(11AM EST – promoted by Nightprowlkitty)
Rep. Damon Silvers, a member of the independent Congressional Oversight Panel, asked what is probably the most important question facing America today.
We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks. We can’t do both.
Which should we do?
The question doesn’t sound all that ominous, but it is. In essence we must chose between protecting the TooBigToFail Wall Street banks, or the rule of law.
That may sound overly dramatic, and I wouldn’t blame you if that was your initial reaction, but surprisingly the choice really is that simple.
Up to this point the media has reported the foreclosure mess as a case of incompetence on the part of the mortgage servicers and banks. Just something expensive that we’ll have to put up with until it gets “straightened out”.
That couldn’t be further from the truth.
“The whole essence of this crisis is fraud and unless we restore the rule of law and transparency of disclosure, we are not going to fix this.”
– Laurence J. Kotlikoff, economics professor at Boston University
There is immense amounts of information coming out about this crisis, so its easy to miss the really juicy parts. Let’s start with the testimony of Richard Bowen, former senior vice-president and business chief underwriter with CitiMortgage Inc., before the FCIC.
In his testimony he talked about the $50 Billion in mortgages that his division bought, and then repackaged and sold to Fannie Mae and Freddie Mac.
“In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets…
“We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production.”
Bowen’s warnings were ignored at Citi, and now the taxpayer owns 75% of Citigroup. The scary thing is that Citi wasn’t the worse offender. Countrywide, now owned by Bank of America, was (although Washington Mutual was a close runner-up).
Countrywide originated over $1.4 trillion of mortgages in 2005-2007. MBIA alleges that over 90% of the defaulted or delinquent loans in the Countrywide securitizations show material discrepancies.
Simply put, BofA doesn’t have that kind of money. It’s not like there isn’t a legitimate reason for these lawsuits against the banks. Countrywide has already settled with the New York pension funds for $624 million, and the line is growing by the day.
“‘This appears to be a massive fraud perpetrated on the investing public on a scale never before seen,’ Rosner added.”
The word of the day is ‘fraud’ kids.
The banks didn’t get into trouble from just incompetence. These people are both smart and greedy.
The FBI warned about an “epidemic” of fraud in the mortgage industry all the way back in 2004. They predicted it could lead to the “next S&L crisis”.
In November 2007, the rating agency Fitch dared to look at some loan files. It found fraud in nearly every single file reviewed.
Matthew Lee, vice-president of Lehman Brothers, was fired without advanced notice for trying to expose the fraud in his company.
It’s foolish to believe that this is all some sort of big misunderstanding. The missing foreclosure documents wasn’t an accident. It was by design.
according to a court filing last year by the Florida Bankers Association, it was routine practice among its members to destroy the original note underlying a property when it was converted to an electronic file.
What is the advantage of destroying the original note? One advantage was being able to sell the same note to multiple investors. It turns out that this practice was somewhat common.
The foreclosure fraud is so blatant that the foreclosure mills have published price lists for forging documents. The prices are very reasonable. The price list includes such things as “Create Missing Intervening Assignment,” $35; “Cure Defective Assignment,” $12.95; “Recreate Entire Collateral File,” $95.
How do you recreate the original note if you don’t have it?
The less sinister (but larger) problems
It wasn’t all just fraud. Sometimes the people in the financial industry just wanted to take shortcuts. The thing is, the “innovations” may not have been legal.
For example, the common practice of transferring a promissory note underlying a property to a trust without identifying it, known as an assignment in blank, may run afoul of rules governing the structure of the security.
“The danger here is that the note would not be considered a qualified mortgage,” said Robert Willens, an authority on tax law, “an obligation which is principally secured by an interest in real property and which is transferred to the Remic on the start-up day.” If, within three months, substantially all the assets of the entity do not consist of qualified mortgages and permitted investments, “the entity would not constitute,” he said.
The omission of citation of the mortgage income stream owner was intentional to avoid tax obligations. The result of this being overturned would be a big tax hit for investors, a tax hit that will wind up in court with the investors suing the banks who sold them the notes.
What’s more, if the loan originator failed to provide the required documentation then a “true sale” may never have happened. That’s a recipe for chaos in the courts.
However, this isn’t the biggest problem that we could be looking at.
The biggest problem involves a company that doesn’t exist called MERS (Mortgage Electronic Registration System).
The big banks have been using this system since the 1990’s. Foreclosure victims have sued the MERS system in the past without success. However, that was before this latest crisis.
MERS lets banks electronically register their sales of home loans so they can avoid trudging down to the county land-records office. According to its website, MERS is owned by the largest lenders in the country including Bank of America, Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo, in addition to Fannie Mae and Freddie Mac, which own or guarantee more than half of the $11 trillion U.S. mortgage market.
In March 2009, U.S. Bankruptcy Judge Linda B. Riegle in Las Vegas decided MERS wasn’t a true beneficiary under a trust deed. Since March 2009, supreme courts in Arkansas, Kansas and Maine have found that MERS had no standing in foreclosure proceedings under their states’ laws. The company suffers no injury and lends no money, the panels said.
The ruling of “suffers no injury” is one of the founding tenants of our common law system. You can’t just wave a magic wand and make that go away.
What’s more, we are talking about 50 different state mortgage laws, thus a quick law from Congress won’t hold up.
No state legislature ever authorized the change in property recording to the MERS system.
As a practical matter, the incoherence of MERS’ legal position is exacerbated by a corporate structure that is so unorthodox as to arguably be considered fraudulent.
There’s that word again.
MERS invites financial companies to enter names of their own employees into a MERS webpage which then automatically regurgitates boilerplate “corporate resolutions” that purport to name the employees of other companies as “certifying officers” of MERS. These certifying officers also take job titles from MERS stylizing themselves as either assistant secretaries or vice presidents of the MERS, rather than the company that actually employs them….
MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each.
Oh, yeah. This sounds real legitimate, in the same way a mob front company is legit.
The U.S. Supreme Court has already ruled in the past that “the note and the mortgage are inseparable” in Carpenter v. Longan. Yet the MERS business model is based around seperating the note and mortgage. The Statute of Frauds requires that all agreements to be performed over more than a year’s time, or in which interest in real property is conveyed, must be in writing and bear an actual signature by the party so bound.
Which brings us back to the question Damon Silvers asked. Are we going to uphold 400 years of property law, or are we going to sacrifice the rule of law to protect the Wall Street banks yet again?
Asked in “Inside Job” why there’s been no systematic investigation of the 2008 crash, Nouriel Roubini answers: “Because then you’d find the culprits.”
The Obama Administration appears to be following the lead of the corrupt Republicans that preceded it when it comes to “fixing” this problem.
The chairperson of the Federal Deposit Insurance Corporation recently suggested a solution to the on-going mortgage and foreclosures scandal. FDIC Chair Sheila Bair proposed that the banks involved would be granted “legal protection from lawsuits” in exchange for granting struggling homeowners a minimum of 25 percent reduction in monthly mortgage payments.
“Legal protection from lawsuits”? Are you kidding me?
I’m not sure if what Bair is proposing is a bribe or a fine, but it certainly isn’t the rule of law. When did protection from legitimate lawsuits become something that gets sold to the highest bidder?
Of course Congress is even worse. Their first reaction was to protect their Wall Street owners at no cost.
This disregard of criminal behavior is so widespread, no wonder there is a grassroots backlash against all incumbents.
There was no action on the foreclosure crisis and no serious attempt to investigate the causes of the crisis. The SEC has brought only a handful of civil cases ending in trivial fines, with neither firms nor individuals required to admit any wrongdoing.
Most tellingly, there has not been a single criminal prosecution of any firm or any individual senior financial executive — literally zero — and, of course, no appointment of a special prosecutor. While we can debate the extent to which fraud caused the crisis, and precisely how much fraud was committed, the answer is clearly not zero.
There are two things we can be certain of: 1) Congress will do nothing to address this problem for the next several weeks, and even then it might be January before anything serious is proposed. 2) The Republican Congress will be even more obsequious to Wall Street than the Democratic Congress.
So the only question left is what this whole mess will cost? To answer that I refer once again to Damon Silvers.
Let me tell you what the Fed says they’re worth. The Fed tells us they’re worth 50 cents on the dollar. So if the Fed’s request to Bank of America is honored, right, Bank of America, assuming they are carrying these bonds, assuming when they buy them back they mark them to market, Bank of America will take a $23 billion loss.
“The Federal Reserve further informs us that there is nothing particularly unique about that particular set of mortgage-backed securities — meaning they have not been chosen…because they’re particularly bad. They believe they are of a common quality with the rest of Bank of America’s underwritten mortgage-backed securities. There are $2 trillion [worth] of Bank of America’s underwritten mortgage-backed securities.
“Five such deals — five such requests, if honored to Bank of America…will amount to more than the current market capitalization of Bank of America, which is $115 billion.
“Now do you wish to retract your statement that there is no systemic risk in this situation? And the word is ‘risk’ — not ‘certainty’ — but ‘risk’? And I would urge you to do so, because these things can be embarrassing later.”
TARP 2 anyone?