The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!

Reggie Middleton's picture

Now that the Robo-Signing scandals have achieved full notoriety
through the media, it is time to address the real issues facing
investors in bank stocks. I also believe that the media is staring at
the wrong target. Each major media outlet is copying what is popular or
what the next outlet broke as a story versus where the true economic
risks actually lie – which is essentially the real story and where the
meat actually is. Here's what's truly at stake – the United States is
now at risk of losing its hegemony as the financial capital of the
world! Why? Because when we had the chance to put the injured banks to
sleep and redirect resources to into new productivity, we instead
allowed politics to shovel 100's of billions in tax payer capital into zombie institutions as
they turned around and paid much of it right back out as bonuses. As a result,
significant capital has been destroyed, the original problem has
metastized, and the banks are still in zombie status, but with share
prices that are multiples of the actual values of the entities that they
allegedly represent – a perfect storm for a market crash that will make
2008 look like a bull rally! For those who feel I am being
sensationalist, I refer you to my track record in making such claims.

The Japanese tried to hide massive NPAs in its banking system after a
credit fueled bubble burst by sweeping them under a rug for political
reasons. Here’s a newsflash – it didn’t work, it hasn’t worked for 20
years, and despite that Japan is embarking on QE v3.3 because it simply
doesn’t believe that it is not working. Here are the steps the US is
consciously taking it its bid to enter a 20 year deflationary spiral
like Japan, and may I add that these steps were clearly delineated on
BoomBustBlog ONE YEAR ago (Bad CRE, Rotten Home Loans, and the End of US Banking Prominence? Thursday, November 12th, 2009), so no one can say this is a surprise.

Step one: Hide the Truth!


Step two: Formulate intricate lies to placate the masses

In this case, the US bank stress tests: You’ve Been Bamboozled, Hoodwinked and Lied To! Here’s the Proof. What Are You Going to Do About It?.
We have government complicity in the purposeful opacity of the values
of the mortgage assets (see the FDIC “Prudent Commercial Real Estate
Loan Workouts” guidance issued Oct 30th, as reported by the WSJ: Banks Hasten to Adopt New Loan Rules and the new FDIC guidance
that states performing loans “made to creditworthy borrowers” will not
require write downs “solely because the value of the underlying
collateral declined”).

Step three: Being forced to face the music

This is where we are now, and I will go through this in more detail below

Step four: The eradication of US banks from global prominence

Not the floundering of the banks that I predicted in 2007 and 2008,
but the outright collapse of many (and probably most) of the big ones,
or at the very least significant shrinkage. Does this sound outrageous
to you? For those of you who believe that the government’s “pretend and
extend” policy has any chance in hell of working, or better yet, that
we are not following in the footsteps of Japan, let’s take a pictorial
trip through recent history. There are practically no Japanese banks in
the top 20 bank category on  global basis by 2003 – NONE (save
potentially Nomura, which arguably survived in name, alone). As you can
see, they literally dominated 90% of the space in 1990!

Click to enlarge…


Source: Cap Gemini Banking M&A

The European banks are not faring much better than the US banks,either – reference the Pan-European Sovergein Debt Crisis,
as I see it. This is so much more serious than robo-signing scandals,
and I have been shouting about this non-sense of 3 years straight. Well,
are we following the Japanese “Lost Path”? Notwithstanding the damning
evidence of hide the truth and hide amongst lies linked to above,
ponder the following rather dated, but still quite poignant data…


Source: Nomura on Balance Sheet Recessions

Keep in mind that the US housing futures data above is based on the unrealistically optimistic Case Shiller index – reference
Those Who Blindly Follow Housing Prices Without Taking Other Metrics
Into Consideration Are Missing the Housing Depression of the New

Robo-Signing: What is the  real issue at hand?

The Robo-Signing issues have arisen because some mortgage servicers
have been signing off foreclosure documents without actually reading
them, or doing so without the presence of a notary. Thus, the Office of
the Comptroller of the Currency (OCC) has directed seven of the US’
biggest lenders — BAC, JPM, WFC, Citi, HSBC, PNC and UBS  — to review
their foreclosure processes. Consequently, Bank of America, JP Morgan
Chase and GMAC Mortgage have suspended foreclosure cases in 23 states
after noting their employees may have mishandled foreclosure documents. Goldman Sachs is following suit via their Litton Loans arm.
It should also be noted that the document forgery issues penetrate much
farther than just distressed properties and foreclosures. Evidence has
surfaced that all types of forgeries and misrepresentations are abound
in all types of mortgage paperwork. 4closureFraud (a sight where I sourced a lot of the recent robo-signing scandal info from) has a post that actually shows  President Obama’s mortgage paperwork as a “Victim to Chase Robo-Signer” This mess, in and of itself, will be difficult to untangle.

For those who didn’t notices, this is a regulatory “hold it” to the
MERS system and an alert to its constituency, many of whom are subjects
of extensive BoomBustBlog forensic analysis. Major MERS shareholders

These companies will start infighting as their myriad interest start
to conflict with each other. Title insurers will balk at insuring what
could be defective title, banks will fight insurers who will try to
renege on insurance and/or put back loans through the warranties and
representations clause as losses to investors mount though either
increased expenses to work out the paperwork mess or outright losses due
to fraud.

Make no mistake, the amount of litigation that is being thrown at
these banks and service companies is significant, and they are shining
lights on aspects of the banking world that were most conveniently kept
secret, as in this class action suit
that outlines the contradictory wording in the MERS paperwork
(reference pages 10, 11 and 15). Pages 15 on makes issue of fraudulent
assignments, of Robo-Signing fame – see for yourself;

Here is a deposition of one of the “said” secretaries from another suit in New Jersey…

Does MERS have any salaried employees?
A No.
Q Does MERS have any employees?
A Did they ever have any? I couldn’t hear you.
Q Does MERS have any employees currently?
A No.
Q In the last five years has MERS had any
A No.
Q To whom do the officers of MERS report?
A The Board of Directors.
Q To your knowledge has Mr. Hallinan ever
reported to the Board?
A He would have reported through me if there was
something to report.
Q So if I understand your answer, at least the
MERS officers reflected on Hultman Exhibit 4, if they
had something to report would report to you even though
you’re not an employee of MERS, is that correct?
MR. BROCHIN: Object to the form of the
A That’s correct.
Q And in what capacity would they report to you?
A As a corporate officer. I’m the secretary.
Q As a corporate officer of what?
Q So you are the secretary of MERS, but are not
an employee of MERS?
A That’s correct.

How many assistant secretaries have you
appointed pursuant to the April 9, 1998 resolution; how
many assistant secretaries of MERS have you appointed?
A I don’t know that number.
Q Approximately?
A I wouldn’t even begin to be able to tell you
right now.
Q Is it in the thousands?
A Yes.
Q Have you been doing this all around the
country in every state in the country?
A Yes.
Q And all these officers I understand are unpaid
officers of MERS
A Yes.
Q And there’s no live person who is an employee
of MERS that they report to, is that correct, who is an
MR. BROCHIN: Object to the form of the
A There are no employees of MERS.

And even more damning, this particular suit gets right to the heart of the matter
from an economic AND legal perspective (something that the previous
suits have not) and that is that the banks were complicit in overvaluing
both the lender and the collateral at the point of underwriting, and
doing so on a broad basis. This is the notion behind my premise that a
wave of losses and litigation will be coming any minute now as investors
and the insurers facing claims from those investors attempt to put back
loans on a wide scale and near universal basis as the rampant fraud of
the real estate bubble of the new millenium is exposed and litigated
throughout the court system.Those entities that swallowed loan mills
such as Wachovia, Countrywide, Nationwide, Lehman, Bear Sterns, Merrill
Lynch and WaMu will be feeling their indigestion.

I read through portions of a couple of filings and there appears to
be some technical errors and maybe even a slight misunderstanding of the
banking business, but if these guys (the plaintiff’s attorneys) get
their act together in terms of coordinating with each other and getting
some real expertise on the subject matter to bolster their filings, I
really don’t see how this will not – at the very least – materially
drive the expense ratios of both the banks and the investment pools, and
at worst hasten the inevitable demise of those entities that underwrote
or bought the bad paper then paid the gift of US taxpayer capital
(TARP,ZIRP, PPIP, etc. ) out as bonuses versus alleviating the matter at

Impact on RMBS and CDOs

Most analysts believe that a break in foreclosures will not be an
optimistic sign for Residential Mortgage Backed Securities (RMBS).  This
is because RMBS portfolios that contain the foreclosure loans will
likely experience higher loss severities due to longer liquidation
timelines.  Additionally, the RMBS market is expected to witness a large
number of repurchases as well as higher monetary losses and ratings
downgrades if it is proved that loans were not serviced in accordance
with regulatory guidelines. Of course, I believe that servicing is the
minor issue. It is the faulty underwriting that is the canary in the
goldmine here, and the servicing issues is simply the impetus that will
shine the light on the premise that at least half of the high LTV loans
written were done so on a fraudulent basis.

GMAC Mortgage Class Action Lawsuit Complaint Filed Over Alleged …

Oct 4, 2010 GMAC Homeowners In Maine File Class Action Lawsuit Complaint Against GMAC Mortgage Over Alleged False Foreclosure Documents, Affidavits and.…Cached

Wrongful Foreclosure Class Action « Timothymccandless’s Weblog

Jan 15, 2010 13 Responses to “Wrongful Foreclosure Class Action” I would like to be included in your class action lawsuit. I am a victim of predatory…/wrongful-foreclosure-class-action/

o    According to Canadian rating agency DBRS “The recent
findings could have far reaching implications throughout the industry
with hundreds of thousands of homeowners contesting foreclosures that
are in process or have been completed; ultimately causing servicers to
face losses due to expensive litigation and class action lawsuits. The
biggest uncertainty remains on how the courts will view the “legality”
of foreclosures that have already taken place and what actions, if any,
will be taken to remedy the situation.

DBRS believes that servicers will be able to quickly correct and
refile any deficient affidavits in addition to implementing the
appropriate controls to ensure there is not another breakdown in
process. However, RMBS that contain these loans will likely experience
higher loss severities due to longer liquidation timelines, negative
rating actions and the potential for loans to be repurchased out of the
transaction due to breaches of representation and warranties if it is
proven that they were not serviced in accordance with applicable
guidelines. DBRS will continue to monitor the impact of this situation
on its rated transactions and take any rating actions as necessary”

o    Researchers at DBRS also highlighted that the robo-signing
debacle will likely lead to a large number of residential
mortgage-backed securities repurchases as well as higher monetary losses
and continual ratings downgrades if it is proven that loans were not
serviced in accordance with federal guidelines. (Source:

Every material development is impetus for the potential for putbacks due to breaches of representation and warranties Uncertainty
in the RMBS market in terms of actual valuation is a result of rampant
and provable inflation of appraisal prices during the underwriting of
said mortgages and not so much falsification of documents since in many
cases those documents can be cured, but misrepresentation cannot! You do
not hear this in the media circuits, but it is a fact. Thus, the
underwriting banks face the chance of systemic losses. I have warned of
this about a year ago – Banks Swallow Another $30 billion or So in More Losses as Their Share Prices Surge (Again).
You see, banks often allowed for the inflation of appraisal values
and/or income/assets, but the broker channel did it as par for the

This is the part that everybody seems to be overlooking…

All you really need to do is find the banks that accepted a lot of
broker business, factor in the expense of the class action suit
litigation that is popping up in nearly every state (try Googling it,
you will be amazed as big firms and store front lawyers alike are
throwing their hats in the ring), and you will see the easiest way out
of a potentially tough bind for investors is the put back. Where does
this land? Squarely on the balance sheet of the banks – who, BTW have
the money to attract even more predatory lawyers. A forensic review of
high LTV loans between 2003 and 2007 should find that at the very least
30% were aggressively valued, with a more realistic number coming in at
about 60%. Ask anyone who was in in the business at that time, I doubt
they will disagree.

When I warned of this LAST YEAR, it was not taken very seriously. I suggest all should think again – Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results. Let’s reminisce…

I pointed out an anomaly in JP Morgan’s “blowout” quarterly earnings release - Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results. Let’s reminisce…

Warranties of representation, and forced repurchase of loans

JP Morgan has increased its reserves with
regards to repurchase of sold securities but the information surround
these actions are very limited as the company does not separately
report the repurchase reserves created to meet contingencies. However,
the Company’s income from mortgage servicing was severely impacted by
increase in repurchase reserves. Mortgage production revenue was
negative $192 million against negative $70 million in 3Q09 and positive
$62 million in 4Q08.

Counterparties who are accruing losses from bad loans, (ex. monoline insurers such as Ambac and MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing loans that appear to breach certain warranties or smack of fraud.
I expect this activity to pick up significantly, and those banks that
made significant use of brokers and third parties to place mortgages
will be at material risk – much more so than the primarily direct
writers. I’ll give you two guesses at which two banks are suspect. If
you need a hint, take a look at who is increasing reserves for
repurchases! JP Morgan and their not so profitable acquisition, WaMu!

As I said, losses
should be ramping up on the mortgage sector. Notice the trend of
housing prices after the onset of government bubble blowing: If Anybody Bothered to Take a Close Look at the Latest Housing Numbers…

PNC Bank and Wells Fargo are in very similar situations regarding
acquiring stinky loan portfolios. I suggest subscribers review the
latest forensic reports on each company to refresh as the companies
report Q4 2009 earnings. Unlike JPM, these banks do not have the
investment banking and trading fees of significance (albeit decreasing
significance) to fall back on as a cushion to consumer and mortgage
credit losses.

Well, it looks as if I was onto something. From Bloomberg:

March 5 (Bloomberg) – Fannie Mae andFreddie Mac may force lenders includingBank of America Corp.JPMorgan Chase & Co.Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski,
who says U.S. banks could suffer losses of $7 billion this year when
those loans are returned and get marked down to their true value. Fannie
Mae and Freddie Mac, both controlled by the U.S. government, stuck
the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults.
Fannie Mae and Freddie Mac are looking for more faulty loans to return
after suffering $202 billion of losses since 2007, and banks may have
to go along, since the two U.S.- owned firms now buy at least 70
percent of new mortgages.

Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing.
As of Dec. 31, Freddie Mac had another $4 billion outstanding
loan-purchase demands that lenders hadn’t met, according to the filing.
Fannie Mae didn’t disclose the amount of its loan-repurchase demands.
Both firms were seized by the government in 2008 to stave off their


The government’s
efforts might be counterproductive, since the Treasury and Federal
Reserve are trying to help banks heal, FBR’s Miller said. The banks
have to buy back the loans at par, and then take an impairment, because
borrowers usually have stopped paying and the price of the underlying homehas plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.

Striking a Balance

“It’s a fine line
you’re walking, because the government’s trying to recapitalize the
banks, not put them in bankruptcy, and then here’s Fannie and Freddie
putting more pressure on the banks through these buybacks,” FBR’s
Miller said. “If it becomes too big of an issue, the banks are going to
complain to Congress, and they’re going to stop it.” [Of, course! Let the taxpayer eat the losses borne from our purposefully sloppy underwriting]

Bank of
America recorded a $1.9 billion “warranties expense” for past and
future buybacks of loans that weren’t properly written, seven times the
2008 amount, the bank said in a
Feb. 26 filing. A spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to comment.

based in New York, recorded $1.6 billion of costs in 2009 from
repurchases, including $500 million of losses on repurchased loans and
$1 billion to increase reserves for future losses, according to a
Feb. 24 filing.

“It’s become a very meaningful issue, and it will continue to be a meaningful issue for the next couple of years,” Charlie Scharf,
JPMorgan’s head of retail banking, said at a Feb. 26 investor
conference. He declined to say when the repurchase demands might peak.

“I can’t forecast the rates at which they’re going to continue,” she said. Her division lost $3.84 billion last year, as the bank overall posted a $6.28 billion profit. “The volume is increasing.”

Fargo, ranked No. 1 among U.S. home lenders last year, bought back $1.3
billion of loans in 2009, triple the year-earlier amount, according to
Feb. 26 filing. The San Francisco-based bank recorded $927 million of costs last year associated with repurchases and estimated future losses.

increased its repurchase reserve sixfold to $482 million, because of
increased “trends in requests by investors for loan-documentation
packages to be reviewed,” according to a
Feb. 26 filing.

“The request for loan documentation packages is an early indicator of a potential claim,” New York-based Citigroup said.

According to a WSJ analysis, the RMBS market may have a balanced
impact with the junior bondholders typically at the bottom of the credit
structure could actually end up better off than expected. Senior
bondholders, typically at the top, could end up worse off.  This is
because when houses that have been packaged into a mortgage bond are
liquidated at a foreclosure sale—the very end of the foreclosure
processes—the holders of the junior, or riskiest debt, would be the
first investors to take losses. But if a foreclosure is delayed, the
servicer must typically keep advancing payments that will go to all
bondholders, including the junior debt holders, even though the home
loan itself is producing no revenue stream. In addition, how the
allocation of cost of re-processing the foreclosed loans, which could be
significant also, remains a key concern. (Source:

However, some analysts and bond traders have a contrarian view that
the “Robo-signing” issues will not have a significant effect on the RMBS
valuations, as most RMBS investments have been made after stringent
performance modeling (Yeeeahhh, right! Just like the HPA
(perpetual housing price appreciation assumptions utilized by Fitch
during the boom to dole out AAA ratings on subprime trash!

This is total and absolute BULLSHIT, but I am including it so as to be
as balanced as possible). More so, they believe that the actual impact
on RMBS valuations will depend on how long it takes for banks to tackle
the problem.

  • According to a RMBS manager at one capital market group, “the
    majority of investors currently involved in trading RMBS performed
    stringent performance modeling. Anyone who bought RMBS from 2006 and
    2007, vintages from when presumably these robo-signed foreclosures were
    inked, would have run the collateral through extended resolution
    ”. He also expects that bond rally will continue, and that
    problem would not emerge unless the robo-signing issue is not resolved
    in less than six months. As per the RMBS manager, “RMBS right now is trading like stocks. Besides, in the year-end, the book always goes up, it’s window dressing the portfolio.
  • Another bond trader, who is also has a bullish view for the market,
    believes that every single major servicer will face problems similar to
    Ally and JPMorgan, but still expects RMBS to remain well-valued
    considering overall loss severities are level and constant repayment
    rates remain healthy (source:
  • According to Brett Schaffer, the president of Phoenix Capital Inc. and Phoenix Analytics Services Inc, “it’s
    premature to determine how big of a hit the “robo-signing” scandal will
    have on servicing valuations. Much depends on how long it takes for
    servicers to address the problem
    . If this gets resolved in
    fairly short order within a month or six weeks and … there isn’t any
    critical flaw in the mortgage servicers’ practices in general, then I
    don’t think it has really any impact,” On the other hand, if it is
    determined that there is a material flaw and there is going to be
    long-term foreclosure halts, then it probably would have a material
    impact on those particular firms. It’s not just a blanket statement for
    the market.”
  • According to Robert Lee, senior vice president at Mortgage Industry Advisory Corp. in New York, “Servicing
    costs are going to rise regardless of how long it takes for the issue
    to be resolved, as companies hire employees to work through the
    documents and the foreclosure process is delayed. But the impact of
    those higher costs on mortgage servicing asset values may be minimal
    because many servicers have been conservative in their estimates.
    Servicing rights themselves right now are weaker than where the cash
    flow values are.”
    He also estimated the hit to most portfolios’
    value from the fallout of the documentation scandal will be less than 10
    basis points. (Servicing values are expressed as a percentage of the
    unpaid principal balance of the loans in a portfolio).

Overall, we at the BoomBust believe that the uncertainty on the
impact of robo-signing on RMBS valuation will remain until the banks
give clarity on how long the foreclosures are expected to remain
suspended. We also believe that the media is staring at the wrong
target. Each major media outlet is copying what is popular or what the
next outlet broke as a story versus where the true economic risks
actually lie – which is essentially the real story and where the meat
actually is. Watch the W&R number over the next two quarters for
those banks that purchased cesspool portfolios such as Countrywide,
National City, Wachovia and WaMu, and let me know if they start to

In the meantime, I will be updating my forensic valuations of the big
banks that I have covered right about the time they report in the
upcoming weeks. These updates will include Morgan Stanley, Goldman
Sachs, PNC, Wells Fargo, and JP Morgan. I will put them through the
realistic stress test scenarios that our government failed to and have
the results available to paying subscribers.
Of course, I will factor in the very real probability of a surge in
W&R activity, just as I warned last year. This is something that is
just not found in banking analysis that I see on the Street. Below is an
example of what was done last year for PNC…


those of you want to know what the stress tests results of the big
banks were if they used the NY Fed/FDIC official loss data, I have run
the numbers for you. It doesn’t look very pretty in some cases. This content is paid subscriber-only,
except for the two links that have public-lite and public excerpt
included! Let’s walk through the PNC free data, in light of how
misleading their latest quarterly report was (see
For those that didn’t notice – Reggie Middleton on PNCl Q3-09 Results and then be sure to read At What Point Does Accounting Gimmickery Become an Outright Lie? Let’s Ask PNC).

Click any of these graphics to enlarge…


Notice the amount of
leverage that PNC is using if one were to use the NY Fed and FDIC data
in lieu of what PNC has proffered through their take home test.


you can see from above, there is a significant difference between what
the government’s SCAP tests reveal PNC will lose and what the
government’s NY Fed and FDIC call sheet data says PNC will lose – a
very significant difference. Solely as a result of looking at this
chart, one should be willing to demand a second round of considerably
more stringent stress testing.


If one were to granularly break down the foreseen losses to PNC’s portfolio using the government data…


you can see, going through each major loan category in PNC’s books
reveals a much LESS optimistic scenario than ANY portrayed in their SCAP
take home test results…

an act of near unprecedented generosity, I have included the PNC
valuation along with the Blackrock contribution in the free PNC lite
public download below (in alphabetical order).


Subscriber content that reveals what
the banks REALLY needed in terms of capital and cushions to whether the
true rate of losses and unemployment to come. You may subscribe here to access this content.

Goldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb

Goldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb

MS Simulated Government Stress Test MS Simulated Government Stress Test 2009-05-05 11:36:25 2.49 Mb

MS Stess Test Model Assumptions and Stress Test Valuation MS Stess Test Model Assumptions and Stress Test Valuation 2009-04-22 07:55:17 339.99 Kb

PNC SCAP Results recast using FDIC and NY Fed data - Pro PNC SCAP Results recast using FDIC and NY Fed data – Pro 2009-05-15 07:31:21 455.37 Kb

PNC SCAP Results recast using FDIC and NY Fed data - Retail PNC SCAP Results recast using FDIC and NY Fed data – Retail 2009-05-15 07:30:25 395.18 Kb

PNC Stress Test Pro PNC Stress Test Pro 2009-04-13 02:10:17 3.11 Mb

PNC Stress Test update - Professional PNC Stress Test update – Professional 2009-04-21 15:55:56 3.00 Mb

PNC Stress Test Retail PNC Stress Test Retail 2009-04-13 02:11:08 323.51 Kb

PNC Stress Test update - Retail PNC Stress Test update – Retail 2009-04-21 15:53:52 777.50 Kb

PNC stress test write up - public lite PNC stress test write up – public lite 2009-07-27 02:37:11 995.30 Kb

Sun Trust Banks Simulated Government Stress Test Sun Trust Banks Simulated Government Stress Test 2009-05-05 11:37:13 1016.17 Kb

JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-22 14:33:53 1.51 Mb

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anonnn's picture

Re: wealth being relative...

As there can be no rich class without a poor class. Thus class-war, albeit by stealth.

In practice, there are only the 2 classes.

The middle-class[es] are an obfuscation to promote infighting and distraction.[Divide & conquer.]

The "poor-" and "middle-" classes have enormous common interests.

I am repulsed at the idea of living in tenement squalor, but I respect and admire the valuable labors their occupants perform.

Janitors, nursing-home assistants, caretakers, nightwatchmen,garbage collection and waste gleaners, farmhands,child care...all make needed contribution to my existence.

anonnn's picture

Important to note that Fannie and Freddie gave explicit instructions to MERS and servicers on how to handle assignment matters...even directing hat MERS not be identified on Foreclosure complaints.

Since Fannie/Freddieboth are founders/Board members of MERS, that puts the US Gov into the mix, as Fannie/Freddie are GSEs and backstopped by USG.

The US Gov was party to the deliberate non-transparency that is the enabler of all it seems.



Geoff-UK's picture

Chart porn.  Unreadable.

Psquared's picture

This still isn't enough to tip over the apple cart for the simple reason that it was predictable and foreseeable. What will eventually tip over the banking system is something unknown - some intervening outside cause.

For one thing, banks are not carrying these foreclosed properties as losses now - they don't have to realize the loss if they don't foreclose. Secondly, suits against securitizers (by MBS holders and REMIC Trusts) will take years if not decades to resolve. Third, Congress will step in and force some sort of nationwide legislation to clean up the fraud, clear up titles and keep the foreclosure mills going.

Reggie Middleton's picture

The entire housing bubble and bank bust was easily predictable and foreseable as well, how did that serve to prevent the carnage that followed?

Whether they carry bad assets as losses or not, they are still bad assets and they cost money to carry, particularly if you are levered 20x.

Then there are the legal fees that may come as a result of class action and Rico cases...

Gwynplaine's picture
Gwynplaine (not verified) Reggie Middleton Oct 12, 2010 5:26 PM

This makes the rationale for QE2 much easier to understand.  The banking sector is still in danger of going under without another round of free money.  Is that the bottom line Reggie?

jkruffin's picture

Once again, Reggie is all over it!  Wish Reggie could get an hour long spot on a REAL news channel to go over this fiasco.  Time to get a lawyer if you own a home, lost a home, or buying a home.  The US is the Fraud country of the world.  Fraud everywhere.  Even our judges have been bought off.  What a crying shame.

CustomersMan's picture


Thanks Reggie,


You are a remarkable help here.


The rant by Rick Santelli at the commodity exchange will be a classic as this unfolds.


It ranks with Arnie talking about being an economic "girly man"  in his speech.


The are exposed for the scum sucking deceivers they are on the right-wing payroll.



non-anon's picture

and the beat goes on

RockyRacoon's picture

Once again all the blame can be laid at the feet of Alan Greenspan.  Why?  Because the Federal Reserve had the power, explicitly, to govern the housing and mortgage markets in the 1990s.  This current debacle would have been a no-news event if Greenspan had done his job.  Period.

If you want to jail people for fraud, or negligence in this case, then start at the source/top with Mr. Greenspan.  A CEO sets the moral tone at his company, and a lack of integrity at all levels seeps down from the top.  This failure to "do his job" on the part of Mr. Greenspan leaked into all the echelons of the housing industry.  All of them.  When a cop makes the point of looking the other way, in a public manner, crooks start stealing things, and otherwise honest people are given the opportunity to seek personal gain in what appears to be sanctioned looting.

Jasper M's picture


    Clairvoyance and precognition are a heavy burden. Try to use these awesome powers only for Good . . . 

blunderdog's picture

I do love Reggie's work.  There are some issues that I just can't get a handle on, though.

What's step FIVE?

I believe that the biggest US banks are indeed already insolvent, and only accounting fraud, voluntarily overlooked by regulatory agencies permits them to continue operations.

IF that is the case, what possible solution exists?  The banks "hold" asset levels which can't be purchased by anyone at this point.  A resolution trust corporation is supposed to provide a means of liquidating assets and distributing any remaining value among the stake-holders, isn't it?  What is there to liquidate?  Even completely wiping out the share-holders doesn't seem to provide a big enough break to make any satisfactory payment to bond-holders.

Small banks don't hold sufficient reserves to keep the underlying basis of the US "real economy" afloat.  Lots of them are failing too.

Based on a non-financier's reading of the history of the past 200 years, I ask: how can any of this actually be resolved without floating a new currency?

tallystick's picture

There are at least 9 entities I've identified so far just in DE and MI that are either MERS  shells or imposter organizations.


Delaware Department of State:Division of Corporations

To request hardcopy of annual reports, specify File #, report year, shipping info and payment info to (CC by fax). Cost is $12 per report. This will get you the full documents (images and text).

Division of Corporations
PO Box 898
Dover, DE 19903
Fax# 302 -739-3812

The following are entries from the DE Division of Corporations Websites of known and suspected MERS shell corporations.

File Number: 2915165 Incorporation Date / Formation Date: 06/30/1998

File Number: 0776829 Incorporation Date / Formation Date: 12/01/1971
(mm/dd/yyyy) Entity Name: MERS, INC. Entity Kind: CORPORATION Entity Type: GENERAL Residency: DOMESTIC State: DE REGISTERED AGENT INFORMATION Name: THE CORPORATION TRUST COMPANY Address: CORPORATION TRUST CENTER 1209 ORANGE STREET City: WILMINGTON County: NEW CASTLE State: DE Postal Code: 19801 Phone: (302)658-7581

4333439 Incorporation Date / Formation Date: 04/12/2007

File Number: 4735339 Incorporation Date / Formation Date: 09/25/2009

File Number: 3518833 Incorporation Date / Formation Date: 04/25/2002

File Number: 4531992 Incorporation Date / Formation Date: 04/10/2008
(mm/dd/yyyy) Entity Name: MERS INVESTMENTS, LLC Entity Kind: LIMITED LIABILITY COMPANY (LLC) Entity Type: GENERAL Residency: DOMESTIC State: DE REGISTERED AGENT INFORMATION Name: CORPORATIONS & COMPANIES, INC. Address: 910 FOULK ROAD, SUITE 201 City: WILMINGTON County: NEW CASTLE State: DE Postal Code: 19803 Phone: (302)652-4800

Other states
Searched for: MERS, LLC
ID Num: B49863

Type: Domestic Limited Liability Company
Resident Agent: SAI R KUMAR
Registered Office Address: 2832 RENFREW STREET ANN ARBOR MI 48105
Mailing/Office Address:
Formation/Qualification Date:5-10-1999
Jurisdiction of Origin:MICHIGAN
Managed by: Members
Status: ACTIVE, BUT NOT IN GOOD STANDING AS OF 5-1-2003 Date: Present

ID Num: 785656

Type of Entity: Domestic Nonprofit Corporation
Resident Agent: RONALD BEATON
Registered Office Address: 1134 MUNICIPAL WAY LANSING MI 48917
Mailing Address: MI
Formed Under Act Number(s): 162-1982
Incorporation/Qualification Date: 3-25-2005
Jurisdiction of Origin: MICHIGAN
Number of Shares: 0
Year of Most Recent Annual Report: 10
Year of Most Recent Annual Report With Officers & Directors: 06
Status: ACTIVE Date: Present

Searched for: MERS HOLDINGS, LLC
ID Num: D3551J

Type: Domestic Limited Liability Company
Registered Office Address: 21815 BON BREA ST. CLAIR SHORES MI 48081
Mailing/Office Address:
Formation/Qualification Date:12-22-2009
Jurisdiction of Origin:MICHIGAN
Managed by: Members
Status: ACTIVE Date: Present

malek's picture

Thanks for the fantastic post.
I especially liked your first chart.

Reggie, as you said in a comment: "Wealth is relative, and is not defined by how much money you have but how poor everybody else is!"

I wonder more about relative truth these days... how is the US standing in truthfulness, in accounting and therefore accountability not limited to financial statements, compared to other countries?

Al Gorerhythm's picture

The world uses Fiat, it starts and ends there.

LadyH's picture

Oh come on, Fannie and Freddie will be brought to heel and loans back to the banks from the GSEs will be held static so not to arouse suspicion. The question is, who were the five calls before and after that billmgot vetoed? I bet the GSE bosses were told to cool their jets on push backs

Fat Ass's picture

It's not 100's it's 100s -- for hell's sake.

How can ANYONE make this mistake?  "s" is for plural (that means "more than one").

For example, cats, dogs, 100s, 1000s, the 1980s, idiots, morons, etc.

Apostrophe is only for ownership, like "John's Pub or "Ben's Nightmare."

DO NOT write " 100's ", it is simply " 100s ". Unbelievable. Makes the whole article look like a child wrote it.

mudduck's picture

#pfffffft;">. scusee.

Bear's picture

Thank's for yo post ... we gotta keep do writing word's pure

blunderdog's picture

But, its not like you loose brain cell's reading wrong punctuation, is it.

(Grammar-fanatic duel!  I think the third sentence's leading "s" should be capitalized, you should have used a colon in place of the first comma in your list of examples, and you forgot a double-quote in the fourth line.  Finally, spaces should never be placed around words inside quotation-marks.  [Double-spacing after periods is one of my errors that I refuse to correct.  It's a matter of principle.  Two spaces forever!  Just to be sure!])

MarketFox's picture

Another question would be the prospective changes regarding Fannie Mae and Freddie Mac....

Surely they are are not going to be in their same position either....

And any effort regarding these entities should be the questioning of their existance as well....

Add this to the mix....


Thank you, RM....


walküre's picture

Nothing that a few trillion extra Dollars couldn't fix!

There will be TARP ad infinitum as long as there's JPM and GS. Few others as well.

Lehman pissed some very influential people off or fell on their own sword to make the rest happy with TARP.

Know your enemy, folks.

Elections are a few weeks away... nobody wants to discuss QE2. It will come, rest assured.

Cow's picture

Thanks Reggie.  Brilliant

tom's picture

Thanks, Reggie, very helpful overview that explains what I was missing, that GSEs and monolines have already been pushing back a lot of mortgages onto the banks for a variety of reasons, so the discovery of widespread notary fraud is only going to make it harder for banks to defend themselves against a growing wave of push-backs.

woolly mammoth's picture

Reggie, I for one em glad you are a contributor to Zero Hedge. Ahh... gotta go, I suddenly have this strong desire to go add more supplies to my fox hole.

Montgomery Burns's picture

I think Costco opens up at 10. See you there!

virgilcaine's picture

Reg puts a few more holes in the American Dream model.

Mercury's picture

Because when we had the chance to put the injured banks to sleep and redirect resources to into new productivity, we instead allowed politics to shovel 100's of billions in tax payer capital into zombie institutions as they turned around and paid much of it right back out as bonuses.

We also had the chance to let supply meet demand in residential real estate - allowing the market to clear.  Instead it looks like Robo-gate, if it ends up crashing the big banks, might (by definition) very well end up handing a bunch of real estate to deadbeat borrowers on a technicality.  Don't these defaulted home owners owe money to somebody even if it's not the bank waving the bogus mortgage title at them?

Doesn't it seem like a good idea to set up a system to identify the last good, legit holder of a  particular mortgage title and let them foreclose on the property in question?

That would get rid of a lot of free-lunch perceptions and market distortions plus, since so many of these bad mortgages are ultimately owned by a handful of big banks, a lot of the bad title/good title discovery might cancel each other out.

HeavyHands's picture

Define "legitimate." If mortgage A is held by a particular beneficiary but serviced by B, there is no definitive paper trail. Only when the actual interest is transferred to another entity is a document recorded linking the two (if you're lucky.)

With MBS pools though, who owns the actual mortgage? Investor X who owns 10% of tranche BB? You might get lucky with CMBS documents listing multi-million dollar property but good luck with RMBS'. Not to mention the fact that lenders enjoy transferring notes back and forth between wholly or partially owned subsidiaries in order to generate fees.

Moving to a Torrens based land system might help matters as the recording office geniunely checks the chain of title, leaving the current holder as the only responsible party. 



atomicwasted's picture

How is it a technicality to expect an entity that's foreclosing on your house to actually prove it has the right to foreclose on your house?

I see the bigger issue out of all this mess being that MERS has completely screwed up the title system in this country.  Who really owns the note on your house?  How can they convey title to you if you sell the house or pay off your mortgage?  If no one can convey title to you, then you're stuck in your house pretty much forever.  So much for mobility when searching for a job, or retiring to a lower-cost area.

Bob's picture

This continuing meme of "just legal technicalities" is getting old, especially when it is repeated day after day by ZH regulars who should know better. 

Not that I too wouldn't love to get the nation's housing stock back into the hands of the banksters to whom it "belongs." 

Mercury's picture

Whether it's a technicality, premeditated fraud or somewhere in between, forgiving mortgages for millions of people who bought way more house than they could afford with little money down is even worse than socializing bad bank debts because it's more visible to average, working Americans.  It will be rubbed in their faces that they are fools to play by the rules, be prudent with their money and live within their means.

minus dog's picture

Technicality or no, you can't just let it slide.  There are a hell of a lot of your "average, working" Americans caught up in this, not just homeowners but those who own or work in businesses that have been crushed by the collapse of the housing bubble.

Do we have the rule of law or not?  I don't think we do, so I'm pretty sure they're going to try to let the banks off the hook for this one.  You're worried people will take it as a signal to just do whatever the fuck they want... we're past that point, EITHER choice is a signal to do so.  They WERE fools to play by the rules, because there is a different set of rules for the wealthy and the politicians, where there are any at all.

Mercury's picture

They WERE fools to play by the rules, because there is a different set of rules for the wealthy and the politicians, where there are any at all.

The rules are: pay your mortgage or your house gets taken away. Defaulting on your mortgage is not playing by the rules.  The banks aren't playing by the rules either. I got it...really...I got it -  but this isn't a zero-sum game where one party has to "win" and the other "lose." If, in any given case, the bank is trying to pass fraudulent paperwork AND the home owner is a deadbeat, they should both take it in the wallet.

Reggie Middleton's picture

You are forgetting to factor in litigation costs. With our legal system, it's not about right and wrong, but who can afford the most resources to bring to bear. Big banks are wealthy, but they may not be able to withstand a deluge of class action lawsuits.

tallystick's picture

A deluge of civil suits by individual homeowners acting Pro Se on their own behalf would destroy the banks by making them appear in more courtrooms than they can possibly afford to defend themselves in. All it takes is some good web resources to train MERS victims on how they can file lawsuit  and what to do.


For those who need a visual  see here:


The ants will feast on bankster before this is over.

apberusdisvet's picture

Reggie:  you have overlooked the fees due to the states and counties upon each transfer; MERS conveniently did not pay these costs, because in many cases that have been brought to light, only the first transfer may have been recorded, albeit fraudulently.  Imagine a RICO judgement for billions due the sand states; politicians are already salivating.

Mercury's picture

I'm not really looking to save the mega banks here.  They should have been euthanized two years ago via some sort of Resolution Trust Co.  I'm more concerned that the residential real estate market isn't further fouled up and artificially supported by the government in the form of basically forgiving mortgage debt.  It will turn neighbor against neighbor.

Furthermore, if some system isn't put in place to identify the last good mortgage title holder, new buyers would be fearful that their purchase could later be "undone" (like the SEC canceling wild HFT prints) if ownership of the previous owner's mortgage later comes into question. 

So, regardless of how evil/stupid the big banks are,  new moral hazards and broken market mechanics will be created if "the little guy" wins big here.

hbjork1's picture

Through the decades, the domiciles I purchased in verious states, required title insurance.  And a copy of the title status was included with the purchase or sale records.  Title, protects both the buyer and seller. 

Today's readily available computer data storage and power have enabled title lookup and printout, admittedly for a fee, but it is a title.  There is no doubt that title imformation, including precise lattitude and longitude location could be economically stored and backed up. 

The only thing that is missing in the establishment of a required nation wide system.  

Yes, more Big Brother, but it appears that we, the people, are not able to function without big brother. 

Of course, bundling mortgages for sale would be more cumbersome.  All that title data would have to go with the the bundled package.  But the law is the law and the individual cost, once the initial data was properly in place,  for computer transfer should be nominal.  I wouldn't even object to a national registry backup.   

This existing situation is crazy.  It is like what we once would call a "South American Banana Republic"  Quasi criminal intermediates, incompetient politicians and uninvolved (until forclosure) banking institutions disputing ownership, would not be able to get around the data base.

The lawsuits now under way are, IMO, a very positive development.  Hopefull people who hired the individual to falsely certify the documents would be subject to perjury charges as well as lawsuit.  

RockyRacoon's picture

Markets WILL clear.  That's the nature of the beast.  The objective will be not to get in the way of the spittle and claws.  Prices will find their levels regardless of the destruction the process generates.  If it appears that banks will again be bailed out to cover this mess there might be hell to pay from regular folks.  One never knows what the catalyst will be.  

Bob's picture

Not to mention the possibility of RICO, as the climate heats up for Barry and Eric Placeholder.  Yes, Reggie, I actually read your whole article. 


LadyH's picture

They must be dancing in the streets of Frankfurt.  First the Greeks loosen monetary policy for them, next the dumb americans screw up so much that the dodgy loans that their crappy banks bought by the thousand can be faxed straight back to New York with a refund request.

Reggie Middleton's picture

What the US has going for it is that much of the developed world is in a similar boat, just a little further upstream. Wealth is relative, and is not defined by how much money you have but how poor everybody else is!

hbjork1's picture

So True Reggie.

Real wealth cannot be separated from quality of life.  As we get older, interest in "things" abates.  The things that matter most are the people around us.  IMO, you can buy physical comfort but cannot buy the comfort of human associations that you respect and respect you. 

Money is a medium of exchange.  Money can only buy so much.  And no matter who we are we eventually leave it all behind.  That is why an endless stream of people like Rockafeller or today's Gates, Buffet and so on, tend to give it away.  It can secure a legacy and toward the end, that is what they really want.

Thanks for your postings! 





DosZap's picture

Amen Reggie.

All things are RELATIVE .................

Dagny Taggart's picture

You nailed it Reggie. Its all about who sucks less now. Sad that our standards are rated upon mediocracy. Thanks for all your hard work. If the TBTF even writedown their losses, you will have aided in keeping my family well fed.

Rogerwilco's picture

New marketing tag line:

MERS, fraud at the speed of light.

Bob's picture

Great, Reggie! 

ZH is on fire today!  This shows what a critical mass of the right people can do.

Prediction: The MSM will soon pick this stuff up. 

Again, great work.  Thanks.