Category Archives: Banking industry

Another Layer of the Mortgage Mess: “Zombie Notes”

One of the claims we’ve heard throughout the mortgage crisis is that all the systems and records are fine, that the banks have just made a few “mistakes” and when they find out about them, they correct them promptly and cheerfully.

If you believe that, I have a bridge I’d like to sell you. Not only is evidence of widespread, and very likely systematic abuses piling up in courtrooms all over the US, but even at this late date, new types of misconduct are coming to light.

More Dubious Research: “It Would Take 62 Years in New York to Repossess the Homes in Severe Default or Foreclosure”

An article at the New York Times, “Backlog of Cases Gives a Reprieve on Foreclosures,” is more than a little frustrating in that it takes some high level factoids about the mortgage mess and fails to draw the right inferences from them.

The premise of the piece is that in some states, the average time to foreclosure has become so attenuated that it would take decades at current rates to clear the backlog. Consider these dramatic-sounding statistics:

In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm.

Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade.

In the 27 states where the courts play no role in foreclosures, the pace is much more brisk — three years in California, two years in Nevada and Colorado — but the dynamic is the same: the foreclosure system is bogged down by the volume of cases, borrowers are fighting to keep their houses and many lenders seem to be in no hurry to add repossessed houses to their books.

The convention in writing is to list the most important cause first. Thus by giving “the foreclosure system is bogged down by the volume of cases” pride of place implies that the “foreclosure system” being overloaded is the biggest cause.

But this level of abstraction is misleading. There is no “foreclosure system”; that turn of phase implies a single overarching set of procedures. As the mere mention of judicial versus non-judicial states indicates, each state has its own laws and case history as to what is proper practice. Referring to a “system” when there is none is also likely to lead many readers to think in term of the system that is involved in the foreclosure process, the judicial system, and to incorrectly infer that courts being overloaded is a major culprit. The vagueness of the expression, in other words, has the effect of directing attention away from the fact that it is the banks’ own machinery that is the most gunked up.

Dubious Research: The More Debt Students Have, The Higher Their Self Esteem

It’s a sign of the times that your humble blogger is having to create finely stratified typologies for the various types of ~~propaganda~~ dubious research being deployed to promote the idea that rule by our new financial overlords, despite the considerable evidence to the contrary, really is for our own good.

We’ve already instituted the Frederic Mishkin Iceland Prize for Intellectual Integrity for special-interest-group- favoring PR masquerading as research.

However, Mishkin is a Respected Personage, and the initial Mishkin Iceland Prize recipients, Charles Calomiris, Eric Higgins, and Joe Mason, presumably knew they were writing utter bunk and were handsomely compensated for attaching their names to less than credible arguments. That suggests we need a separate category for the more mundane, bread-and-butter shilldom that is dressed up to look like serious academic work. Let’s call it the Lobsters Really Want to be Your Dinner Prize.

Durbin Bill Designed to Throw Wrench in Wall Street Infrastructure Heist

Since we so seldom have positive news to report on NC, we thought it was important to highlight a promising development. Senator Richard Durbin has introduced legislation that would considerably complicate the effort of Wall Street players to ~~pillage~~ privatize state and government assets for fun and profit.

It is key to understand what a bad deal these transactions are for ordinary citizens

Fraud, Anyone? Another Type of Mortgage Document Fabrication Finally Getting Attention

One of the strongest testaments to the severity of the mortgage mess is the use of document fabrication as a remedy to otherwise insoluble problems. Although the business has now been shut down, the firm DocX, which was a subsidiary of Lender Processing Services, had a notorious price sheet that showed the comparatively modest fees it charged for creating, as in fabricating, documents out of whole cloth. Foreclosure defense attorneys reacted strongly to the publication of this information. The price sheets contained codes, and they had repeatedly seen these very same codes on foreclosure related documents and had wondered what they meant.

Why would lawyers and servicers (and their enabler DocX) resort to fraud

Mirabile Dictu! Central Bankers Getting Concerned About Bank Capital Levels Rather Late in the Reform Game

Something very peculiar is afoot. Well after the bank regulatory reform debate was supposedly settled, central bankers seem to be reopening that discussion. It’s puzzling because the very reason the banks won so decisively was that central bankers were not prepared to get all that tough with their charges.

I’m not clear what has led central bankers to get a bit of religion. Is it the spectacle of the Bank of England talking about breaking up the banks (they won’t get their way thanks to bank lobbyist working over the Independent Banking Commission, but no one doubted their sincerity)? Or the Swiss National Bank imposing 19% capital requirements, which as we discussed, is likely to lead to the investment banking are of UBS being domiciled elsewhere (assuming a country capable of bailing it out will have it)? Or perhaps it is central bankers being forced to recognize that their Plan A of extend and pretend and super low interest rates simply won’t lead banks getting to meaningfully higher capital levels when the staff continues to take egregious amounts out in compensation? Or have they realized how bad bank balance sheets are in the Eurozone and how tight the linkages still are among the major capital markets players, and they belatedly realize they need them to be much more shock resistant?

The bottom line is that various central bankers have taken the surprising step of insisting their banks meet more stringent requirements for the biggest banks than those originally planned to be to be included in Basel III. Per Bloomberg:

Michael Hudson: Free Money Creation to Bail Out Financial Speculators, but not Social Security or Medicare

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College

Financial crashes were well understood for a hundred years after they became a normal financial phenomenon in the mid-19th century. Much like the buildup of plaque deposits in human veins and arteries, an accumulation of debt gained momentum exponentially until the economy crashed, wiping out bad debts – along with savings on the other side of the balance sheet. Physical property remained intact, although much was transferred from debtors to creditors. But clearing away the debt overhead from the economy’s circulatory system freed it to resume its upswing. That was the positive role of crashes: They minimized the cost of debt service, bringing prices and income back in line with actual “real” costs of production. Debt claims were replaced by equity ownership. Housing prices were lower – and more affordable, being brought back in line with their actual rental value. Goods and services no longer had to incorporate the debt charges that the financial upswing had built into the system.

Financial crashes came suddenly. They often were triggered by a crop failure causing farmers to default, or “the autumnal drain” drew down bank liquidity when funds were needed to move the crops. Crashes often also revealed large financial fraud and “excesses.”

This was not really a “cycle.” It was a scallop-shaped a ratchet pattern: an ascending curve, ending in a vertical plunge. But popular terminology called it a cycle because the pattern was similar again and again, every eleven years or so. When loans by banks and debt claims by other creditors could not be paid, they were wiped out in a convulsion of bankruptcy.

What Happens if the Consumer Financial Protection Bureau Has No Director By Its Start Date?

A useful article in CNN Money (hat tip SA) describes what happens if the Consumer Financial Protection Bureau does not have a director in place by its official start-up date, July 21. That outcome looks certain, given that the House Oversight Committee has scheduled its ritual flogging of its defacto head, Elizabeth Warren, for July 14, and Senate Republicans have vowed to nix any candidate lest they get to strangle the agency by controlling its budget.

Even if Obama were to have a brain transplant and do something so out of character as to get in a fight with banks and the Republicans, the logical window of opportunity for breaking the Senate’s planned pro-forma sessions (a device to forestall a recess appointment) would be the four week end of summer Congressional break. That starts August 8. So it looks like a sure bet that the CFPB will go past July 21 with no chief in place.

Contrary to popular opinion (and bank lobbyist fond hopes) the CFPB is not stymied if a director has not been installed. What would happen is:

How the Mortgage Industry Bullies Lawyers Who Sue Them (With the Help of PR Outlet Housing Wire)

One of the striking things, as the mortgage crisis has ground on, is how persistent and to some degree effective the industry incumbents have been in influencing news stories. One can argue they’ve been more successful than the TBTF banks, perhaps because if you can tank the global economy, keep your job, and still continue to pay yourself egregious bonuses, you don’t need to stoop to throttling every bit of negative coverage. The fact that near-urban legends like strategic defaults are trumpeted in the media as if they are a meaningful phenomenon, or that defenses of securitization practices by firms like K&L Gates, which have liability on their legal opinions, dominated the coverage on that issue for quite some time until more and more court decisions showed their analysis to be sorely wanting, illustrates how much spin there is in what purports to be news.

For instance, the website Housing Wire, which appears to aspire to cover the mortgage/housing space comprehensively, nevertheless has had some pretty telling omissions. You saw nary a peep of the bombshell of a story by lawyer Abigail Field in Fortune, which found that all of the mortgages securitized by Countrywide and a large proportion of those that it serviced had not been transferred to the trusts as stipulated in the pooling and servicing agreements that govern then. As we have discussed in this blog at some length, this has devastating consequences. If the borrowers challenge a foreclosure, unless the judge is bank friendly, they will probably prevail. No one wants the party that would be in a position to foreclose (someone earlier in the securitization chain) to do so; that’s an admission the securities are not mortgage backed at least in part if not in full and the investors were defrauded. And there are no retroactive fixes (why do you think document fabrications have become so common?)

Similarly, we have commented on how remarkable it is that foreclosure mills all over the US participated in widespread, systematic frauds on courts (robosigining, forgeries, affidavits being filed without the requisite personal knowledge of the affiant, document fabrication) and yet there has been a failure of state bar associations to sanction the attorneys involved.

But there is a long and proud tradition of small firm attorneys being harassed in various ways when the go up against the big dogs, and attorneys taking on the mortgage-industrial complex are getting their share of i

Mirabile Dictu! SEC Probes Relationship Among Toxic CDO Sponsor Magnetar, Merrill, and CDO Manager

It has taken forever for the SEC to probe the workings the biggest sponsor of toxic CDOs and of course the agency is going after only one highly publicized doggy deal. Nevertheless, the SEC has finally decided to look at the less than arm’s length relationship between the hedge fund Magnetar, whose Constellation program played a central role in blowing up the subprime bubble, and its collateral manager, which in this case a Merrill affiliated firm called NIR. As we will discuss, collateral managers were critical because they effectively served as liability shields for the other participants.

Note that Magnetar does not appear to be the target; the Financial Times reports that the SEC is examining how the deal’s underwriter Merrill sold the deal and how it worked with NIR.

Inept Obama “Anybody but Warren” Stance Reveals Fundamental Bank v. Middle Class Fault Line

It is obvious that Elizabeth Warren should head the Consumer Financial Protection Bureau. No less than our favorite NC nemesis, the staunch Administration defender Economics of Contempt, has said she is “tailor made” for the job. In the face of increasingly vocal bank opposition to the notion of an effective bank watchdog for consumers, she’s done better than anyone anticipated. And despite the Republican bluster about using a pro forma session to keep the Senate in business to block a recess appointment, the Democrats could break that maneuver if they wanted to.

So why does Team Obama try to hide its choice not to appoint her behind silly “compromises” like its trial balloon of serving up the CFPB’s number two, Raj Date, as a candidate to lead the agency? The Republicans have already said they will approve no one unless they can cut off CFPB’s air supply by controlling its budget. You can’t negotiate with someone who won’t negotiate. Your options are to defy them or capitulate.

So this “compromise” is an inept sleigh of hand to shift responsibility for the Adminsitration’s refusal to appoint Warren on the Republicans.

The failure of the Team Obama to move beyond this impasse is revealing. It isn’t merely, as we have repeatedly mentioned, a sign that the Administration is in bed with the banksters. That’s a given. We predicted that Warren would not get the job.

But what is astonishing is how she has managed to out maneuver them and how Team Obama has failed for months to come up with responses. It isn’t as if this crowd feels any compunction to hide the contempt it has for the idea of keeping prior promises; just look for some of many examples, at this video Lifting the Veil, from 7:00 to 13:00, or at Glenn Greenwald’s discussion of how in mere weeks what was promised to be a mere fly over exercise in Libya is now turning into another nation-building exercise.

The Warren fiasco reveals deeper layers of the Administration’s character defects: its indifference to the plight of the middle class and its tactical incompetence

New York State Appellate Court MERS Smackdown: Another Nail in the Coffin

There has been a lot of buzz about a strongly worded decision by the New York Second Appellate Division in the Bank of New York v. Silverberg. This is yet another ruling against MERS, but its implications are narrower than some commentators have suggested.

It is critical to note that MERS in theory is a mortgage registry, which means whatever authority it has (a matter still being sorted out), it extends to the lien only. MERS has repeatedly said in depositions it was not a lender and has no rights to the note, the borrower IOU. Thus since in most states the note is the critical instrument (the lien is a “mere accessory”), the party foreclosing needs to be a holder of the note (that actually means more than mere possession, you need to be a party of interest, in some states).

MERS advised last year that servicers stop filing foreclosures in the name of MERS. However, there appear to be quite a few foreclosures undertaken in the name of MERS grinding their way through the system; this was one of them (I’m a bit puzzled that more in states with MERS-unfavorable precedents have not been withdraw and refiled, but that is over my pay grade).

You have to love New York judges. The ruling begins: “This matter involves the enforcement of the rules that govern real property and whether such rules should be bent to accommodate a system that has taken on a life of its own.” It’s not hard to guess where this one is going.

HUD: Bank of America “Significantly Hindered” Mortgage Probe (Updated)

We said Bank of America would rue its purchase of Countrywide shortly after it took at stake in the troubled subprime originator:

[E]ven though the financial press has almost universally hailed Bank of America’s investment in Countrywide as a bold and savvy stroke, the market has remained singularly unimpressed.

I will confess I haven’t studied the details of the deal for a simple reason: I’m appalled that B of A would even consider it. The two banks had reportedly been talking for six years. That means B of A knew, or ought to have known, Countrywide very well. An article by Gretchen Morgenson in Sunday’s New York Times paints Countrywide is, at least in spirit if not the letter of the law, a criminal enterprise…. But I know lawyers who have Countrywide in their crosshairs, and I am certain they have plenty of company.

To put it another way: there’s enough fraudulent selling in the the subprime market in general, and smoke around Countrywide in particular, to deter anyone investor who takes litigation or reputation risk seriously.

In my day, no respectable institution would make a high-profile equity investment or otherwise closely link its name with an organization that had the whiff of serious liability about it (except in liquidation or some other scenario which got rid of the incumbent management team).

It looks like Bank of America, in a misguided effort to limit Countrywide-related damage, has adopted some of its less than seemly habits, namely a disregard for oversight.

Michael Hudson: The Financial Road to Serfdom – How Bankers are Using the Debt Crisis to Roll Back the Progressive Era

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College. Cross posted from CounterPunch.

Financial strategists do not intend to let today’s debt crisis go to waste. Foreclosure time has arrived. That means revolution – or more accurately, a counter-revolution to roll back the 20th century’s gains made by social democracy: pensions and social security, public health care and other infrastructure providing essential services at subsidized prices or for free. The basic model follows the former Soviet Union’s post-1991 neoliberal reforms: privatization of public enterprises, a high flat tax on labor but only nominal taxes on real estate and finance, and deregulation of the economy’s prices, working conditions and credit terms.

New York Attorney General Schneiderman Investigating Validity of Mortgage Transfers at Bank of America (Updated: Trustees Bank of New York and Deutsche Bank Also Being Probed)

The mortgage industry defenders are looking more and more like fools or liars.

Last year, a case called Kent v. Countrywide created a firestorm because both Bank of America’s attorney (who was admittedly just a typical foreclosure mill type) and a senior executive from Countrywide’s servicing unit said that Countrywide as a matter of business practice retained mortgage notes. That was the wrong thing to say in court. From a November post:

We’ve had a series of posts (see here, here, and here) on the judge’s decision in a case called Kemp c. Countrywide, which provided what appeared to be the first official confirmation of what we’ve long suspected and described on this blog: that as of a certain point in time post 2002, mortgage originators and sponsors simply quit conveying mortgage notes (the borrower IOUs) through a chain of intermediary owners to securitization trusts, as stipulted in the pooling and servicing agreements, the contracts that governed these deals. We say “appeared to be” because Bank of America’s attorney promptly issued a denial, effectively saying that the employee whose testimony the judge cited in his decision, one Linda DeMartini, a team leader in the bank’s mortgage- litigation management division. didn’t know what she was talking about. As we discussed, this seems pretty peculiar, since she was put on the stand precisely because she was deemed to be knowledgeable about Countrywide’s practices….

If true, this has very serious implications. As we’ve indicated, it means that residential mortgage backed securties are not secured by real estate, or as Adam Levitin put it, they are “non mortgage backed securities….With the ramifications so serious, expect industry denials to continue apace until the evidence becomes overwhelming.

That time has arrived.