goddamed piece of paper.” We bankers know what we know. And we know these houses belong to our RMBS whether we did everything according to your outmoded rules or not. They belong to us. Get used to it. It’s hard enough to have to explain to some turbaned oil sheik why the 10 million dollars of the RMBS he bought are now worth half that let alone trying to explain why we might not even own the houses that backed the loans. But we want to be fair. So we paid a little overtime plus incentives for a bunch of our backoffice people in India to review the files. By golly they didn’t find a single problem except for one fellow who found over half his cases were problematic. The only good thing about that was we only had to pay him half what the others got. And then we fired him since it was obvious he was a trouble maker.

    We bankers are geniuses when we bother to think about it. We managed to turn an $80,000 rathole in the ghetto of Pittsburgh, CA (and that’s 90% of it) into a $280,000 palace in just three years and then sold it to a poor Hispanic cook working at a retirement home. He makes $45,000 a year and his wife works at McDonald’s making $20,000. You should have seen the happy looks on their three kids’ faces at the housewarming. We got them into a great negam loan that only cost $650 a month for the first three years. Sure, it ballooned to $1400 but it looked like that house would be worth nearly a million by then. At least that’s what the Iranian real estate salesman said. And he was their best friend so they certainly thought he was giving an honest opinion. How could he have guessed it would auction for $55,000 three years later? Life is uncertain. And now they’re back in a two bedroom apartment with cots and a sleeper in the living room. I like to think this experience has whetted their appetite for a better condition of living now that they’ve had a first hand experience at “living the dream.” Unfortunately, the refinance mortgage they took out two years in for a half percent better rate didn’t have the “jingle keys” provision so they’re paying back the $250,000 they owe the bank week by week. But you know what? They made a deal with us and they signed the papers. We didn’t have a gun to their head. A deal’s a deal. You gotta respect the law in these matters. That’s very important for you to understand. We expect you to stand by your commitments and read the fine print.

    You need to understand that we’re just middle men who go out and put deals together for our “clients.” Our clients are primarily the Sovereign Wealth Funds all sitting on piles of cash accumulating from the obscene profits being made on oil. That money has to go somewhere and it’s our job to create investment opportunities that at least appear to have a better rate of return than T-Bills. We’re just working schmucks like anyone else. Maybe paid a little better – but we earn every dollar! It’s hard working with fools on both sides of the deal. Our tongues are bloody nearly every day.

    You all have the gall to want to “rein in” the investment professionals at Goldman Sachs and J.P. Morgan. Do you realize what would happen if you had your way? If our great investment bank’s operations were curtailed, the clients would just go elsewhere to find someone willing to put together a great money making deal like, for instance, buying a 75 year lease on Chicago’s parking meter operation. Suppose that deal hadn’t gone through. An hour’s parking would have remained at two bits instead of a buck. By jacking the rates, extending the hours and making the meters operate seven days a week instead of five we are doing our part in reducing traffic conjestion. And what thanks do we get? None. Shows you just how sincere these “green” people are. All they can do is belly ache about the loss of street fairs because the new meter owners demand fair compensation for the lost revenue. It’s obvious these “street fairs” are losing propositions or they’d make enough money to pay the franchise with money left over. We’re promoting social efficiency by eliminating these economically sterile activities. We have stores if the lumpenfolk want to buy things. In fact we have more “store per person” than any other country in the world – nearly 25 square feet of it. We need to generate sales in those stores so the renters can pay back the CMBS holders. Street fairs are diverting dollars to sales that do not benefit our clients and, therefore, do not benefit our country.

    My suggestion is that you folks get back out there and start spending again because, face it, that’s the only task you’re really fit to perform. You are the Great American Consumer and it should make your chest swell with pride. Your consumption is a vital part of the wonderful world wealth making machine. China makes stuff and you consume it and digest it and drop it out your backsides. We have tried to keep you supplied with enough dollars so that you can do your job. But now you have reneged on your obligations. You have failed to heed your wonderful V.P. Dick Cheney’s advice to hold hands and buy an SUV. There is a price to be paid for your stubborn refusal to spend beyond your means. You are now “little people.”

    So stop whining about your government catering to the banks. We fund your government. You bitch and moan at the thought of any tax increase so your government has to come to us, hat in hand, every year for a couple trillion dollars in loans. You think a government in that kind of financial condition is in any position to tell us how to run our business? Just keep in mind that the Fed is an independent organization. In fact it can’t even be audited. I advise you entertain a certain meekness when dealing with the organization that owns your government and that your uncharitable understanding of the situation puts the cart before the horse.

      1. Siggy

        You should cry. While redolent in sarcasm, the rant has too much truth to be dismissed. You should cry because the sarcasm is too clever and the twist of cause and effect too wrong. Most of all, it evades the question of fraud by making fraud irrelevant.

        You gotta ask, is that a rant that Joe Goebbbels would like?

  24. Wandering By

    Parallel Morgenson’s reporting with that of John Burns on the Wikileakin’ Julian Assange. There’s good reason she’ll get the foreclosure stories wrong – At one point she was claiming it was “illogical” for Banks to foreclose. Illogical only if you’re completely unaware – she must have been thinking of Leonard Nimoy. Hack!

    1. micr line

      uhm wouldn’t the blog world be alot better off if it spent less time trashing Morgenson and Story and more time just writing and doing research?

  25. micr line

    “uncharacteristically cautious” “pulled punches”

    it’s called ‘due diligence’ and ‘journalism’,,, ie, risk management.

    if only there were some book where someone explained how failing to manage risk creates conditions for fraud to occur…

    lets ask dan rather how he feels about pulling punches. or peter arnett. etc etc

  26. backstop

    Yves – This is so widespread and evident it makes me wonder if it wasn’t designed. The cartel and government have seen the effects of a depression and deflation. Are you sure that they didn’t see this coming? No government bailout needed during deflationary times. Those who fight decrease debt through the courts…a good thing for the US economy during a deflationary cycle. Is there going to be a “V” in the dollar? Was this designed so that we wouldn’t ever have to worry about becoming a third world country?

  27. John Ryskamp

    I also wrote Gretchen that she was not fully in the picture. But neither are you:

    1. who holds title? You blithely assume that the homeowner is innocent and is simply the victim of all this. I don’t think the MBS investors are going to think that way. Look at what home buyers and sellers signed off on when they bought and sold. Look at the facts they represented as true. The investors will go right after title, asking the judge that it be put in a constructive trust.

    2. Homeowners are going to stop paying property taxes, and sue the government entity coming after them for those taxes, as a co-conspirator. What did governments know about this entire system. This is government-as-criminal. Don’t think homeowners–who now doubt whether they hold legal title (regardless of what documents may say)–won’t assert this as they question whether they need to pay property taxes or whether they need to get out even if they stop paying property taxes. What this is all leading to is the conclusion on the part of the public that government in America is a criminal.

    3. Don’t expect banks and homeowners to let MBS investors portray themselves as innocent victims. Expect banks and homeowners to sue on the basis that the investors do not hold securities. They hold unsecured loans, based on the knowledge investors had of the scams. Again, look at the factual representations investors signed off on.

    Where YOU are naive is in believing that there are some innocent parties in a Ponzi scheme. Baby, there are NO innocent parties in a Ponzi scheme. You’re about to find that out.

    1. Yves Smith Post author


      Your hostile tone is unwarranted and the three points you list show you have misread, either by lack of attention or design, both this post and my work generally on this topic.

  28. Kevin Lagorio

    I really have learned a lot and have read most of the comments from this lively discussion of very intelligent people. I do not hold a candle to any of you, but I am going to try.

    The fraud in these loans runs from the bottom to the top of the food chain! It is so pervasive and abusive; any of us that took out loans were all caught up in the greed of the moment. However I do feel that the borrowers were sucked into the mess, although they did take the money, they have a right to be treated fairly under the law and not be subjected to all of the fraud, deceit, and the fake modification scenarios that are being used to delay foreclosures and creating more ultimate fees for the servicers, etc. I agree that the mortgages should not be completely written off and that the borrowers does owe the money. However I do feel honest modifications and workouts should be performed on behalf of the borrowers! However the opposite is happening! The borrower’s rights under the various states laws should be enforced to the fullest, any criminal activity should be pursued and the borrowers to get the appropriate damages as allowed under the LAW!

    If these damages wipes out one of these mortgages then so be it! If not this country will be heading to total anarchy and a total meltdown in a matter of months!

    All of the reasons for not transferring and destroying the title chain is outright fraud and the fact that these mortgages were securitized not just once but many times! Basic accounting rules teaches one that accounting messes by sophisticated individuals are just a good way to cover up theft or fraud! How many times was your loan sold, to make all those lucrative fees?

    This is an email from a person I know on his legal fight on his mortgage in California to show what is happening. I have taken out all names to protect all parties. You be the judge but this is going to be happening a lot in the next few weeks and months! Here is the body of his email to me.

    “I have already found all the stuff on my mortgage. Major Fraud! ABC mortgage “table funded” my loan for ACME mortgage (Illegal!!). It was assigned to a pool, CXLT 2006-8T1. It missed the cutoff date and was not properly inserted in the pool. This means they sold the loan multiple times to investors without perfecting the security into the pool. The note was shredded after putting it into the MERS Blackhole. The copy that XYZ has produced to me has no endorsements or allonges, which means that the now defunct ABC Mortgage can’t endorse shit! The title is broken on my property. GHI Title executed the loan for ABC, they had ME pay for Title Insurance with MERS (not ABC) as the beneficiary of the insurance!! This means they knew title was screwed up before they even refi’d for me. You see, PPOX table funded my original loan for JKL Mortgage for a B S Pool!! They screwed up the chain of title even back then!!!

    I am simply filing a Quiet Title Action. This will clean up my title, invalidate the Deed of Trust. I will then push my clean deed into a living trust!

    Since the Note is then proven to be unsecured, I am going to then have them produce standing.

    Once they can’t prove standing, they will then be sued for treble damages big time.

    The Judge can’t use the “Your just trying to get a free house”, since I put $70k down, and have made payments of nearly $300k over the last 7 years. That is not considered free by any stretch.

    I have an AWESOME attorney who is kicking there butts!!

    When it all comes down to it, I should end up with the house free and clear from the asshole pretender lenders”

    What a mess and no wonder the mortgage securitization market is being handled by the Federal Reserve, keeping the housing market alive through the government guarantee wards, Fannie and Freddie that will cost us all billions and billions. It will just end up on the taxpayers’ back that cannot be ultimately paid along with everything else. If you are buying a house now you are a fool, renting or sitting on the side lines is much smarter as houses drop another 20 to 30% and this mess is unwound over the next few years. Hopefully it can be unwound???


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