Archive for the ‘MBS’ Category
It just never ends.
So the Justice Department has sued S&P claiming that they issued knowingly-false ratings on various structured products that they knew were going to blow up.
There is one glaring problem - the supposed “injured party” is the issuer!
That’s right folks — the claim is apparently that Citibank (among others) created crap, asked S&P to rate it, they did, and then they bought their own crap and were injured by it.
But you see, in this fairy-tale land of the SEC, the creator of the crap didn’t know it was crap, even though in in the instant case that Citibank’s former risk officer testified under oath that in 2006 60% of their loans were defective — and 80% were defective in 2007.
This was the Chief Risk Officer and his assessment of whether the loans were “authentic” (as represented) or whether they were chock full of lies and material misrepresentations.
How can you sue when you knowingly buy something that your own people intentionally created in a bogus manner and which you thus knew was crap, irrespective of what someone else said? How could you rely on someone’s outside opinion when you know the facts and do not need to rely on opinions at all?
There’s no basis for this lawsuit. There are a crazy number of reasons that people should be sued and prosecuted, but this isn’t one of them. If I create rat poison and then having done so, eat it, it’s my own damn fault if I die as a consequence.
What was going on here is that BAC and Citibank (among others) were intentionally defrauding everyone in sight — including the regulators. By taking crap loans (which they owned) and packaging them into securities that they then bought a “AAA” label forthey were improving their capital ratios since the risk was made to magically disappear.
Citibank wasn’t a victim of anything — they were the protagonist and the entity committing the offense! The entity playing the games here was the bank itself, not the ratings agency. They knowingly took crap and packaged it, then bought the packaged crap they solicited the bogus ratings on for the purpose of improving their apparent capital and thus making the firm look stronger than it really was, and all of this was intended to (and did) result in bonuses for executives and stock price advances — until it blew up in their face.
Rather than prosecute the bad guys Eric Holder now chases after someone who went along because they were paid rather than busting the entity that orchestrated the entire mess in the first place.
This is yet another political farce intended to protect the guilty.
Wow, you’re so on-the-ball that it only took you five years to start raising hell beyond when multiple people, myself included, began to howl about exactly this point?
Investors in mortgage-backed securities, built on the shoulders of the tax-advantaged Real Estate Mortgage Investment Conduit (“REMIC”), may be facing extraordinary tax losses because of how bankers and lawyers structured these securities. This calamity is compounded by the fact that those professional advisers should have known that the REMICs they created were flawed from the start. If these losses are realized, those professionals will face suits for damages so large that they could put them out of business. That is, unless the Wall Street Rule is applied.
From 2010-10-03 on The Ticker, which re-hashed a theme I’ve been pounding on since 2007:
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.
And of course if there are no notes that are transferred this explains many things.
Like robosigned documents.
Like “lost document” affidavits (it explains notes being intentionally lost, since they can’t be transferred to their correct place late, as the time window has long expired to meet legal requirements.)
Like allonges that magically appear on a document years later (and which are barred under the UCC because otherwise fraud becomes trivial to commit.)
Because REMICs did not file the correct returns and may have committed fraud, the statute of limitations for earlier years will remain open indefinitely, giving the IRS adequate time to pursue REMIC litigation after it obtains the information it needs.If the IRS does not take action at the appropriate time, however, it will be a serious failure and will result in the loss of billions of dollars of tax revenue for the federal government.
More troubling still is the IRS’s failure to address the wide-scale abuse and problems that existed during the years leading up to the financial meltdown. The IRS’s failure to adequately police REMICs is one more reason that the mortgage industry was able to overly inflate the housing market. And that, inexorably, led to the crash and our tepid recovery from it.
More generally, by overlooking the serious defects in the transactions, courts and governmental agencies encourage the type of behavior that led to the financial crisis. Lawmakers, law enforcement agencies and the judiciary cede their governing functions to private industry if they allow players to disregard the law and stride to create law through their own practices.
And until We The People demand through political process that this crap stop and if necessary form a new political party to do so, trampling the existing parties who refuse, you will continue to get screwed and both you and your children will be serially robbed and financially abused by these latter-day robber barons.
Release Date: September 13, 2012
For immediate release
Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
In other words all the stuff The Fed has done has not worked.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
In other words what The Fed has done thus far has not worked.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
Ah, now we get to the rub, don’t we?
See, The Fed has no short-term securities left; they’ve basically sold them all, and at the end of “Twist” will have sold them all. They also own something like 70% of the long end of the curve, and if they buy much more they’ll destroy what little liquidity is left.
So the question is this: Can this do anything positive?
The answer is this: Let’s look at the figures.
Let us assume we get 50 basis points in downward movement from today’s figures — which means a 30 year mortgage goes from ~3.5% to 3.25% for a conforming note.
Let’s further presume that we’re going to finance $200,000. This produces a payment of $895.48.
If the rate moves to 3.25% then the financed amount rises to $206,317, or about a 3% increase in house prices.
That’s all Bernanke gets out of this, assuming you get 50 basis points — and you won’t, as the 10 year will move up while MBS move down. You’ll probably get 25 basis points, which means you’ll get a whole 1.5% increase in home prices.
The net effect is null in terms of market impact.
The stock market is up nearly 200 points but the fact of the matter is that Bernanke is lying about the expected results — they are an economic nullity.
This is the reality of the lower boundary; the difference in price support from 5% to 3% is large but as you approach zero the additional movement you can actually achieve becomes smaller and smaller while the required amount of purchases to effect that change becomes larger and larger.
Worse, the potential impact of a dislocation event in the market goes way up as the leverage at The Fed goes up as well.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
No you won’t. You didn’t this time and you won’t forward either.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
That’s even worse. The PPI number was smoking and oil is now up 1.25% today, with basically all of it coming after the announcement.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.
This “accomodation” cannot work because for each dollar emitted into the economy purchasing power is debased by the same dollar. This is an effectivetax on everyone — including saved capital.
But in this case the real problem is that the “impact” from this program is an economic nullity.
Bernanke took this action, in my opinion, in an attempt to find the last few points on the stock market because he knows, as does the rest of the FOMC, that Europe (and China, for that matter) is about to blow — and that we’re simply not making any progress economically. Therefore he felt compelled to “do something”, even if the “something” is economically pointless, simply to avoid the stock market throwing a temper tantrum.
In the end the bottom line is that The Fed has shot its last bullet and it was a dud, as it is simply impossible for them to provide effective policy accommodation at this point in the cycle.
In an admittedly strange twist of timing JP Morgan, the same JP Morgan that just announced a surprise $2 billion loss caused by the “London Whale,” became the first and only of 26 banks disclosing subprime investor data to flip me the digital bird, refusing access to the public loan-level performance data for their Washington Mutual loans. WaMu, one of the most reckless subprime lenders, was swallowed whole by JPM and they’re having serious indigestion.
Nelson D. Schwartz and Jessica Silver-Greenberg of the New York Times verify that the purpose of the Chief Investment Office — the London Whale — is to offset risk caused by the Washington Mutual loans:
Under Mr. Dimon’s leadership, the chief investment office — which was responsible for the outsize credit bet — was retooled to make larger bets with the bank’s money, a former employee said. Bank executives said the chief investment office expanded after JPMorgan Chase’s 2008 acquisition of Washington Mutual, which added riskier securities to the company’s portfolio. The idea behind the strategy was to offset that risk.
It isn’t hard to figure out why JP Morgan doesn’t want anybody looking into and through their garbage. I have not been able to ascertain whether these reports are required under disclosure requirement Regulation AB (the law itself seems to say yes, but the experts I spoke to gave divergent readings). Whether they are or aren’t, JPM’s refusal — when everybody else cooperated speaks for itself.
As those loans sour, and they continue to rot like a dead skunk on a hot July day, the bets needed to offset the losses are increasing. It looks like the bank, peering into that portfolio they refuse to share, is becoming more than a little bit desperate. Like a compulsive gambler after a multi-day bender resulting in crippling losses they decided to double down rather than walk away, leading to their current whale of a surprise and likely a mirror-image follow-up for the WaMu losses this was supposed to offset.
For anybody who believes that JPM’s position is normal .. it isn’t. Twenty-six other banks quickly popped open the doors to their repositories, as they’re required to do. Perennial bad-boy Aurora Loan Services is the only other one that’s ignored my requests, though since it looks like they’ve sold their servicing operations the jury’s out whether their silence is purposeful or whether there’s nobody home on the other side of those requests.
Like I said, I’m not sure whether these disclosures are exempt. There are certainly many marked private, but they seem to be overwhelmingly CDOs and similar more exotic or clearly closely held instruments. I’ve never seen an entire series of MBS from an issuer that is exempt: even a few stray WaMu deals that ended up in other repositories are open to the public.
JP Morgan’s insistence that “[t]he site is maintained for JPMorgan Chase RMBS clients,” only, demanding that I include my JP Morgan Chase contact, may be legal but it is unprecedented. In context of their recent trading losses, the knowledge that those losses were to hedge against the WaMu losses, Dimon’s prior comments downplaying both losses, and strong analysis that the WaMu loans are some of the most impaired MBS it’s fair to conclude that JPM is hiding something in the basin of their loan outhouse.
I’ve spent the past couple months holed away downloading MBS data in bulk to enable investors, analysts, academics, government agencies, or whoever else wants to inspect performance information and project losses for every subprime loan trust. When finished, this week hopefully, I’ll have a veritable ABS MRI machine that can peer into the true health of the housing and housing finance market. It’s harder than it sounds: one of those projects where software engineers emerge from their digital caves after months, bleary eyed and long past due for a haircut but holding game-changing technology.
My database, which includes everything except WaMu loans thanks to Jamie, is finally almost finished. But even in preliminary form it is clear that the AAA-rated senior tranches — the ones that really were never supposed to take losses — are toast that’s burning worse by the day. Servicers, trustees, government officials have been doing anything to delay the inevitable losses but when people don’t pay their mortgages, and housing has declined by over 50% in many of their markets, there’s only so much accounting chicanery they can do: the money just isn’t there.
My suspicious are more grounded than tin-hat delusions we’ve been hearing from the housing is hot again crowd. R&R Consulting, a well-regarded structured valuation expert I work closely with conducted a portfolio-wide analysis of undisclosed (“limbo”) losses on RMBS. In a special in-depth report dated February 2012, long before JPM told me piss-off when asking for access to the more granular WaMu loan-level data, they reported that WAMU had the highest limbo loss level–about $810 million—in just one transaction. Repeat: experienced analysts dug this out even without loan level data. It sounds likely that it won’t be long until Dimon reports another ten-figure surprise that I’m sure he’ll apologetically pawn off on the US taxpayer.
For anybody asking “um — isn’t this over — didn’t all this fall apart back in 2008?” the answer is not really. That mega-meltdown was really a mini tremor caused by the lower and smaller tiers of these securities; last time junior visited to stir things up but this time papa’s walking down the street carrying a mean look and a big stick. That’s because the mezzanine level tranches of most bubble-era MBA are either gone or guaranteed to be gone — finally eaten up by current or pending losses — leaving the lower AAA tranches to take their place as the bearer of losses. This was never supposed to happen. Everybody knew that CDOs created from the lower tranches were risky, even if the ratings agencies said otherwise, but nobody thought the meltdown would last this long that the actual top tranches would be nicked. But the data couldn’t be clearer: those bottom level A-class tranches of yesterday are the new bottom level M-class tranches of yesterday.
All this is surprising because these same MBS tranches have been on fire lately. Hedge funds bought them for very little when nobody wanted them — setting their own price — and now they’re selling them back at steep gains because housing is peachy again, never mind the enormous amount of shadow inventory. Hopefully the buyers of these same securities aren’t being set up, again, because nobody would be stupid enough to fall for that same trick, again. Hopefully.
It is these lower tranches and other derivative products, which are by definition exponentially smaller than the more senior securities like the ones JPM is hiding (well, before the banks multiplied them several times over using credit default swaps) that blew up the world economy in 2008.
I’m guessing that it is the inevitable meltdown of what remains of the AAAs (the amount outstanding has been reduced considerably by refis) that has been at the impetus for the housing cheerleaders. By refusing to move their foreclosures forward, then refusing to take title, then refusing to REO those homes, the trusts don’t have to recognize the losses because, ya’ know, the abandoned and dilapidated properties will magically double in value as long as we hold our breath and wish.
My mountain of data that shows loss severity in excess of 100-percent is not uncommon. When we look at the loans, compare similar loans from those who report them more honestly, multiply the average severity by pending reported and, um, overlooked foreclosures, then it becomes clear that the lowest rated AAA’s are toast. This reaffirms the report by R&R Consulting report that $175 billion of loan level losses had not been allocated to the trusts. Whoops!
Jamie Dimon admitted his $2 billion loss “plays right into the hands of a bunch of pundits out there” on his conference call explaining his stinky. Dimon went on to call the losses “egregious” and “self-inflicted.” In light of the London Whale it is clear that when it comes to sky-high risk, like JPM’s WaMu exposure, the bank has adopted an advanced risk management strategy: telling researchers to piss off then hiding.
By Michael Olenick for Naked Capitalism, creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data
It was rather amusing to read this over the weekend from Bloomberg’s editorial department:
How would all the mortgages for these apartments and houses be funded? Lenders simply followed the people. For decades, urban investors had bought stakes in farm mortgage bonds. With the agricultural economy in such straits and the urban economy booming, groups such as the Farm Mortgage Bankers Association of America (which later dropped the “Farm” from its name) reoriented their sights on the cities, looking for ways to lend to these new urban dwellers, bringing their experience in turning mortgages into bonds.
Banks loved the new invention because it allowed them to skirt regulations. Although the Federal Reserve regulated the proportion of savings that could be lent as mortgages (half of savings deposits) there were no restrictions on mortgages funded by bonds. These bonds, however, had a maximum length of five years, forcing the mortgage debt to be refunded, at minimum, every five years. But since the balloon mortgage, so popular in the 1920s, was refinanced every three to five years, there shouldn’t have been a problem as long as more investors could be found.
Did you detect the elements of a Ponzi Scheme in there? You should have.
In point of fact the reason this collapsed is the same as the reason it collapsed this time around — the “values” lent against were nothing but hot air and when the next sucker failed to appear to buy at a higher price the scheme collapsed. Since the borrower was never able to perform to maturity on the original terms it was mathematically impossible to avoid the collapse; we were simply arguing over when, not whether, the collapse would occur.
The same thing happend this time around. And just like the in 1930s the government this time bowed to political pressure and refused to force those who made bad loans — knowing full well that they could not be performed on their original terms, and that the collateral was not worth the amount lent — to eat their own cooking and collapse.
Having pemitted regulations to be “skirted” (a convenient word for counterfeiting) there were in fact only two options — lock everyone up who engaged in these frauds, starting with the CEOs of the financial institutions involved, clawing back every nickel they had in the process, or attempt to transfer the debt to the taxpayer in some fashion.
The government did the worst of all of it. FDR not only allowed the depositors of the institutions involved to get hosed he also didn’t lock the banksters up and he transferred the losses to the citizens — even those who had not been a part of the scams — through currency devaluation.
In short he did basically what we’ve done this time and the result was the destruction of our economy for more than a decade, ending only when we entered WWII.
There is no answer to these dilemmas once the government turns a blind eye or worse, becomes explicitly involved in public frauds of this sort. The choices are only to prosecute and force those who committed the evil acts to eat them or to force everyone in the economy to eat them and protect the politically powerful who committed the crimes.
The simple fact of the matter is that at the root of this crisis, as it was in the 1930s, is counterfeiting by the lending institutions involved. The lending of money against nothing but hot air depresses the value of the currency which drives the price of assets and the real income of earners in opposite directions. This is inherently a fraud upon the public in each and every instance, committed with license and therefore given “legality” by the government in question as that which is counterfeited is the nation’s currency.
There is no solution that can be found to this problem until it is faced head-on and stopped.
Simply put so long as banksters are allowed to counterfeit the currency we are arguing over whether we’d like to be financially raped a bit, some or deeply and long rather than whether we’re going to suffer this ignoble act at all.
It becomes even worse when, as has happened this time around, the counterfeiting becomes part and parcel of how government funds itself. Government borrowing is inherent vice — a perhaps-necessary vice in a handful of circumstances (e.g. declared war) but nonetheless it is inherent vice, as government never borrows against value, it borrows against the promise that you will get up and go work tomorrow to pay taxes – the very definition of “hot air” unless enforced at gunpoint (at which point we call it what it is — slavery.)
There is nothing wrong with borrowing against actual market value of an asset — that is, liquifying that asset for the purpose of commerce. That sort of lending is essential to modern commercial flows; without letters of credit, for example, international trade would be nearly impossible at any rational level of risk.
But as soon as you allow someone to lend money unbacked by anything — that is, not backed by the actual liquidation value of the asset nor actual capital put forward by an investor or equity holder then you have committed a public fraud. You have allowed the lending institution to counterfeit the currency in question by increasing its quantity in the market simply on whim.
This is exactly identical, in mathematical and economic terms, to the lending institution running off stacks of $100 bills on the office copier. That act, when performed, is universally recognized as a serious felony worthy of prosecution and incarceration.
It is no different in economic and mathematical impact when a bank creates credit money out of thin air, backed by nothing other than a promise to get out of bed and go to work tomorrow, irrespective of whether that credit money is created by The Fed or a commercial bank.
We will never solve our economic problems until we face the mathematical reality of what has been done and thus why these acts must, in each and every instance, fail and lead to economic ruin.
Whoo boy. A couple things on the MBS front today, both succinctly synopsized by The Market-Ticker:
After nearly four years in which I’ve outlined that I don’t believe the formalities of MBS securitization were followed, and two years of increasing evidence, despite intentional obstruction by OTS, OCC, the FDIC, The Fed and Congress, along with a rapidly-increasing number of court rulings that strongly suggest that I (and a few others) have been right while the naysayers are wrong, we finally have a law enforcement agency looking into this matter:
New York Attorney General Eric Schneiderman has targeted Bank of America, the biggest U.S. bank by assets, in a new probe that questions the validity of potentially thousands of mortgage securities and their associated foreclosures, two people familiar with the matter said.
The investigation, which began quietly in recent weeks, is part of a larger inquiry that is scrutinizing whether mortgage companies and Wall Street firms took the necessary steps under New York state law when creating mortgage-backed securities, these people said, who requested anonymity because they weren’t authorized to speak publicly about the probe.
There’s plenty of reason to ask these questions. Like, for example, the court ruling that I cited last week. Then there’s this ruling which just popped up as well, this time from the 9th Circuit in Arizona.
Again, the record shows that the note was not properly indorsed into the trust. A late assignment was attempted but was judged legally defective.
Note, however, that this leaves open the question of what’s in the MBS box that the presumed holders of certificates which were issued against this obligation?
It appears, in this case and in literally hundreds of thousands of others, that these assignments are being made – whether legally sufficient at the time or not – well beyond the legal closing date of the trust involved.
That is, for the purpose of assigning interest they may (or may not) be sufficient to permit a foreclosure but as a matter of law and fact they cannot transfer the asset, in this case the note, into a trust that closed a year, two or even five years in the past!
The record in these cases is quite clear: When these fraudclosures are contested assignments “magically appear” (as opposed to being documented as having occurred contemporary with the creation of the trust in question) and often are dated on or near the date of the foreclosure proceeding. This may be legal to effectuate a foreclosure but at the same time it documents that the MBS certificate holders bought an empty box since these assignments invariably are not from the Trust to a servicer or institution for the purpose of foreclosure and recovery (perfectly legal) but rather are typically from the originator to the servicer, documenting that the transfer that was supposed to have taken place years previously did not as a matter of both law and fact.
Well folks? You can’t have this both ways. If the legal formalities of NY Trust Law (and IRS REMIC requirements) were complied with then what should be presented to the court is the original or a certified copy of the original assignment chain that took place into the trust prior to its closing date.
I challenge you to find documents evidencing these alleged transfers. What I keep seeing in these cases, in virtually every contested case I’ve seen, is instead a transfer that purports to grant the rights in the mortgage to the servicer-cum-foreclosing party from the originator on or about the time the foreclosure is filed.
The problem is that the originator was paid within days of the issuance of the mortgage and according to NY Trust Law had to indorse and tender that note to the Securitizer, who then had to tender it to the Depositor, and who then was supposed to have tendered it into the trust.