Hubris Watch: US Bank CEO Sniffs About Breaking Rules When His Bank Has Huge Trustee Liability

One of the benefits of the Occupy movement is that it is flushing out some particularly egregious behavior among the top 1%.

A writer for the Minneapolis CityPages managed to worm his way into a presentation to the annual meeting of the Minnesota Chamber of Commerce by US Bank’s CEO, Richard Davis. Even though Occupy Minnesota was protesting outside, Davis chose to ignore them. His speech made clear that the business community does not care about long-term self interest, let alone social responsibility. Housing and the foreclosure crisis were absent from the 2012 legislative priorities. But tax reform, which is code for shifting even more of the cost of government on to the small fry? Yeah, that’s a big deal.

Davis’ apparent lone comment on the public ire against the banks was dismissive:

“‘Everybody’s breaking the rules, blah blah blah,” Davis said at one point, mocking the general sentiment behind the public outrage before admonishing them to “Get over it.”

Davis’ arrogance no doubt seems justified, since only rulebreakers who aren’t in the corporate elite club, like Bernie Madoff, have been brought to justice. And he stole from rich people, which made him a prime target. By contrast, US Bank on Davis’ watch, is a recidivist rulebreaker, but he clearly regards that as a matter of no import. (Davis was US Bank’s president starting in October 2004, was promoted to CEO in December 2006, and became chairman in December 2007).

US Bank is one of the four biggest securitization trustees, along with Bank of New York, Deutsche Bank, and Wells Fargo. That, sports fans, means his bank has massive liability on mortgage backed securitizations. We discussed this issue recently as far as Bank of New York is concerned. The same logic applies to US Bank:

What has gotten less attention is the implication of the probable derailment of this deal for the Bank of New York, and its vulnerability to mortgage litigation. If you think, as banking expert Chris Whalen does, that BofA is a goner by virtue of the odds of very large damages in the various mortgage cases that are in progress, Bank of New York is a goner even faster if (and we really mean when) investors start saddling up to target the bank.

The liability of trustees in mortgage securitizations is so obvious and comparatively easy to prove that I am surprised that no one has yet gone after it. However, investors are probably understandably cautious about filing suits that might expose widespread failures of originators and pacakgers to convey mortgage loans to securitizations, which would lead to lots of collateral damage (no pun intended). The Delaware filing on the BofA settlement highlights the issue, which is that the trustees had made multiple representations in securities filings that the mortgage trusts had the assets they said they did. From our post on the Delaware filing:

And it goes straight to an issue we flagged, that the trustee makes annual certification in SEC filings, and the bar for securities fraud is much lower than under contract law theories. Delaware’s securities laws follow SEC 10(b)5 language re disclosure (that it not merely be narrowly accurate, but that it be free of material omissions). Boldface ours:

The acts and practices of BNYM alleged herein may have violated 6 Del. C. § 7303(2), in that BNYM may have made untrue statements of material fact and/or omitted to state material facts in order to make the statements made, in light of the circumstances under which they were made, not misleading. BNYM’s conduct as described above may have violated the Delaware Securities Act insofar as the Trust PSA requires the Trust annually to certify the following “servicing criteria”:

• “Collateral or security on mortgage loans is maintained as required by the transaction agreements or related mortgage loan documents.
• “Mortgage loan and related documents are safeguarded as required by the transaction agreements;” and
• “Any addition, removals or substitutions to the asset pool are made, reviewed and approved in accordance with any conditions or requirements in the transaction agreements.” [See generally, Trust PSA, [Ex W to NY Petition]].

The Delaware investors in the Trusts may have been misled by BNYM into believing that BNYM would review the loan files for the mortgages securing their investment, and that any deficiencies would be cured.

As we reported in September, lawyers had found evidence that Countrywide did not transfer the notes (the borrower IOUs) to the securitization trusts as stipulated in the pooling and servicing agreements…

Because those agreements had strict cut off dates as to when those transfers had to be completed, and governing law for the overwhelming majority of the trusts (New York law) is unforgiving on this matter (New York trusts are not permitted to deviate from their written directives) the failure to perform as stipulated cannot be remedied…Hence the widespread use of document fabrication to get around this mess.

Note that Biden is not going directly after Bank of New York. He is merely seeking to question and perhaps block the settlement with Bank of America. But the issue he raises is a nuclear weapon.

Biden is clearly well aware of the widespread failure to convey notes to securitization trusts. He made a similar argument in his filing against MERS for deceptive consumer practices. So far, he has not gone after a trustee directly, but he seems to be waiting for an opportunity to take a rifle shot.

Small scale surveys (of two counties in New York, performed by Abigail Field, plus similar studies performed by state level investigators) have found near complete fails by Countrywide, but also less total but still pervasive fails by other originators. Given that there is ample evidence in court filings of chain of title abuses in securitizations where US Bank is the trustee, there is no reason to believe it is a miraculous lone good actor.

Remember, the false certifications we cited above are in many cases ongoing (while those relating to the origination of the deal have passed the statute of limitations as far as Federal securities laws are concerned). Trustees make certifications at the closing of the deal and in annual SEC filings. Even though a trustee could file with the SEC to be exempt from the annual filing requirement if a deal had less than 50 investors, trustees generally made at least one annual filing.

And if trustees are indeed pursued for civil securities liability, it would open the door to criminal action. For a trustee, keeping track of physical documents, particularly mortgage notes, which have clear monetary value, is a basic operational competence. The trustees that screwed up on such a massive scale by definition cannot have had adequate internal controls. Yet Sarbanes Oxley required certain executives, at a minimum the CEO and CFO, to certify the adequacy of internal controls. The statutory language for criminal violations tracks the language for civil violations. Thus, success in a civil case sets up a criminal action; the only obstacle is the higher burden of proof. As we wrote:

Since Sarbanes Oxley became law in 2002, Sections 302, 404, and 906 of that act have required these executives to establish and maintain adequate systems of internal control within their companies. In addition, they must regularly test such controls to see that they are adequate and report their findings to shareholders (through SEC reports on Form 10-Q and 10-K) and their independent accountants. “Knowingly” making false section 906 certifications is subject to fines of up to $1 million and imprisonment of up to ten years; “willful” violators face fines of up to $5 million and jail time of up to 20 years.

The responsible officers must certify that, among other things, they:

(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuer’s internal controls as of a date within 90 days prior to the report; and
(D) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date;

These officers must also have disclosed to the issuer’s auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):

(A) all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer’s ability to record, process, summarize, and report financial data and have identified for the issuer’s auditors any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls

The premise of this requirement was to give assurance to investors as to (i) the integrity of the company’s financial reports and (ii) there were no big risks that the company was taking that it had not disclosed to investors.

This section puts those signing the certifications, which is at a minimum the CEO and the CFO, on the hook for both the adequacy of internal controls around financial reporting (to be precise) and the accuracy of reporting to public investors about them. Internal controls for a bank with major trading operations would include financial reporting and risk management.

It’s almost certain that you can’t have an adequate system of internal controls if you all of a sudden drop multi-billion dollar loss bombs on investors out of nowhere.

Failure to comply with the basic requirements of the pooling and servicing agreement and the institutionalized making of false certifications to investors in SEC filings would seem to constitute a gross failure of internal controls.

State attorneys general like Beau Biden and New York’s Eric Schneiderman, who is also investigating a wide range of mortgage abuses, are honing in on trustee liability. And as they get closer to the mark, investors, who are generally conservative, may finally become emboldened and follow suit. The number of filings against the proposed Bank of America $8.5 billion mortgage settlement, another case involving dubious trustee conduct, suggests that long-suffering mortgage investors may finally be roused. And that means that Richard Davis’ smug complacency may prove to be sorely misguided.

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  1. psychohistorian


    This posting is just like your book ECONNED in that it provides the legal world within “our” government the facts necessary to prosecute some folks… least start a %$&*+ investigation.

    BUT, is there anyone in jail yet? NO!

    The Greece posting was powerful also…forgot to mention in my comment.

  2. G3

    Wow! Thanks Yves. City Pages is a very local rag available for free here but they do some really good kick ass reporting.

    Another good one from the rag related to the USBank and OccupyMN:

    OccupyMN (Minneapolis actually) hasn’t picked up steam. But people show up for direct actions. With nights getting colder, less & less people are sleeping at the People’s Plaza (Hennepin county government plaza)because tents are not allowed here. The county sheriff is a “law and order” Republican (the “Kitten for Sheriff” write-in campaign got 6000 votes for his imaginary opponent in 2010 against him – he ran unopposed) who has been clever enough not to be rough and give publicity to us. Occupy St.Paul kicks off this week at the state capitol grounds where tents are allowed and hope it picks up.

  3. craazyman

    I wonder if Mr. Davis is an Occupy Wall Street recruiter in disguise.

    Maybe he’s so far in disguise he doesn’t even recognize it himself.

    Hard to believe these elite morons can find new ways to get lower and lower, but they seem to. Not sure if that’s talent, but it is astonishing.

      1. Anon

        Re: Krugman piece on Mayor 1% blaming F&F for Wall Street-created US housing/mortgage catastrophe, for a man who owns and controls the eponymous Bloomberg info terminal empire, Mayor 1% sure is a data-free zone himself.

  4. ndallasj

    While this article does effectively point out the potential perils to USB as trustee, I am dubious about the quotes attributed to Mr. Davis. Even if one questions his ethics, I doubt that he would make such comments in a public setting. Another source quotes Davis as saying “Really? Like anything in your life is certain? … Get over it.” So the “get over it” comment was an exhortation to businesspeople to quit whining about uncertainty, not a comment about rule-breaking.

    1. Mannwich

      In THAT setting, at a VERY business-friendly Chamber event, I more than believe he would say this kind of thing. I actually fully expect it.

  5. LucyLulu

    The statute of limitations on Sarbanes-Oxley violations, as for securities fraud, has an absolute five year timeframe if investors are going to file suit, so time is quickly running out for filing suits. The BAC-Countrywide-BNYM deal that Biden recently filed suit on was closed in February 2007 IIRC, which was the last few months of when these deals were being packaged and put together.

    1. Yves Smith Post author

      Lucy Lulu,

      You missed that the trustees are making representations in ONGOING SEC filings. This is not about the origination of the deal (they also made that sort of representation then), which to your point took place years ago, but ongoing liability.

      And contract claims don’t have statute of liability issues, but you don’t get to criminal charges on that path.

  6. LucyLulu

    I’d like to add, whether its the trustee or the depositor that gets sued, its been surprising to me that there haven’t been more suits by investors, given the widespread losses they’ve suffered. Granted there have been logistical hurdles to overcome for individual investors but the larger pension funds and investment institutions haven’t brought suits either. Why? Is it “professional courtesy” type thinking at work, not wanting to rat out fellow workers in the trade?

    1. Yves Smith Post author

      No, it’s two reasons:

      1. Fund managers are not set up go initiate suits, ex hedge funds, and hedgies (except for distressed bottom fishers) weren’t RMBS buyers

      2. The funds all have ongoing relationships with Wall Street and the big banks. Particularly with the Wall Street firms, they depend (or rather think they depend) on them for information. They are afraid of being frozen out, which will hurt their fund’s returns. And an underperforming fund loses investors.

      1. steelhead23

        Thank you for the explanation Yves, but I suspect more sinister motivations. First, we by now all know that a fund manager gets paid whether he makes or looses money. So, it is not truly the pension fund manager who was injured, it was the beneficiaries and as we have seen, the term fiduciary responsibility no longer has any meaning. Further, it isn’t today’s beneficiaries who were hurt, it is tomorrow’s. So, unless the government were to insist on pension funds assuming no greater than the 10Y Treasury rate returns on investment, or similar, a fund could assume an unrealistic return on investments and look sound. In fact, their pals in banking could help them achieve such returns by, say, buying high yield Greek bonds. My basic point is that because the losses suffered by big pension and insurance funds do not fall on the principals of these firms, the motivations you ascribe dominate their thinking. Probably the best way to get big trustee suits going would be for the beneficiaries of insurance and pension funds that have taken large hits to sue the firms for dereliction of fiduciary duty (I am not a lawyer, so my jargon may be off), or threaten to. If a pension fund manager is facing litigation for taking losses, he/she might just get up the gumption to sue the trustees that caused them.

        1. Yves Smith Post author

          Fund managers (ex global macro hedgies) have narrow mandates. The sort of fund manager that is permitted to invest in RMBS won’t be investing in Greek bonds.

          And an asset manager most certainly does suffer if fund returns are not competitive. He loses assets. His fees are set as a % of assets.

          I agree these guys for the most part can’t be bothered, but you forget other issues. Most funds sit in larger firms. Even if they guy who managed the fund that has the RMBS is ripshit, he has to persuade higher management to go along, most important, the general counsel. And they can’t probably charge this back to investors. So why should they be charitable and spend their own money on this? Plus they have a free rider problem. They spend time and effort and everyone in the industry benefits.

          Plus the RMBS set 25% thresholds (as in investors representing 25% of the value of the bonds) have to get together to sue on most issues. The investors don’t know who the other investors in their deal are!

          So there are huge practical issues and economic hurdles to litigating.

          1. Nathanael

            I’m fairly sure a pension fund trustee could charge the costs of filing suit in a case like this (where the pension fund was defrauded) to the pension fund.

            I think there must be institutional inertia, that they’re simply not ready to, or used to, doing this. You’d expect CALPERS to take the lead.

      2. Andyc

        Investors should sue both of them, fund managers and Wall Street.

        Where are the ambulance chasers when you need them.

        I guess ambulance chasers only chase ambulances.

        : )

  7. Sluggeaux

    Yves, Davis’ “get over it” smugness is well-founded. Remember, Beau Biden, Eric Schneiderman, and other state attorneys general are elected officials. In a post-Citizens United world, it only takes money to pick them off. Congress and state legislatures could, under section IV of Citizens United, require transparency in political spending by CEO-class blood-suckers, but thus far our coin-operated legislators have failed to do so. While based on valid legal theories, the investigations by “rogue” AG’s are a minor blip on the radar to the kleptocracy.

    1. Yves Smith Post author

      Um, aggressive state AGs get good press and often become governors. That in fact is the new PR meme being used against Schneiderman, that’s he’s a Spitzer wannabe (even though Spitzer tried all his cases in the press and Schneiderman is bending over backwards not to do that).

  8. Barbara Roper

    Meanwhile, President Obama’s Jobs Council has proposed making compliance with Sarbanes-Oxley voluntary for companies up to $1 billion in market cap or, alternatively, exempting companies for 5 years after they go public. Because, presumably, accounting fraud is a great jobs creator.

  9. ep3

    YVes, i see a lot of things going on that convey Davis’s attitude. Everyone seems to think that “so and so is breaking the law and getting away with it, so can I”. It’s like the person speeding on the highway. other motorists say “hey why don’t the cops stop him?”. yet the cops are no where to be found. so everyone decides to speed. it’s a form of laizze faire for motorists. the idea of policing yourself. now not everyone would speed. some ppl have a conscious. but jerks like Davis would speed and then use their financial power to get out of any trouble they get into. And that reinforces to the average joe this idea of “he did it and got away with breaking the law. So will I”.

  10. steelhead23

    “Get over it!” Oh Dude, you have no idea. Yes, we would all wish to ‘get over it’ but there you are, rubbing our shiny little noses in it. Dick (I can call you Dick, can’t I) allow me to explain how badly we wish to get over it… your dead body that is. You see, as Yves has politely explained, we broadly believe that you and your pals have not only gotten away with magna grand theft, in doing so you have harmed the very foundation of our society. I no longer cry for justice as the rule of law, Justice has fallen asleep, I cry out for the mob and a new Committee for Public Safety to deal with you and your friends. Get over it indeed.

  11. Lew Glendenning

    Good stuff.

    Banks should be RICOed. Individuals can bring RICO suites for triple damages. Can there be a class-action RICO?

    Banks meet the RICO definition of ongoing criminal enterprises.

    From the wikipedia article :

    Under the law, racketeering activity means:

    * Any violation of state statutes against gambling, murder, kidnapping, extortion, arson, robbery, bribery, dealing in obscene matter, or dealing in a controlled substance or listed chemical (as defined in the Controlled Substances Act);
    * Any act of bribery, counterfeiting, theft, embezzlement, fraud, dealing in obscene matter, obstruction of justice, slavery, racketeering, gambling, money laundering, commission of murder-for-hire, and several other offenses covered under the Federal criminal code (Title 18);
    * Embezzlement of union funds;
    * Bankruptcy fraud or securities fraud;
    * Drug trafficking; long-term and elaborate drug networks can also be prosecuted using the Continuing Criminal Enterprise Statute;
    * Money laundering and related offenses;
    * Bringing in, aiding or assisting aliens in illegally entering the country (if the action was for financial gain);
    * Acts of terrorism.

  12. Ray Phenicie

    From the archives at Reuters-December 2010-still timely today:

    –I suspect that we will see a criminal prosecution of Dick Fuld at some point, although as Eisinger points out it’s certainly taking long enough. A criminal prosecution of Angelo Mozilo is much less likely now that he’s settled his civil suit with the SEC. Stan O’Neal? Chuck Prince? Martin Sullivan? Going after those guys would require a degree of testicular fortitude which simply doesn’t exist anywhere in the Obama administration. There might be a handful of mid-level executives eventually — people higher up the food chain than Fabulous Fab, but well below CEO level. The top cats are sitting comfortably in a cloud of impunity, and they all have very good lawyers.–

    That anatomical analysis is apt-I’d say the same applies to the soft vertebrae of certain high ranking Obama Admin people -or maybe their feed from the financial industry is too rich in sugar.

  13. Ray Phenicie

    Oh, and thanks again Yves for your excellent summary of the mortgage industry implosion, explosion, downfall whatever we’re going to call it-this whole mess needs to be tracked because of the way it is linked to fundamental principles of law and order. It’s really hard to keep track of all that’s going on and this site really helps immensely!

  14. Tom Nacey

    Madoff in jail, and let’s not forget, Martha Stewart. Jailed mostly for merely lying about a tip to sell some stock. Stock that was actually purchased with her own money! Clearly these were “token” prosecutions. Throw the public a bone. Can anyone tell me how many people are employed by the SEC and what, if anything they do all day?

    1. 5:00 PM

      Obviously she doesn’t swing this way, but Martha would be an amazing recruit for OWS and its allies. She may be in the 1% (I’m not sure), but what happened to her is as blatantly unfair as anything else we’ve seen.

      1. PQS

        Martha is (or was) a big Demo contributor, and fairly lefty in her personal life, tantrums notwithstanding. She grew up very working/lower middle class.

        I always thought the reason she was prosecuted was BECAUSE of her support for the opposition.


      Yes, Tom, but congress has “underfunded” the agency. They slept through regulating pre 2008. Now they need more money? Stay the *&%k asleep!

  15. Don Lowell

    In Minnesota OC has spread to towns throughout the state.

    Rochester, Mankato, Fairbalt, Bemedji, Duluth, Brainerd, St. Paul, Woodbury and on and on.

    Lookin good!!

  16. Mark Erickson

    Yves, check the link to City Pages again. Your quoted graf has been changed to reflect the truth: Davis was talking to his audience of business owners, chiding them for a lack of confidence and whining.

    I also question your use of a stand in for US Bank for most of the content of this post. In case you didn’t know, US Bank has been aggressive lately in trying to get issuers to take back bad mortgage debt. Does this change your opinion:

    1. Yves Smith Post author


      You imply the article has been changed/corrected from the version I read. It hasn’t. The characterization in the post is accurate (that Davis ignored the OWS protestors and was reported to have made a contemptuous comment about the rule of law). You also imply that I am ignorant of what US Bank has been doing, which is incorrect.

      1. These actions are bupkis relative to all the trusts they oversee. Investors were champing for this sort of action YEARS ago. There have been a shitload of foreclosures since subprime imploded, and fraud was known to be a huge issue back then (you can find evidence in this blog in 2007 and 2008, for instance). If US Bank had acted earlier, literally billions of investor losses might have been shifted back onto the originator. And the depth of fraud would have brought to the surface earlier, on the Dodd Frank negotiation timetable. This is way too little, and much too late.

      2. This has nothing to do with trustee liability on chain of title. Two separate issues. US Bank is continuing to make false certifications in ongoing SEC filings.

      1. Mark Erickson

        On my first point, the article was changed. The quote you produce now reads:
        “‘Everybody’s breaking the rules, blah blah blah,'” Davis said at one point, admonishing the assembled business leaders to “get over it.”
        Did you not even check? They changed the title too.

        I’m happy to take your expert opinion on the trustee issue, but the “get over it” line was completely distorted by City Pages. If you look, you’ll see that no other outlet reported that Davis was directing the comment at protestors.

      2. Mark Erickson

        “In case you didn’t know” was actually written without any snark or irony. Same goes for “Does this change your opinion.” You’ll have to trust me on that I guess. However, I do still question why you quoted a long section that only mentions US Bank in passing once.

  17. freedomny

    Not “exactly” in line with the post, but take a read, or a watch of Bill Moyers speech. It’s on Huffington Post under “People “Are Occupying Wall Street Because Wall Street Has Occupied the Country”. It’s amazing. Sorry I couldn’t put a link in….the young ones weren’t around and I’m fairly clueless when it comes to technology…:)

  18. Fiver

    Good article and comments which make clear both why the guy should be nailed, and why he likely won’t be.

    But this raises a vital question:

    Why have people not yet started to take back control of their pension funds? It’s absolutely clear that far too many fund managers have been completely compromised over the last couple decades.

    For my part, the idea that pension funds were ever allowed to become dependent on the “market” in the first place was criminally stupid. I wrote my own many times warning them what was coming well before the Internet crash and the financial crisis, to no avail. The something for nothing mentality of indefinite 8% paper returns in a 2% growth economy strikes me as problematic to say the least. I say higher premiums/employer contributions for plans that are guaranteed by the State at a reasonable interest rate and NOBODY screws around with the money.

  19. Craig Bradley


    U.S. BANK CEO Richard Davis really needs to be taken outside and given some street justice. Something akin to being “tared & feathered” would be quite appropriate. If nearby local Occupy Wall Street protestors ever catch wind of Davis’s nauseating arrogance and misdeads, perhaps someone will then supply the tar and feathers for his “correction”.

  20. George Orwell

    I have to laugh about one thing. All you liberals want to rage against the machine and bring banks down. Then what? What happens when the economy grinds to a halt and everything stops? Make a distiction between bad players and the institutions. SOme people should go to jail, but say that banks are evil or that our institutions have to be blwn up and taken down is silly. If you really belive that..then you are not an American and do not believe in the COnstitution. You are nothing more but a socialist or communist or anarchist looking to destroy America.

  21. George Orwell

    One other thought…let’s not forget that most of the people who are underwater on their mortgages DID receive the funds they sought via the mortgages and re-fi’s they took out. They used that money for things they wanted to purchase or to purchase a house they could never really afford.

    As my Father once told me, “if it too good to be true Son, its too good to be true.” So, while the Bankers have been acting sleazy, many of the people who are underwater did too by overstating income, using fake appraisals, and not being 100% truthful on loan applications.

    Its a screwed up situation and the only real way out of this is to probably force the banks to take an across the board haircut on EVERY mortgage (not just the underwater mortgages-why should someone who is greedy or slefish get a break when an honest person does not?) in the US. This across the board haircut probably need to be in the form of a flat 25-30% reduction of principal in all mortgages. The rates should then be recalculated at current market rates. You would thus get the makert values back in line between the mortgages and the real estate. If people then default, they could then be evictited in a more orderly process.

    Short of this haircut…the markt will not rebound and hence the economy won’t either.

  22. A

    Orwell:”…let’s not forget that most of the people who are underwater on their mortgages DID receive the funds they sought via the mortgages and re-fi’s they took out. They used that money …”
    and let’s not forget that, by now, most of the people…had thought to pay it all back from their earnings (and promised appreciation of their houses), and just hadn’t factored in that a financial crisis was coming, that would not only reduce their home’s value, but also throw them out of work. (And apparently even the overpaid geniuses at investment houses didn’t factor this in; e.g. Morgan Stanley defaulted on 5 San Francisco Towers for 8 billion; 12/17/2009)
    Most buyers were aware that housing was in a bubble, but thought, so what, if my house’s price drops by 10%, I live in it and my job can still pay the mortgage.
    I suspect that all the house flippers got out early.

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