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How Did the Banks Get Away With Pledging Mortgages to Multiple Buyers?

George Washington's picture




 

Washington’s Blog

I've repeatedly documented that mortgages were pledged multiple times to different buyers. See this, this and this.

In response, some people (including one of the country's top bankruptcy lawyers) have told me they don't buy it.

Specifically, they ask such questions as:

  • With
    a mortgage sold to two different entities, wouldn't the income
    from the mortgage be shown on the books of both entities?
  • Was
    the interest/principal payments that were made by the homeowner
    before they stopped being divided between both entities? If so,
    wouldn't this have rung alarm bells immediately?
  • If only one was getting it, why didn't the other entity immediately try to foreclose?
  • If
    there was one servicer involved, was the servicer covering the
    difference between what was collected and the payments actually
    made? If so, how did the servicer do this and still remain in
    business?
  • If two servicers were involved, why didn't this come out sooner or were both servicers hiding this fraud?

So
I wrote to some of the leading experts on mortgage fraud - L. Randall
Wray (economics professor), Christopher Whalen (banking expert with
Institutional Risk Analytics), and William K. Black (professor of
economics and law, and the senior regulator during the S & L crisis)
- to seek their insight.

Chris Whalen told me:

All
good points, but the short answer is that nobody may have noticed until
now. The issue of substitution and other games played by servicers
makes exact tracking of loans problematic. It should show up in the
servicers reports and should be caught, but there are a lot of things
that go on in loan servicing that nobody talks about. Until about 2006,
the GSEs and banks would advance cash and would substitute, but not
now. The noble practitioners you heard from are all sincere and want to
believe in intelligent design.

Whalen explained:

Prior
to FAS [i.e. Financial Accounting Standards] 166/167, a defaulted loan
might sit in a FNM/FRE pool for up to a year before the default was
removed from the trust. The issuer would then place a new loan into the
pool or “substitute” for the old loan. No purchase event was booked.
The investor would never know. In fact, the issuer would keep paying
interest on the original principal amount in those days. Now under FAS
166/167, the issuer must immediately repurchase the defaulted loan and
take the loss less estimated recovery. That is why the pace picked up
this year when it comes to repurchase demands.

 

You should refer
your dubious and very naive friends to the case of National Bank of
Keystone, WV. One of the worst failures per $ of assets in FDIC
history. The management hid a Ponzi scheme in the loan servicing area
for five years. Paid interest to investors with their own principal.
Two auditors missed the fraud and later were sued by the FDIC acting as
receiver for the dead bank. And this was a small operation. The big
five are an even worse mess. Remember, when the seller of a loan and
the servicer are the same, anything can happen. And it usually does.

Professor Black told me:

Double
pledges (as they're typically called, though one could pledge multiple
times) are a well known fraud device. It is correct that one of the key
purposes of adopting Article 9 of the Uniform Commercial Code (UCC) was
to reduce the risk and frequency of this form of fraud. So, double
pledges in the modern era require both (A) fraud (on the part of the
borrower or purchaser) and incompetence, indifference, or corruption on
the part of the original secured lender or their agents if the borrower
is the fraudster or the purchasers if they are the fraudsters.

The
two potential sources of fraud: A fraudulent borrower could pledge the
same home as security for multiple mortgage loans. Title checks, by
the lender/title insurer are so easy to conduct and so vital to protect
the lender that this form of fraud is vanishingly rare. Alternatively,
and far more likely, the lender could sell the mortgage to multiple
buyers. Those buyers could have far lower incentives to check on prior
pledges and less ability to check for prior pledges. The entity selling
a loan to multiple parties (A) has a compelling incentive to hide the
prior pledge(s), (B) is financially sophisticated, and
therefore more
capable of deception than a homeowner, and (C) can pick who to make the
multiple sales to -- allowing them to select the most vulnerable
targets for fraud.

Subpart (C) provides the logical transition to
the second requisite for multiple pledge frauds -- vulnerable victims.
The characteristics they would exhibit include (A) growing massively,
(B) purchasing nonprime loans without fully underwriting the quality of
the loans (and quality in this context inherently requires superb
"paperwork"), (C) poor internal and external controls, and (D) opaque
systems that make it extremely difficult to determine the beneficial
owner and locate key mortgage documents that would reveal multiple
sales. Unfortunately, these four characteristics were characteristic
of many purchasers of nonprime mortgages. That is why I have long
stated that the process was dominated by the financial sector equivalent
of "don't ask; don't tell."

Bottom line: the elite bankers and the anti-regulators have been so unwilling to
find the truth that no one knows how bad these frauds became. Finding the facts
is essential and can and should be done by reviewing samples of the loans pledged or sold to Fannie and Freddie and the Fed.

And professor Wray told me that record-keeping by servicers was terrible, and pointed me to the following article from the Tampa Tribune:

Peter
Bakowski, a 58-year-old former Tampa mortgage broker, has admitted
orchestrating a Ponzi scheme that involved more than 30 investors and
institutions and more than 150 deals, documents show.

 

***

 

Bakowski sold the mortgage assignments to multiple investors, promising high rates of return and using all the money he generated to "keep the scheme afloat," according to his plea agreement.

 

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Tue, 10/26/2010 - 11:10 | 677671 gwar5
gwar5's picture

I think the POS banksters are already two more frauds ahead while we are just uncovering the current ones.

They've commoditized humans for the revenue generator slaves that we are, long ago. I wonder how many times I've been double booked as a ledger entry so I could be leveraged twice.  Nice to have people fight over you but I can do without.

I hope I never become a liability on their books. They'll sell my soylent green for the carbon credits PDQ.  You can't go anywhere these days without stepping in a rabbit hole.

 

Tue, 10/26/2010 - 11:06 | 677660 moofph
moofph's picture

a question for the professors:

how many words are necessary to describe "pick-pocket"?

answer for the professors (i have taken the liberty to speak on their behalf since they work so tirelessly to spell things out for me and it would appear they are quite busy at the moment)...well, in case you haven't figured it out yet, the answer is one word..."irrelevant".

Tue, 10/26/2010 - 10:54 | 677615 win
win's picture

Being sucked in again . . .

The fraud in mortgage backed securities is a separate issue from mortgage fraud.

The administration has sufficient evidence to pursue securities fraud on mortgage backed securities however, doing so will necessarily require another bank bailout. But the public would go ballistic if it were to do so. They must therefore create a public crisis in order to justify this bailout.

Enter mortgage fraud. If the media can work the public into a mind numbing rage over the injustice of evil bankers abusing poor defenseless homeowners and inextricably tie mortgage fraud to mortgage backed securities, then the politicians can pursue another banker bailout under the guise of "protecting the homeowner".

That is my theory - lets see how it works out

 

Tue, 10/26/2010 - 09:17 | 677298 skipjack
skipjack's picture

Why it will not be easy or perhaps even possible to sweep this away ?  Four words - unions, pimpco, money market funds.  Thes, they are IIRC the vast majority of the private entities holding MBS.

They too have $1500/hour lawyers and politicos supporting them, so they will not just "go away" or allow themselves to be shafted like the GM bondholders did.

No, this has serious legs precisely because it's one politically favored and wealthy constituency, the banksters, against another politically-favored and cash-flush constituency, the unions and the fund companies.  You might also throw in the insurance industry against the banksters too, as they probably wrote a lot of derivatives as a counterparty in the mess.

 

There's no "sweep under the rug" possible.

 

Tue, 10/26/2010 - 11:34 | 677740 RichardENixon
RichardENixon's picture

It won't be swept under the rug. It will be swept onto the Fed's balance sheet and thus become a liability of the American taxpayer.

Tue, 10/26/2010 - 09:48 | 677378 TuffsNotEnuff
TuffsNotEnuff's picture

A $4-trillion ($4,000,000,000,000.00) pile of horse shit.

Which none of the politicos can smell, though they do hope that Elizabeth Warren will save them from their folly/cowardice/stupidity and pull their Uranus-severed genitals out of their mouths.

There's no Aphrodite popping out of the foam this time around....

Tue, 10/26/2010 - 09:46 | 677369 i-dog
i-dog's picture

"unions, pimpco, money market funds."

Most of their assets are in worthless MBS and CDS paper -- soon to become even more worthless when a bank holiday closes the banks and the markets for a massive devaluation of USD, ETF, GLD and equity paper. No fighting funds there!

Tue, 10/26/2010 - 09:52 | 677396 TuffsNotEnuff
TuffsNotEnuff's picture

The MBS's aren't that bad off.

The CDS's ??? Fantasy paper, masquerading as MBS's... a helluva lot of it.

Tue, 10/26/2010 - 09:43 | 677356 11b40
11b40's picture

...and add the International counter parties who are holding MBS.  This garbage was sold all oer the world, and the world wants it's money back.

Tue, 10/26/2010 - 11:22 | 677705 DaveyJones
DaveyJones's picture

That may be the final factor. We've said this before, hopefully the regulators in other countries will do what ours should have some time ago

Tue, 10/26/2010 - 08:53 | 677239 trav7777
trav7777's picture

I feel a great disturbance in the Force...it is as if millions of senior tranches cried out in terror, and were suddenly impaired

Wed, 10/27/2010 - 10:13 | 680330 SWRichmond
SWRichmond's picture

I feel a great disturbance in the Force...it is as if millions of senior tranches cried out in terror, and were suddenly impaired

Man, that is a fricking thing of beauty there!

Tue, 10/26/2010 - 09:41 | 677350 Cognitive Dissonance
Cognitive Dissonance's picture

Not to worry. Darth Vader Bernanke is coming to the rescue of all those poor impaired tranches.

"Give me your tired, your hungry, your seriously impaired tranches."

Tue, 10/26/2010 - 08:46 | 677225 dizzyfingers
dizzyfingers's picture

For today’s Outside the Box I have something a little different. Michael Hudson has written a book called The Monster about the Mortgage industry, and specifically Ameriquest and Lehman. Someone sent me his introduction and I read it on the plane. I will buy the book. It made me angry. And the new financial regulations don’t address some of the real problem here.

It is an easy read, well written and lots of great quotes and stories. I won’t say enjoy but do take the tine to read and then think about what you just read and about the culture in our country. John Maulden

 

The Monster : How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America--and Spawned a Global Crisis

Michael W. Hudson

Introduction:
Bait and Switch

A few weeks after he started working at Ameriquest Mortgage, Mark Glover looked up from his cubicle and saw a coworker do something odd. The guy stood at his desk on the twenty-third floor of downtown Los Angeles's Union Bank Building. He placed two sheets of paper against the window. Then he used the light streaming through the window to trace something from one piece of paper to another. Somebody's signature.

Glover was new to the mortgage business. He was twenty-nine and hadn't held a steady job in years. But he wasn't stupid. He knew about financial sleight of hand—at that time, he had a check-fraud charge hanging over his head in the L.A. courthouse a few blocks away. Watching his coworker, Glover's first thought was: How can I get away with that? As a loan officer at Ameriquest, Glover worked on commission. He knew the only way to earn the six-figure income Ameriquest had promised him was to come up with tricks for pushing deals through the mortgage-financing pipeline that began with Ameriquest and extended through Wall Street's most respected investment houses.

Glover and the other twentysomethings who filled the sales force at the downtown L.A. branch worked the phones hour after hour, calling strangers and trying to talk them into refinancing their homes with high-priced "subprime" mortgages. It was 2003, subprime was on the rise, and Ameriquest was leading the way. The company's owner, Roland Arnall, had in many ways been the founding father of subprime, the business of lending money to home owners with modest incomes or blemished credit histories. He had pioneered this risky segment of the mortgage market amid the wreckage of the savings and loan disaster and helped transform his company's headquarters, Orange County, California, into the capital of the subprime industry. Now, with the housing market booming and Wall Street clamoring to invest in subprime, Ameriquest was growing with startling velocity.

Up and down the line, from loan officers to regional managers and vice presidents, Ameriquest's employees scrambled at the end of each month to push through as many loans as possible, to pad their monthly production numbers, boost their commissions, and meet Roland Arnall's expectations. Arnall was a man "obsessed with loan volume," former aides recalled, a mortgage entrepreneur who believed "volume solved all problems." Whenever an underling suggested a goal for loan production over a particular time span, Arnall's favorite reply was: "We can do twice that." Close to midnight Pacific time on the last business day of each month, the phone would ring at Arnall's home in Los Angeles's exclusive Holmby Hills neighborhood, a $30 million estate that once had been home to Sonny and Cher.On the other end of the telephone line, a vice president in Orange County would report the month's production numbers for his lending empire. Even as the totals grew to $3 billion or $6 billion or $7 billion a month—figures never before imagined in the subprime business—Arnall wasn't satisfied. He wanted more. "He would just try to make you stretch beyond what you thought possible," one former Ameriquest executive recalled. "Whatever you did, no matter how good you did, it wasn't good enough."

Inside Glover's branch, loan officers kept up with the demand to produce by guzzling Red Bull energy drinks, a favorite caffeine pick-me-up for hardworking salesmen throughout the mortgage industry. Government investigators would later joke that they could gauge how dirty a home-loan location was by the number of empty Red Bull cans in the Dumpster out back. Some of the crew in the L.A. branch, Glover said, also relied on cocaine to keep themselves going, snorting lines in washrooms and, on occasion, in their cubicles.

The wayward behavior didn't stop with drugs. Glover learned that his colleague's art work wasn't a matter of saving a borrower the hassle of coming in to supply a missed signature. The guy was forging borrowers' signatures on government-required disclosure forms, the ones that were supposed to help consumers understand how much cash they'd be getting out of the loan and how much they'd be paying in interest and fees. Ameriquest's deals were so overpriced and loaded with nasty surprises that getting customers to sign often required an elaborate web of psychological ploys, outright lies, and falsified papers. "Every closing that we had really was a bait and switch," a loan officer who worked for Ameriquest in Tampa, Florida, recalled. " 'Cause you could never get them to the table if you were honest." At companywide gatherings, Ameriquest's managers and sales reps loosened up with free alcohol and swapped tips for fooling borrowers and cooking up phony paperwork. What if a customer insisted he wanted a fixed-rate loan, but you could make more money by selling him an adjustable-rate one? No problem. Many Ameriquest salespeople learned to position a few fixed-rate loan documents at the top of the stack of paperwork to be signed by the borrower. They buried the real documents—the ones indicating the loan had an adjustable rate that would rocket upward in two or three years—near the bottom of the pile. Then, after the borrower had flipped from signature line to signature line, scribbling his consent across the entire stack, and gone home, it was easy enough to peel the fixed-rate documents off the top and throw them in the trash.

At the downtown L.A. branch, some of Glover's coworkers had a flair for creative documentation. They used scissors, tape, Wite-Out, and a photocopier to fabricate W-2s, the tax forms that indicate how much a wage earner makes each year. It was easy: Paste the name of a low-earning borrower onto a W-2 belonging to a higher-earning borrower and, like magic, a bad loan prospect suddenly looked much better. Workers in the branch equipped the office's break room with all the tools they needed to manufacture and manipulate official documents. They dubbed it the "Art Department."

At first, Glover thought the branch might be a rogue office struggling to keep up with the goals set by Ameriquest's headquarters. He discovered that wasn't the case when he transferred to the company's Santa Monica branch. A few of his new colleagues invited him on a field trip to Staples, where everyone chipped in their own money to buy a state-of-the-art scanner-printer, a trusty piece of equipment that would allow them to do a better job of creating phony paperwork and trapping American home owners in a cycle of crushing debt.

Carolyn Pittman was an easy target. She'd dropped out of high school to go to work, and had never learned to read or write very well. She worked for decades as a nursing assistant. Her husband, Charlie, was a longshoreman.In 1993 she and Charlie borrowed $58,850 to buy a one-story, concrete block house on Irex Street in a working-class neighborhood of Atlantic Beach, a community of thirteen thousand near Jacksonville, Florida. Their mortgage was government-insured by the Federal Housing Administration, so they got a good deal on the loan. They paid about $500 a month on the FHA loan, including the money to cover their home insurance and property taxes.

Even after Charlie died in 1998, Pittman kept up with her house payments. But things were tough for her. Financial matters weren't something she knew much about. Charlie had always handled what little money they had. Her health wasn't good either. She had a heart attack in 2001, and was back and forth to hospitals with congestive heart failure and kidney problems.

Like many older black women who owned their homes but had modest incomes, Pittman was deluged almost every day, by mail and by phone, with sales pitches offering money to fix up her house or pay off her bills. A few months after her heart attack, a salesman from Ameriquest Mortgage's Coral Springs office caught her on the phone and assured her he could ease her worries. He said Ameriquest would help her out by lowering her interest rate and her monthly payments.

She signed the papers in August 2001. Only later did she discover that the loan wasn't what she'd been promised. Her interest rate jumped from a fixed 8.43 percent on the FHA loan to a variable rate that started at nearly 11 percent and could climb much higher. The loan was also packed with more than $7,000 in up-front fees, roughly 10 percent of the loan amount.

Pittman's mortgage payment climbed to $644 a month. Even worse, the new mortgage didn't include an escrow for real-estate taxes and insurance. Most mortgage agreements require home owners to pay a bit extra—often about $100 to $300 a month—which is set aside in an escrow account to cover these expenses. But many subprime lenders obscured the true costs of their loans by excluding the escrow from their deals, which made the monthly payments appear lower. Many borrowers didn't learn they had been tricked until they got a big bill for unpaid taxes or insurance a year down the road.

That was just the start of Pittman's mortgage problems. Her new mortgage was a matter of public record, and by taking out a loan from Ameriquest, she'd signaled to other subprime lenders that she was vulnerable—that she was financially unsophisticated and was struggling to pay an unaffordable loan. In 2003, she heard from one of Ameriquest's competitors, Long Beach Mortgage Company.

Pittman had no idea that Long Beach and Ameriquest shared the same corporate DNA. Roland Arnall's first subprime lender had been Long Beach Savings and Loan, a company he had morphed into Long Beach Mortgage. He had sold off most of Long Beach Mortgage in 1997, but hung on to a portion of the company that he rechristened Ameriquest. Though Long Beach and Ameriquest were no longer connected, both were still staffed with employees who had learned the business under Arnall.

A salesman from Long Beach Mortgage, Pittman said, told her that he could help her solve the problems created by her Ameriquest loan. Once again, she signed the papers. The new loan from Long Beach cost her thousands in up-front fees and boosted her mortgage payments to $672 a month.

Ameriquest reclaimed her as a customer less than a year later. A salesman from Ameriquest's Jacksonville branch got her on the phone in the spring of 2004. He promised, once again, that refinancing would lower her interest rate and her monthly payments. Pittman wasn't sure what to do. She knew she'd been burned before, but she desperately wanted to find a way to pay off the Long Beach loan and regain her financial bearings. She was still pondering whether to take the loan when two Ameriquest representatives appeared at the house on Irex Street. They brought a stack of documents with them. They told her, she later recalled, that it was preliminary paperwork, simply to get the process started. She could make up her mind later. The men said, "sign here," "sign here," "sign here," as they flipped through the stack. Pittman didn't understand these were final loan papers and her signatures were binding her to Ameriquest. "They just said sign some papers and we'll help you," she recalled.

To push the deal through and make it look better to investors on Wall Street, consumer attorneys later alleged, someone at Ameriquest falsified Pittman's income on the mortgage application. At best, she had an income of $1,600 a month—roughly $1,000 from Social Security and, when he could afford to pay, another $600 a month in rent from her son. Ameriquest's paperwork claimed she brought in more than twice that much—$3,700 a month.

The new deal left her with a house payment of $1,069 a month—nearly all of her monthly income and twice what she'd been paying on the FHA loan before Ameriquest and Long Beach hustled her through the series of refinancings. She was shocked when she realized she was required to pay more than $1,000 a month on her mortgage. "That broke my heart," she said.

For Ameriquest, the fact that Pittman couldn't afford the payments was of little consequence. Her loan was quickly pooled, with more than fifteen thousand other Ameriquest loans from around the country, into a $2.4 billion "mortgage-backed securities" deal known as Ameriquest Mortgage Securities, Inc. Mortgage Pass-Through Certificates 2004-R7. The deal had been put together by a trio of the world's largest investment banks: UBS, JPMorgan, and Citigroup. These banks oversaw the accounting wizardry that transformed Pittman's mortgage and thousands of other subprime loans into investments sought after by some of the world's biggest investors. Slices of 2004-R7 got snapped up by giants such as the insurer MassMutual and Legg Mason, a mutual fund manager with clients in more than seventy-five countries. Also among the buyers was the investment bank Morgan Stanley, which purchased some of the securities and placed them in its Limited Duration Investment Fund, mixing them with investments in General Mills, FedEx, JC Penney, Harley-Davidson, and other household names.

It was the new way of Wall Street. The loan on Carolyn Pittman's one-story house in Atlantic Beach was now part of the great global mortgage machine. It helped swell the portfolios of big-time speculators and middle-class investors looking to build a nest egg for retirement. And, in doing so, it helped fuel the mortgage empire that in 2004 produced $1.3 billion in profits for Roland Arnall.

In the first years of the twenty-first century, Ameriquest Mortgage unleashed an army of salespeople on America. They numbered in the thousands. They were young, hungry, and relentless in their drive to sell loans and earn big commissions. One Ameriquest manager summed things up in an e-mail to his sales force: "We are all here to make as much fucking money as possible. Bottom line. Nothing else matters." Home owners like Carolyn Pittman were caught up in Ameriquest's push to become the nation's biggest subprime lender.

The pressure to produce an ever-growing volume of loans came from the top. Executives at Ameriquest's home office in Orange County leaned on the regional and area managers; the regional and area managers leaned on the branch managers. And the branch managers leaned on the salesmen who worked the phones and hunted for borrowers willing to sign on to Ameriquest loans. Men usually ran things, and a frat-house mentality ruled, with plenty of partying and testosterone-fueled swagger. "It was like college, but with lots of money and power," Travis Paules, a former Ameriquest executive, said. Paules liked to hire strippers to reward his sales reps for working well after midnight to get loan deals processed during the end-of-the-month rush. At Ameriquest branches around the nation, loan officers worked ten- and twelve-hour days punctuated by "Power Hours"—do-or-die telemarketing sessions aimed at sniffing out borrowers and separating the real salesmen from the washouts. At the branch where Mark Bomchill worked in suburban Minneapolis, management expected Bomchill and other loan officers to make one hundred to two hundred sales calls a day. One manager, Bomchill said, prowled the aisles between desks like "a little Hitler," hounding salesmen to make more calls and sell more loans and bragging he hired and fired people so fast that one peon would be cleaning out his desk as his replacement came through the door.As with Mark Glover in Los Angeles, experience in the mortgage business wasn't a prerequisite for getting hired. Former employees said the company preferred to hire younger, inexperienced workers because it was easier to train them to do things the Ameriquest way. A former loan officer who worked for Ameriquest in Michigan described the company's business model this way: "People entrusting their entire home and everything they've worked for in their life to people who have just walked in off the street and don't know anything about mortgages and are trying to do anything they can to take advantage of them."

Ameriquest was not alone. Other companies, eager to get a piece of the market for high-profit loans, copied its methods, setting up shop in Orange County and helping to transform the county into the Silicon Valley of subprime lending. With big investors willing to pay top dollar for assets backed by this new breed of mortgages, the push to make more and more loans reached a frenzy among the county's subprime loan shops. "The atmosphere was like this giant cocaine party you see on TV," said Sylvia Vega-Sutfin, who worked as an account executive at BNC Mortgage, a fast-growing operation headquartered in Orange County just down the Costa Mesa Freeway from Ameriquest's headquarters. "It was like this giant rush of urgency." One manager told Vega-Sutfin and her coworkers that there was no turning back; he had no choice but to push for mind-blowing production numbers. "I have to close thirty loans a month," he said, "because that's what my family's lifestyle demands."

Michelle Seymour, one of Vega-Sutfin's colleagues, spotted her first suspect loan days after she began working as a mortgage underwriter at BNC's Sacramento branch in early 2005. The documents in the file indicated the borrower was making a six-figure salary coordinating dances at a Mexican restaurant. All the numbers on the borrower's W-2 tax form ended in zeros—an unlikely happenstance—and the Social Security and tax bite didn't match the borrower's income. When Seymour complained to a manager, she said, he was blasé, telling her, "It takes a lot to have a loan declined."

BNC was no fly-by-night operation. It was owned by one of Wall Street's most storied investment banks, Lehman Brothers. The bank had made a big bet on housing and mortgages, styling itself as a player in commercial real estate and, especially, subprime lending. "In the mortgage business, we used to say, 'All roads lead to Lehman,' " one industry veteran recalled.Lehman had bought a stake in BNC in 2000 and had taken full ownership in 2004, figuring it could earn even more money in the subprime business by cutting out the middleman. Wall Street bankers and investors flocked to the loans produced by BNC, Ameriquest, and other subprime operators; the steep fees and interest rates extracted from borrowers allowed the bankers to charge fat commissions for packaging the securities and provided generous yields for investors who purchased them. Up-front fees on subprime loans totaled thousands of dollars. Interest rates often started out deceptively low—perhaps at 7 or 8 percent—but they almost always adjusted upward, rising to 10 percent, 12 percent, and beyond. When their rates spiked, borrowers' monthly payments increased, too, often climbing by hundreds of dollars. Borrowers who tried to escape overpriced loans by refinancing into another mortgage usually found themselves paying thousands of dollars more in backend fees—"prepayment penalties" that punished them for paying off their loans early. Millions of these loans—tied to modest homes in places like Atlantic Beach, Florida; Saginaw, Michigan; and East San Jose, California—helped generate great fortunes for financiers and investors. They also helped lay America's economy low and sparked a worldwide financial crisis.

The subprime market did not cause the U.S. and global financial meltdowns by itself. Other varieties of home loans and a host of arcane financial innovations—such as collateralized debt obligations and credit default swaps—also came into play. Nevertheless, subprime played a central role in the debacle. It served as an early proving ground for financial engineers who sold investors and regulators alike on the idea that it was possible, through accounting alchemy, to turn risky assets into "Triple-A-rated" securities that were nearly as safe as government bonds. In turn, financial wizards making bets with CDOs and credit default swaps used subprime mortgages as the raw material for their speculations. Subprime, as one market watcher said, was "the leading edge of a financial hurricane."

This book tells the story of the rise and fall of subprime by chronicling the rise and fall of two corporate empires: Ameriquest and Lehman Brothers. It is a story about the melding of two financial cultures separated by a continent: Orange County and Wall Street.

Ameriquest and its strongest competitors in subprime had their roots in Orange County, a sunny land of beauty and wealth that has a history as a breeding ground for white-collar crime: boiler rooms, S&L frauds, real-estate swindles. That history made it an ideal setting for launching the subprime industry, which grew in large measure thanks to bait-and-switch salesmanship and garden-variety deception. By the height of the nation's mortgage boom, Orange County was home to four of the nation's six biggest subprime lenders. Together, these four lenders—Ameriquest, Option One, Fremont Investment & Loan, and New Century—accounted for nearly a third of the subprime market. Other subprime shops, too, sprung up throughout the county, many of them started by former employees of Ameriquest and its corporate forebears, Long Beach Savings and Long Beach Mortgage.

Lehman Brothers was, of course, one of the most important institutions on Wall Street, a firm with a rich history dating to before the Civil War. Under its pugnacious CEO, Richard Fuld, Lehman helped bankroll many of the nation's shadiest subprime lenders, including Ameriquest. "Lehman never saw a subprime lender they didn't like," one consumer lawyer who fought the industry's abuses said.Lehman and other Wall Street powers provided the financial backing and sheen of respectability that transformed subprime from a tiny corner of the mortgage market into an economic behemoth capable of triggering the worst economic crisis since the Great Depression.

A long list of mortgage entrepreneurs and Wall Street bankers cultivated the tactics that fueled subprime's growth and its collapse, and a succession of politicians and regulators looked the other way as abuses flourished and the nation lurched toward disaster: Angelo Mozilo and Countrywide Financial; Bear Stearns, Washington Mutual, Wells Fargo; Alan Greenspan and the Federal Reserve; and many more. Still, no Wall Street firm did more than Lehman to create the subprime monster. And no figure or institution did more to bring subprime's abuses to life across the nation than Roland Arnall and Ameriquest.

Among his employees, subprime's founding father was feared and admired. He was a figure of rumor and speculation, a mysterious billionaire with a rags-to-riches backstory, a hardscrabble street vendor who reinvented himself as a big-time real-estate developer, a corporate titan, a friend to many of the nation's most powerful elected leaders. He was a man driven, according to some who knew him, by a desire to conquer and dominate. "Roland could be the biggest bastard in the world and the most charming guy in the world," said one executive who worked for Arnall in subprime's early days. "And it could be minutes apart."He displayed his charm to people who had the power to help him or hurt him. He cultivated friendships with politicians as well as civil rights advocates and antipoverty crusaders who might be hostile to the unconventional loans his companies sold in minority and working-class neighborhoods. Many people who knew him saw him as a visionary, a humanitarian, a friend to the needy. "Roland was one of the most generous people I have ever met," a former business partner said.He also left behind, as another former associate put it, "a trail of bodies"—a succession of employees, friends, relatives, and business partners who said he had betrayed them. In summing up his own split with Arnall, his best friend and longtime business partner said, "I was screwed."Another former colleague, a man who helped Arnall give birth to the modern subprime mortgage industry, said: "Deep down inside he was a good man. But he had an evil side. When he pulled that out, it was bad. He could be extremely cruel." When they parted ways, he said, Arnall hadn't paid him all the money he was owed. But, he noted, Arnall hadn't cheated him as badly as he could have. "He fucked me. But within reason."

Roland Arnall built a company that became a household name, but shunned the limelight for himself. The business partner who said Arnall had "screwed" him recalled that Arnall fancied himself a puppet master who manipulated great wealth and controlled a network of confederates to perform his bidding. Another former business associate, an underling who admired him, explained that Arnall worked to ingratiate himself to fair-lending activists for a simple reason: "You can take that straight out of The Godfather: 'Keep your enemies close.' "

Excerpted from The Monster by Michael W. Hudson
Copyright 2010 by Michael W. Hudson
Published in 2010 by Times Books/Henry Holt and Company
All rights reserved. This work is protected under copyright laws and reproduction is strictly prohibited. Permission to reproduce the material in any manner or medium must be secured from the Publisher.

 

 How can anyone think elections "fix" anything?
Tue, 10/26/2010 - 11:50 | 677789 Bob
Bob's picture

Thanks for the breath of reality, dizzy.  Now this is American business as I know it, from the front lines all the way to the top. 

This guy should get a youtube video out there as part of his promo. 

Tue, 10/26/2010 - 09:11 | 677286 Widowmaker
Widowmaker's picture

George W. Bush was never elected.

Make no mistake about it -- the bank cartel installed that crook.

Tue, 10/26/2010 - 09:33 | 677324 Cognitive Dissonance
Cognitive Dissonance's picture

Make no mistake about it -- the bank cartel installed that crook.

This is an unpopular idea because it runs so contrary to the public myth of a "free" America that holds "elections" where people are selected by popular "consent" to lead us.

I'm working on an article called "A Silent Coup D'etat" that touches on this subject as part of a bigger theme.

Tue, 10/26/2010 - 09:55 | 677406 TuffsNotEnuff
TuffsNotEnuff's picture

CD...... you are such an incurable optimist.

Tue, 10/26/2010 - 10:03 | 677443 Cognitive Dissonance
Cognitive Dissonance's picture

My rejection of the public mythology Kool-Aid doesn't make me anything other than a careful researcher who doesn't assume that the various "truths" I've been told in the past are actually true. The more rocks I look under, the more spiders, cockroaches and other assorted bugs I find.

I do myself and those around me a disservice by remaining with the fantasy world that's been constructed for our behalf in order to control, manipulate and extort.

Tue, 10/26/2010 - 08:45 | 677223 primefool
primefool's picture

If we have no laws that are ever enforced we will be living like some aborginal rainforest tribe within a generation. people need to reflect on why the West became successful over the past few hundred years. It is not written in stone - it is a function of a culture that rewarded technological accomplishments, dealt rather harshly with criminals and did not sit around and wallow in its problems. Disciplined, cultured and capable of extreme violence towards threats.

Why are we sitting around being ripped off every which way, no laws seem to apply to certain segemnts of the population. No one seems to know how to enforce any laws - so people are actually scared of violating them. Are we turning aborginal? ( eating spam out of cans and singing teenage love songs strumming a ukelele so Asian tourists can throw us a few coins?)Western culture has decided to chuck in the towel? I dont get it.

Tue, 10/26/2010 - 08:51 | 677237 trav7777
trav7777's picture

well, our government has not exactly been favoring hires on the basis of competency for some time.  We favor diversity.  At any cost.

This leads to systemic gridlock and incompetence.  How interested does anyone expect an AG who was derisively referred to as "Place" Holder by a major local paper during his stint as US Attorney for DC?

Our nation is in a multidecade process of systematic repudiation of all the cultural norms of the dominant demographic which led to its position.

Tue, 10/26/2010 - 09:38 | 677343 TuffsNotEnuff
TuffsNotEnuff's picture

Oh... Ashcroft was such a ubermensch super lawyer ?

There's dumbasses in every shade of skin, or gender. Still, Holder is a coward. So far utterly gutless.

Tue, 10/26/2010 - 08:56 | 677243 Widowmaker
Widowmaker's picture

Good post.  Also illustrates the govt exploitation by design.

Tue, 10/26/2010 - 08:48 | 677230 dizzyfingers
dizzyfingers's picture

Pirates are now in charge and they have penultimate power -- even to say "there isn't going to be an election".

Tue, 10/26/2010 - 09:34 | 677331 TuffsNotEnuff
TuffsNotEnuff's picture

Summers out, Warren in. Similar to replacing Rumsfeld with Gates....

When they call Coleen Rowley and ask her to reconstitute the Organized Crime Strike Force from Rudy Giuliani's day, then I'll believe something is moving.

Tue, 10/26/2010 - 08:38 | 677211 zenon
zenon's picture

I'm by no means an expert, but the only way I see that multiple pledging could have taken place is with synthetic CDO's. In other words investors were effectively selling CDS's on a group of mortgages with the buyers of the CDS's providing the "mortgage" payments to these investors.

Tue, 10/26/2010 - 09:30 | 677317 TuffsNotEnuff
TuffsNotEnuff's picture

BINGO !!

That's the major trillions of this scam.

Little Tampa Ponzi Guy ??? No-no-no.

Tue, 10/26/2010 - 09:31 | 677311 i-dog
i-dog's picture

The lenders stood to make so much on the CDSs from each default (reportedly upwards of 30 times the loan amount!), that they could happily pay the investors the small change out of their own very deep pockets while waiting for the default.

This was the whole point of the scam ... to sign up borrowers who had no hope of repaying so that the lenders could collect on the CDS 'bet' when the borrower inevitably defaulted.

Tue, 10/26/2010 - 22:23 | 679450 Coldfire
Coldfire's picture

A stunningly evil system of incentives. As a nation we are being reacquainted - without lubricant - with the fundamental importance of the concept of "insurable interest."

Tue, 10/26/2010 - 08:19 | 677186 Duuude
Duuude's picture

What may change is that there will not be a private market for MBS going forward.

Tue, 10/26/2010 - 08:31 | 677204 Widowmaker
Widowmaker's picture

Jokes on you, there never was a market - it's a racket.

Tue, 10/26/2010 - 09:28 | 677309 TuffsNotEnuff
TuffsNotEnuff's picture

The paperwork said that it was a market. Read the contracts. Pension funds and private investors got contracts saying they were buying Mortgage Backed Asset bonds. Boilerplate says so.

What did get sold were bets at the Goldman/CS/etc run Big Short Casino. The pensions bought trillions of shadow images of real MBA bonds.

Finger shadows on the walls
Of Goldman/CS office walls.

This round of disinformation attempts to blame mortgage brokers and originators for the duplicates. There's a tiny bit of that. But the BIG SCAM is that Goldman/CS/etc sold Big Short Casino bets as though they were selling real MBA bonds.

Little Tampa Ponzi Guy ??? He and his fellows were 1/10th of 1% of the phony-MBA-bond-and-mortgage scams.

Paperwork stopping housing seizures ??? August and September went 95,000+ and 100,000+ record takings, down payment and improvement wipeouts, and more/acceleration due for October-November-December. Its a bullshit story to distract us from the REAL NUMBERS for property takings.

Tue, 10/26/2010 - 08:05 | 677168 frankTHE COIN
frankTHE COIN's picture

I remember in the mid 2000s when i heard in conversation from a few mortgage loan officers that their firm would do anything to sign up volumes of people. One of the worse i heard was convincing the client that they could afford the interest only loan ( knowing that they could'nt ) and the firm would make the first 3 monthly payments. They felt after that the mortgage firm was in the clear and did'nt care what happened to the client after that.

Tue, 10/26/2010 - 05:32 | 677120 Coldfire
Coldfire's picture

I would love to hear CD opine on whether or not the lucid commentary by these sober and coherent experts will change a damn thing.

Tue, 10/26/2010 - 09:02 | 677240 Cognitive Dissonance
Cognitive Dissonance's picture

I would love to hear CD opine on whether or not the lucid commentary by these sober and coherent experts will change a damn thing.

Ummmm,

It sounds like you have applied selective hearing or reading when it comes to my comments. I never said "it" won't change a damn thing. I have said many times over the past few weeks that ultimately there will be a political solution implemented to "fix" these issues because the balance of power is still heavily weighted towards the banking cabal and the corporations.

If the banks, which ultimately directly or indirectly service many of these loans, originated many of them and even bundled many of these securities into MBS, were Too Big To Fail in the past, and it's clear the banking cabal has captured the Congress, than what makes us believe the banks will not be To Big To Fail this time around.

Sure, they might let one TBTF bank go as a PR stunt to try and convince the population that they tried to fix the problem, but couldn't without killing the so called "economic recovery". Who knows how it will work out. But if this issue matures to a full scale thermonuclear event, the problem will be papered over with a political solution.

They are trying to kick this can past this election cycle so they have some breathing room. I fully expect an engineered stock market crash to "force" the political solution. It might even come under the cover of a disappointment over a smaller than expected QE 2.0

I'm not happy or joyful with my conclusion. And I certainly could be wrong. In fact, I would love it if I'm wrong. I'm just as outraged as everyone else here by this ongoing cluster-fuck. But to believe that the banks specifically and the powers that be generally are just going to allow themselves to be snowed under without an all out war is naive and dangerous false hope seeking.

I'm all for hope. We need hope to get out of the bed in the morning. But false hope paralyzes us into inaction, where we all wait around and do nothing to protect ourselves hoping this time will be different. This is why we are lied to, to enable our tendency to engage in false hope seeking rather then get down to the dirty work of taking back our country.  

Tue, 10/26/2010 - 22:18 | 679440 Coldfire
Coldfire's picture

CD - I was suggesting that nakedly revealed fraud would be ignored in favor of a political "solution", not that you said that "it" won't change a damn thing.

Tue, 10/26/2010 - 10:59 | 677639 ZackAttack
ZackAttack's picture

Looking at the price action in BAC, I'm starting to think they're the offering.

Tue, 10/26/2010 - 12:01 | 677820 BearOfNH
BearOfNH's picture

There's poetic symmetry at work here. Back in 1930 the first bank to fail was the Bank of United States. Many others followed, but B.U.S. was the leader, as it were. Now if Bank of America were to fail we would see history rhyming, as Mark Twain liked to say.

Tue, 10/26/2010 - 12:37 | 677900 downrodeo
downrodeo's picture

If I didn't know any better, I'd say the universe was orchestrating the entire episode. Then again, I really don't know any better...

Tue, 10/26/2010 - 11:16 | 677689 Cognitive Dissonance
Cognitive Dissonance's picture

Letting BAC "fail" would re-bury a lot of graves people are looking to dig up. Think of all the mortgage garbage BAC swallowed during the "save the TBTF banks" campaign of 2008-2009.

By letting this wounded animal die, the government can brush the dirt off it's hands and say "Well, it looks like we got most of it" without really digging too deep. Win/win for everyone but you and me. Thus it's perfect.

Tue, 10/26/2010 - 09:21 | 677303 i-dog
i-dog's picture

"I fully expect an engineered stock market crash to "force" the political solution. It might even come under the cover of a disappointment over a smaller than expected QE 2.0"

Good call, CD. It would be perfect timing -- right after the election and during the lame duck Congress session.

Tue, 10/26/2010 - 09:17 | 677296 SWRichmond
SWRichmond's picture

I'm all for hope. We need hope to get out of the bed in the morning. But false hope paralyzes us into inaction, where we all wait around and do nothing to protect ourselves hoping this time will be different. This is why we are lied to, to enable our tendency to engage in false hope seeking rather then get down to the dirty work of taking back our country. 

I am gonna have that tatooed on the inside of my eyelids in glow-in-the-dark ink.

Tue, 10/26/2010 - 09:13 | 677290 breezer1
breezer1's picture

+1000

Tue, 10/26/2010 - 08:26 | 677182 Widowmaker
Widowmaker's picture

Sadly, it doesn't matter in the land of too big to jail.

Any indictments yet -- even one?  What about those record TARP bonuses?   When does the statute of limitations plan of criminal escape expire?   

There's your answer.

I've said it countless times, until street beatings happen to these crooks, given by the common man, the law will continue to be a total failure and laughing stock of the rich using it as a tool to oppress/steal from everyone else.  Incorporation doesn't follow these crooks home.  The statute of limitations doesn't expire on ass beatings, right Chemba?

How will your cursed ill gotten Goldman Fags retirement feel with people threatening your family for the rest of your life?  Money can only insulate, it can't protect.

Tue, 10/26/2010 - 09:31 | 677319 11b40
11b40's picture

If the issue of the same mortgage tied to multiple MBS is really widespread, based on the way I read this article, fraud is very clearly involved.

These are real pieces of property and real families involved.  Real lawyers smell real blood in the water, the sharks have started circling and a lot of them are hungry.  Some may even have a dog in the hunt. 

Add to this the fact that all 50 AG's are now on the trail - on behalf of their citizens.  I don't know the laws in all the states, but I think most AG's are elected, and are not really backed but big campaign contributions.  Often, it is big prosecutions that can make or break them at the polls.  It is not so easy for TPTB to stiff these guys and tell them to just move along and go play somewhere else.  What happens if there are criminal indictments that get in front of a jury?

And then we have the International exposure.  Many foreign interests want their money back on crappy MBS stinking up their portfolios, and have their own power base to back them up.

There may be some "political" solution, but what a rotten kettle of fish.  How could all the players be satisfied?

TPTB have been covering this up for years, but somehow the zombies keep coming back to haunt them.  They just won't stay buried.  Perhaps 'The Night Of The Living Dead' is upon us. We can always be hopeful.

http://www.fancast.com/movies/Night-of-the-Living-Dead/20388/594595810/Night-Of-The-Living-Dead/videos?cmpid=syn_rss

Happy Halloween....Independent Contractor

Tue, 10/26/2010 - 12:18 | 677852 downrodeo
downrodeo's picture

"....mmmmmmmm....brains...."

Tue, 10/26/2010 - 12:25 | 677655 Widowmaker
Widowmaker's picture

All good points, however what's bigger than all 50 AG's? 

Insert the Federal Reserve Bank.  Of banks, for banks, by banks and operated by fraud street with comprehensive immunity from everything.

It's their complacency and lack of fundamental respect of the rule of law that is treason, "we never saw it coming..." cry me a river of lies.

I knew the Fed was the Don of organized fraud when they bailed out every last crook on Christmas fu**ing day.

If I'm present when a 12 year old girl is being gang-raped I'm not accountable for putting a stop to it (or even trying) as long as I'm the Fed, "I never saw it coming," and besides, it's not in my charter -- but I'm hell bent advocating that gang-bonuses are paid out of that girls future in the name of free markets.  People, this is organized crime.

Lastly, insert a captured/corrupt Fed-cum guzzling Congress led by fudge-packer-Frank and Fraud-Dodd that endorses this behavior and decision-making.  Bye bye AG's through simple marginalization -- they don't print money for lawless dogs in Congress.

The private Federal Reserve is the textbook example that CRIME PAYS IN THE US OF A.

Tue, 10/26/2010 - 09:09 | 677281 TuffsNotEnuff
TuffsNotEnuff's picture

TOO BIG TO JAIL -- indeed.

Jail and money don't mix. Sure as a sunrise since January 2008 when George Anderson got drunk at a Rangers game, killed Florence Cioffi DUI at 60 mph up Water Street and Sip, fled the scene, and bought his way to a 15-day stint at Rikers and a $500 fine.

Yeah, vehicular homicide manslaughter is a felony in NY State. But not if you have enough money. No way. That is a fact.

Mortgage fraud ???? Fergitaboutit....

Read the carriage scene from "Tale of Two Cities" if you want to know where we are. And after the Citizens United counterrevolution, its going to get worse. Look at the dozen worst criminals/idiots/thugs the GOPers are running for Senate around the country -- if the Dems ran the likes of these scumbags, corporate media would tear their heads off.

Maybe they'll throw a gold coin or two to distract us....

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