How Allstate Used Sampling To Confirm JPMorgan/WaMu Lied About Virtually Everything When Selling Mortgages

Tyler Durden's picture

A month ago, we wrote an article titled: "How Allstate Used Sampling To Confirm BofA/Countrywide Lied About Virtually Everything When Selling Mortgages" in which we described how the insurance company used sampling to confirm that Bank of America had misrepresented virtually every metric when selling mortgages: everything from loan LTV, to percentage of owner-occupied properties. The differentials in some cases were as large as 50%. Today, Allstate, again under the guidance of Quinn Emmanuel, has used the same technique to determine that JPM and WaMu are guilty of precisely the same criminal misrepresentation in its prospectuses when selling tens of thousands of loans. And once again, this will most certainly lead to absolutely nothing. The reason? Just read Matt Taibbi's Rolling Stone piece on why when it comes to crime, Wall Street has a limitless "get out of jail" card. The alternative is a domino-like fall out that would likely see most if not all Wall Street executives actually having to lose sleep over the possibility of jail time (which would also take down every single externally regulating and SRO organization created to "police" the greatest scam in history). And that, as the FCIC has determined, will never happen until the market is in an uptrend. What happens after the next (and final, unless intelligent and wealth extraterrestrial life is discovered, willing to bail out the entire world which has gone all in the ponzi recreation quest) crash is a different story.

From the Allstate vs JP Morgan lawsuit:

Allstate selected a random sample of loans from each offering in which it invested to test Defendants’ representations on a loan-level basis. Using techniques and methodologies that only recently became available, Allstate conducted loan-level analyses on nearly 26,809 mortgage loans underlying its Certificates, across 17 of the offerings at issue here.

For each offering, Allstate attempted to analyze 800 defaulted loans and 800 randomly-sampled loans from within the collateral pool. These sample sizes are more than sufficient to provide statistically-significant data to demonstrate the degree of misrepresentation of the Mortgage Loans’ characteristics. Analyzing data for each Mortgage Loan in each Offering would have been cost-prohibitive and unnecessary. Statistical sampling is an accepted method of establishing reliable conclusions about broader data sets, and is routinely used by courts, government agencies, and private businesses. As the size of a sample increases, the reliability of its estimations of the total population’s characteristics increase as well. Experts in RMBS cases have found that a sample size of just 400 loans can provide statistically significant data, regardless of the size of the actual loan pool, because it is unlikely that such a sample would yield results markedly different from results for the entire population.

Specifically, Allstate did the following:

To determine whether a given borrower actually occupied the property as claimed, Allstate investigated tax information for the sampled loans. One would expect that a borrower residing at a property would have his or her tax bills sent to that address, and would take all applicable tax exemptions available to residents of that property. If a borrower had his or her tax records sent to another address, that is good evidence that he or she was not actually residing at the mortgaged property. If a borrower declined to make certain tax exemption elections that depend on the borrower living at the property, that also is strong evidence the borrower was living elsewhere.

A review of credit records was also conducted. One would expect that people have bills sent to their primary address. If a borrower was telling creditors to send bills to another address, even six months after buying the property, it is good evidence he or she was living elsewhere.

A review of property records was also conducted. It is less likely that a borrower lives in any one property if in fact that borrower owns multiple properties. It is even less likely the borrower resides at the mortgaged property if a concurrently-owned separate property did not have its own tax bills sent to the property included in the mortgage pool.

A review of other lien records was also conducted. If the property was subject to additional liens but those materials were sent elsewhere, that is good evidence the borrower was not living at the mortgaged property. If the other lien involved a conflicting declaration of residency, that too would be good evidence that the borrower did not live in the subject property.

In a nutshell, as Allstate summarizes, it was lies all the way:

the disclosed underwriting standards were systematically ignored in originating or otherwise acquiring non-compliant loans. For instance, recent reviews of the loan files underlying some of Allstate’s Certificates reveal a pervasive lack of proper documentation, facially absurd (yet unchecked) claims about the borrower’s purported income, and the routine disregard of purported underwriting guidelines. Based on data compiled from third-party due diligence firms, the federal Financial Crisis Inquiry Commission (“FCIC”) noted in its January 2011 report:

The Commission concludes that firms securitizing mortgages failed to perform adequate due diligence on the mortgages they purchased and at times knowingly waived compliance with underwriting standards. Potential investors were not fully informed or were misled about the poor quality of the mortgages contained in some mortgage-related securities. These problems appear to be significant.

Some of the unbelievable findings are presented below. They speak for themselves...and, again in any normal non-banana republic, would lead to at least several criminal prosecutions. In America? No way.

Not surprisingly, the performance of loans issued by JPM and its acquisition Bear, deteriorated rapidly post issuance:

And some other notable disclosures from the Allstate filing:

Evidence Demonstrates That Credit Ratings Were A Garbage-In, Garbage-Out Process
The supposedly-independent ratings given to the Certificates by the major credit rating agencies were based on the loan profiles fed to the agencies by Defendants. As previously explained, key components of that data were false. As such, Defendants essentially predetermined the ratings by feeding garbage into the ratings system. This rendered misleading Defendants’ representations concerning the significance of the Certificates’ credit ratings because Defendants failed to disclose that the ratings would be based entirely on information provided by Defendants themselves, and therefore would not reflect the true credit risk associated with the Certificates.

Defendants Were An Integrated Vertical Operation Controlling Every Aspect Of The Securitization Process
Because the Wall Street banks, such as JPMorgan and Bear Stearns, wanted to ensure a steady supply of mortgage loans to securitize, they often acquired their own loan originators. Conversely, loan originators, such as WMB, often formed their own underwriters so they could securitize their loans without paying fees to the Wall Street banks. In this way, Defendants became integrated vertical operations controlling every aspect of the securitization process, giving them actual knowledge about every aspect of the securitization process, from loan origination through sale to Allstate.

Percentage of Known Non-Conforming Loans. Defendants fraudulently omitted the fact that both the underwriters’ internal due diligence, as well as third-party due diligence firms, had identified numerous loans that did not conform to the stated underwriting guidelines. Nor did Defendants disclose that many of those very same non-conforming loans had been “waived” into the collateral pools underlying the Certificates anyway. That high numbers of rejected loans were knowingly being included in the underlying mortgage pools is not only a fraudulent omission in its own right, but makes even more misleading Defendants’ disclosures about their underwriting process.

Owner Occupancy Statistics. The Offering Materials made specific representations regarding the percentage of borrowers who would be occupying the property being mortgaged – a key risk metric given that borrowers are less likely to “walk away” from properties they live in, as compared to properties being used as vacation homes or investments. Analytical tools recently made available to investors confirm that, in truth, a far greater percentage of the loans underlying Allstate’s Certificates than represented were given to borrowers who lived elsewhere.

(iv) Loan-to-Value Ratios. The Offering Materials represented that the underlying loans had specific loan-to-value (“LTV”) and combined loan-to-value (“CLTV”) ratios. These are additional key risk metrics, because they represent the equity “cushion” that borrowers have, and the likelihood of repayment to lenders upon foreclosure. Analytical tools recently made available to investors confirm that the Offering Materials vastly overstated the value of the collateral being included in the loan pools, and hid additional liens that had been placed on the properties. This falsely reduced the loans’ LTV and CLTV ratios.

(v) Purpose And Use Of Exceptions. The Offering Materials represented that loans which did not meet certain criteria were approved as “exceptions” only on the basis of countervailing features of the borrowers’ risk profiles that ‘made up’ for negative aspects of the risk profile. In truth, however, “exceptions” were used as a way to increase loan volume by circumventing the applicable underwriting guidelines. For instance, recent reviews of the loan files underlying some of Allstate’s Certificates reveal that non-compliant mortgage loans did not have any identified countervailing features, and that various undisclosed procedures were employed to create loan pools outside of the disclosed underwriting guidelines.

Credit Enhancement Features. The Offering Materials represented that the Certificates had certain “credit enhancements” used to improve the likelihood that holders of such certificates would receive regular principal and interest payments thereon.  “Credit enhancements” are features designed to reduce the risk of loss to investors in the senior tranches of certificates. These features can include overcollateralization (i.e., the value of the collateral underlying the certificates is greater than the principal balance of the certificates), the subordination in right of payment of junior certificates to senior certificates, the establishment of reserve accounts, a mortgage pool insurance policy, an interest rate swap agreement, or a combination of such features

Regardless of the glaring evidence to the contrary, we are now 100% confident that nothing short of another cataclysmic market crush, which will occur once the Central Planning cartel finally loses control of the market, nobody will be held accountable for the same bubble reflation that the Fed itself is now hoping and praying that banks can succeed in. Hoping otherwise is nothing less than supreme naivete as to how the US "democratic" system operates.

Full filing


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Misean's picture

"What happens after the next crash is a different story."

Paper and cotton and CPU cycles cost more than a trillion Weimar Benny Bucks?

The Axe's picture

Banks don't have to tell you the truth!!!!  Wells fargo doesn't even have to tell the SEC why their CFO left.....ha ha 

Zero Govt's picture

the WS bwankers don't want the truth but matters not the sack of shit that is mortgages will come back to haunt them in non-stop legal cases from the investors they shafted, the State Law they pissed all over and the mortgage owners they tried to shaft with fraudulent documentation ... this shit stinks too much to cover up and will be the end of them a few years down the road be assured

Ponziconomy's picture

Manhattan: The GITMO of finance (without the fence).


Temporalist's picture

There is no fraud.  There is no inflation.  Gold is in a bubble.  Politicians are only concerned about their constituents.

USA 2.0

Maybe it's time to put Martha Stewart back in jail...

whisperin's picture

I know that folks from allstate are reading ZH. If you really are serious about gettinting your money back you need to read the piece that Matt Taibbi wrote and ask yourself who else would be vunerable. That is the federal officials and employees who are supposed to be investigating this stuff. If in the due course of your litigation you find that certain individuals of our fine federal/state entities failed to act or acted in such an aggregious manner as to subvert, hinder or help perpetuate a fraud then you need to sue them individually as well. I know that they are covered by federal tort protections. This does not extend to such actions. The only way the exec's stay out of jail is if the minions escape as well. So far it's been all gain and no pain for them as well. Just like Lloyd going to jail a minion who loses all will put a cold chill into regulator tailpipes. 

Tic tock's picture

Why cannot the President sue this case?

New_Meat's picture

He could, but that would call into question the unerlying "fairness" that the Community Reinvestment Act was intended to enforce.  Remember that Janet Reno and ACORN were picketing and threatening institutions that didn't issue mortgages.  Pressure got too much.  So the safety valve was to re-sell crap mortgages to an enhanced Fannie and Freddie, who did their new duty by scrapping all but the AAA brand to put on all of the critters who came through their pipe.  Fannie and Freddie had certain excellent political help, e.g. Rahm: and

Raines made like almost $100MM, e.g.:

(We long suspected that Our Dear Governor Deval Patrick was angling for one of these sweet posts, but, well, the bottom fell out so he had to be Pluffe's trial run for the 'hopey-changey' thing.)

Did I mention that the AG is Eric Holder?

Horizon3's picture

Exactly the reason, mortgages should NOT be sold by the originating bank, the whole housing collapse debacle was caused by it.

Granted it was a device created to accomidate the stupid laws passed by Congress that basically made it mandatory to lend to anyone, irregardless of heir ability to repay.

In the "Good Old Days" banks and loan companies made a mortgage, and they held the paper untill it was paid off.

Another thing that led to it, was the propensity of fools paying $300k or more for a $80k house just because they wanted it more than some other dufus that was driving up the price, "Bidding War".

If Congress really wanted to stop this idotic mortgage trading scam, they could pass a bill that makes it illegal .. will they do it? probably not .. they will save that for a future "Look We Fixed What We Broke Moment".

topcallingtroll's picture



ANOVA is great because it also can give you the difference between the populations so that the damages are easily calculated as is shown in the tables as well as the possibility that chance alone gave the results.  A one percent chance that the data was random, versus a 99 percent chance that the data difference is a deliberate difference should be good enough for "proponderance of evidence."  In such a case your P <0.01

This same technique could be used by CALPERS on their lawsuit regarding best pricing of trades.  It can be used by anyone who wants to prove that credit card companies systematically gave the worst pricing in foreign exchange to credit card customers who used their cards overseas.  It can be used to determine any time traders systematically mis attribute trades or systematically give worse pricing to certain clients.

I am confident that if a smart lawyer took on the big banks and got the data for just a single day of foreign exchange transactions, that it would be apparent that credit card holders got the worst pricing all throughout the day.  This pads the premiums from flow trading and hedging.  If you were delta hedging and trading around an order book you would show excessive profits.  They would stick out like a sore thumb.  ANOVA would be able to show any systematic bias in how foreign exchange trades were attributed, or any systematic bias in hedging around order flow to goose the profits illegally by systematically giving worse pricing to some and better pricing to others.. 

Just get a quant and explain you want to break the daily trading data into several populations.  Large hedge fund traders, retail traders, proprietary traders, and then just grab the data for the trades done on a single day.  In determining if banks deliberately gave the worst pricing throughout the day to credit card foreign exchange transactions then divide the population into credit card foreign exchange transactions and non credit card foreign exchange transactions.  Better yet do a MANOVA a multivariate analysis of variance and break the data down into bank proprietary trading, large clients, etc, and you can see where the gains went that were cheated out of the credit card customers.  I hope I explained this well enough  Anybody is welcome to help clarify.

Agent P's picture

"I hope I explained this well enough  Anybody is welcome to help clarify"

Statistical significance, bitchez!

topcallingtroll's picture

I didn't get to work on a second draft before it locked, but this can be used for any trading where there is a systematic bias in how trades are attributed, otc derivatives, foreign exchange, retail stock trading, and if somebody would look at how hillary turned 1000 dollars into 100,000 dollars in a commodity account it would be clear the pattern of misrepresented trades, since it is doubtful this is the only time that particular broker did someone a favor.

Withdrawn Sanction's picture

The watermen of the Eastern Shore know a thing or 2 about blue crabs.  After the first crab you catch, when you place it in the bushel basket, you have to put the lid on the basekt, else it'll climb up the basket sides and escape.  But put the second crab in along w/the first and the lid need not be replaced.  Either crab, seeing the other trying to escape, will pull the potential escapee back down into the basket.

The key to the mortgage fraud is not to rely on inept or corrupt financial policemen to prosecute but rather to count on the self-interests of the wealthy investors who have been scammed or on those who no longer want to participate in the scam.  Thus, Allstate, the CFO of Wells, and others are the second and later crabs in the mortgage basket and they seem unlikely to allow the other crabs (JPM/BSC, BAC, etc.) to escape.

le_cinque's picture

This has seriously put doubts in my mind about the soundness of statistical analysis. I think it is voodoo science and should be banned.

BofA, I can see it, but JMP, come on, this cannot be true.

topcallingtroll's picture

if someone could convince you that there was a 99 percent chance that the differences in the actual loan components versus the represented loan components was a real difference and could not have been just random or accident, would that be enough evidence?  Remember in a civil judgment it is preponderance of the evidence, not reasonable doubt.

Lapri's picture

Why would Allstate think their certificates are actually backed by those mortgages?

Zero Govt's picture

Round up sub-prime pigs and take pigs ear (dodgy high risk mortgage)

'Transform' pigs ear into AAA-rated silk purse using CRA fraud factory

Sell AAA-rated silk purse to pension and sovereign funds

Usurp State Law using butchers factory called MERS

Pocket vast bonuses for selling pigs ears as silk purses

Short pigs ears and pocket additional pig swill bonuses 

When pigs ears (shit) hits the fan call fellow snorter buddies in Washington

Washington and Fed bails out and buys your steaming pig shit with US citizens money  

Increase Exec bonuses with taxpayer money, give speech at NY Uni on how 'astute' you are

Maintain pretence you're a genius, everyone else was born yesterday and Washington, The Fed and Regulators will continue to be so corrupt you'll be safe from criminal prosecution 

Dirtt's picture


You might have added at the end confiscate retirement accounts in exchange for "universal" "healthcare."

Zero Govt's picture

ah yes the pensions industry, sure to become another 'hot topic' in Europe you may have heard the Hungarian Govt tried to rob private pensions to bailout their own bankrupt public pensions, the French Govt robbed their own long-term pension savings to bailout short term social security bankruptcy while in Britain the Labour Party already raided private pensions 3 times turning a once decent industry into a shambles. Seems politicians, like bwankers, can't do their sums very well, ho hum! 

Thinking Bulldog's picture

This is by far the most cogent summary of subprime I have yet read.  Zero Gov't Score. Well played Sir.

whatz that smell's picture

god bless the bernank!- building a ponzi to heaven.

i heart you man! may your descendants ascend!

eatthebanksters's picture

The owners of the certificates have a much bigger problem based upon recent legal decisions...that is do they own the note (and have standing to foreclose).  I have been researching this heavily as my home is underwater and my loan is supposedly in a WAMU Certificate (I won't say which one).  The problem is there is no record of my note being properly assigned and in fact the the REMIC requirements may have been violated.  Then there are issues with the pooling and servicing agreement which have been found to be invalid in court.  This may not help me, but it certainly adds strength to the put back cases the investors are filing.  I'm happy to see our legal system working where our criminal prosecution and governmantal system has failed.

topcallingtroll's picture

In a recourse state it is possible this might get so snarled up in a few cases that they can't take the house to satisfy a default, but they could still go after you personally and any other assets you have.  That is a problem that people in recourse states haven't thought about. 

PulauHantu29's picture

"JPM lied about every mortgage..."

Do you see something wrong here? Is this unusual? I thought it is the "industry norm."

Ted K's picture

Surprised this didn't get more comments, this is outstanding data.  Great stuff Tyler & Company, please be persistent on this type stuff and keep it up.  Absolutely awesome.  You guys put WSJ to shame.  WSJ is a joke.