tidal wave of evidence showing that the giant banks have engaged in
fraudulent foreclosure practices is so large that the attorneys general
of up to 40 states are launching investigations.
People's homes are being taken when they didn't even hold a mortgage, and the big banks have been using "robo signers" to forge mortgage related documents. Indeed, even president Obama has been hit by robo signers (see this and this).
Its so blatant that foreclosure mills have published price lists for forging documents, including such gems as:
"Create Missing Intervening Assignment" $35
"Cure Defective Assignment" $12.95
"Recreate Entire Collateral File" $95
But let's take a step back. Only with some context will the actions of the banks with regards to these "defects" make any sense.
As I pointed out last year:
Simon Johnson confirmed what William K. Black has said about fraud by the financial sector, booms and busts.
As I previously wrote:
Black explained that fraud by a financial company usually involves the company:
1) Growing like crazy
Making loans to people who are uncreditworthy, because they’ll agree
to pay you more, and that’s how you grow rapidly. You can grow really
fast if you loan to people who can’t you pay you back
3) Using extreme leverage.
This combination guarantees stratospheric initial profits during the expansion phase of the bubble.
But it guarantees a catastrophic subsequent failure when the bubble loses steam.
collectively - if a lot of companies are playing this game - it
produces extraordinary losses (more than all other forms of property
crime combined), and a crash.
In other words, the companies
intentionally make loans to people who will not be able to repay them,
because - during an expanding bubble phase - they'll make huge sums of
money. The top executives of these companies will make massive salaries
and bonuses during the bubble (enough to live like kings even even if
the companies go belly up after the bubble phase).
Johnson confirmed that a high housing default rate was part of the banks' models.
The financial giants knew they would make huge sums during the boom,
and then transfer their losses to the American people during the bust.
As William Black noted last October:
involved knew that the CDOs which packaged subprime loans were not AAA
credit-worthy (which means that they are completely risk-free). He
also said that the exotic instruments (CDOs, CDS, etc.) which spun the
mortgages into more and more abstract investments were intentionally created to defraud investors
November 2007, one rating agency - Fitch's - dared to take a look at
some loan files. Fitch concluded that there was the appearance of fraud
in nearly every file reviewed
As I wrote in April:
University of Texas economics professor James K. Galbraith previously said that fraud caused the financial crisis:
You had fraud in the origination of the mortgages, fraud in the underwriting, fraud in the ratings agencies.
Senator Kaufman said last month:
Fraud and potential criminal conduct were at the heart of the financial crisis.
According to economist Max Wolff:
securitization process worked by "packag(ing), sell(ing),
repack(aging) and resell(ing) mortages making what was a small housing
bubble, a gigantic (one) and making what became an American financial
problem very much a global" one by selling mortgage bundles worldwide
"without full disclosure of the lack of underlying assets or risks."
accepted them on good faith, failed in their due diligence, and rating
agencies were negligent, even criminal, in overvaluing and endorsing
junk assets that they knew were high-risk or toxic. "The whole process
was corrupt at its core."
Indeed, Galbraith just gave a must-watch half hour speech where he points out:
- "At the root of the crisis we find the largest financial swindle in world history."
- The fraud originated in the mortgage market of the United States.
houses were over-appraised, and the banks only hired appraisers who
were willing to do that. Galbraith rhetorically asks: "For what
conceivable reason would a lender accept an inflated appraisal for a
house against which it was going to make a loan?"
language used in the mortgage industry is very telling: "liar's loans",
"ninja loans" (where the borrowers had no assets and no income),
"neutron loans" (where it would destroy the people but leave the
buildings), and "toxic waste"
- The mortgages in the millions were counterfeits,
not mortgages. They were "laundered" ... the dirty paper was converted
into clean paper. Securitization was used to convert the worthless
paper from triple D minus junk to triple A. The commercial banks were
the "fences", they took the laundered paper and sold it on to the
legitimate market. The "marks" were the pension funds, or any
investing entity which trusted triple A rating or investment banks.
- The police left the beat.
the counterfeit is big enough, the whole system collapses, because you
can't tell what's real from what's counterfeit and so confidence
- The failure to face the problem of fraud
constitutes a huge barrier in the path of economic recovery. The
banking system can't be restored until it is taken apart, cleaned up and
rebuilt in a transparent and honest manner.
should make the Department of Justice uncomfortable to ignore these
frauds. Because if we don't have fair and honest and functioning
financial system, we won't get out of this crisis.
Indeed, there was fraud at every step
of the mortgage process. The big banks intentionally signed up
borrowers with insufficient income and assets, threw out the
documentation because it would prove fraud, racked up loan fees and
received short-term payments before all of the new borrowers ran out of
money, and then laundered the bad loans into securitized instruments to
sell to the suckers.
The banks created an intermediary called
"MERS" to hold all of the documentation, in at attempt to shield the
banks legally. But courts have held that this scheme doesn't fly, and
that MERS doesn't have title to foreclose on houses. See this and this (and as Tyler Durden points out, MERS might have infected the commercial real estate market as well.)
there's the whole foreclosure scandal, where banks have forged and
backdated documentation to try to prove they are entitled to foreclose.
This is the part that is in the news right now. But because fraud was
committed every step of the way - from mortgage origination and loan
applications, to securitiztation, to MERS to foreclosures - it shows a
fraudulent scheme, and not just sloppy paperwork.
As Yves Smith writes:
banks' statement that is a minor paperwork problem] is an effort to
divert attention from the real issue, the mess the securitization
industry has made of the housing market at pretty much every step of
the process, from ginning up bad “spready” loans on purpose to feed
demand for CDOs, to deciding to ignore the carefully-devised procedures
to make sure the securitization trust complied with all the
requirements needed for it to have ownership of the mortgages ....
Karl Denninger writes:
Everyone talking about this in the mainstream media - with a handful of exceptions ... is trying to play this down as a mere technicality.
It's a coverup that is now coming unraveled.
In another essay, Denninger points out:
The issue is not "robo-signed" documents. The issue is that the robo-signed documents are
an attempt to cover up for previous failures in the securitization
process which have left investors worldwide holding an empty bag, and
homeowners with seriously-damaged chains of title.
As Ellen Brown writes:
most reports, it would appear that the voluntary suspension of
foreclosures is underway to review simple, careless procedural errors.
Errors which the conscientious banks are hastening to correct. Even
Gretchen Morgenson in the New York Times characterizes the problem as "flawed paperwork."
But those errors go far deeper than mere sloppiness. They are concealing a massive fraud.
They cannot be corrected with legitimate paperwork, and that was the reason the servicers had to hire "foreclosure mills" to fabricate the documents.
errors involve perjury and forgery -- fabricating documents that never
existed and swearing to the accuracy of facts not known.
problems cannot be swept under the rug as mere technicalities. They go
to the heart of the securitization process itself. The snowball has
just started to roll.
How do you recreate the original
note if you don't have it? And all for a flat fee, regardless of the
particular facts or the supposed difficulty of digging them up.
of the mortgages in question were "securitized" - turned into Mortgage
Backed Securities (MBS) and sold off to investors. MBS are typically
pooled through a type of "special purpose vehicle" called a Real Estate
Mortgage Investment Conduit or "REMIC", which has strict requirements
defined under the U.S. Internal Revenue Code (the Tax Reform Act of
That was not done; and there is no
legitimate way to create those conveyances now, because the time limit
allowed under the Tax Code has passed.
The question is, why
weren't they done properly in the first place? Was it just haste and
sloppiness as alleged? Or was there some reason that these mortgages
could NOT be assigned when the MBS were formed?
argues that it would not have been difficult to do it right from the
beginning. His theory is that documents were "lost" to avoid an audit,
which would have revealed to investors that they had been sold a bill
of goods -- a package of toxic subprime loans very prone to default.
(Its not working very well.)
So what can we do, if anything?
But these solutions will only be followed if the government decides to start following the rule of law again.
As the Wall Street Journal notes,
some congress members and states attorney general have set their sites
a little lower, focusing on short-term help for homeowners:
think the mortgage-servicing firms need to understand that they face
real exposure now, and they would be well advised to take this very
seriously, to clean this up by doing loan workouts to keep people in
their homes, which up till now they've just paid lip-service to," said
Ohio Attorney General Richard Cordray.
in Congress have called for a moratorium on all foreclosures until the
documentation issue is resolved, though senior Administration
officials Monday again declined to endorse that idea.
attorneys' general immediate aim is to determine the scale of the
document problems and correct them. But several of them have said that
the investigation could force the lenders and servicers to agree to mass
loan modifications or principal forgiveness schemes. Other
possibilities include financial penalties or changes in mortgage
Former New Jersey attorney
general Peter Harvey, now a trial lawyer in New York, said that a
settlement with state attorneys general would likely "to give the banks
some cover" to make changes that might otherwise result in lawsuits by
investors in mortgage-backed securities.
attorney general Thomas Miller, who is leading the effort, said his
office might take cues from an investigation brought by Massachusetts
attorney general Martha Coakley. She successfully pressured Bank of
America Corp. in March to reduce mortgage-loan balances by as much as
30% for thousands of borrowers, using the threat of a lawsuit to get a
settlement, though documentation problems were not at issue then.
The primary weapon the states could wield would be
their respective laws against unfair and deceptive acts and practices,
said Prentiss Cox, a professor of law at the University of Minnesota and
former Assistant Attorney General in Minnesota.
Those laws are
easier to apply, however, when a lender misleads a borrower than in
pursuing problems with foreclosures related to documentation, he said.
Individual attorneys general could also bring actions under states'
various foreclosure laws.
Illinois Attorney General Lisa Madigan
said she was preparing to introduce legislation meant to tighten
foreclosure laws and prevent document errors in the future. She also is
pushing federal representatives to resurrect a bill that would allow
bankruptcy judges to "cram down," or cut, a troubled homeowner's
"The immediate goal is to stop fraudulent
foreclosure and to require that the lenders and servicers are following
the law. But that's the bare minimum. That's what they have to do to
follow the law," she said.
Nearly a dozen attorneys general
nationwide, including Ms. Coakley and Mr. Miller, have called on
lenders and servicers to suspend foreclosures until document
irregularities are studied and corrected.
Top lawyers from
multiple states have gone after mortgage lenders before. In 2008, Bank
of America Corp. settled charges brought by 15 attorneys related to
accusations of predatory lending in its Countrywide Financial Corp.
unit, granting loan modifications worth $8.4 billion to thousands of
Mr. Cordray, of Ohio, last week became the first
attorney general to sue a mortgage servicer, when he filed suit against
GMAC Mortgage LLC. The suit also named as a defendant GMAC employee
Jeffrey Stephan, an alleged "robo-signer," who said that he signed off
on thousands of court documents related to foreclosures without reading
GMAC announced that it was suspending foreclosures
in the 23 U.S. states where judges are required to sign off on them
after news of Mr. Stephan's activities surfaced. J.P. Morgan Chase
& Co.'s Chase Home Mortgage unit suspended judicial foreclosures
soon after, and Bank of America followed suit. On Friday, Bank of
America widened its foreclosure freeze to all 50 states.
attorney generals would like to look beyond the narrow issues raised by
the robo-signing. The issue "I'm most engaged in right now is the big
servicers who are initiating foreclosures while the borrower is in the
modification process," said Arizona Attorney General Terry Goddard.