Whistleblower Speaks On Fraudclosure

Tyler Durden's picture

Zero Hedge has been approached by an individual who participated directly in the various aspects of what is now broadly known as Fraudclosure. The below narrative recounts his experience in the due diligence process of selecting loans for the MBS pipeline. And far more than just legalese "technicalities" or a broad abrogation of property rights, as he points out there is a far more palpable issue for all those who hold Mortgage Backed Securities or other pool aggregations of mortgage loans: "we have no idea what is in those packages." This coming from the person who helped pick, diligence and sort through the various loans...

Full exposition:

The truth behind the foreclosure crisis. 

Yes,  I am choosing to remain an anonymous coward.  I just have been waiting this shoe to drop for a long time.  The last thing I want to do is have to explain myself and get my ass sued for defamation.  Not worth it. 

This much I can tell you.  We have no idea what is in those packages. I personally packaged billions in MBS which have been placed on public shelves.  Those assets were underwritten by Goldman, Morgan or name your investment bank.   

I started packaging loans as early as 2003, at the beginning of the crisis.  After working for a large aggregator in New York, I joined GMAC.  Those were good times.  I worked directly with the traders to package assets that we would buy from our institutional clients and broker channel.  It was the trader’s responsibility to close the deal with the underwriter.  He would then hand the deal to the securitization group where it was managed by an asset specialist and a securitisation manager.   We take the pool to the ratings agencies, S&P, Fitch, or Moody`s where we get levels of overcollateralization required for the waterfall of public tranche offerings. 


Then, we worked with underwriters of the deal to perform due diligence.  That is where this process breaks down.  They use sampling to verify the makeup of the pools.  There is a lot of pressure to get the deals done in a timely manner so they don’t have time to check every asset.  The most I’ve ever checked on a deal is 30%.   We’ve done some pools that came back very different from what the trader originally told us.  I’ll give a personal example and show how  it relates to the foreclosure crisis. 

I put together a large subprime deal where we said that the percentage of Stated income assets was 10%.  Out of a pool of over 500 assets, we ran our due diligence and pulled a sample of 50 assets, we had over 25% of the assets come back as stated income.  Well, we got another 50 assets and still came back with 22% stated.  It was obvious to me and the underwriter that the stated income levels were higher than originally reported. 

How did we handle this issue?  We threw all the stated income assets out of the deal.  In this case we threw out 22 assets and packaged the deal as 10%.  In fact that is how we would typically handle issues where we had discrepancies.  I told my boss on several occasions that it was a real fishy way of doing things, but as everyone was also doing it, my coworkers, the guys from Goldman, the agencies, I just kind of went along with it.  

We securitized that deal and put 10% stated on the dealbook.  S&P put their name on the package.  Goldman underwrote that deal and sent it out to hedge funds and pension funds.  What the hell? 

That deal was one of the worse deals that we did.  Many other deals did come in as reported. Some might have been only 15%, or 12%  instead of 10% stated.  In most of those cases, we might have only thrown out a couple of assets.  And, it may have mathematically worked out assuming that the sample is representative of the population, but it still leads me to my big problem, that there were far too many instances of incorrectly labelled loans, incorrect documentation such that the pool information which went on the dealbook could be very different from the actual makeup of the pool.

Don’t get me wrong, I’m not saying that all deals are incorrect, most aren’t.   I’m saying that many are, and we have no way of knowing which deals are tainted. Fortunately, most deals have been seasoned a bit which make them easier to value, but the foreclosure documentation is just one instance where my shady scepticism has been vindicated.  I knew there was shit floating around in the pools we were putting together, but the sampling technique and level of due diligence was never going to clean it out. 

Due Diligence of lack thereof

That is one of the big fights that the we had with the i-bank underwriting the deal.  We would always try to reduce the sampling size.  The agencies would stand on the sidelines, and put the stamp of goodness on the pool so long as we were in agreement with the underwriters.

Now going back to the foreclosure mess, when doing the due diligence, we would often find assets that were missing a document here and there (and these were just the ones that we were catching).  We had the same response to the bad docs as we did the stated income discrepancies, i.e. just throw those assets out. 

I’m no expert, but I do know that statistically, if there is a problem with the sample,  there is an overwhelming likelihood of having problems with the population.  If you are checking the meat and find out its bad, you don’t just throw out the piece that you checked.  It means you have a problem.  Check everything. 

During the heyday of securitization, due diligence was something that we tried to limit.  The underwriters were really looking for instances of egregious fraud.  They did not set out to intentionally fraud investors, they just thought that by throwing out the offending assets, the pool would be made whole so to speak

Loan Documents

Foreclosure and other loan docs make the issue more complex.  We would buy assets all over the country and package them up.  Every state has its own laws as to the documentation required.  We do have lawyers who are experts in the ins and outs of loan documents, but in all honesty, we relied on the threat of reps and warrants to help us feel comfortable.  

We didn’t check every single loan document for every single legally required piece of information.  Yea, we’d check for the important things, but we couldn’t and didn’t check for every single clause on every single loan document.  We couldn’t.  And now we are finding out that we should have. 

But, as I said before, we have no idea what is in those packages.  

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BobPaulson's picture

Tip of the iceberg?

Bob's picture

Mortgages Were Fraudulently Pleadged To Multiple Buyers at the Same Time:


Noah Vail's picture

"We didn't intend to defraud anybody." But he knew that if there was a problem with the sample there was a problem with the whole pool bu they went ahead and sold it anyway. The same sorry excuse we hear everywhere. Try telling a jury that he didn't intend to commit fraud with the admission of that knowledge.


He's a coward alright, and a scumbag who knowingly screwed investors. I love it, he says "I told my boss this stinks" but then he went right on doing it. He needed the job (money) of course. Just a well paid whore, IMHO.

Bob's picture

That's what the small fry are for.

zot23's picture

And the rest of us are not Noah?  If you believe the FED is taking us all for a ride and you still pay bills in those funny green pieces of paper, you're a paid whore (and now you know it.) You and I might not be as blackened as our anonymous leaker friend, but no one in a centralized economy is lily white on these issues. 

I give this guy props for coming forward now (even anonymously) to spill the beans.  It's still enough to put his job and his family's bread at a terminal risk.  The only reason he would do this is out of a sense of guilt, a bothered conscience, at what he sees he and his partners did.  If he wanted to CYA he would toe the line and shrug while lamenting the new liars' code, "How could anyone have foreseen this happening?"

I just sincerely hope he can find it in himself to take the next step and give a deposition to a lawyer about what we read above.  There are some state AGs around the country looking for such a silver bullet to help those that have been hurt most in this mess and put the biggest fish they can get behind bars.  It would take more guts and might rip away his anonymity, but if he's serious about putting this right that's what is needed.  

Otherwise, you'd be right and he'd be a coward.

Bob's picture

That's fair.  I would add that even a coward would be well-advised to work out a deal with  an AG before somebody else beats him to it and he is hung out to dry. 

RecoveringDebtJunkie's picture

I agree that we are all complicit in this destructive, widespread ponzi scheme to some degree or another. Here is an extensive piece discussing that complicity:


But that's also the key word, degree. A person that recklessly labels loan pools in MBS and helps major banks defraud investors is significantly more complicit than the person who deposits money at those banks or takes loans from them or uses their CCs.

Ripped Chunk's picture

Gross negligence can be found to be tantamount to fraud. Especially when you are supposed to know what the fuck you are doing.

LiquidBrick's picture

I love it, he says "I told my boss this stinks" but then he went right on doing it. He needed the job (money) of course. Just a well paid whore, IMHO.

Yep! Everyone grows a conscious when the heat is on. All of a sudden he is the good guy for blowing the whistle. If he did this 2-3 years ago he could get some credit for being brave but a self admitted coward is just looking for acceptance in society.

This coward can't be trusted to wash cars properly in a car wash with Mexicans and would run off with the tip box.

I wouldn't let him pour me water in a pizzeria.


Moonrajah's picture

Sir, your horse is too high. Try not to fall off.

Rogerwilco's picture


It's the tip of something alright, but it's not as big as an iceberg.

Cognitive Dissonance's picture

Tip of the iceberg?

Yes, an iceberg the size of Greenland which is now floating off the East Coast of the USA from Wall Street to Pennsylvania Ave.

Riddle me this Batman. If I had 1,000 units to sell and I wanted to sell 1,500 (and I had no problem with fraud) what would I do? 

That's easy Robin, I would play a game of "Hide the Property" by treating the 1,000 units like a deck of cards, shuffling and re-shuffling them repeatedly until I could place the same property in multiple piles. Thus I could make 1,000 look like 1,500 or even 2,000.

After all, who's gonna check for duplications within different piles. All that will happen is they check within each pile so you just don't double up on units within each pile. ChaChing!

Holly Cash Register Batman.  

Yes, Robin, now you understand why they wanted to bury this in the now taxpayer owned Freddie and Frannie balance sheets. And of course the Fed. 

mrhonkytonk1948's picture

Seems like MERS would have to assign some sort of unique ID to each mortgage simply to operate.  Might be a forensic treasure-trove when the class action guys start looking for the same mortgage turning up in multiple REMICs.

pan-the-ist's picture

I would love to put my perl skills to good use.

Bob's picture

How about a little database harvesting?

NotApplicable's picture

It's an 18 digit mortgage ID number (MIN).

LeBalance's picture

How many real ounces of gold back each 100 "ounces" on paper?  We found out that "the paper financial asset" was backed by 1/100 ounce of physical.  (from the CFTC hearings thanks to GATA and Andrew McGuire.)

Cliff Diving?

Diogenes's picture

Riddle me this Batman. If I had 1,000 units to sell and I wanted to sell 1,500 (and I had no problem with fraud) what would I do?


There is another angle on this. According to Catherine Austin Fitts Solaris site, the CIA and possibly other government agencies, have been raising money for years by buying a house and getting up to 10 mortgages with different banks. The banks sell the loans to Freddie and Fannie, they go into default and the government pays off.

She found out about this from a bank executive, even before the mortgage mess, who figured it out from analysing Fannie and Freddie's loss data.

Cognitive Dissonance's picture

I have no problem with Fitts view.

I suspect real estate/mortgage fraud has been used by many parties, both private and governmental, for decades. In fact, I believe it grew to become so widespread and pervasive that it exploded and needed to be buried.

The problem is that it doesn't stay buried.

BobPaulson's picture

On top of this I thought some courts had found that partial ownership of a slice and dice of a mortgage does not actually give a bank the right to foreclose. Didn't a judgment like that go through last year against a German bank? This makes junk bonds look like Krugerrand. 

El Hosel's picture

FLASH CRASH... JPM just traded down to 10 cents...

   Further evidence of fair and orderly markets.

Dagny Taggart's picture

Yes it did. How embarassing for JPM. I mean, nowadays, we see this happen all the time. But, not to JPM. It's rather like getting caught whacking off in the theatre. They must be mortified.

El Hosel's picture


  The S&P 500 jizzed itself in public yesterday, Abby Joe where is the box of tissue?

Biggvs's picture

IB shows a low of one cent!

tired1's picture

Can you provide a source, please? I've looked at some common charts and can't find any reference.

pan-the-ist's picture

I'm confused.  Rush said this is Clintons fault, not the banksters.

Careless Whisper's picture

this person needs to be in the witness protection program. the criminal bankers don't like it when their fraud is exposed.

Cognitive Dissonance's picture

I assume you're joking.

The captured and complicit Federal Government runs the Witness Protection Program, right?

Yeah, I thought so.

DaveyJones's picture

True but this aint no 911. Looks like there's a lot of witnesses to the inner workings. 

Cognitive Dissonance's picture

Which is why they will implement a "political" solution.

Sure the people will scream and holler and complain and maybe, just maybe, write their Congress Critter. But in the end, until "we the people" show the powers that be that "we the people are united and willing to stand together" it's understood the powers can do just about anything they want.

THAT was the lesson learned from the bloodless (from the powers that be point of view) coup of 9/11.

MachoMan's picture

we WILL have a political solution because the emperor has no clothes...  there isn't any money left to throw at the issue...  they can't just buy all the mbs to keep them off of bank books...  the only solution is political.  Further, so long as the states are dependent upon the federal government for financing, then they're captured as well.

DaveyJones's picture

I'm not disagreeing at all but I refuse to accept it. At some point comes the breaking. Everyone in debt so everyone gives up the rules. They are the pimps, we are the whores. The collapse of the economy is nothing compared to the collapse of law. The naked protection of powerful criminals. This can not go on. And where does the chain end? Who is the final banker holding everyone by their vitals?   

MachoMan's picture

I agree the breaking will come.  The problem is, this isn't it.  The breaking is not going to be telegraphed...  it's just going to appear, like the flash crash, while everyone stands around with their jaws open.  In other words, an asteroid is approaching, but we have time to try and figure out how to divert it.  It's the asteroid we don't see that's the problem.

Cognitive Dissonance's picture

We are so very desperate to deny that we're Zimbabwe that we continue to believe our white knight in shinning armour is just around the corner.

Actually, s/he is just around the corner. But that white knight is you and me and they and them and those and us. Until we shake off our victim mentality and take personal responsibility for our own rescue, the Ponzi will never stop. Never.

This is an extremely positive post because the solution's in our hands. We just don't like it.

Milestones's picture

Exactly as I have posted! We have the Alexanderian sword in our hands confronting the Gordian Knot. We the people only have to seize the moment and USE the damn sword.

This nation and its people have been handed the means to extracate themselves from the reptile if they only have the one ounce of courage it takes to do it.  Milestones

MachoMan's picture

CD, I agree that we still have to try, but the reason americans' spirits have been beaten down is that we're cognisant of the fact that we're in the twilight of the war...  the wealth gap is basically the fiscal representation of the degree to which the war has been lost.  This wealth is presently being converted at breakneck speed into harder assets, which can be utilized regardless of the underlying economic conditions.  Without any growth available to the world at this juncture, it may very well be the last robbery.  Deep down, we're aware of this...  mad at ourselves for letting it happen... 

I agree that we, collectively, will eventually make an effort to combat the spoils of the wealth gap.  My problem is that it's an ounce of prevention or a pound of cure.  By the time we get around to it, we'll need 10 pounds of cure.  I just hope that we're even capable of making the necessary changes when we've obtained the requisite level of collective will.  I don't put it out of the realm of possibility (and I certainly hope for it), but this time might be different given the world's growth model...  the point where we are on the timeline of the world's business cycle, relative demographics, and attitudes.

We can all help out in our own little ways, but I doubt it will be enough.  For example, paying all local businesses with cash and not requesting receipts to be written...  not accepting credit...  banking locally...  purchasing pms and taking physical delivery...  but, the wealth gap is a startling divide...  I hope we can bridge it AND keep some semblance of objectivity, fairness, consistency, and wisdom in tact.  I strongly doubt that the huffingtonesque suggestions for protest will amount to the level sufficient to make fruitful change...  we'll see if the upcoming elections make any dent in the problem...  but my guess is that the national political process has been captured for decades and the old game of blame the other head of the same snake will continue.

Geoff-UK's picture

Is CD telling us...'we are the ones we've been waiting for?!'

Fíréan's picture

The difficulty in getting a political solution is the interests and concerns of the other countries whose banks were defrauded in this matter. Having bailed out their own banks already are they not more likely to look for and go after  the guilty, with intention of recouperating their losses, than to comply with yet another public deception from which they could stand to loose yet again ? This is not just an internal US situation.

MachoMan's picture

These foreigners/central banks have already stepped in line through swap lines and/or exchanged the mbs for treasuries...  They are solely and completely dependent upon the FED's success and, like the states, will act accordingly and say "how high?" at the word jump.

apberusdisvet's picture

A lot of "assisted" suicides coming just like those that happened at F&F.  (just don't tell anyone....sssshhhh!)

idea_hamster's picture

Don't worry s/he's safe:

I’m not saying that all deals are incorrect, most aren’t.

Ha ha -- clearly, going off the KoolAid cold turkey is tough -- just a sip every now and then to remind ourselves that the world is going to be OK....

Cognitive Dissonance's picture

Withdrawal is a bitch.

As I commented in another thread our worldview controls us. Thankfully our ego tells us it's the other way around. Ironically for those who first begin to reject some long held notions and beliefs, there is this tendency to hold on even tighter to other beliefs as a sort of internal balancing act.

One doesn't enter the scalding hot water of the brave new world quickly. Over time we slowly slip beneath the surface, coming out from time to time for breathers when it becomes too hot to bear.

mrhonkytonk1948's picture

Now, now.  In corporate-speak, the process described by the author is "working smarter, not harder" and "doing more with less" or as a mainstream economist might say, "increasing productivity".  The system will produce EXACTLY this sort of outcome over and over and over as those at the top of the food chain are consumed by greed and those at the bottom with fear.  Or, to paraphrase Dostoevsky, "once Consequences and Accountability are dead, everything is permitted."

i-dog's picture

"I’m not saying that all deals are incorrect, most aren’t."

Hmmmm ... something doesn't smell right to me. Lots of wishy-washy statements that a cross-examining attorney would tear to shreds.

Raymond K Hassel's picture

Why didn't I buy those long dated out of the money puts last week? 

Rogerwilco's picture

Your process and methodologies sound surprisingly similar to the way Congress writes laws. FUBAR, and bonuses for the guilty, what a country!