Madelman Matters

Insider Says Wells Fargos Independent Foreclosure Review for OCC is a Sham

I got an email the other night from one of my readers. It said

I was hired as one of those Independent File Review Specialist at a company called Promontory working on Wells Fargo Bank. I have 15 years industry experience in all facets of the mortgage & title industry, and just needed a job at the moment. I must say the whole project is a mess, and a terrible joke on the victims of foreclosure and the American people. Its a total sham.

No kidding, I said to myself. Or, as Yves Smith would say Quelle surprise. The email continued

I have found errors that should be moved up through the ranks, but am told quit digging so deepput your shovel awayFocus on the questions in scope The review forms are set up so no harm could ever be found. Its equivalent of an attorney presenting his case to a judge with just 20% of the evidence.

Well, that cant be good, right? He went on

I would also like to mention that I was brought in through a temp agency..some of the people brought in with me do not know the difference between a truth in lending statement, and a note. Its a shame, these are your reviewers!!! The supervisors dont want any troublethey are mostly temps too, just trying to get a promotion to full time. Does this sound like a fair and impartial review to you? Since were temps I suppose thats impartial, not to mention they made us affiant notaries so we can so-called notarize each others reviews.

Doesnt sound fair and impartial in the least, now does it? But I do like the ability to notarize each others reviews. That sounds handier than a pocket on a mans shirt. He closed by saying

The foreclosed victims dont realize if they do not provide specific dates on the intake forms their complaints are considered general comments out of scope. They should specifically ask for a full file review and hopefully their info has not been scrubbed or purged I could go on and on, but I just felt I needed to share this.

And in my opinion, youve done a very good thing.

Our insider says he was hired by Promontory Compliance Solutions, LLC to do work on the Independent Foreclosure Review for Wells Fargo Bank. The companys Website describes itself as follows:

Promontory excels at helping financial companies grapple with and resolve critical issues, particularly those with a regulatory dimension. Taken as a whole, Promontory professionals have unparalleled regulatory credibility and insight, and we provide our clients with frank, proactive advice informed by evolving best practices and regulatory expectations.

Promontory is a leading strategy, risk management and regulatory compliance consulting firm focusing primarily on the financial services industry. Led by our Founder and CEO, Eugene A. Ludwig, former U.S. Comptroller of the Currency, our professionals have deep and varied expertise gained through decades of experience as senior leaders of regulatory bodies, financial institutions and Fortune 100 corporations.

The companys founder and Chief Executive Officer is Eugene Ludwig. According to the companys Website

Gene, the Founder and Chief Executive Officer of Promontory Financial Group, is a trusted adviser to many of the worlds leading financial companies. He is widely recognized as a farsighted thinker on the most pressing issues confronting financial services. Before founding Promontory, Gene served under President Clinton as U.S. Comptroller of the Currency, the head of the federal agency responsible for supervising the preponderance of U.S. banking assets. He went on to become Vice Chairman and Senior Control Officer of Bankers Trust/Deutsche Bank.

As Promontorys Chief Executive Officer, Geneprovides hands-on leadership and direction to all our global offices.

Now, I am not suggesting that either Mr. Ludwig or Mr, Moses are involved in the OCC Complaint review process in any way, and neither is the insider who works there. But, they do own the company and as such, they are ultimately responsible for what goes on there. It is my most sincere hope that they fix whatever is apparently broken about the independent review process.

Now, I realize that no one was terribly impressed with the OCCs independent review process when it was announced, and a big part of the dissatisfaction was based on the apparent lack of true independence of the companys that were being hired to do the reviewing. But, that didnt bother me as much as it did others because I think its pretty much impossible to find a company in this country capable of handling the requirements of the review that doesnt already have a relationship with the large banks.

I thought,Gretchen Morgenson,did a darn fine job reporting on the various opinions of the programs inadequacies. For example, in her column that appeared in the New York Times on Christmas Eve last year, she wrote: Nye Lavalle,a foreclosure fraud expert who began warning bank executives about bad lending practices back in 1999, is troubled by this situation. Nye had told Gretchen:This review process is a wink-wink, nod-nod. (By the way, I just did a Mandelman Matters podcast with Nye and Max Gardner, so look for that this weekend.)

Yves Smith onNaked Capitalismalso pummeled the obvious inadequacies of the OCCs process, pointing out flaws including the limited years being reviewed, 2009 and 2010, and borrowers asked to sign some sort of limited release of future claims. Yves referred to it as, yet another Obama Administration pretend we are helping ordinary citizens when we are in fact helping the banks scheme.

~~~

• File reviewers are only allowed to look at the last added and removed dates. This is the last time the file was opened by a servicing representative before it was removed/referred to attorney for foreclosure. So they are only getting to review the file at the very end, meaning thats the only data thats being examined to determine if anything was done incorrectly.

• File reviewers get the intake form, which is what the homeowner submitted, and use it to answers questions on Promontorys form, with drop down options depending on boxes checked. However, if there are no specific dates provided by the homeowner regarding the circumstance being described, the policy is that its considered General Commentary it is not in scope. So, its disregarded in its entirety. The thing is that on the official form sent out to homeowners by the OCC, there is no instruction to provide dates for each assertion, with the exception of one of the questions where it says, if possible provide dates. As a result, I would suspect that the vast majority of complaints will be disregarded as General Commentary.

• When a file reviewer looks for payment history, oftentimes it comes up as image not available or this time period not available. They say that they keep the payment history on microfiche, so hes told to order a sub-process to get payment history from God knows where, and it takes weeks. So, whoever gets his request knows exactly what he wants to look at any why, and therefore has the opportunity to scrub the data, to eliminate escrows misapplied or not applied or any inappropriate fees.

• Supervisors told his entire group that Wells Fargo had submitted over 10,000 files to Promentory. Only 4 were found to be in question, and upon final review by Wells, no harm was found. So, 10,000 homeowners submitted their complaints and all 10,000 were deemed to be models of perfection.

• Every problem/error he has found and reported to supervisors, he has been told such things as:put your shovel away; stop digging; if you look long enough at anything youll find something; put your blinders back on and get back to work.

• He also says that the questions on Promontorys form are worded in such a way that it makes it very difficult to ever find fault. For example, by using compound questions, he is often told to answer no, when the first part of the question would be a yes.

• They made the file reviewers, affiant notaries, so that they can so-called notarize each others reviews.

Heres a copy of the actual agreement between Promontory and Wells Fargo its 137 pages long, incredibly detailed SMOKE SCREEN.
Wfb Promotory Agreement

Okay, theres more but thats enough for right now. Id like to make a point here.

Everyone knew the OCCs review process was a stacked deck, but I was willing to let that go, which apparently proves that Im an overly trusting idiot. Wait that wasnt my point.

My point is that for Wells Fargo, a stacked deck apparently wasnt good enough. In a game against homeowners, Wells had to have all the cards and then be allowed to deal them without anyone looking so that they could just lay down Royal Straight Flush after Royal Straight Flush.

I mean, basically EVERYONE thinks of the OCC as being a regulator thats straight out of a Marx Bros. movie. It wouldnt matter what the OCC said at this point, no one has any confidence in them to be able to do anything effectively, in terms of regulation. Personally, Im not banking at anything regulated by the OCC anymore. Its become clear that theyre either so entirely bought off, or so entirely incompetent that theyre actually scaring me.

Want to know how bad it is? The OCC makes the SEC look like the Gestapo of Wall Street, right? Exactly.

But, I want to make sure I say this I dont believe for a moment that Promontory implemented such a system and set of policies without Wells making it clear that its what the bank wanted. It would be impossible for Promontory to do it on their own Wells had to be in the drivers seat here. And that stinks.

Lets just do a quick recap here it all started with robo-signing making headlines in September of 2010. GMAC was busted by Jeffrey Stephans deposition by attorney (and good friend of mine), Tom Cox of Portland, Maine. Within days, other banks were feigning shock and announcing self-imposed moratoriums, so they could ascertain to what degree they might unknowingly be doing it too. Its really kind of hysterical to think about it today, right? I mean, in light of what John OBrian, Jeff Thigpen, and most recently San Francisco has brought to light?

Not that I ever had any doubt I knew it was ubiquitous from day one. Why, because if youre a bank then robo-signing is simply not an idea that appears on a list with other ideas. No one sitting around the conference table on the 32nd floor says:

No, go back one slide I like the one where we have everyone sign Mickey Mouse. Yeah, lets go with that.

I even wrote a song about it when it was revealed that GMAC had not stopped robo-signing even after they had been exposed and then told not to do it anymore. I guess, Massachusetts Attorney GeneralMartha Coakley was the last straw and GMAC picked up their sandbox toys and stormed out of the state in a huff.

So, most of the banks stopped foreclosing so they could do their own internal investigations okay, it was ridiculous but it happened. And after a couple of weeks, they all started back up again, or thats what they said anyway, having investigated without finding a shred of evidence that anything was amiss.

Except Wells Fargo, remember? I sure as heck do I never forget a fake. While BofA and JPMorgan were voluntarily suspending foreclosures pending their own investigations, Wells Fargo was assuring the marketplace that it was certainly not their problem and that there was no need for them to even slow down, let alone stop foreclosing. They were down right dismissive about the whole thing, which is what made what happened next so great.

Does anyone know how to pronounce Xee Moua? (Lord, this is fun.) Yes, in a deposition of Xee Moua, just two weeks later on October 14, 2010, she said she signed as many as 500 foreclosure related papers per day on behalf of Wells Fargo, and that the only information she verified was that her name and title were spelled correctly. When the lawyer asked whether she checked the amount owed by the borrower, she said, I do not.

And if memory serves, Wells Fargos response was No comment. To which I replied, Hahahahahahaha.

But, Im not laughing about whats going on a promontory Compliance Solutions on behalf of Wells Fargo Bank. Because its not the least bit funny. The OCC, the Federal Reserve and the FDIC said they had all investigated and at the conclusion of those investigations, the OCC issued consent orders, and we all read them. And they said, among a whole lot of other things, that the banks we employing UNSAFE AND UNSOUND PRACTICES. And the CEOs and other senior executives all signed those consent orders.

And then months went by, and finally the OCC announced that the time had finally come for some small measure of justice to be meted out to the homeowners who had been victimized by the banks unsafe and unsound practices. The homeowners wouldnt have to sue the banks, the OCC would make certain that the banks were made to compensate those they had wronged.

And even though I, like everyone else, didnt have much faith and recognized that the deck was stacked as I mentioned above, I told people they should not just ignore it out of hand. I told my readers that I didnt believe they should asume that no relief would be possible it sure sounded like the OCC meant business. It couldnt hurt anything, and maybe theyd get something out of it. I know the reviews arent exactly independent, but still I think its worth doing.

And Wells Fargo you should know something about me. My readers trust me. Because I never lie to them. And I takle that trust very seriously. They also ask my opinions on things, and tend to think that opinion is right, especially about something like this. And yet, after three and a half years and more than 600 articles long articles, I know, I know you, Wells Fargo made me wrong. So, to my readers I apologize, I had no idea that Wells Fargo Bank would even contemplate these sort of deplorable acts.

You had everything in your favor, but you couldnt even play it fair under those circumstances. Im done with you. Doesnt Warren Buffett own part of you? What say you Oracle of Omaha?

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, youll do things differently.

Who said that, Mr. Buffett? That would be you, sir.

Well the way I se it, Wells Fargo has deceived the victims of the banks unsafe and unsound practices, as determined by an investigation by the OCC, the FDIC and the Federal Reserve, by at least attempting to deprive them of what they were promised. I have nothing else to say. Its not funny. Not at all.

Want to know something? If I got caught doing something like this Id probably leave the country. Im not saying anyone else should do that, but I would be so ashamed oh, wait I just realized something if I got caught doing something like this, Id be arrested and thrown in jail. Thats right, I wouldnt have to worry about being ashamed. Whew I didntknow where I was going with that for a moment.

What follows is a podcast featuring the whistle blower the anonymous independent file reviewer working for Promontory on the Wells Fargo Bank account that reached out to us because he was fed up. I verified his identity and spoke with him at length. His voice has been disguised in order to protect his identity. Turn up your speakers and click here its fascinating and terrifying and sickening all at the same time.

I had to modify his voice to protect his identity, so it may be difficult to understand him right in the beginning for a few seconds, but youll adjust so stay with it and youll hear him. Also, the whole thing is about 15 minutes long, so I hope you stay with it until the end because I included a recently recorded song written and produced by my good friend from Northern California, Denny Armstrong. Its good and very uplifting in a patriotic sort of way,

There will be more to come in the days ahead.

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ProPublica

Banks Colluding with Insurers to Rip Off Homeowners, Lawsuit Alleges

by Cora Currier
ProPublica, Feb. 24, 2012



Justin Sullivan, Getty Images

A class-action lawsuit in Florida that moved forward this week highlights a little-appreciated aspect of the housing market — the cozy relationship between banks and insurance companies that often results in overpriced home insurance for already struggling borrowers.

As American Banker reported, a federal judge in Miami on Tuesday opened the door to a class action against Wells Fargo. More than 20,000 Florida homeowners can now sue Wells Fargo and an insurance company, QBE, for allegedly overcharging for insurance. More than $50 million in insurance premiums are at issue, according to American Banker.

The suit itself, filed last year, is sealed, but the judge, Robert Scola, laid out the allegations against Wells Fargo. The judge didn’t rule on the case but allowed it to go forward as a class action. In his decision, the judge cited the plaintiffs' claims that Wells Fargo and QBE “colluded in a scheme to artificially inflate the premiums charged to homeowners.”

The judge also said Wells Fargo has actually threatened to retaliate against homeowners who join the suit.

A spokesman for Wells Fargo said in an emailed statement that “the judge’s recent ruling only addresses the certification of the class in this case and not any of the underlying claims. We disagree with a number of the representations made by the plaintiffs’ attorneys.”

The bank also disputed the judge’s claim that it threatened retaliation for the suit, saying “we made our argument in a purely procedural context in connection with the class certification motion. Wells Fargo has no intention of taking the actions referenced with regard to our customers.”

QBE did not respond to our requests for comment.

The case sheds light on the world of force-priced insurance, an industry that has grown in the years since the housing crisis. Among all the suits and scandals related to the crisis, troubles with force-placed insurance have flown largely under the radar. Here’s some background on the lawsuit and why there might be more of suits to come.

What force-placed insurance is and why it’s controversial

Force-placed insurance is just what it sounds like — insurance you are forced to buy.

This insurance is meant to protect mortgage lenders against damage to homes. If the homeowner doesn’t have insurance on a house, or has let it lapse, most mortgage contracts allow the lender to buy the insurance and pass on the cost to the borrower.

Some homeowners, though, have complained of sudden and excessive penalties, as well as policies that seem to be added unnecessarily — and sometimes retroactively — to their bills. What’s more, the cost of force-placed insurance can be 10 times that of a regular policy, adding to the homeowner’s burden and increasing the chance of default, which is bad for both homeowners and investors in the mortgage market.

Lenders, of course, need to make sure that the asset behind a loan is safe. Force-placed insurance is expensive, the industry argues, because it is high-risk — if you’re the kind of homeowner who doesn’t have any insurance on your property, you’re probably also likelier to default. And because force-placed insurance often replaces lapsed insurance, insurers take on more risk because it has to happen quickly.

But as American Banker started reporting in 2010, problems can arise when banks also make big money off these insurance policies. Bank of America, until recently, owned the company that provided its force-placed insurance. Other banks, including Wells Fargo, contract with insurance companies and get a commission from the policies placed on homes underlying their mortgages.

In some cases, American Banker reported, an insurance company appears to be paying a bank to do nothing except pass along customers. The bank, in turn, has an incentive to force insurance onto its borrowers.

The charges against Wells Fargo

The suit alleges that Wells Fargo and insurer QBE inflated the costs of force-placed insurance policies and that QBE paid commissions to Wells Fargo — commissions the plaintiffs say amounted to kickbacks.

In his approval of the class-action suit, the judge summarized the plaintiffs’ allegations:

American Banker reported that internal Wells Fargo email messages seem to show that some bank employees were uncomfortable with QBE’s high premiums. In court proceedings, Wells Fargo said the pricey policies were justified because of Florida’s vulnerability to hurricanes.

Wells Fargo also argued that borrowers could have avoided the need for force-placed insurance and thus shouldn’t be able to complain about the expensive premiums.

To that, U.S. District Court Judge Scola responded: "That's like a defense for usury … you are going to have a defense that they live a bad lifestyle which leads them to be more in a position to be taken advantage of ...? That makes no sense."

The case materials were originally public before Wells Fargo got them sealed, citing business confidentiality concerns. American Banker’s review of the case is based on materials that it reviewed before the case was sealed, while the rest is gleaned from Scola’s opinion on the class-action designation.

Fighting a class-action suit

Wells Fargo and QBE didn’t want a class-action designation because they said individual borrowers' claims would vary too much, an argument that didn’t win over the court.

The judge also wrote that Wells Fargo actually threatened to escalate foreclosure proceedings against homeowners who joined the class-action suit. The bank’s arguments against the class action, he said, “unabashedly set out its threats to retaliate against any homeowner seeking to avoid the alleged excessive and inflated force-placed insurance premiums through this litigation.”

The judge based his conclusion on certain types of borrowers that Wells wanted excluded from a class action, including those who were in default. Scola claimed that for people in default on their mortgages:

Wells Fargo, as we mentioned above, denies that it planned to take these actions.

Not the only ones

It’s not just Wells Fargo that could face litigation. The plaintiffs’ attorneys have said they plan to file similar suits beyond Florida. The New York State Department of Financial Services subpoenaed 31 banks in October, including Wells Fargo, to look into what a spokesman called the “sometimes problematic overlap between banking and insurance.”

Last summer, a class-action suit in Minneapolis won more than $9 million from Chase Home Finance for 40,000 homeowners who claimed Chase forced them to buy unnecessary flood insurance.

There may be new regulations in the works clamping down on force-placed insurance, but so far nothing has been implemented.

In an op-ed published earlier this month, Richard Cordray, director of the new Consumer Financial Protection Bureau, promised “new consumer protections” that would require banks to allow borrowers to purchase their own insurance. This month’s big mortgage settlement, to which Wells Fargo is a party, also promises restrictions and regulations to reduce premiums and force banks to communicate more clearly with homeowners. But it is unclear exactly how the deal’s rules will be enforced or how they fit into the CFPB’s promised regulations. The CFPB did not immediately respond to our requests for comment.



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www.CreditSlips.org

The Servicing Settlement: Banks 1, Public 0

by Adam Levitin

What are we to make of the servicing settlement announced today with much hoopla? The short answer is not much. The settlement is the large consumer fraud settlement ever, but it accomplishes remarkably little in terms of either alleviating the foreclosure crisis of holding to account those responsible for the housing bubble and subsequent foreclosure abuses. As my Texas relatives say, it's All sizzle, no steak.

Instead, I think the settlement needs be seen as the conclusion to round one of an on-going struggle for accountability and reparations for the enormous damage the housing bubble did to the United States. Whether we will ultimately see meaningful accountability and reparations in the end is very much in question. Round two, featuring the Residential Mortgage-Backed Securities Fraud taskforce, could well be stillborn; the taskforce combines more motivated and more capable agencies, but it isn't clear of the motivated can leverage the more capable or will be bogged down by them. But as for this settlement, if this is all that we get, its a big nothing.

There are two big issues to parse in the settlement: what does it cover and what sort of relief does it provide. Not surprisingly, both are quite limited; the banks wouldnt pay big dollars for a small release.

The settlement covers mortgage servicing abuses, as well as a $1 billion settlement of claims that Countrywide (BoA) was cheating the FHA. It also includes settlements of litigation by the Arizona and Nevada AGs for BoAs violations of an earlier settlement. It also covers some origination claims on which the statutes of limitations have run or will shortly expire. The settlement apparently (and here the precise language is crucial) excludes securitization-related claims, fair lending claims, false claims acts violations, MERS issues, and criminal claims. It also doesnt prevent homeowners or investors from bringing their own suits. So its really covering robosigning and overbilling in foreclosures.

Given the relatively narrow scope of this settlement, its not surprising that the dollars involved are quite small compared to the overall harms created by the housing bubble and aftermath. The formal price tag for the settlement is $25 billion, although it is projected to accomplish up to $40 billion in relief. Only $5 billion of that is hard cash contributed by the banks. Let me repeat that. The five banks involved in the settlement, which have a combined market capitalization of over $500 billion, are putting in only $5 billion. Thats less than 1% of their net worth. And they are admitting no wrongdoing. To call that accountability is laughable.

That $5 billion in hard cash is going to the state and federal government, only some of which will be given to borrowers. What about the other $20 billion? Thats to come in the form of $3 billion in refinancings and $17 billion in principal reductions, deeds in lieu, short sales, anti-blight measures, etc. The banks receive variable credit for these actions, depending on whether these measures are taken for loans owned by the banks or owned by others and serviced by the banks. Basically, its full credit if the bank owns the loan, and half credit if the bank merely services the loan. Because of this formulation, the $17 billion in principal reductions, DILs, short sales is anticipated to result in $32 billion in actual relief. In other words, it is expected that the banks will modify the loans owned by others rather than the loans they themselves own. And when a second lien loan owned by the bank is involved, it only has to be written down pari passu (at the same percentage) as the first lien loan. So from absolute to relative priority, which is a major handout to the big banks, which have large underwater second lien positions.

Or put differently, $32 billion of the settlement is being financed on the dime of MBS investors such as pension funds, 401(k) plans, insurance companies, and the likeparties that did not themselves engage in any of the wrong-doing covered by the settlement. This shouldnt be a surprisethe state Attorneys General previously cut a similar deal with Bank of America, which promised to make up for its wrongdoing by modifying loans own by other parties.

But lets get to the bigger problem. Whether this is a $25 billion or $40 billion settlement is really beside the point. Its a drop in the bucket relative to the scale of the problem. There is approximately $700 billion in negative equity nationwide weighing down the housing market and the economy. Add to that legions of homeowners dealing with unemployment or underemployment and weve got a problem that absolutely dwarfs the settlement numbers. Its Pollyannism to think that this settlement will have any impact on the national housing market. At best it makes some incremental improvements and helps a small number of homeowners. But at worst, it lets the banks off the hook for the largest financial crime in history.

I cant say Im surprised, however. There was no investigation was done prior to this settlement. That had been the sticking point for a number of attorneys general who eventually signed on to the settlement, but only once it was narrowed. But that doesnt take away the problem that there was no investigation. If you go bear hunting without any ammo, you arent going to bag a bear.

To illustrate how little the settlement does for the housing market, lets take the settlements most optimistic projections and assume that it really results in $40 billion of mortgage relief of various sorts. How much does that translate into per distressed homeowner? Lets assume that the universe of distressed homeowners is limited to those underwaterroughly 11 million. So were talking $3,636 per homeowner. That doesnt help a whit in terms of preventing foreclosure.

Now to be sure, the relief will be more concentrated on a subset of these homeowners. The settlement is estimated to help about 2 million homeowners, hopefully to the tune of about $22,000 each. That's certainly a lot better than $3,636, but consider that the average negative equity is about $50,000. At a very generous best, then the settlement only gets rid of less than half of the negative equity for 18% of underwater homeowners. So we're talking about a solution that has less than a 10% impact. Best case scenario is less than 1 in 10 are helped. In any case, those luck few,will be chosen not by where the relief will help the most or by who is most deserving, but by what will be most advantageous to the banks. So some lucky group of homeowners will have won the lottery and in some cases might avoid foreclosure. For most distressed homeowners, its no soup for you! And because fixing the housing sector is about volume, this means that there's no soup for all of us--the housing sector will remain severely depressed.

What about the argument that the settlement will help the housing market by enabling foreclosures to start up again and for banks to clear through the shadow inventory? Well, whats causing the shadow inventory? Is it the possibility of state and federal prosecutions for robosigning? Is it lack of uniform servicing standards? Nope, and nope. The shadow inventory problem is at core the result of two problems. First, the foreclosure system only has limited bandwidththere are only so many foreclosures that can be processed at a time. Second, the banks have their own staffing issues. And third, the bigger problem is that the banks dont have their paperwork in order to foreclose.This servicing settlement doesnt affect any of these problems (maybe it will encourage better staffing on behalf of the banks, but if that hasnt happened by year 5 of the crisis, I cant imagine it will any time soon). National servicing standards as part of a settlement in no way replace existing state and local requirements, and to the extent they supplement them, it may make things harder for the banks. The fact that a bank is in compliance with the servicing standards in the settlement doesn't mean that the bank can in fact foreclose, and litigation of foreclosure actions is private litigation, not governed by this deal. (And this leaves aside the question of bank compliance with this settlement.)

The settlement also creates really awful incentives. It has zero deterrent effect against future wrong-doing. This settlement set a price-tag for mortgage servicing abuses. If the abuses are more profitable than the cost of settlement, what rational bank wouldnt engage in them? The early CFPB-settlement analysis that was leaked months ago envisioned $25 billion as being simply the disgorgement component, not the remedial component. Here we have a settlement with $ 5 billion in actual disgorgement and very little thats remedial, let alone punitive (which is necessary to have deterrence).

Also announced in conjunction with the big settlement were the fines the OCC is imposing as part of its consent orders. They total $394 million, but they are payable either in cash or in kind via relief given to homeowners as part of the OCC Potemkin foreclosure review process. Please Hammer, Don't Hurt 'Em! (Hmm, maybe the banks' theme song should be "U Can't Touch This".)

Is this really the best our government can do? I hope not. This settlement might or might not be the end of the attempt to rectify the financial crisis, but as things stand, we have a settlement in which the banks commit to follow the law and pay out some pocket change. The settlement doesnt fix the housing market. It doesnt create accountability for the financial crisis. It doesnt even create incentives against future wrong-doing. But it provides the Obama Administration (and those attorney generals who just jumped in for the settlement at the last minute) with a fig leaf of political cover. It galls me is that the Obama Administration is going to trumpet this settlement as evidence that it is serious about prosecuting the crimes behind the financial crisis and helping homeowners. It was heartening to hear Obama talk about protecting the middle class in his State of the Union address. It was the right message, but the President is simply not a credible messenger. If Obama wants to run as the champion of Main Street against Romney, the Captain of Wall Street, hes going to need to do something a lot more credible than this settlement.

The score: Banks 1, Public 0.

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The Top 12 Reasons Why You Should Hate the Mortgage Settlement

Posted: 02/ 9/2012 8:46 am

As readers likely know by now, 49 of 50 states have agreed to join the so-called mortgage settlement, with Oklahoma the lone refusenik. Although the fine points are still being hammered out, various news outlets (New York Times, Financial Times, Wall Street Journal) have details, with Dave Dayen's overview at Firedoglake the best thus far.

The Wall Street Journal is also reporting that the SEC is about to launch some securities litigation against major banks. Since the statue of limitations has already run out on securities filings more than five years old, this means they'll clip the banks for some of the very last (and dreckiest) deals they shoved out the door before the subprime market gave up the ghost.

The various news services are touting this pact at the biggest multi-state settlement since the tobacco deal in 1998. While narrowly accurate, this deal is bush league by comparison even though the underlying abuses in both cases have had devastating consequences.

The tobacco agreement was pegged as being worth nearly $250 billion over the first 25 years. Adjust that for inflation, and the disparity is even bigger. That shows you the difference in outcomes between a case where the prosecutors have solid evidence backing their charges, versus one where everyone know a lot of bad stuff happened, but no one has come close to marshaling the evidence.

The mortgage settlement terms have not been released, but more of the details have been leaked:

1. The total for the top five servicers is now touted as $26 billion (annoyingly, the FT is calling it "nearly $40 billion"), but of that, roughly $17 billion is credits for principal modifications, which as we pointed out earlier, can and almost assuredly will come largely from mortgages owned by investors. $3 billion is for refis, and only $5 billion will be in the form of hard cash payments, including $1500 to $2000 per borrower foreclosed on between September 2008 and December 2011.

Banks will be required to modify second liens that sit behind firsts "at least" pari passu, which in practice will mean at most pari passu. So this guarantees banks will also focus on borrowers where they do not have second lien exposure, and this also makes the settlement less helpful to struggling homeowners, since borrowers with both second and first liens default at much higher rates than those without second mortgages. Per the Journal:

"It's not new money. It's all soft dollars to the banks," said Paul Miller, a bank analyst at FBR Capital Markets.

The Times is also subdued:

Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.

2. Schneiderman's MERS suit survives, and he can add more banks as defendants. It isn't clear what became of the Biden and Coakley MERS suits, but Biden sounded pretty adamant in past media presentations on preserving that.

3. Nevada's and Arizona's suits against Countrywide for violating its past consent decree on mortgage servicing has, in a new Orwellianism, been "folded into" the settlement.

4. The five big players in the settlement have already set aside reserves sufficient for this deal.

Here are the top twelve reasons why this deal stinks:

1. We've now set a price for forgeries and fabricating documents. It's $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It's a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.

2. That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.

3. That $5 billion divided among the big banks wouldn't even represent a significant quarterly hit. Freddie and Fannie putbacks to the major banks have been running at that level each quarter.

4. That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.

5. The enforcement is a joke. The first layer of supervision is the banks reporting on themselves. The framework is similar to that of the OCC consent decrees implemented last year, which Adam Levitin and yours truly, among others, decried as regulatory theater.

6. The past history of servicer consent decrees shows the servicers all fail to comply. Why? Servicer records and systems are terrible in the best of times, and their systems and fee structures aren't set up to handle much in the way of delinquencies. As Tom Adams has pointed out in earlier posts, servicer behavior is predictable when their portfolios are hit with a high level of delinquencies and defaults: they cheat in all sorts of ways to reduce their losses.

7. The cave-in Nevada and Arizona on the Countrywide settlement suit is a special gift for Bank of America, who is by far the worst offender in the chain of title disaster (since, according to sworn testimony of its own employee in Kemp v. Countrywide, Countrywide failed to comply with trust delivery requirements). This move proves that failing to comply with a consent degree has no consequences but will merely be rolled into a new consent degree which will also fail to be enforced. These cases also alleged HAMP violations as consumer fraud violations and could have gotten costly and emboldened other states to file similar suits not just against Countrywide but other servicers, so it was useful to the other banks as well.

8. If the new federal task force were intended to be serious, this deal would have not have been settled. You never settle before investigating. It's a bad idea to settle obvious, widespread wrongdoing on the cheap. You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove. In Missouri and Nevada, the robosigning investigation led to criminal charges against agents of the servicers. But even though these companies were acting at the express direction and approval of the services, no individuals or entities higher up the food chain will face any sort of meaningful charges.

9. There is plenty of evidence of widespread abuses not that are appear not to be on the attorney generals' or media's radar, such as servicer driven foreclosures and looting of investors' funds via impermissible and inflated charges. While no serious probe was undertaken, even the limited or peripheral investigations show massive failures (60% of documents had errors in AGs/Fed's pathetically small sample). Similarly, the US Trustee's office found widespread evidence of significant servicer errors in bankruptcy-related filings, such as inflated and bogus fees, and even substantial, completely made up charges. Yet the services and banks will suffer no real consequences for these abuses.

10. A deal on robosiginging serves to cover up the much deeper chain of title problem. And don't get too excited about the New York, Massachusetts, and Delaware MERS suits. They put pressure on banks to clean up this monstrous mess only if the AGs go through to trial and get tough penalties. The banks will want to settle their way out of that too. And even if these cases do go to trial and produce significant victories for the AGs, they still do not address the problem of failures to transfer notes correctly.

11. Don't bet on a deus ex machina in terms of the new federal foreclosure task force to improve this picture much. If you think Schneiderman, as a co-chairman who already has a full-time day job in New York, is going to outfox a bunch of D.C. insiders who are part of the problem, you are smoking something very strong.

12. We'll now have to listen to banks and their sycophant defenders declaring victory despite being wrong on the law and the facts. They will proceed to marginalize and write off criticisms of the servicing practices that hurt homeowners and investors and are devastating communities. But the problems will fester and the housing market will continue to suffer. Investors in mortgage-backed securities, who know that services have been screwing them for years, will be hung out to dry and will likely never return to a private MBS market, since the problems won't ever be fixed. This settlement has not only revealed the residential mortgage market to be too big to fail, but puts it on long term, perhaps permanent, government life support.

As we've said before, this settlement is yet another raw demonstration of who wields power in America, and it isn't you and me. It's bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners.

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Old mortgages rise from the dead, haunt homeowners

Thu, Jan 26 2012

By Michelle Conlin

(Reuters) - In July 2009, Roy and Sheila Bowers refinanced the mortgage on their suburban ranch home in Topeka, Kansas. The couple wanted to take advantage of the low interest rates that were all the rage at the time.

Roy, a truck driver, and Sheila, a former hotel housekeeping supervisor, knew their new loan from Wells Fargo would enable them to save $198.86 a month - a nice chunk to help with gas and groceries.

But what the Bowers never imagined was that their old loan, the one Wells Fargo told them was paid off, would resurrect itself, trashing their credit report, scotching their son's student loans and throwing the whole family into foreclosure. All, they say, even though they didn't miss a single mortgage payment.

The Bowers are not alone.

More and more, homeowners say that mortgages they thought were dead and buried are springing back to life, sometimes haunting them all the way into foreclosure.

"It's the most egregious manifestation of an industry that's seriously broken," said Ira Rheingold, a lawyer who is the executive director of the National Association of Consumer Advocate.

Diane Thompson, an attorney with the National Consumer Law Center, says she has defended hundreds of foreclosure cases, and in nearly all of them, the homeowner was not in default. "The record-keeping on the part of the mortgage servicers is not to be trusted."

The problems grew from a lot of sloppy recordkeeping that began during the housing boom, when Wall Street built a quick-and-dirty back-office operation to process mortgages quickly so lenders could sell as many loans as possible. As the loans were later sold to investors, and then resold around the world, the back office system sidestepped crucial legal procedures.

Now it's becoming clear just how dysfunctional and, according to several state attorneys general, how fraudulent the whole system was.

Depositions from "affidavit slaves" depict a surreal, assembly-line world in which the banks and their partner firms hired hair stylists, fast-food kids and Wal-Mart floor workers, paying them $10 an hour, to pose as bank vice presidents, assistant secretaries and corporate attorneys.

These "robosigners" became a national sensation in the fall of 2010 when it was revealed that they faked titles, forged documents and backdated affidavits so they could make up for the bypassed procedures and foreclose on properties.

They passed around notary stamps as if they were salt. They did all of this, they testified, without verifying a single word in any of the documents - as is required by law.

And it was all done, they say, to foreclose on as many homeowners as fast as possible.

No one collects statistics on wrongful foreclosures, or how many people are facing the phantom mortgage debts. But as the industry enters its fifth year of unwinding its mortgage morass, consumer groups, homeowner attorneys and foreclosure-fraud investigators say they are seeing more cases where people who don't owe the banks a dime are getting ensnared in the same hell as those who have missed payments.

They add that such problems are likely to intensify. Former industry employees have testified that they knowingly pushed through foreclosures on the wrong people.

It all casts a pall over a housing market in worse condition than it was during the Great Depression. By some estimates, 12.5 percent of U.S. homes with mortgages are either in foreclosure or the loans are at least 30 days past due, representing about $1 trillion in value.

"This is an epic problem that the economy hasn't even begun to digest," said Florida foreclosure analyst Lisa Epstein.

In some cases, mortgages that were supposed to die off in a refinancing are popping back up, while in others, the loans were paid in full. Homeowners who pay off their houses through bankruptcy programs are also falling prey.

So are homeowners who never even had a mortgage to begin with.

Homeowners say the banks' repo men sometimes even show up at work. Banks also hector them with threatening letters and phone calls. "It scared the hell out of him," said a Houston lawyer whose client was the target of such efforts. "He was absolutely spooked," lawyer Barry Brown said.

So was Shantell Curtis of Utah. She showed up at her accountant's office last year only to learn that she had been sued for foreclosure on a house she had sold years before. Bank of America reported the delinquency to credit bureaus, tarring Curtis's credit. It turned out the entire saga stemmed from a bank coding error. The amount the bank falsely alleged Curtis still owed on her mortgage? One dollar.

Vietnam vet Dwight Gaines fell behind on his payments on his Birmingham, Alabama, home. Gaines paid off his entire mortgage, plus all the fees and expenses he owed the bank in March 2010, as a part of a Chapter 13 bankruptcy plan. But Bank of America kept sending Gaines notices that he still owed $6,842.37. Nearly two years later, Gaines is still fighting the bank in court.

"In my experience, if I had not sued Bank of America, they would have eventually placed Mr. Gaines in foreclosure although he had completely paid his mortgage," said Gaines' lawyer, Wesley Phillips.

Bank of America spokewoman Jumana Bauwens said the bank is working to resolve the Gaines situation. She also said that "these situations pre-date a review of our foreclosure procedures which took place in the fall of 2010. At the time, we identified areas of our process that needed to be improved, and we have been making those improvements."

The reincarnating mortgage is only the latest development in the megabanks' mortgage debacle, a scandal that has made them the target of a mounting pile of investigations and lawsuits. Though a settlement with most of the U.S. attorneys general may be imminent, a rogue group of AGs has peeled off to launch their own investigations.

One of those AGs, New York's Eric Schneiderman, is a part of the U.S. Justice Department task force announced by President Obama in his State of the Union address on Tuesday night.

Up until Obama's announcement, the federal government's response to the alleged financial misconduct was in the form of an independent review of the banks overseen by the federal Office of the Comptroller of Currency. But critics have labeled the OCC review as a farce rife with conflicts of interest.

The OCC spokesman, Bryan Hubbard, disputed that claim, saying the OCC has gone to great lengths to ensure that the independent consultants hired by the banks to review their procedures would report to regulators, not the banks. "During the selection process of the independent consultants and law firms, regulators rejected some proposed consultants and law firms to prevent conflicts of interest," said Hubbard.

Such reviews are supposed to gather information from homeowners like Jennifer Wilson, a former nursery school teacher from Philadelphia. Wilson settled a wrongful foreclosure case with Wells Fargo in June 2010. That month, court records show, Wells Fargo filed a satisfaction of mortgage document noting that the $8,000 loan on Wilson's home had been paid in full.

But more than a year later, on December 8, 2011, Wilson, who is disabled and lives below the federal poverty line, answered her door to see a process servicer brandishing foreclosure warning papers from Wells Fargo. The bank's letter warned Wilson that she owed 57 months of late payments, plus expenses, totaling $18,407.55. If she did not pay within 30 days, the bank said, it would sue for foreclosure.

"I thought I'd been punked," said Wilson. Even more bizarrely, one day later, a different process server from a different company showed up on Wilson's door and handed over the exact same papers Wilson had received the day before.

"We see a lot of cases like this, where they are trying to collect even though there is no mortgage," said Wilson's lawyer, Jennifer Schultz. "Once the system has marked you as delinquent, there's just this massive machinery that takes over. There are people whose lives are destroyed by the system, and there's no way to fix it."

"We are working with her to resolve this matter as quickly as we can," Wells Fargo spokesman Jim Hines said.

Some critics say the stories indicate a pattern of systemic wrongdoing. That is one allegation lobbed in a December lawsuit against the banks brought by Massachusetts Attorney General Martha Coakley, who is among the handful of attorneys general that split off from the broader AG settlement group.

For the Bowers of Topeka, it all started in July 2009, when they refinanced their home with Wells Fargo. As is standard in a refinance, the couple used the proceeds from their new loan to pay off their old loan, with Security National Mortgage Company.

On July 6, 2009, Wells Fargo sent the Bowers a letter with a header in all caps at the top that stated: "CONFIRMATION OF LOAN PAYOFF." The letter opened by saying: "Congratulations! We are pleased to inform you that we have processed the funds necessary to pay your loan in full."

At the same time, Wells Fargo also sent a certificate of satisfaction to the Bowers local recorder of deeds in Shawnee County, Kansas. That notice certified that the Bowers' old loan of $184,222.00 had been paid off.

As the Bowers had hoped, their interest rate dropped from 7 percent on the old loan to 4.875 percent on the new one. The couple say they paid their new mortgage early each month.

But what the Bowers didn't know is that, five months later, the banks' private mortgage recording service filed an "Erroneous Release of Mortgage" document on the Bowers' loan with the Shawnee County Recorder's Office. The filing stated that the Bowers' first mortgage "has not been fully paid, nor satisfied, nor discharged, but, instead, continues to exist."

The document was signed by a robosigner, the Bowers' attorney alleges.

One month later, the Bowers noticed that the loan number and interest rate on their mortgage statement had mysteriously changed. Wells Fargo was now charging them the old 7 percent rate - and it hit them with more than $3,000 in late fees.

Thus began the family's descent into their mortgage ordeal. Sheila Bowers says she called Wells Fargo over and over and finally learned that the bank was now alleging that the couple's refinance never went through, and so the bank was reverting to the terms of the original mortgage.

To Wells Fargo, it was as if the refinance had never occurred. Yet Wells Fargo then reported two mortgages to the credit bureaus. That lowered the couple's credit score to the point where they couldn't obtain their son's new student loans.

"We only ever got one bill," said Sheila Bowers. "But they kept telling us we had two mortgages."

The Bowers couldn't find a lawyer who would take their case, especially since they could pay so little. But through friends, they knew an owner of a Topeka mortgage brokerage company who was also an attorney: Donna Huffman. It turned out Huffman was defending just such cases. "I'm a lender suing lenders," said Huffman. "I fought to put people in homes, and now I'm fighting to keep them."

Huffman sued, alleging that the bank was making the Bowers pay for its mistake. Wells Fargo response, in court papers, was that the Bowers failed to sign all the paperwork necessary for the refinance to go through. But the Bowers say they signed every document that the bank gave them. The bank also says in court papers that the Bowers never attended a closing. But the Bowers say the bank never told them they needed to do so.

What made the story even more strange to the Bowers is that when Sheila Bowers called the Federal Housing Administration to get help, the FHA, in a letter filed in court papers and dated October 19, 2010, told her that the loan Wells Fargo was trying to collect on did not exist. Instead, the FHA said it had documentation showing that the Bowers' original loan "was terminated on July 1, 2009, by prepayment," suggesting that Wells Fargo did pay it off. As far as the FHA was concerned, the loan that Wells Fargo was enforcing didn't exist.

Despite the misunderstanding, the Bowers continued to send in their mortgage payment to Wells Fargo, with the amount for the new, refinanced loan, every month. They hoped the entire ordeal would one day get cleared up. But in November 2010, Wells Fargo rejected the Bowers payment and sent it back. The next month, five days before Christmas, the bank foreclosed. The family then stopped sending in payments. They continue to live in limbo in their house as they fight for resolution.

Wells Fargo spokesman Jim Hines said: "The allegations, we feel, are baseless. We feel we are entitled to protect our lien interest because the promissory note has never been paid and the note and the (original) mortgage are in default."

To this day, the Bowers say they have no idea where all the mortgage payments they sent in after they got their new loan went.

"Nobody seems to know," said Sheila Bowers. "It's a mystery."

(Corrects paragraph 10 to $10 an hour instead of $10 per day; corrects last paragraph to Bowers instead of Bowe)

(Reporting by Michelle Conlin; Editing by Gary Hill)

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Bank of America Settlements Impede Fraud Probe, Arizona Says

By Karen Gullo

Jan. 26 (Bloomberg) -- Bank of America Corp. is impeding an investigation of its loan modification practices by negotiating settlements with borrowers who must agree to keep them secret and not criticize the bank in exchange for cash payments and loan relief, Arizona officials say.

The Arizona Attorney Generals office is asking a court to block those aspects of the settlements and require the bank to turn over all the agreements. The bank denies any wrongdoing.

One 2011 accord involving a borrower facing foreclosure who defaulted on a $253,142 mortgage included a $5,000 payment, plus $7,500 for legal fees, and the defaulted payments were waived and the loan was modified to a 40-year term with a 2 percent interest rate, court documents show. The terms of the original loan and the borrowers complaint about the lender werent described in the documents.

The borrower will remove and delete any online statements regarding this dispute, including, without limitation, postings on Facebook, Twitter and similar websites, and not make any statements that defame, disparage or in any way criticize the banks reputation, practices or conduct, according to documents filed in state court in Phoenix. The borrowers name and address were redacted.

Non-Disparagement

Bank of America attorneys argue that borrowers dont have to sign the agreements to get a loan modification and deny that settlements hinder the states probe. Borrowers can be subpoenaed to disclose the accords, and the Charlotte, North Carolina-based bank wont enforce the non-disparagement provision if they talk to investigators, the banks lawyers have said in court filings.

A hearing is set for Feb. 1 on the dispute.

Arizona Attorney General Thomas Horne, a Republican who took office last January, is investigating Bank of America as part of a 2010 lawsuit alleging customers of its Countrywide Financial mortgage unit were misled about requirements for loan modifications. The bank, which acquired Calabasas, California- based Countrywide in 2008, provided inaccurate and deceptive reasons for denying modification applications, according to the the complaint. A similar suit was filed by Nevada.

The settlement agreements came to light as state investigators followed up on borrower complaints filed with the attorney generals office. The office learned of 12 settlements while examining 1,900 complaints and when it attempted to contact the borrowers, Assistant Attorney General Carolyn Matthews said in Jan. 11 court filing.

Frequent Contact

Only four returned phone calls and none would provide a copy of the settlement, Matthews said. Some who signed the settlements had previously been in frequent contact with the attorney generals office, according to court records.

Matthews contends that under the terms of the settlements, even if subpoenaed, borrowers cant reveal any unflattering information about the bank. They couldnt talk about misrepresentations the bank made about loan modifications, which is what the state is investigating, she said.

These agreements have completely silenced even the most communicative consumers, Matthews said in the filing. The settlement agreement purposefully makes it impossible, legally and practically, for a consumer signing it to come forward, voluntarily and promptly, to provide evidence in this case.

She asked a state judge to order Bank of America to notify borrowers who signed the agreements that they dont have to adhere to the confidentiality and non-disparagement provisions.

Inappropriate Practices

Settlements with borrowers are more likely in cases in which the bank engaged in inappropriate practices, such as steering customers away from more affordable loans, or canceling a mortgage modification after a single payment went missing from a borrower who otherwise kept up with payments, said Patricia Garcia Duarte, chief executive officer of Neighborhood Housing Services of Phoenix Inc., which works with families facing foreclosure. Bank of America is a contributor to the organization, according to the groups website.

Patricia Lee Refo, a Bank of America attorney, said in court filings that the confidentiality provisions are common in settlement agreements, which the bank uses on a limited basis to resolve disputes and avoid a costly lawsuit. Theres no policy to ask borrowers to sign settlement agreements in exchange for loan modifications, David Thornton, senior vice president for social media and urgent customer relations, said in a filing.

Extremely Serious

Plaintiff cannot ask this court enter the extremely serious finding that defendants have interfered with law enforcement based on one settlement agreement, or even 12, containing plain vanilla terms litigants use every day to resolve disputes, Refo said in a court filing.

The bank cant say how many settlements have been reached with Arizona customers because the agreements arent centrally stored on computers, Thornton said.

We look at each situation on a case-by-case basis and decide what to do based on the specific situation, Shirley Norton, a Bank of America spokeswoman, said in an e-mail.

Wells Fargo & Co., the biggest U.S. bank by market value and the largest mortgage lender, has a similar practice, said James Hines, a spokesman for the San Francisco-based bank.

Each case is unique and for a variety of reasons we may elect to include a confidentiality and/or a non-disparagement agreement as part of the settlement, Hines said in an e-mail. He said he didnt know how many settlements had been reached.

Borrowers' Boon

Loan modification settlements are a boon for borrowers struggling to keep their homes, Duarte said in a phone interview. Duarte said she doesnt see many such settlements and that borrowers who sign one cant talk about them.

That shouldnt apply to investigators like the attorney general, she said.

Lump sum payments of thousands of dollars and provisions blocking borrowers from criticizing banks arent common, she said.

Clearly the banks are freaking out, they are paranoid, Duarte said. Bank of America has the worst reputation because its so large. A lot of it isnt their fault, it was Countrywide.

The case is Arizona v. Countrywide Financial Corp. CV2010-033580, Arizona Superior Court, Maricopa County (Phoenix).

--Editors: Peter Blumberg, Glenn Holdcraft

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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Bank of America's back-door TARP

(With OMGIII Update at Foot of the Article)

August 10, 2011: 11:37 AM ET

Taxpayer-owned Fannie Mae just bought the servicing rights to a bunch of bad loans from the struggling Bank of America. Where does it end?

By Abigail Field, contributor

FORTUNE -- Taxpayers may not realize it, but they just bailed out Bank of America again, this time to the tune of more than a half billion dollars.

The Charlotte, NC-based bank was one of the biggest recipients of bailout funds during the financial crisis. But Bank of America (BAC) continues to face deep problems related to its troubled mortgage portfolio and investors have battered the stock, which has plunged over 40% so far this year. That's escalated concerns that the bank may need to raise more capital. Yves Smith at Naked Capitalism has even started aBofA death watch.

But apparently the federal government is determined to resurrect BofA: theWall Street Journalreportsthe feds have just used Fannie Mae, which is controlled by the U.S. government, to infuse BofA with $500 million and ease one of the bank's biggest headaches.

According to the WSJ, Fannie Mae spent $500 million to buy the Master Servicing Rights to a big chunk of the "seven million loans still causing the most problems." Although the $500 million is a paper loss to BofA, in that the rights were "originally worth more," it looks like BofA is still getting a good deal because the portfolio's "value is expected to deteriorate further."

In fact, the deal is worth much more than $500 million to BofA, because getting rid of those servicing rights lifts a huge cost burden off BofA's shoulders. And if securitized loans are involved, which they most likely are, the sale also limits the BofA's potential liability to investors for its current servicing violations. Finally, the $500 million is surely more than the servicing rights are worth in an arms-length transaction. How do we know? Beyond the comment that the loans are expected to "deteriorate further," the goal of the intervention can only be to fix Bank of America's capital structure, which is easier for the government to do if it overpays for the rights.

In short, purchasing these servicing rights was another Troubled Asset Relief Program.

Servicing defaulted loans can be good business if cheaply produced foreclosure paperwork isn't questioned, and if the foreclosures have equity and can be resold easily with lots of junk fees. But the mortgage servicing rights Fannie Mae bought are stinkers: they have a 13% delinquency rate, which means lots of foreclosures and loan modifications.

Both foreclosures and mods have been big headaches for BofA, which faces potential liability for document fraud in its foreclosures on multiple fronts. Beyond that, foreclosures are simply expensive to do well. BofA was recentlypunished by Treasuryfor failing to do modifications well, and it's also beensued for how it does them.

But the loans Fannie Mae now has to deal with are even worse than 13% delinquency rate suggests. According to the WSJ, "more than half of the loans are in troubled U.S. real-estate markets." This likely means markets where a high percentage of the houses are underwater and there's a huge oversupply, driving prices down further and making defaults more likely.

Fannie Mae is purchasing "the servicing rights in order to transfer the day-to-day management of those loans to a different company." That's another huge sign that Fannie Mae is overpaying. If the rights were really worth $500 million, wouldn't a private company pay that for them? Instead, it sounds like Fannie Mae is doing a bailout two-step, one to BofA and one to whomever takes these rights off Fannie Mae's hands.

Another thing needs to become clear: where did Fannie Mae get the money to do BofA the favor of buying these rights? Fannie Maejust asked for another bailoutof its own, seeking a new $5.1 billion infusion last week.

Think about how good this deal is for BofA: it gets to stop the bleeding, or at least cauterize much of the wound in its balance sheet that lousy mortgage servicing rights and mortgage securities liabilities are creating. And it gets half a billion dollars to boot.

UPDATE: January 17, 2012

The February 2012 edition of "Mortgage Servicing News" just reported that the MSRs purchased from BOA by Fannie involved the rights to service defaulted notes with unpaid principal balances of up to $74 billion dollars. In lieu of selling these Master Servicing Rights, Fannie has retained Green Tree, Nationstar Mortgage and Seterus, Inc. (the IMB operation) to "sub-service" these loans for Fannie. Fannie has been using loans from the Treasury to fund the purchase of these MSR rights from BOA and has also entered into at least 14 other non-disclosed transactions of a similar nature. Mortgage Servicing News refers to this as the "forced placed repurchase of Master Servicing Rights" by Fannie with taxpayer money. Fannie, as owner of the MSR rights, has also assumed the obligation to advance the principal and interest payments each month on the serviced loans to the Trusts involved regardless of whether these advances are recoverable or not recoverable at an eventual REO sale. Fannie is also advancing all of the funds for the sub-servicers to fund foreclosures, bankruptcy filings, property inspections, appraisals, broker price opinions, etc.

By:

O. Max Gardner III
MaxGardnerLaw, PLLC
PO Box 1000
Shelby NC 28150
maxgardner@maxgardner.com
www.maxgardnerlaw.com

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naked capitalism

Bank of America Prepares Emergency Plans at Fed Behest, May Need to Amputate on Geographic Basis

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Fair Game

From East and West, Foreclosure Horror Stories

By GRETCHEN MORGENSON

January 7, 2012

THE authorities have fallen silent lately about a possible settlement over foreclosure abuses at big mortgage servicing companies.

The talks began in earnest last March, and people keep whispering that a deal is nigh. But last week, a spokesman for Shaun Donovan, the secretary of Housing and Urban Development and a lead negotiator, said that there was nothing new to report.

Thats probably not a terrible thing. After all, no deal is better than a bad deal. State and federal authorities jumped into these talks without conducting serious investigations into foreclosure shenanigans. Why strike a deal one that would, say, shield banks from new litigation over toxic loans, flawed securitizations and the mess at MERS, the registry that has made such a jumble of land records without knowing what happened?

So its nice to know some attorneys general are taking matters into their own hands. One is Martha Coakley of Massachusetts, whose lawsuits against big banks have unearthed important details about dubious mortgage practices.

Another is Catherine Cortez Masto of Nevada. She filed a case against Morgan Stanley that was settled last year, generating as much as $40 million in monetary relief for borrowers. She also participated in a suit against Wells Fargo that resulted in $45 million in principal forgiveness for Nevadans. And she has a case pending against Bank of America.

Last month, Ms. Masto sued Lender Processing Services, the huge default and foreclosure processor that works behind the scenes for most large banks. With this case, she demonstrated how enlightening an in-depth study can be. The complaint, which came after a 14-month inquiry, contends that L.P.S. deceived consumers by committing widespread document execution fraud, misrepresenting its fees and making deceptive statements about its efforts to correct paperwork. Investigators interviewed former L.P.S. employees and customers and examined foreclosures the company had worked on.

L.P.S. played a critical role in the deceptive foreclosure practices that have harmed Nevada homeowners and burdened Nevada courts, the complaint said. Consumers have paid the price, it continued, through bankruptcies, evictions and foreclosures that were predicated upon false, forged, fraudulent and/or inaccurate documents.

L.P.S. strongly disputes the allegations and has vowed to fight. The company has come under the microscope partly because of its size and scope: its loan-processing services touch 27 million loans, half of all the mortgages in the nation, by dollar amount. Most large loan servicers use L.P.S. systems.

Its a lucrative business. For the nine months ended Sept. 30, the companys loan transaction services generated operating margins of 20 percent on $1 billion in revenue.

When mortgages go into default, L.P.S. provides banks servicing the loans with an automated system that monitors the cases as they proceed.

The details recounted in the Nevada lawsuit describe how that system hustled borrowers through the foreclosure process. A boiler-room operation comes to mind, or that great Lucille Ball skit in which she tries in vain to keep up with the assembly line at a chocolate factory.

For example, a former L.P.S. employee who worked in attorney management, overseeing firms that performed legal work for foreclosures, told Nevada investigators that L.P.S. required him to resolve issues raised by the firms at a rate of 30 foreclosure files every hour. Thats two minutes apiece. The employee soon left L.P.S.

Former workers at another division described their work as surrogate signers. They said their job was to forge signatures on documents. These people were hired through temporary agencies; one said she was paid $11 an hour and told that her job was to sign somebody elses signature on documents, the lawsuit said. She told investigators that she signed roughly 2,000 documents a day for months.

Another former worker said that when a banking executive came by for a tour, the signers were told to lie and tell the executive they were signing their own names, the lawsuit says.

Notarization worked much the same way, the complaint said. One former worker said she realized that she might have notarized documents she had also signed as a surrogate.

As a result, the lawsuit said, borrowers had to deal with documents containing false assertions about which entity was authorized to foreclose, and false assertions about whether the consumer was delinquent on a loan payment.

Kind of important details, no?

Michelle Kersch, a spokeswoman for L.P.S., said it no longer executes documents in Nevada and does so elsewhere with stringent controls in place to ensure compliance with all rules.

In an interview last Thursday, Ms. Masto declined to talk specifically about the case against L.P.S. But she said that her office had been working on mortgage-related investigations since 2007, when consumers began complaining. It really required our team to figure out what was going on, she said, to understand it from the beginning to the end, then put in place a plan based on our limited resources to target the types of fraud we were seeing. Eighteen people investigators, prosecutors and support staff work full time on mortgage issues in the Nevada office.

The challenge we have is statute of limitations on these cases, Ms. Masto said. It could be anywhere from four to six years, depending on the incident.

When she filed suit against L.P.S., she said it was the next, logical step in holding the key players in the foreclosure fraud crisis accountable. That suggests other cases are forthcoming.

If you are going to allow banks to skate around the integrity of the system, she said, what kind of justice is that? Good question.

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HOUSINGWIRE

NY Fed believes Fannie, Freddie should order principal reductions

Investors who buy delinquent mortgages routinely reduce principal to maximize value on these loans, according to William Dudley, president of the Federal Reserve Bank of New York. Therefore the government-sponsored enterprises should do so as well.

"It would make sense for Fannie and Freddie to do this as well in order to minimize loss of value on the delinquent loans they guarantee," Dudley said in a speech at the New Jersey Bankers Association Economic Forum in Newark, N.J., on Friday.

The GSEs routinely resist calls for principal reduction. Michael Williams, CEO of Fannie Mae, told HousingWire in September that the company has no plans to ask mortgage servicers for principal reductions.

In May, Freddie Mac CEO Ed Haldeman, who recently announced his resignation, said principal write-downs do not make sense for Freddie Mac. Further, principal reduction may lead borrowers to default at higher rates to try to get their mortgage debt reduced.

Dudley said such a tactic would need to be avoided if Fannie and Freddie were to order mortgage servicers to reduce principal on the loans the GSEs securitize.

"I believe we should also develop a program for earned principal reduction for borrowers who are underwater but keep on making their mortgage payments," he said. "Such a program would strengthen the incentives for mortgage holders who are underwater to continue to stay current on their loans, and reduce the likely number of defaults and REO sales."

Dudley said analysis from the New York Fed suggests that without a significant turnaround in home prices and employment, a substantial proportion of negative-equity mortgages default, without an earned principal reduction program in place.

"One option developed by my staff is for Fannie Mae and Freddie Mac to give underwater borrowers on loans that they have guaranteed the right to pay off the loan at below par in the future under certain circumstances, including that the borrowers have continued to make timely payments," he added.

"For instance, the borrower could be given an open-ended option to pay off the loan at a loan-to-value ratio of 125%, and the right to pay off the loan at an LTV of 95% after three years of timely payments," according to Dudley.

He adds that this would protect borrowers against further declines in home prices who, in return, give up a portion of any upside from future capital gains on the home via a shared appreciation agreement.

"Note that under this arrangement some of the reduction in the loan amount would be paid by the borrower as the outstanding balance was amortized by continued monthly payments," he said.

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SFGate.com

6 million estimated foreclosures by 2016

Wednesday, December 28, 2011

Number of the day

6 million

That's how many homes will be repossessed by banks or sold at distressed prices by 2016, according to Oliver Chang, a Morgan Stanley analyst in San Francisco. The dismal environment has prompted Fannie Mae and Freddie Mac to rethink their strategy. The mortgage companies, which were seized by the government in 2008, are turning some of their inventory of repossessed homes into rentals - part of a bid to cut losses, stabilize neighborhoods and support housing values.

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naked capitalism

Thursday, December 22, 2011

The Administration Likes Foxes in Charge of Henhouses Proof that OCC Foreclosure Reviews Are a Sham

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Special Report: The watchdogs that didn't bark

(Reuters) - Four years after the banking system nearly collapsed from reckless mortgage lending, federal prosecutors have stayed on the sidelines, even as judges around the country are pointing fingers at possible wrongdoing.

The federal government, as has been widely noted, has pressed few criminal cases against major lenders or senior executives for the events that led to the meltdown of 2007. Finding hard evidence has proved difficult, the Justice Department has said.

The government also hasn't brought any prosecutions for dubious foreclosure practices deployed since 2007 by big banks and other mortgage-servicing companies.

But this part of the financial system, a Reuters examination shows, is filled with potential leads.

Foreclosure-related case files in just one New York federal bankruptcy court, for example, hold at least a dozen mortgage documents known as promissory notes bearing evidence of recently forged signatures and illegal alterations, according to a judge's rulings and records reviewed by Reuters. Similarly altered notes have appeared in courts around the country.

Banks in the past two years have foreclosed on the houses of thousands of active-duty U.S. soldiers who are legally eligible to have foreclosures halted. Refusing to grant foreclosure stays is a misdemeanor under federal law.

The U.S. Treasury confirmed in November that it is conducting a civil investigation of 4,500 such foreclosures. Attorneys representing service members estimate banks have foreclosed on up to 30,000 military personnel in potential violation of the law.

In Alabama, a federal bankruptcy judge ruled last month that Wells Fargo & Co. had filed at least 630 sworn affidavits containing false "facts," including claims that homeowners were in arrears for amounts not yet due.

Wells Fargo "took the law into its own hands" and disregarded laws banning perjury, Judge Margaret A. Mahoney declared.

And in thousands of cases, documents required to transfer ownership of mortgages have been falsified. Lacking originals needed to foreclose, mortgage servicers drew up new ones, falsely signed by their own staff as employees of the original lenders - many of which no longer exist.

But the mortgage-foreclosure mess has yet to yield any federal prosecution against the big banks that are the major servicers of home loans.

UNPRECEDENTED FRAUD

Reuters has identified one pending federal criminal investigation into suspected improper foreclosure procedures. That inquiry has been under way since 2009.

The investigation focuses on a defunct subsidiary of Jacksonville, Florida-based Lender Processing Services, the nation's largest subcontractor of mortgage servicing duties for banks.

People close to the investigation said indictments may come as early as the end of this month. Nationwide press reports had showed photos of what appeared to be obviously forged signatures on foreclosure affidavits.

The Justice Department doesn't disclose pending investigations, making it impossible to say if other criminal inquiries are underway. Officials in state attorneys' general offices and lawyers in foreclosure cases say they have seen no signs of any other federal criminal investigation.

"I think it's difficult to find a fraud of this size on the U.S. court system in U.S. history," said Raymond Brescia, a visiting professor at Yale Law School who has written articles analyzing the role of courts in the financial crisis. "I can't think of one where you have literally tens of thousands of fraudulent documents filed in tens of thousands of cases."

Spokesmen for the five largest servicers - Bank of America Corp., Wells Fargo & Co., JP Morgan Chase & Co, Citigroup Inc., and Ally Financial Group - declined to comment about the possibility of widespread fraud for this article.

Paul Leonard, spokesman for the Housing Policy Council, whose membership includes those banks, said any faults in foreclosure cases are being addressed under a civil settlement earlier this year with federal regulators.

FALSE STATEMENTS

Justice Department and Federal Bureau of Investigation officials say they have brought mortgage-fraud criminal cases through their "Operation Stolen Dreams." None, however, were against big banks. All targeted small-scale operators who allegedly defrauded banks with forged mortgage applications or took advantage of homeowners by falsely promising arrangements to get them out of default and then pocketing their money.

Justice Department spokeswoman Adora Andy declined to comment on the absence of prosecutions for foreclosure practices by big banks. She said in a statement: "The Department of Justice has been and will continue to aggressively investigate financial fraud wherever it occurs, including at all levels of the mortgage industry and, when we find evidence of a crime, we will not hesitate to pursue it."

Some judges have accused banks of falsely stating in court that they are working on loan modifications for homeowners in default.

In a November 30 court hearing, not previously reported, a federal bankruptcy judge in New York accused Bank of America of falsely telling courts and the public that it was working to renegotiate loans.

"Bank of America issues constant press releases about how it is responsive to their borrowers on these issues. They are not, period," said Judge Robert Drain, in a case involving homeowner Richard Tomasulo, a pharmacist from Crompond, New York. Drain said Bank of America had been telling the court since January that it was working to modify Tomasulo's mortgage, but hadn't done so.

"Whoever is in charge of this program and their supervisor, who should be following it, should be fired" because "they are frankly incompetent."

Bank of America spokeswoman Jumana Bauwens said the bank has completed "nearly one million" modifications since 2008. The U.S. Treasury this year suspended loan modification incentive payments to the bank because it was "seriously deficient" in responding to requests for modifications.

CHEATERS AND LIARS

Foreclosure fraud came to light in September 2010, with evidence that employees of Ally Financial Corp. had committed "robo-signing," in which low-level workers signed and swore to the facts in thousands of affidavits they hadn't read or checked.

The affidavits were notarized outside the signers' presence, in apparent violation of state and federal criminal laws.

Since then, mounting evidence of possible foreclosure fraud has convinced judges and state regulators that servicers have harmed homeowners and the investors who bought mortgage-backed securities.

A unit of the Justice Department that oversees bankruptcy court cases, the U.S. Trustees Program, said in its 2010 annual report that there were "pervasive and longstanding problems regarding mortgage loan servicing," which "are not merely 'technical' but cause real harm to homeowners in bankruptcy."

Banks, the Trustees Program says, have falsified affidavits by claiming homeowners owe fees for services never rendered and by overstating how much owners are behind on payments.

Former federal prosecutor Daniel Richman, a professor of criminal law at Columbia University Law School, says a central question is who prosecutors would target in criminal investigations. Richman said it would be easy but not worthwhile to charge large numbers of rank-and-file workers who, directed by supervisors, falsely churned out affidavits.

He said criminal investigations would be warranted, but harder to bring, "if there are particular individuals who lie at the heart of this conduct in a very significant way."

In October 2010, members of Congress pressed the Justice Department to investigate. Attorney General Eric Holder said investigations were best left to the states, with help from the Justice Department.

The Office of the Comptroller of the Currency, the top bank regulator, quickly negotiated settlements with the 14 largest servicers, requiring changes in practices and "remediation" for harmed homeowners. That settlement allows the banks to choose their own contractors to determine who was harmed and by how much.

Lawmakers and homeowner advocates have criticized the arrangement, contending that it will let the banks avoid making all wronged homeowners whole, because the contractors are paid by and answer to the banks.

Since then, the department's civil division has worked with a shaky coalition of all 50 states, which have been seeking a civil settlement with five banks that are the largest loan servicers. The negotiations center on requiring them to pay $20 billion or more in penalties, only some of which would go to compensate wronged homeowners.

STATES TAKE ACTION

Federal law enforcement has been noticeably absent, even in areas hardest hit by the crisis, such as Las Vegas.

In 2010 the FBI's Las Vegas office shut down its mortgage fraud task force, which had focused on small-scale swindlers.

Tim Gallagher, chief of the FBI's financial crimes section, said that the Las Vegas office had asked to transfer agents to other duties.

Impatient with the lack of federal prosecution, states including New York, Massachusetts, Delaware and California have launched their own investigations of the banks.

In November, it became the first state to file criminal charges. The state attorney general obtained a 606-count indictment against two California-based executives of Lender Processing Services.

It accuses the executives of paying Nevada notaries to forge the pair's signatures and falsely notarize them on notices of default, documents Nevada requires in foreclosure actions. State officials said more indictments are expected.

In an interview, John Kelleher, Nevada's chief deputy attorney general, said the investigation began in response to citizen complaints.

"We were concerned and then shocked at the sheer number of fraudulent documents we were finding that had been filed with the county recorder," Kelleher said.

Investigators found "tens of thousands" of false records filed on behalf of big mortgage servicers, he said.

The two executives have pleaded not guilty. In a press release, the company said: "LPS acknowledges the signing procedures on some of these documents were flawed; however, the company also believes these documents were properly authorized and their recording did not result in a wrongful foreclosure."

BACK HOME IN NEW YORK

The U.S. Attorney's Office in Manhattan is the federal prosecutors' office that traditionally has filed the most cases against top banks and financiers. But it hasn't brought any foreclosure-related criminal cases involving Wall Street's biggest financial houses or the law firms that represent them.

To date the only step it has taken publicly was an October 2011 civil settlement with New York State's largest foreclosure law firm.

The Steven J. Baum P.C. law firm, based near Buffalo, New York, in recent years filed approximately 40 per cent of all foreclosures in New York State, on behalf of banks and other mortgage servicers. Court records show that the firm angered state court judges for alleged false statements and filing suspect documents.

Arthur Schack, a state court judge in Brooklyn, in a 2010 ruling said that pleadings by the Baum firm on behalf of HSBC Bank, a unit of London-based HSBC Holdings, in a foreclosure case were "so incredible, outrageous, ludicrous and disingenuous that they should have been authorized by the late Rod Serling, creator of the famous science-fiction television series, The Twilight Zone."

Another state judge that year imposed $5,000 in sanctions and ordered the firm to pay $14,500 in attorneys' fees, ruling that "misrepresentation of the material statements here was outrageous."

But the U.S. Attorney's office in Manhattan filed no criminal charges against the Baum firm. Instead, it signed a settlement with Baum ending an inquiry "relating to foreclosure practices." The agreement made no allegations of wrongdoing, but required the firm to improve its foreclosure practices.

Baum agreed to pay a $2 million civil penalty, but didn't admit wrongdoing.

The law firm said it would shut down after New York Times columnist Joe Nocera in November published photographs of a 2010 Baum firm Halloween party in which employees dressed up as homeless people. Another showed part of Baum's office decorated to look like a row of foreclosed houses.

"The settlement between the Manhattan U.S. Attorney's Office and the Steven J. Baum Law Firm resulted in immediate and comprehensive reforms of the firm's business practices," said Ellen Davis, spokeswoman for the Manhattan U.S. Attorney's office.

Earl Wells III, a spokesman for Baum, said the lawyer wouldn't comment because "he's laying low right now."

An HSBC spokesman said: "We are working closely with the regulators to address any matters raised regarding" the bank's foreclosure practices.

BROKEN PROMISES

The most serious potential foreclosure violations involve falsified mortgage promissory notes, the documents homeowners sign vowing to repay mortgage loans. Courts uniformly have ruled that unless a creditor legally owns the promissory note, it has no legal right to foreclose. For each mortgage there is only one promissory note.

Bankruptcy court records reviewed by Reuters show that at least a dozen radically different documents purporting to be the authentic promissory note have turned up in foreclosure cases involving six different properties in the federal bankruptcy court for the Southern District of New York.

In one, Wells Fargo is battling to foreclose on the Bronx home of Tindala Mims, a single mother who works as an ambulance driver. In September 2010, Wells Fargo filed a promissory note bearing a signed stamp showing that the note belonged to defunct Washington Mutual Bank, not Wells Fargo. The judge threw out the case.

In a second attempt, the court was given a different version of the note. But inspection showed physical alterations. A variety of marks on the original were missing or seemed obviously altered on the second. And the second version had a stamped endorsement, missing on the first, that appeared to give Wells Fargo the right to foreclose.

The judge threw out the second attempt too. Wells Fargo is trying a third time. It declined to comment on the case.

Linda Tirelli, Mims' lawyer, in October sued Wells Fargo, alleging "fabrication of documents."

"It seems to me that Washington is deathly afraid of the banking industry," Tirelli said. "If you're talking about filing false documents and filing false notarizations, do you really think that the U.S. Attorney would find it too difficult to prosecute?"

The office of U.S. Attorney Preet Bharara in Manhattan has routinely brought charges involving forgery and filing false documents against smaller targets.

In April, the FBI arrested seven employees of the USA Beauty School in Manhattan. Bharara's office alleged that the seven suspects had forged documents such as high school diplomas, attendance records and applications for financial aid for students taking cosmetology classes.

In August, Bharara's office filed felony charges against a sports-memorabilia company's CEO, accusing him of auctioning jerseys falsely advertised as "game used" by Major League Baseball players.

In a press conference, a U.S. Postal Inspection Service official said prosecution was important because "victims felt that they had a piece of history only to be defrauded and left with a feeling of heartbreak."

Given the record of Bharara's office, and those of his fellow U.S. Attorneys around the country, to aggressively pursue violations both big and small, the absence of cases involving the foreclosure fiasco seems to stand out.

"Why there hasn't been more robust prosecution is a mystery," said Brescia, the visiting professor at Yale.

(Editing by Michael Williams and Chris Kaufman; Reporting By Scot Paltrow)

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NEW DEAL 2.0

Mortgage Servicers: Getting Away with the Perfect Crime?

Monday, 11/28/2011 - 9:58 am by Matt Stoller | 5 Comments

Without prosecutions, theres nothing keeping fraud from becoming a standard business practice.

In 2004, the FBI warned Congress of an epidemic of mortgage fraud, of unscrupulous operators taking advantage of a booming real estate market. Less than two years later, an accounting scandal at Fannie Mae tipped us off that something was very wrong at the highest levels of corporate America.

Of course, we all know what happened next. Crime invaded the center of our banking system. Wall Street CEOs were signing on to SEC documents knowing they contained material misstatements. The New York Fed, riddled with conflicts of interest, shoveled money to large banks and tried to hide it under the veil of central bank independence. Even Tim Geithner noted that Lehman had air in the marks in its valuations of asset-backed securities, as the bankruptcy examiners report showed that accounting manipulation to disguise the condition of the balance sheet was a routine management tool at the bank. Theres a reason Charles Ferguson got an Academy Award for his work on the documentary Inside Job.

And yet, no handcuffs. The big news on prosecutions in the traditionally high-powered Southern District of New York are convictions for relatively petty insider trading that are unrelated to the collapse of the economy. The criminal charges could have been filed in the 1980s. U.S. Attorney Preet Bharara has brought minor civil suits against banks, but nothing significant, and no criminal indictments for the Ponzi scheme of the last four years.

And what happens when this kind of fraud goes unprosecuted? It continues, even today. The same banks that ran the corrupt home mortgage securitization chain are now committing rampant fraud in the foreclosure crisis. Heres New Orleans Bankruptcy Judge Elizabeth Magner discussing problems at Lender Processing Services, the company that handles 80 percent of foreclosures on behalf of large banks (emphasis added):

In Jones v. Wells Fargo, this Court discovered that a highly automated software package owned by LPS and identified as MSP administered loans for servicers and note holders but was programed to apply payments contrary to the terms of the notes and mortgages.

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The bad behavior is so rampant that banks think nothing of a contractor programming fraud into the software. This is shocking behavior and has led to untold numbers of foreclosures, as well as the theft of huge sums of money from mortgage-backed securities investors.

Heres how the fraud works: Mortgage loan notes are very clear on the schedule of how payments are to be applied. First, the money goes to interest, then principal, then all other fees. That means that investors get paid first and servicers, who collect late fees for themselves, get paid either when they collect the late fee from the debtor or from the liquidation of the foreclosure. And fees are supposed to be capitalized into the overall mortgage amount. If you are late one month, it isnt supposed to push you into being late on all subsequent months.

The software, however, prioritizes servicer fees above the contractually required interest and principal to investors. This isnt a one-off;its programmed. Its the very definition of a conspiracy! Who knows how many people paid late and then were pushed into a spiral of fees that led into a foreclosure? Its the perfect crime,and many of the victims had paid every single mortgage payment.

A lack of criminal prosecutions means that unethical business practices like this one drive out ethical business practices. After all, why should a bank hire an ethical default servicer that charges a high price for its product when it can pay nothing to one that simply extracts from investors and homeowners?

The joke that is the U.S. Attorney network has become very old and very stale. And unfortunately, because of Attorney General Eric Holder, that joke is on us.

Matt Stoller is a Fellow at the Roosevelt Institute and former Senior Policy Advisor to Congressman Alan Grayson.

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POLITICO

State AGs target mortgage mess

by ERIC SCHNEIDERMAN & BEAU BIDEN | 11/6/11

Americas free markets work only when there is one set of rules for everyone and everyone plays by those rules.

It is now clear, however, that many in the mortgage finance industry ignored the rules over the past decade. This led to a breakdown in our housing market and in the market for mortgage-backed securities.

These two markets are inextricably linked. Any real effort to repair the damage caused by the collapse of the housing bubble must address the injury in both sectors. Tens of millions of homeowners and millions of investors including retirees with money in pension and mutual funds were devastated by this manmade catastrophe.

We recognized early this year that, though many public officials including state attorneys general, members of Congress and the Obama administration have delved into aspects of the bubble and crash, we needed a more comprehensive investigation before the financial institutions at the heart of the crisis are granted broad releases from liability.

We undertook such an inquiry, building on the work of many others. And we know time is of the essence. Homeowners and investors are suffering every day, and patterns of abuse and misconduct are continuing. Were working hard to complete the first and most critical phase of our investigation before the end of 2011.

The key to our strategy to root out the conduct that triggered the biggest financial crisis since the Great Depression is recognizing that a comprehensive effort requires an attack from both sides looking at harm both to borrowers and to investors. So we are investigating four distinct, but interdependent, areas of abuse. Only one of those areas is being discussed in the negotiations now under way among the banks, the administration and some of our colleagues.

First, we are investigating misconduct by loan originators: banks and the other lenders engaged in patterns of deceptive conduct when they made mortgage loans across the country.

Second, we are delving into the aggregation, or pooling, of mortgages by major banks. These pools of mortgages were, for the most part, deposited into New York and Delaware trusts, sliced into shares of toxic debt and sold for trillions of dollars as mortgage-backed securities. The banks sponsoring those trusts vouched for the quality and title of these mortgage pools to investors and in their submissions to tax authorities, insurance companies and rating agencies.

Third, we are examining the continuing abuses in the servicing of millions of mortgages, most of which are the responsibility of other branches or divisions of the banks that assembled the pools of mortgages in the first place. This investigation includes allegations of widespread abuse of our courts and deed registries such as the submission of false documents in legal proceedings. It also includes dual tracking, a practice in which borrowers are forced to negotiate a workout to a delinquent loan with their bank while simultaneously fighting the bank in a foreclosure action. There has also been widespread failure to adhere to the requirements of the Servicemembers Civil Relief Act.

The clearest example of the gross levels of misconduct during this process is the use and abuse of the Frankensteins monster of a recording system called the Mortgage Electronic Registration Systems. It was set up by financial institutions, including the government-sponsored enterprises Fannie Mae and Freddie Mac, as a means to evade the decades-old system of recording who owns interests in a given piece of property.

MERS, on behalf of its members, has foreclosed on properties in which it did not own any interest. In addition, MERSs shoddy record keeping and opaque practices continue to wreak havoc on homeowners, investors and all stakeholders in our property sysyem.

Delaware sued MERS a Delaware corporation on Oct. 27 for deceptive business practices. The state alleges that MERS does not follow its own rules, that its registry is inaccurate and unreliable, and that MERS often acts without authority to foreclose or transfer loans on behalf of securitization vehicles when those vehicles themselves have failed to follow the rules and, thus, do not own the loans on which MERS tries to take action.

New York has also expanded its investigation. The state issued a subpoena for MERSs records relating to the banks using its services to bring foreclosure proceedings all across America. We are determined to get out in the open the troubling facts related to the banks use of MERS.

All 50 state attorneys general teamed up with federal agencies last fall to focus on the last of these four areas. As our colleagues seek to settle these servicing-related issues, the financial institutions on the other side of the negotiating table have predictably sought releases that are as broad as possible from future liabilities, delaying the process.

We look forward to doing whatever it takes to obtain servicing reforms whether through a negotiated deal with banks or through regulations issued by the federal Consumer Financial Protection Bureau. But we will not release claims that we are currently investigating, including securitization, origination and MERS.

Reforming the servicing of mortgages is crucial. But these servicing abuses did not create the mortgage bubble. Robo-signing did not blow up the U.S. economy. Rather, these are symptoms of a more far-reaching and insidious problem.

The American people deserve a full investigation and public exposure of the conduct that got us into the economic quagmire we face today. We must ensure that it never happens again. And we must restore public confidence that ours is a nation committed to the goal of equal justice for all.

Eric Schneiderman is the attorney general of New York, and Beau Biden is the attorney general of Delaware.

Read an Executive Summary of the NATIONAL MORTGAGE SETTLEMENT - click here.

Read an article written by a young college student articulately explaining CREDIT DEFAULT SWAPS and HOW THEY DESTROYED LEHMAN BROTHERS - click here.