See, I Told You So (Mass-Document Forgery?)


Hattip to Yves over at Naked Capitalism…

The cure for the mortgage documents puts the loan out of eligibility for the trust. In order to cure, on a current basis, they have to argue that the loan goes retroactively back into the trust. This is the cure that the banks have been unwilling to do, because it is a big problem for the MBS. So instead they forge and fabricate documents.


See, there’s this little problem.  A REMIC (Real Estate Mortgage Investment Conduit, or “MBS”) is a special thing under IRS rules.  Normally a business would have to operate at a profit or loss, pay taxes, and then pay dividends.  This results in double-taxation.

A REMIC has a special status under the IRS code which avoids this; the interest flows through to the investor without being separately taxed at the business-level of the REMIC itself. 

But in exchange for this, there are constraints.  One of them is that a REMIC cannot acquire “distressed” assets – that is, notes that have defaulted.  It cannot, in other words, engage (intentionally, up front) in what would be considered “recovery operations” if you will.

The reason for this is that if it could, every “distressed asset” acquirer would set up such a structure and avoid monstrous amounts of tax.  So, as to avoid this problem, a REMIC can acquire only loans that are current.

That’s a problem for two reasons:

  • The master pooling and servicing agreements for these trusts called for the notes to be endorsed over to the trust at the time of the MBS creation.  This was NOT DONE, as I have repeatedly pointed out going back to 2007.  I believe a big part of why it was not done is that IF it had been done the original paperwork would have been available to the trustee and ultimately the MBS owners, who would have immediately discovered that the representations and warranties as to the quality of the conveyed paper were being wantonly violated.  Further, the pooling and servicing agreements specified a limited amount of time (usually 90 days maximum post-closing) for this to all be completed.  THERE IS NO CURE BEYOND THAT 90 DAY PERIOD AVAILABLE.

  • In addition these defaulted notes can’t be conveyed into the REMIC now even if there was a cure available in the pooling and servicing agreement, because doing so causes revocation of the REMIC’s tax-privileged status retroactive to its creation.  This would likely expose the trustees to not only monstrous lawsuits but possible criminal fraud charges.

So now we have the foreclosing parties (the servicers) “acquiring” the alleged notes via “lost note” affidavits and other “re-creation’ games.  But that’s not valid – first, the P&S agreement specified that the trustee had to have that paperwork on file within 90 days of closing with wet-ink conveyances.  He never did.  Second, he can’t acquire it now due to the IRS rules.  Third, there’s the issue of bankrupt issuers (e.g. “Joe’s Mortgage and Pawn”) of which there were thousands during the go-go years – in order to effectuate those transfers the bankruptcy trustee must approve it and there has to be someone from the original entity who can endorse it over – good luck with both.

But now 4closurefraud has blown the door off this with their posting of the actual price list for mass creation of missing documents.  Create, as in “fabricate”, one would presume.  And when we’re talking legal documents here that would appear to mean “forgery” and “perjury”.

How big is this?  Well, two of the “listed services” are major problems – and something called an “allonge” is, in my opinion, the big one. 

An “allonge” is another piece of paper that is permanently attached (so as to be physically inseparable) to an original document which has space for endorsements.  Think of it like a way to enlarge the “endorsement” space on the back of a check.  For obvious anti-forgery reasons if you can insert one of these surreptitiously (or worse, replace an existing one!) you can fabricate signatures that never actually occurred, and for this reason the UCC has STRICT RULES on how and when these can be used.  Specifically, you can’t attach one unless all original places for endorsement, including the margins and back sides of the page, have been consumed. 

Again, the reason for this is to prevent black-letter fraud where endorsements that never were really there “magically appear” on a document, usually backdated, or where legitimate endorsements are removed and/or replaced.

As Yves alleges:

So wake up and smell the coffee. The story that banks have been trying to sell has been that document problems like improper affidavits are mere technicalities. We’ve said from the get go that they were the tip of the iceberg of widespread document forgeries and fraud. This price sheet provides concrete proof that the practices we pointed to not only existed, but are a routine way of doing business in servicer and trustee land. LPS is the major platform used by all the large servicers; it oversees the work of foreclosure mills in every state.

And this means document forgeries and fraud are not just a servicer problem or a borrower problem but a mortgage industry and ultimately a policy problem. These dishonest practices are so widespread that they raise serious questions about the residential mortgage backed securities market, the major trustees (such as JP Morgan, US Bank, Bank of New York) who repeatedly provided affirmations as required by the pooling and servicing agreement that all the tasks necessary for the trust to own the securitization assets had been completed, and the inattention of the various government bodies (in particular Fannie and Freddie) that are major clients of LPS.


As I said on 4/9/2007:

NO contract excludes recovery for fraud. Ever. No one in their right mind would exclude such a cause of action. Ever.

I’ve been in business for more than 20 years, and I’ve never in my life seen a contractual situation where fraud does not allow whatever was “done” to be “un-done”, with the original parties on the hook – 100%.

So while mortgage companies may maintain that they have “little” exposure to defaults because they sold these loans off to the bond market without recourse, if in fact 60 percent of the ALT-A stated income products have incomes fraudulently inflated by 50% or more those mortgage companies can probably be forced to take back each and every one of those loans.
HALF of all stated-income loans?
This will BANKRUPT every single one of these companies if it happens.

Anyone care to bet whether or not the bondholders – many of whom are pension funds and other big institutions – will just sit silently and watch the defaults happen without looking into this – when they know that all they have to find is an overstated income and they can “PUT” the loan back on the issuer for its full unpaid face value, plus imputed interest?

There are people who say “mortgage fraud has been around forever.” Indeed. But what’s different here is that if these statistics are correct ninety percent of stated-income loans are fraudulent. This means that they are subject to being forcibly put back on the originator at any time!

The real stinker, of course, is that when “Joe’s Mortgage and Pawn” went down he had his warehouse line from someone like JP Morgan, Countrywide, Deutsche Bank or similar.  That is, the big banks are the place where all this crap-pile of bad paper ultimately should and must wind up.

Now, three and a half years down the road, what we appear to have documentary proof of is that the originators knew it at the time, and like most people who start with one small offense, the real problem and what ultimately sinks them is what they do later on to try to cover it up.

We made a severe policy error in 2007 and 2008 in trying to protect these clowns from the just desserts they cooked in their own ovens.  Now we have these same institutions trying to force the homeowner and MBS holder, including pension funds, to eat the consequences of these actions.

This is manifestly unjust and must stop – and toward that end, we are finally starting to see organizations representing MBS holders demand exactly that

AMI Press Release 10-1-2010

The salient paragraph:

“We hope that servicers who operated in a manner inconsistent with generally accepted industry practices, whether intentionally or unintentionally, will do the right thing and immediately enforce any violations of representations and warranties in PSAs. The unfortunate and little- known consequence of these operational breakdowns is the destruction of capital needed to sustain fixed income investors reliant upon cash flow from pensions and retirement accounts,” said Katopis.

Better late than never.

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