Is the banks’ sloppy paperwork a matter of simple technicalities that are relatively easy to cure, as the banks contend? Or are there more far-reaching consequences for banks and the institutions that bought mortgage-backed securities during the mania?
Oddly enough, the answer to both questions may be yes.
Nothing odd about it, really.
The issues here aren't just "cost", as everyone wants to claim, or "shortcuts." They go directly to the fundamental question of the rule of law and 5th Amendment rights to Due Process. To the extent that pleadings and affidavits were submitted to courts with false contents - and swearing that you have personal knowledge when you do not is false contents folks - they are generally felonies. There is every reason to believe that hundreds of thousands of felonies have been committed here, and that responsibility for those acts does and should rest up and down the line - not just with law firms that were running "puppy-mill style foreclosure operations" but those institutions who hired them knowing that their production goals could only be met through subversion of the law.
Conspiracy remains a crime in this country, and with good reason - it induces other people to commit criminal acts. We must, as a society, demand accountability.
If there are no indictments forthcoming for these ridiculously widespread abuses and violations of basic Constitutional Rights then I will be forced to concede that if citizens decide to take the law into their own hands, ignoring the banksters Constitutional Right to due process and instead act as judge, jury and executioner, they will have done exactly as they have been shown is permitted and appropriate by the very people who they take their wrath out upon.
This road, of course, is one that has the label "Madness, Exit Here" emblazoned on it.
We are well beyond the point where our governments, both state and federal, should have stomped on this with a thousand subpoenas and a flurry of indictments along with cease-and-desist injunctions.
So far it appears that our state and federal governments instead intend to take the "Madness" road.
So be it; the consequences of that decision rest on their heads.
The MBS situation, however, is where I have said for three years the true problem lies. Gretchen dances around this, while alluding to the underlying issue:
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 entity would not constitute."
That's polite language for "There is no legally-constituted trust, there is no tax passthrough, and the entirety of the MBS structure - the securitization - is void as the law governing them was not complied with."
This is a real problem because the people who bought that crap - $1.4 trillion or so of it still outstanding in the private-label market alone - paid good money - and for those deals where this happened they got nothing in return for it.
“The issue of bad assignment has many implications,” said Christopher Whalen, editor of the Institutional Risk Analyst. “It does question whether the investor is secured by collateral.”
Many people ask "Why would they do this? What motive is there, beyond sloppiness, for not properly transferring the paperwork?"
Well that one's easy folks, and goes back to what I said in 2007:
Let me restate that again so that everyone gets it - every single ALT-A lender is at risk of having every defaulted loan - no matter how long it has been since it was securitized and sold off - PUT back on them if there is any material misstatement in the paperwork!
Let me make this CRYSTAL CLEAR for anyone who doesn't get it yet - there is going to be a massive shizstorm of Biblical Proportions when this unwinds. And unwind it will, as our nation's housing market is in the tank, home prices are decreasing, and that is putting increasing numbers of these loans underwater - where it is impossible for the owners to refinance out of impending disaster. As a consequence they will increasingly fall behind and as soon as their loan gets flagged as an "NPA" (Non-performing asset) whoever holds the bond sausage that was made out of that "mystery meat" is going to do their damndest to not be the bagholder.
They managed to put this off for three years via various accounting frauds.
First, they simply stiff-armed people.
Then, Bernanke and Paulson played extortion with Congress to get their "TARP", which, incidentally, included a cute single-sentence change in reserve requirements so Bernanke could set bank reserves to zero - something he previously could not do.
But Paulson decided not to buy up the bad paper (gee, you think $700 billion might be the bad part of the $1 trillion or so of the undocumented crap? How come that's suspiciously close to 60-80% of production?) and instead "recapitalize" the banks - that is, ignore the entire reason that they needed TARP in the first place.
The market saw through the ruse, and continued to pummel the stocks - and credit-default swaps - of these bankrupt issuers. Remember, this is the testimony under oath before the FCIC:
60% defective loans in 2006, 80% defective in 2007: Citibank's former chief underwriter, who testified under oath that management was fully aware they were buying and selling trash.
Clayton, which was hired to do audits, revealed that about half of the loans did not meet standards, and that about 30% had "level three" disqualifications - that is, there were no mitigating circumstances that could merit an exception. They would be "put back" into the pool - and had to be "selected" three times before being "out". The odds of that, if you were sampling ten percent? It's 10% to the third power, or about 1 in 1,000 that the loan would not wind up in the pool.
Intent? Uh, yeah. And here's the problem: This appears to be fraud in the inducement not only for the buyer of the MBS but also for the borrower who took the loan, in that once this was detected, and we know Citi knew about it in 2006, the Banks continued to solicit business for known-defective loans.
This constitutes bad faith as you are making a loan you know cannot be paid as agreed in the aggregate.
There is an implied covenant of dealing in good faith in all contracts. I cannot induce you to commit to a contract that I have every reason to believe you cannot perform on - that is, where my intent is not your performance as I represent to you but rather I intend and expect that you will default.
People have tried to defuse this mess by saying that "the borrowers are to blame for borrowing money they could not pay." But the problem with this analysis is that it fails to take into account that the lenders knew by 2006 they were in the majority making loans to people who couldn't pay and continued to issue those loans - which means they were making loans for the explicit purpose of inducing people not to borrow and pay but to borrow and default, destroying the borrower financially. And incidentally, for those who wish to point to the UCC (and some people are starting to in their claim that this is a "nothingburger"), there's a problem that arises with the Uniform Fraudulent Transfer Act when the lender makes a loan knowing that the cash flow and asset position of the debtor is insufficient to make payment as agreed.
So what did Geithner (who, I will remind you, was Citi's along with the other big banks', primary regulator for safety and soundness during this entire mess) do? Did he force the banks to tell the truth, to unwind fraudulent transaction, and take these institutions through receivership? Uh, no.
Instead he, along with the banks, President Obama and Kanjorski, extorted FASB - the accounting standards body - forcing them essentially at gunpoint to make legal marking these loans which everyone knew were crap when they were made at whatever the banks wished, instead of at their actual value - which, for those 80%, was in fact recovery value at the time of origination or approximately 50 cents on the dollar!
Got it yet folks?
The banks made loans they knew could not be paid as agreed. That's fraud in the inducement (on the borrower) and under longstanding case and statutory law makes the debt avoidable.
They sold them to people while intentionally concealing that they knew they were making loans that could not be paid as agreed. That's fraud in the inducement too (on the MBS buyer this time, as they were sold paper that was worth substantially less than promised with full knowledge of that fact.)
They then got government to allow them to hide the actual value (or rather, the lack thereof) of these loans on their books by getting the government to extort the accounting standards body, claiming that these loans were "money good" when they knew at the time of origination they were not, and in fact, they're still not. Said deception continues to this day and is uncovered every week when we have more banks seized, as I have repeatedly chronicled going back over more than a year.
But all that game-playing didn't make the problem go away, as the bad paper is still there, still bad, and the embedded losses are still real.
We continue to seize banks on a weekly basis and discover that their so-called "assets" are being carred at 95 to 97 cents on the dollar, and yet when they are sold they're bringing 50 cents less rehabilitation costs and legal fees, which are averaging around $50,000 a property. That is, the so-called "$500,000" loan in fact has a value of about $200,000, or a 60% loss.
These same losses must be presumed to be present in all of the big banks' loan books.
So now what?
The lenders got to the point (after three years, natch) where it's obvious that the person who is living in a house and hasn't made a payment in more than two years is never going to pay. The house's value has dropped on the market to half or less the total outstanding balance on the loans. The bank, acting as servicer, has been pretending that all is well, and MBS buyers have gotten their payments for the most part - but now the cash flow is becoming a problem. So they go ahead and try to foreclose.
But when they do, suddenly all the former scams and schemes risk becoming uncovered. If the original note is tendered the facts and figures on it can be challenged. It might be shown, for example, that the original W2 was altered - not by the borrower, but by the originating party. It might be shown that the note was never endorsed into the trust that allegedly is attempting to foreclose, and thus the trust doesn't own it and can't foreclose. The raw violations of ratios and other reps and warranties for notes in that trust will become public knowledge - most particularly, visible to the owners of the MBS, who have been trying to get this information by request and have been repeatedly stiff-armed. Once they have this information they now will have the necessary proof to win a lawsuit, and convincing the necessary 25% of the noteholders to come along for the ride suddenly gets a lot easier. Never mind that this pattern of conduct also might lead to the original lending transaction being declared void for fraud in the inducement and/or avoidable under bankruptcy, as the evidence of a pattern of conduct - making known bad loans to people - goes directly to the implied covenant of good faith.
So instead of producing the actual note with all assignments and allonges attached, as the law requires, they produce a "lost note affidavit." The problem with that, of course, is that "lost" and "intentionally concealed or destroyed" are not synonyms, and filing a "lost" affidavit for something you shredded out behind the warehouse, desire to conceal, or never had is in and of itself a fraud - this time on the Courts. A little affidavit fraud to top it off is no big deal at this point, even if it winds up being so outrageous as to "certify" you served someone when in fact you tossed it in the sewer.
After all, if the truth comes out, everyone involved in this game going back to the original issue of the loan is screwed, blued and tattooed - so at this point they may as well just make things up and lie, since there is nothing (more) to lose.
And that, my friends, is why we have Foreclosuregate.
This is not about "bad borrowers" or "mere technicalities."
It is about uncovering all the scams and frauds that go back to the origination of these loans, and which everyone involved is doing their damndest to try to keep out of the public eye.
Don't let them.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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