Category Archives: Credit markets

60 Minutes on Mortgage Securitization Document Lapses and Foreclosure Fraud

For readers of Naked Capitalism and any of the foreclosure-related blogs, this 60 Minutes report covers familiar ground. However, the fact that the story is coming now shows that even with bank efforts to pretend that there is nothing to see here, in fact the problems are widespread and difficult to solve. This segment, as highlighted in the text advanced release last Friday, includes a discussion of DocX and the practice of using “surrogate signers“, which are temps signing….in the name of robosigners! Having robosigners relying on corporate authorizations wasn’t low cost enough, apparently. Rather than take the time and effort to have more robosigners authorized (which is already not kosher, as we know, since the robosigners were attesting to have personal knowledge when they clearly didn’t), they went beyond providing bogus affidavits to having workers engage in forgery.

It also showed the work of NACA, but didn’t provide the most crisp description of the NACA process and how it addresses servicer bottlenecks (see here for more details). But it does feature Lynn Szymoniak and the procedures of the now-shuttered DocX, the infamous document fabricating subsidiary of LPS.

So consider this an interesting view of the state of play.

Magnetar Strikes Again: JP Morgan Negotiating Settlement with SEC on Toxic CDO

As longstanding readers of this blog presumably know, we broke the story of Magnetar, a Chicago-based hedge fund. Magnetar was arguably the biggest player in driving toxic subprime demand through its program of creating hybrid CDOs (largely consisting of credit default swaps, but also including cash bonds by design).

Magnetar constructed a strategy that was a trader’s wet dream, enabling it to show a thin profit even as it amassed ever larger short bets (the cost of maintaining the position was a vexing problem for all the other shorts, from John Paulson on down) and profit impressively when the market finally imploded. Both market participant estimates and repeated, conservative analyses indicate that Magnetar’s CDO program drove the demand for between 35% and 60% of toxic subprime bond demand. And this trade was lauded and copied by proprietary trading desks in 2006.

As a source who worked in the structured credit area of a firm that did Magnetar trades explained in ECONNED:

Alabama Judge Accepts New York Trust Theory, Dismisses Foreclosure Action for Failure to Comply With Pooling and Servicing Agreement (Updated)

Paul Jackson has been forced to eat a bit of crow. A judge in Alabama in a case called Horace v. LaSalle overturned a foreclosure action based on the failure of the trust to comply with the terms of the pooling & servicing agreement. As you see, the judge ruled that the borrower can assert rights under the Pooling and Servicing agreement as a third party beneficiary and that he was “surprised to the point of astonishment” that the trust had not complied with the terms of its PSA.

The ruling in favor of the borrower endorses an argument we have made since last year on this blog, that the pooling and servicing agreement stipulated a specific set of transfers be undertaken to convey the borrower note (the IOU) to the securitization trust within a specified time frame. New York trust law was chosen to govern the trusts precisely because it is unforgiving; any act not specifically stipulated by the governing documents is deemed to be a “void act” and has no legal force. So if a the parties to a securitization failed to convey a note to the trust within the stipulated timetable, retroactive fixes don’t work. In this case, the note had been endorsed by the originator, Encore, but not by the later parties in the securitization chain as required in the pooling and servicing agreement. See the order below:

Banksters’ Mortgage Counteroffer Makes a Further Mockery of Fraudclosure Settlement Negotiations

It should really be no surprise that the banksters have the temerity to take a weak mortgage fraud settlement proposal, advanced by the 50 state attorneys general and various Federal agencies, and water it down to drivel. Since March 2009, when the Obama administration cast its lot with them, major financial firms have become increasingly intransigent. And this has proven to be a winning strategy, since Obama’s pattern over his entire political career has been to offer proposals that don’t live up to their billing, then eagerly trade away what little substance was there in the interest of having bragging rights for yet another “achievement”. The degree of exaggeration involved is roughly equivalent to him claiming he’d bedded every woman he had ever met for coffee.

David Apgar: Is That a Horse’s Head Under the Sheets or Are You Just Happy to Fleece Me?

By David Apgar, the Director of ApgarPartners LLC, a new business that applies assumption-based metrics to the performance evaluation problems of development organizations, individual corporate executives, and emerging-markets investors, and author of Risk Intelligence (Harvard Business School Press 2006) and Relevance: Hitting Your Goals by Knowing What Matters (Jossey-Bass 2008). He blogs at WhatMatters. The […]

Quelle Surprise! Fed Lent Over $110 Billion Against Junk Collateral During Crisis

Former central banker Willem Buiter once remarked that the Federal Reserve’s “unusual and exigent circumstances” clause, which enables it to lend to “any individual, partnership or corporation” if it can’t get the dough from other banks, allows the Fed to lend against a dead dog if it so chooses.

It looks like the US central bank did precisely that.

Matt Stoller: Comptroller of the Currency Orders National Banks to Cover Up Foreclosure Scandal

By Matt Stoller, a fellow at the Roosevelt Institute. His Twitter feed is:
http://www.twitter.com/matthewstoller. Cross posted from New Deal 2.0

Acting OCC head John Walsh is standing in the way of information that could help desperate homeowners.

I was rereading some testimony by Mark Kaufman, the Maryland Commissioner of Financial Regulation, on mortgage servicer behavior. He testified this month before the House Oversight Committee on something quite scandalous.

Why Liberals Are Lame (Part 2)

It may seem churlish to pick on a specific, well intentioned liberal organization to illustrate a rampant pathology within what passes for the left in the US. Nevertheless, examples serve as important case studies and hopefully will help both the object of presumably unwanted attention and its broader constituency understand that many of their campaigns actually undermine the causes they purport to represent.

Let’s look at an example, an e-mail from the Progressive Change Campaign Committee to constituents of Alabama’s Spencer Bachus, the Chairman of the House Financial Services Committee and self-proclaimed Best Friend of Banks (“My view is that Washington and the regulators are there to serve the banks”):

Josh Rosner: Dodd Frank is a Farce on Too Big to Fail

Note: Josh Rosner, managing director of Graham Fisher & Co., submitted this written testimony for a March 30 panel for the House Oversight Committee that was cancelled. His testimony has been entered into the Congressional Record and will be available on the House Oversight Committee website in the near future. The text appears below..

Has Dodd-Frank Ended Too Big to Fail?

Almost three years have passed since the United States financial system shook, began to seize up, and threatened to bring the global economy crashing down. The seismic event followed a long period of neglect in bank supervision led by lobbyist-influenced legislators, “a chicken in every pot” administrations, and neutered bank examiners.

While the current cultural mythology suggests the underlying causes of the crisis were unobservable and unforeseeable, the reality is quite different. Structural changes in the mortgage finance system and the risks they posed were visible as early as 2001. Even as late as 2007 warnings of the misapplications of ratings in securitized assets such as collateralized debt obligations and the risks these errors posed to investors, to markets, and to the greater economy were either unseen or ignored by regulators who believed financial innovation meant that risk was “less concentrated in the banking system” and “made the economy less vulnerable to shocks that start in the financial system.” Borrowers, these regulators argued, had “a greater variety of credit sources and (had become) less vulnerable to the disruption of any one credit channel.”

In the wake of the crisis, and before either the Congressional Oversight Panel or the Financial Crisis Inquiry Commission delivered their final reports on the causes of the crisis, Congress passed the Dodd-Frank Act. The act claimed to end the era of “too-big-to-fail” institutions and sought to address the fundamental structural weaknesses and conflicts within the financial system. To falsely declare an end to Too Big to Fail without actually accomplishing that end is more damaging to the credibility of U.S. markets than a failure to act at all. The historic understanding that our markets were the most free to fair competition, most well regulated and transparent, has been the underlying basis of our ability to attract foreign capital. It is this view that, in turn, had supported our markets as the deepest, broadest, and most liquid.

In fact, Dodd-Frank reinforces the market perception that a small and elite group of large firms are different from the rest.

Hooray! Jamie Dimon Says New Capital Rules Will Kill Zombie Banks!

It really is a sign of how complete a victory that the banks have won over the rest of us that Jamie Dimon has the nerve to complain about banking regulations. Even worse, he is egging on a effort by Republican bank-owned Congresscritters to roll weak bank capital rules back.

His position is pure, simple, unadulterated bank propaganda: what is good for banks is good for America, when the converse is true. Simon Johnson warned in his May 2009 article “The Quiet Coup” that the financial crisis had turned American into a banana republic with a few more zeros attached, a country in the hands of oligarchs, in this instance, the financiers. And we playing out the same script he saw again and again in emerging economies:

Lender Processing Services Behind More Record-Keeping Botches and Foreclosure Forgeries

Lender Processing Services has played a singularly destructive role in the mortgage servicing industry. The firm not only offered document fabrication services through DocX, a company it acquired and was forced to shut down after the Department of Justice started sniffing about, but is being revealed to be involved in more abuses as far as borrower records and legal process are concerned. Readers may recall that it is also the target of two national class action suits on illegal legal fee sharing which if successful will produce multi-billion-dollar damages.

This abuses matter due to the role that LPS has come to play. It is the biggest player in default services, meaning it acts as the de facto selector and supervisor of foreclosure mills via its system, LPS Desktop, which manages and oversees the work of local law firms on behalf of its bank servicer clients. It also provides the servicing platform for more than half of the servicing industry. And as our two latest examples show, the company clearly places its profits over integrity of records and due process.

OMG, Greenspan Claims Financial Rent Seeking Promotes Prosperity!

I was already mundo unhappy with an Alan Greenspan op-ed in the Financial Times, which takes issue with Dodd Frank for ultimately one and only one disingenuous and boneheaded reason: interfering with the rent seeking of the financial sector is a Bad Idea. It might lead those wonderful financial firms to go overseas! US companies and investors might not be able to get their debt fix as regularly or in an many convenient colors and flavors as they’ve become accustomed to! But the Maestro managed to outdo himself in the category of tarting up the destructive behaviors of our new financial overlords.

What about those regulators? Never never can they keep up with those clever bankers. Greenspan airbrushes out the fact that he is the single person most responsible for the need for massive catch-up. Not only due was he actively hostile to supervision (and if you breed for incompetence, you are certain to get it), but he also gave banks a green light to go hog wild in derivatives land. And on top of that, he allowed banks to develop their own risk models and metrics, which also insured the regulators would not be able to oversee effectively (there would be a completely different attitude and level of understanding if the regulators had adopted the posture that they weren’t going to approve new products unless they understood them and could also model the exposures).

And the most important omission is that the we just had a global economic near-death experience thanks to the recklessness of the financial best and brightest.

Are Banks Scheming to Gut the Role of the Courts in Foreclosures?

I may be overreacting but given the sorry behavior of banks throughout the crisis and its aftermath, better to be vigilant than sorry.

The Wall Street Journal provided a very sketchy summary of the counterproposal that the banks will put on the table in the foreclosure fraud settlements this week:

The 15-page bank proposal, dubbed the Draft Alternative Uniform Servicing Standards, includes time lines for processing modifications, a third-party review of foreclosures and a single point of contact for financially troubled borrowers. It also outlines a so-called “borrower portal” that would allow customers to check the status of their loan modifications online.

But the document doesn’t include any discussion of principal reductions. Nor does it include a potential amount banks could pay for borrower relief or penalties.

This seems innocuous, right?

Think twice.

The Consumer Financial Protection Bureau’s Bogus Mortgage Settlement Math

Shahien Nasiripour of Huffington Post’s new article, “Big Banks Save Billions As Homeowners Suffer, Internal Federal Report By CFPB Finds,” includes a presentation from the Consumer Financial Protection Bureau dated February 14 prepared for Tom MIller, the Iowa Attorney who is leading the 50 state attorneys general foreclosure fraud settlement negotiations.

If I were a betting person, I’d wager this document was leaked to show that the Administration and the AGs did not just make up the $20 to $30 billion settlement figure that has been bandied about ask their ask, but have a sound, reasoned basis for their demand.

Unfortunately, the document simply proves that they did make up the $20 to $30 billion figure.Not only is the analysis effectively fabricated, it’s the wrong analysis. But I have to say, having been at McKinsey, it’s impressive the use of McKinsey firm format makes a story look much more credible than it really is.

Illustrating How Infrastructure Deals Result in High Fees and Diminished Service

It isn’t hard to understand why infrastructure deals (the sale of government owned assets to private investors) are inherently a ripoff. We’ve had such a vogue for private contracting that a lot of services that are almost certainly more cheaply run by the government (e.g., logistical support for the military as proven by Iraq profiteering by Blackwater) that it’s a pretty safe assumption that most assets now held by government bodies are the the sort of thing that it makes sense for the government to own: high cost to build, long lived, not terribly complex to maintain assets.

Infrastructure investors like to see returns in the mid to upper teens. The deals are complicated to put together, so the fees are high. The deal needs to generate enough to pay the fees and generate the required returns. Since it is pretty much impossible to run something like a parking meters “smarter”, the usual course of action is a combination of increasing charges to the users (taxpayers who in the past used it for free or much less) and cut maintenance costs.

The Sydney-based investment bank Macquarie pioneered this business. Reader Crocodile Chuck pointed us to one of its latest capers. From the Sydney Morning Herald: