Chris Whalen's latest Institutional Risk Analytics is a must read letter as it highlights yet another aspect of foreclosure fraud, one which finds various analogues in the way the MBS originating banks took advantage of AIG, knowing full well it was stuffed to the gills with worthless pieces of paper and taking out enough insurance on it to require a federal bailout when mark to fraud failed and mark to market finally worked for a very short period of time. Now, it seems, it is the mortgage insurers turn: "So today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent." The question is how many CDS have Goldman et al purchased in bulk in anticipation of the imminent wholesale MI Event of Default, which will force Geithner to once again use the Mutual Assured Destruction wildcard and force taxpayers to bail out those holding MI insurance, especially if the originators and servicers end up being one and the same...
From Whalen's latest:
Several mortgage market observers describe the current private mortgagre insurance market in the U.S. as a regulatory artifice -- or more accurately regulatory arbitrage. MI was re-created expressly for the GSEs to provide cover for loans with an LTV greater than 80%. It was a simple business and, if the management of an MI underwriter was not too stupid, it could make a decent return. The problem is that management of the old line MIs typically did a lot of very stupid things, acts of idiocy that were encouraged by the GSEs and their allies in Congress. A handful of the more egregious lapses in judgment by the MIs and the GSE included risk management changes that come under the familiar story of "innovation," a familiar ruse that was a key part of the push by both political parties for affordable housing going back decades:
(1) Eliminating independent risk management departments; line managers in the MIs were allowed to override corporate risk departments, particularly when insuring large bulk deals.
(2) Signing fraud, and documentation (completion) waivers in order to land large bulk deals from the largest producers.
(3) Insuring bulk deals without performing random inspections to (a) keep lenders honest and (b) assess underwriting quality.
(4) Insuring subprime loans (non GSE loans) without proper credit models; and insuring production from lenders with questionable credentials.
(5) Insuring large quantities mortgage product that was outside the knowledge base of the MIs. Remember that the MIs had almost 40 years of insuring plain vanilla F&F product. Now they were insuring 220's and every other kind of crappy paper the lenders threw at them. They had no clue how this stuff would perform. No attempt was made to model it properly.
So what happened? By summer of 2007 most of the bulk GSE pools underwritten by the MIs started to experience extremely high levels of delinquencies. But rather than curtail MI operations and shore up underwriting, the MIs made a big push and increased subprime production insuring large amounts of subprime product (lots of 220s) all the way into first quarter 2008.
The MIs tripled down and did so in hopes of making enough fee income to (1) meet plan and (2) shore up capital that had started to bleed. This push, which was not always reported honestly to share and bond holders, signed the respective death warrants for Fannie and Freddie. But the zombie dance party rocks on.
So today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent.
Thus we go back to the low-income borrower, who is forced by the GSEs to pay for private mortgage insurance that will never pay out. The relationship between the GSEs and the MIs is identical to the "side letter" insurance transactions between AIG and Gen Re, and come to think of it, the AIG credit default swaps trades with Goldman Sachs (GS) and various other Wall Street dealers. In each case the substance of the transaction is to falsify the financial statements of the participants. And in each case, the acts are arguably criminal fraud. And in the case of the zombie banks, the GSEs and the MIs, the fraud is being actively concealed by Congress, the White House and agencies of the U.S. government led by the Federal Reserve Board. Is this not tyranny?
Look for topical comparisons of fraudclosure to the AIG implosion to gain far more prominence as the mortgage fraud topic just refuses to go away, and has the big 3 holders, Paulson, Och Ziff, and Caxton, cowering in semi-lit rooms, thinking of effective exit strategies that, for now, do not involve wholesale middle-class bailouts. Also look for the Treasury to soon disclose just how profitable its imminent bail out of the mortgage insurers will end up being for taxpayers...