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Ny Fed Joins Attorneys General In Pursuing Foreclosure Frauds

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In my experience Credit Writedowns is a reliable, pragmatic and balanced blog. I find the change of tone of the posts to be remarkable.


Coming to the UK soon I'm pretty sure.

NY Fed Joins Attorneys General in Pursuing Foreclosure Frauds

from Credit Writedowns by Randall Wray [/url]

by L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute and author of Understanding Modern Money.In a surprising turn of events, the NYFed—no less—has gone after the Bank of America for its fraudulent mortgage business. Yes, the former home to Treasury Secretary Geithner–the best friend Wall Street has ever had–is now acting like the lapdog that bites the hand that feeds.

BofA has reacted as expected, trying to slap the little pipsqueak pet back into submission, announcing an end to its moratorium on foreclosure fraud and threatening to unleash its dark army of lawyers who are ready to do battle in the courts to maintain the myth that the junk banks securitized met required underwriting standards.

It is of course all high drama worthy of a mid-afternoon soap opera, with the Fed proclaiming dismay, nay, shock!, that banks sold it toxic waste. The over-acting would be hilarious if this were not such a serious issue.

In truth, it is all fraud, from start to end—from origination of the mortgages through the securitization, on to the duping of investors, and to the foreclosing on (mostly) innocent bystanding homeowners. The FBI warned of an epidemic of mortgage fraud in 2004, investigations demonstrate that 80% of the fraud is at the hands of lenders, and the fraud was no secret within the industry and within government long before the NYFed, USFed, and Treasury started bailing out the control fraud banks by purchasing their assets, guaranteeing their liabilities, lending against toxic waste, and buying their worthless equities—putting Uncle Sam on the hook in an amount estimated to total more than $20 trillion.

Meanwhile, the bank frauds have been kicking Americans out of their homes, manufacturing fake documents, and re-selling property to which they have no legitimate title.

But the past week has not been good for control fraud banks. State Attorneys General have gone after them, thumbing their collective noses at the weak-kneed Obama Administration that had done nothing more than to plead with the frauds to please be a tad bit nicer as they steal homes.

Judges have also gone after banks—noticing how amateurish the doctored and counterfeited documents looked, and they began to throw the bank plaintiffs out of court. We know that in many or most cases the banks do not have the borrowers’ notes—that are required in almost all states to take away someone’s home. Lots of bank officials and employees have committed crimes for which they can be prosecuted and for which they will serve real prison time.

All of this seems to have forced the Fed’s hand. Most bettors had put their money on Fannie and Freddie, not the Fed, to first call the bluff of the bank frauds. They have far more on the line—no doubt they are sitting on well over a trillion dollars worth of junk that does not meet the underwriting standards claimed by the securitizers. To be sure, they had taken some action, but it was the NYFed’s audacity that grabbed the headlines. Hey, there is, finally, the audacity of hope that President Obama used to talk about—funny that it should rest in the hands of the thoroughly compromised NYFed.

The banks, predictably, claim everything is fine. BofA supposedly spent a couple of hours during its self-imposed introspective moratorium to check through hundreds of thousands of foreclosures to ensure that all its procedures were appropriate. Surprise, surprise, it could not find a single mistake! Boy, these guys ARE good, even though they took over the mother of all control frauds, Countrywide Financial—inheriting its toxic waste. Yet, not one error! There is, again, a certain audacity there—perhaps one more in tune with the protect-Wall-Street-at-any-cost sort of song Karaoked so far at the White House.

Right—please sell me a Brooklyn bridge, or two, too. The fraud continues apace. The banks intend to continue to defraud both homeowners and investors in the toxic securities it sold.

How do we know it is all fraud?

Look, when lenders market “low doc”, “Ninja” and “Liar’s loans” (that accounted for half of all mortgages at the peak of the bubble), there is no question that the intent is to defraud investors. The appellations say it all. When lenders market “nuclear” hybrid loans with low teaser rates that blow up in two or three years, forcing borrowers into default, there is no question that the intent is to defraud borrowers. Fraud was the business model. Everyone in the industry knew that—from property appraisers to originators to credit raters to securitizers to insurers. Fraud, fraud, fraud. It is time to break out that F word and to use it liberally.

In an important piece by Felix Salmon, a “smoking gun” is produced. The big investment banks (Goldman, Bear, Citigroup, Merrill, Lehman, Morgan, Deutsche) used Clayton Holdings to do “third-party due diligence” on the mortgages that were pooled into securities. Note that this was most certainly NOT done to protect the investors who would buy the securities—rather it was to SCREW them. Clayton would “taste sample” some of the mortgages (5% to 35%), typically finding that a third or more did not meet underwriting standards. The investment bank would then kick those out and go back to the originator to renegotiate the price on the entire mortgage pool. Since the investment bank had proof that the pool did not meet standards, it would be able to get a better price.

Here’s the kicker. The investment bank did not, and did not want to, examine the whole pool in order to reject all the bad loans. Indeed, it WANTED a bad pool–a package of mortgages that contained many mortgages that did not meet underwriting standards–because this allowed it to reduce the price paid. Then it would tell the investment buyers of the securities “Oh, yes, we did due diligence, using an expert third party”. Of course the investment bank would not pass along the price discount it had obtained from the originator, and would not tell the buyer that the pool still contained an untold amount of junk mortgages. That would defeat the whole purpose of the third party “due diligence”—which was done only for the benefit of the investment bank in order to screw more profits out of the investor. Amazingly, the banks turned “due diligence” into a mechanism for fraud. These guys ARE audacious. They ARE good!

So here we are. The Fed, Fannie and Freddie, Pimco, and other big holders of the securities are now going after the banks. This is going to get really fun.

There is no better time to declare a bank holiday to try to unravel this mess. The banks will not survive the onslaught. The only question is how long do we really want to drag this out? Should we go through years of court battles while the economy suffers and Americans lose their homes? Or do we just get it over this weekend by shutting down the control frauds? Void all the fraudulent paper, let occupants keep their homes and negotiate fair “rents” in lieu of unaffordable mortgages. Swiftly deal with the fall-out. Pursue, prosecute, and incarcerate the guilty. Return the nation to the rule of law.

I’d mention that audacity of hope, but unfortunately it has been strangled and dragged through Main Street to the point that it is no longer recognizable.

Professor Wray also blogs at New Economic Perspectives, and at New Deal 2.0.

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If this is pursued correctly then its game over for some of these banks. Their greed knows no limits.

If it's pursued to it's logical conclusion many of these executives living in their multimillion pound homes will be spending decades living in a room say 6*8 hoping their ass can take the next pounding.

For the political elites they have a huge problem, because if they start jailing the bankers someone is going to start to question why the politicians turned a blind eye, someone then might mention big wads of cash that came for election campaigns.

It's going to get ugly as the parasites squirm for survival.

Edited by interestrateripoff
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If it's pursued to it's logical conclusion many of these executives living in their multimillion pound homes will be spending decades living in a room say 6*8 hoping there ass can take the next pounding.

For the political elites they have a huge problem, because if they start jailing the bankers someone is going to start to question why the politicians turned a blind eye, someone then might mention big wads of cash that came for election campaigns.

It's going to get ugly as the parasites squirm for survival.

Seeing as how everythings connected these days why have we heard nothing from our side of the pond?

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They know the banks will never be able to pay up and they will never void the loans or let the too big to fails fail so someone going to have to pony up some cash.

Do you think they want to monetise the debt print up a load of cash give to PIMCO etc. and increase the Fed's balance sheet?

Fact is if PIMCO were as sharp as knives they would have known this paper was worth didly squat plenty of people did.

Wonder what other tu*ds PIMCO are sitting on glad I haven't got any money with these morons.

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Now I know you are pulling my leg.

There isn't a single husband in England with a hungry wife.

Are you sure about the q.....?

I've seen a lot of chmping this shit and the attendant grumbling belly....


Edited by Injin
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I don't see it.

Olivier "lottery winner" Twist did okay.


THE government's spending review was last night welcomed by wily old men who organise gangs of cheeky pick-pockets.

The leaders of some of Britain's most endearing petty criminals said chancellor George Osborne had created the perfect conditions for the large scale recruitment of desperate, starving children with innocent faces and quick, skillful hands.

Brian Fagin, who mentors more than 20 scamps in central London, said: "I loves me boys but they's only good for a couple of years of top-quality thievin' before they becomes too big to hide in a wicker basket or scamper between the legs of a dozy copper.

"When times is good the best young lads is awf to school, learnin' how to work computers and whatnot whilst the likes of me and me good friend Bill Sykes is required to sell extended warranties and payment protection insurance.

"Lord give us me pick of 'ungry young boys, forced to feed their families by relievin' the toffs of a shiny pocket watch or a crisp 10 shillin' note. Mr Osborne has done me a right good turn and no mistake.

"Perhaps I should invite him to me 'umble abode for a genteel cup of tea and a French fancy and thank 'im in person for his gracious acts of kindness. Whadaya say boys?"

Mr Fagin was then surrounded by a dozen barefoot lads in battered top hats who grabbed their belt buckles and kicked their legs in the air while they all sang a song about how easy it is to steal iPods.


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Sounds like a more proactive form of "drip down" as espoused by that wonderful actor president person.

See, it works if people are willing to put in the leg work.

History has a lot to teach us. I wonder where the ancestors of Sykes are - right now?

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The Sharks, They Be A-Swimmin'

Huffpo published yesterday afternoon a reasonably-accurate exposition on the Foreclosuregate losses that could accrue to the banking system, and outlines the primary risk I've been harping on since 2007 - misrepresentation (or worse) in the loans in the pools:

But this is just exposure to Fannie and Freddie. The private sector is angry about all kinds of things--from wronged borrowers to deceived investors. Investors are already organizing against both mortgage servicers -- for improperly handling troubled loans -- and against investment banks -- for selling them garbage. They aren't just angry about fraudulent foreclosures -- evidence is mounting that mortgage servicers can't even handle the profits from mortgages correctly, and aren't sending investors reliable, verifiable payments.

Yep. Or worse, selling them nothing.

Bill Frey, who runs the hedge fund Greenwich Capital, has organized a massive clearinghouse of mortgage investors for the express purpose of bringing lawsuits against big banks that issued bogus mortgage-backed securities. He told me this afternoon that he's about to move: In the next couple of weeks Greenwich and other investors will bring big lawsuits against major banks.

Will these combined troubles be enough to sink any big banks? If investors can win a couple of lawsuits, easily.

The bar is high on these suits, but most of the hurdle is procedural. You need 25% of the MBS pool to have standing - that's blocked most of these up until now, and the banks (cleverly) structured most of the notes so that getting to the 25% is tough. That is, the "Senior" portions of the offering typically encompass about 80% of the total, just enough so that until and unless those people take losses they have a strong DISincentive to participate in a suit.

But if they feel the heat of risk, this all changes immediately, and instead of having 80% of the investors on your side the flip to the other side of the equation becomes equally dramatic and immediate.

That's all it will take - for the overcollateralization offered by the junior tranches to be exhausted, and the senior portions to start getting whacked on with unrecoverable losses - not "mark-to-market" losses, but permanent impairments due to parts of the pool being found to be contaminated beyond that which overcollateralization can protect against.

With loss severities running around 50%, that won't be tough to do if 1/3rd or more of the pools are junk - and the testimony from Clayton at the FCIC hearing strongly suggests that to be the case.

The banks appear to have relied on the premise that they could get away with this by structuring securities such that all of the junior tranches could get wiped out and yet it would not produce enough angry noteholders to meet standing requirements. That's nice of them, isn't it?

But greed ultimately will nail these guys, because it also appears they didn't stop short of the line where the senior holders were "safe." That line, once crossed, will immediately lead to essentially all of the noteholders being both willing and able to sue.

What's worse is that if the holder is a pension fund it has no choice but to sue once value is impaired, because the pension fund manager has no discretion - he is a fiduciary for the pension beneficiaries and can potentially be held personally liable if he does not discharge that duty.

The premise among the market participants that has produced a big shrug in stock prices thus far is that since robbery and fraud has become Wall Street's "greatest and most profitable product" in the last ten years that they will be able to continue, with help from Washington DC, and avoid the liability for their actions.

I don't think so - not when the biggest constituency that is getting hosed here are pension funds, including union pension funds. Those folks not only want to sue once they can establish standing and have an unjust loss they have to sue.

I predict some truly ugly surprises in the offing, and soon.

Looks like the bankers may have completely butt fooked themselves.

It will be interesting to see how they contain this mess, who will be the ultimate VI in this. Big corporations will now get pitted against each other funding politicians to do their bidding.

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  • 417 Brexit, House prices and Summer 2020

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