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Archive for the ‘Mortgage Bonds’ Category

How the banks could inflict such damage on the country’s home title and mortgage registry system would take another investigation by Congress to determine – assuming Congress was interested.

The Mortgage Electronic Registration Systems company (known as MERS), which has been at the center of legal problems affecting the securitization of home mortgages and foreclosures, has given up one of its principal corporate objectives. It is now instructing its members to cease foreclosing on residential properties in the name of MERS, and to begin immediately to register all assignments of mortgages with local county recorders of deeds. (Image)

The whole purpose of MERS when it was established in 1996 was to by-pass the county recording process, and the billions of dollars of fees that banks and mortgage companies would have had to pay to comply with state and local real estate laws. MERS operated on a legal assumption that it could have its cake and eat it too, by acting as an agent for its member banks in their real estate transactions, but also acting if necessary as a principal in its own name when it came to assigning mortgages and foreclosing on properties.

This legal principle took a devastating blow last week when US Bankruptcy Judge Robert Grossman of New York issued a ruling stating that MERS cannot operate as a principal when it came to assignments and foreclosures. The company only maintained a parallel data base of mortgage assignments that gave it no legal rights to interfere in real estate legal processes. By making changes to its rules today that will abandon any pretense that MERS is a principal to real estate transactions, the company is bowing to Judge Grossman’s ruling. By also instructing its members to begin filing mortgage assignments with county clerks, MERS is defeating one of the basic purposes of its establishment: the avoidance of real estate fees.

Fee avoidance was essential if the home mortgage was ever going to be securitized, since securities require multiple assignments of the same mortgage which eventually finds itself in the hands of a trustee for the security. It is now open to question whether mortgage backed securities can remain profitable with fees having to be paid multiple times for as many as 1,000 mortgages in a security. This is going to have serious implications for Fannie Mae and Freddie Mac, which are the only parties left in the US which issue and securitize home mortgages. Fannie and Freddie were founding partners in the establishment of MERS, so this is as much a blow to their business model as it is to MERS, which the two government agencies can ill afford when Congress is debating their future.

Judge Grossman was fully aware of the implications of his ruling.

The Court recognizes that an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States. However, the Court must resolve the instant matter by applying the laws as they exist today. It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices. MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law. Link

MERS claims that over 50 million mortgages in the US have been registered on its system. Given the action MERS took today, it will be much harder now for lawyers to argue in court that assignments made only on the MERS registry are legally valid. Unfortunately, for any of these 50 million mortgages that were securitized, chances are the various assignments along the way to the trustee were not recorded on local government records. This now means the chain of title is “clouded”, and such uncertainty affecting tens of millions of mortgages is the last thing the housing market needs. Sellers and buyers don’t know if the title will be clear of any other claims should they engage in a transaction, and homeowners might not even know if they are making monthly payments to the right bank.

Similarly, trillions of dollars of mortgage backed securities are now clouded too, because they aren’t backed by mortgages. MERS is effectively admitting that these securities are uncollateralized, which means investors now have a sound legal claim that the banks issuing the securities should buy them back at 100% of face value. There are, in fact, reasonable claims already being made by some investors against, for example, Wells Fargo and JP Morgan Chase, that these banks perpetrated a fraud by selling so-called “mortgage backed securities” which they should have known were uncollateralized.

It is questionable if MERS can even survive this capitulation to legal reality, but MERS only has 50 employees. Whether Fannie Mae and Freddie Mac can survive is now also open to question, especially if the housing market is going to revert to the old model where mortgages are kept forever by the bank originating the transaction, since securitization will be defunct. Even if Congress intervenes and passes a national law that recognizes the principal rights of some entity that replaces MERS, this will still probably require that each assignment in a securitization be registered locally and fees paid.

How the banks could inflict such damage on the country’s home title and mortgage registry system would take another investigation by Congress to determine – assuming Congress was interested. One thing is for certain: if the CEOs of all the major banks don’t resign because of this scandal, if there isn’t a thorough house cleaning of the boards and executive ranks of the major banks behind the mortgage securitization process, if in fact no one takes any responsibility for placing tens of millions of American homes in legal limbo, than we can conclude malfeasance and corruption have taken firm root on Wall Street.

First published at The Agonist

The following organizations are Shareholders of MERS.

American Land Title Association
Bank of America
CCO Mortgage Corporation
Chase Home Mortgage Corporation of the Southeast
CitiMortgage, Inc.
Commercial Mortgage Securities Association
Corinthian Mortgage Corporation
EverHome Mortgage Company
Fannie Mae
First American Title Insurance Corporation
Freddie Mac
GMAC Residential Funding Corporation
Guaranty Bank
HSBC Finance Corporation
Merrill Lynch Credit Corporation
MGIC Investor Services Corporation
Mortgage Bankers Association
Nationwide Advantage Mortgage Company
PMI Mortgage Insurance Company
Stewart Title Guaranty Company
SunTrust Morgage, Inc.
United Guaranty Corporation
Washington Mutual Bank
Wells Fargo Bank, N.A.
WMC Mortgage Corporation

Source:  MERS

Adam Levitin testifying before Congress regarding foreclosure practices:

MERS & The Foreclosure Crisis

The Big Banks & Lenders Have Committed Mortgage Fraud

Now, someone tell me exactly why MERS and its owners/members have not been prosecuted?  And please tell me why foreclosures initiated or assigned by MERS, especially in non-judicial states, are still continuing.

h/t Analyzer

Damn those deadbeat borrowers…

From the Allstate vs JP Morgan lawsuit:

Allstate selected a random sample of loans from each offering in which it invested to test Defendants’ representations on a loan-level basis. Using techniques and methodologies that only recently became available, Allstate conducted loan-level analyses on nearly 26,809 mortgage loans underlying its Certificates, across 17 of the offerings at issue here.

For each offering, Allstate attempted to analyze 800 defaulted loans and 800 randomly-sampled loans from within the collateral pool. These sample sizes are more than sufficient to provide statistically-significant data to demonstrate the degree of misrepresentation of the Mortgage Loans’ characteristics. Analyzing data for each Mortgage Loan in each Offering would have been cost-prohibitive and unnecessary. Statistical sampling is an accepted method of establishing reliable conclusions about broader data sets, and is routinely used by courts, government agencies, and private businesses. As the size of a sample increases, the reliability of its estimations of the total population’s characteristics increase as well. Experts in RMBS cases have found that a sample size of just 400 loans can provide statistically significant data, regardless of the size of the actual loan pool, because it is unlikely that such a sample would yield results markedly different from results for the entire population.

Specifically, Allstate did the following:

To determine whether a given borrower actually occupied the property as claimed, Allstate investigated tax information for the sampled loans. One would expect that a borrower residing at a property would have his or her tax bills sent to that address, and would take all applicable tax exemptions available to residents of that property. If a borrower had his or her tax records sent to another address, that is good evidence that he or she was not actually residing at the mortgaged property. If a borrower declined to make certain tax exemption elections that depend on the borrower living at the property, that also is strong evidence the borrower was living elsewhere.

A review of credit records was also conducted. One would expect that people have bills sent to their primary address. If a borrower was telling creditors to send bills to another address, even six months after buying the property, it is good evidence he or she was living elsewhere.

A review of property records was also conducted. It is less likely that a borrower lives in any one property if in fact that borrower owns multiple properties. It is even less likely the borrower resides at the mortgaged property if a concurrently-owned separate property did not have its own tax bills sent to the property included in the mortgage pool.

A review of other lien records was also conducted. If the property was subject to additional liens but those materials were sent elsewhere, that is good evidence the borrower was not living at the mortgaged property. If the other lien involved a conflicting declaration of residency, that too would be good evidence that the borrower did not live in the subject property.

In a nutshell, as Allstate summarizes, it was lies all the way:

the disclosed underwriting standards were systematically ignored in originating or otherwise acquiring non-compliant loans. For instance, recent reviews of the loan files underlying some of Allstate’s Certificates reveal a pervasive lack of proper documentation, facially absurd (yet unchecked) claims about the borrower’s purported income, and the routine disregard of purported underwriting guidelines. Based on data compiled from third-party due diligence firms, the federal Financial Crisis Inquiry Commission (“FCIC”) noted in its January 2011 report:

The Commission concludes that firms securitizing mortgages failed to perform adequate due diligence on the mortgages they purchased and at times knowingly waived compliance with underwriting standards. Potential investors were not fully informed or were misled about the poor quality of the mortgages contained in some mortgage-related securities. These problems appear to be significant.

Some of the unbelievable findings are presented below. They speak for themselves…and, again in any normal non-banana republic, would lead to at least several criminal prosecutions. In America? No way.

Not surprisingly, the performance of loans issued by JPM and its acquisition Bear, deteriorated rapidly post issuance:

Read more at ZeroHedge

Allstate vs JP Morgan 2-16-2011

ZeroHedge

4closureFraud

Lawsuit alleges the bank took extreme measures to defraud investors, and now JPMorgan may be on the hook

Former Bear Stearns mortgage executives who now run mortgage divisions of Goldman Sachs, Bank of America, and Ally Financial have been accused of cheating and defrauding investors through the mortgage securities they created and sold while at Bear. According to e-mails and internal audits, JPMorgan had known about this fraud since the spring of 2008, but hid it from the public eye through legal maneuvering. Last week a lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JPMorgan was unsealed. The lawsuit’s supporting e-mails, going back as far as 2005, highlight Bear traders telling their superiors they were selling investors like Ambac a “sack of shit.”

News of internal whistleblowers coming forward from Bear’s mortgage servicing division, EMC, was first reported by The Atlantic in May of last year. Ex-EMC analysts admitted they were sometimes told to falsify loan-level performance data provided to the ratings agencies who blessed Bear’s billion-dollar deals. But according to depositions and documents in the Ambac lawsuit, Bear’s misdeeds went even deeper. They say senior traders under Tom Marano, who was a Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally’s mortgage operations, were pocketing cash that should have gone to securities holders after Bear had already sold them bonds and moved the loans off its books.

Mike Nierenberg, who ran the adjustable-rate mortgage trading desk at Bear and is now the head of mortgages and securitization for Bank of America, was a key player ensuring the defaulting loans Bear was buying would move off their books right after they bought them, with little concern for the firm’s due diligence standards. He was joined in this scheme by Jeff Verschleiser, his peer and Senior Managing Director on the mortgage and asset-backed securities trading desk and head of whole loan trading. He is now an executive in Goldman Sachs’ mortgage division.

According to the lawsuit, the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds. The Marano-led traders also cut the time allowed for early payment defaults, without telling the bond investors. That way, Bear could quickly securitize defective loans, without leaving enough time for investors to do their own due diligence after the bonds were sold and put-back any bad loans to Bear.

The traders were essentially double-dipping — getting paid twice on the deal. How was this possible? Once the security was sold, they didn’t have a legal claim to get cash back from the bad loans — that claim belonged to bond investors — but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the decision-makers for the double dipping scheme, and thus, are named as individual defendants in the suit.

Bear deal manager Nicolas Smith wrote an e-mail on August 11th, 2006 to Keith Lind, a Managing Director on the trading desk, referring to a particular bond, SACO 2006-8, as “SACK OF SHIT [2006-]8″ and said, “I hope your [sic] making a lot of money off this trade.”

It’s this blatant internal awareness inside the Bear mortgage trading division that the Ambac suits says led Bear to implement an across-the-board strategy to disregard its contractual promises and conceal the defective loans. By JPMorgan taking over Bear, it became the successor of interest in Bear Stearns. As the lawsuit lays out, JPMorgan is responsible for the flagrant accounting fraud started by Bear designed to avoid, and has continued to avoid, recognition of vast off-balance sheet exposure relating to its contractual repurchase agreements. This allowed executives to reap tens of millions of dollars in compensation from a bank that wouldn’t have been able to buy Bear without tax payer assistance.

80% of Loans Went Bad Almost Immediately

In 2007, when Ambac started to realize something was very wrong with its high-rated bonds, it demanded Bear provide loan-level detail and reviewed 695 non-performing loans in its portfolio. Ambac’s audit concluded that 80 percent of the loans showed an early payment default. This meant they should have never have been packed in the bonds Bear sold and were required to be repurchased. Bear refused, and of course had already been pocketing buyback money for itself from the originators. Bear also never told investors that its auditor Price Waterhouse and Coopers submitted an internal review in August 2006 that this repurchase process was not in-line with its due diligence standards and not typical for the industry. By January 2007, a Bear internal audit also reported the firm had collected $1.7 billion in repurchase claims — a 227% increase over the previous year. Yet Marano’s group of traders continued their double-dip payment scheme and kept selling the toxic loans with full awareness of the poor quality of the due diligence.

Jeffrey Verschleiser even said in an e-mail that he knew this was an issue. He wrote to his peer Mike Nierenberg in March 2006, “[we] are wasting way too much money on Bad Due Diligence.” Yet a year later nothing had changed. In March 2007, Verschleiser wrote to Nierenberg again about the same due diligence firm, “[w]e are just burning money hiring them.”

Then in November 2007, Verschleiser wrote to his risk committee that he knew insurers for mortgage securities were going to have big financial problems. He suggested they multiply by ten times the short bet he’d just made against stocks like Ambac. These e-mails show Verschleiser’s trading desk bragging to firm leadership that he made $55 million off shorting insurers’ stock in just three weeks.

Eventually, as Ambac kept demanding a repurchase of the bad loans, Bear acknowledged in late 2007 it would have to buy some back. The lawsuit lists over $600 million in claims with $1.2 billion in damages from the soured mortgage securities it invested in and insured against. But according to the lawsuit, in the spring of 2008, JPMorgan dismissed an outside audit review of the loans’ need to be repurchased and once again refused to pay Ambac. The suit asserts JPMorgan knew a repurchase would result in a huge accounting liability that would put their balance sheet in serious trouble at that time.

Last week, JPMorgan CEO Jamie Dimon said it will take years to get through mortgage litigation risk the bank inherited and had set aside around $9 billion for litigation-related risk. Yet in the bank’s January earnings call, Dimon suggested that the bank may not have to buy back any soured mortgages from private investors and said that the issue is “not that material” for JPMorgan. Still, Ambac recently won a court order in December to add accounting fraud against JPMorgan to its suit, which can double or triple lawsuit awards. So it’s hard to tell whether America’s largest bank is prepared to pay for the sins of Bear. JPMorgan did fight tooth and nail for the Ambac suit not to be made public, however, because the firm argued it could damage the reputations of senior bank executives currently working in the industry. Individuals named as defendants included: Jimmy Cayne, Alan “ACE” Greenberg, Warren Spector, Alan Schwartz, Thomas Marano, Jeffrey Mayer, Mary Haggerty, Baron Silverstein, Jeffrey Verschleiser, and Michael Nierenberg.

Ambac’s lawsuit is led by Eric Haas of Patterson Belknap Webb & Tyler LLP. Depositions show internal Bear executives saying Nierenberg and Verschleiser were responsible for deciding how much risk to take when acquiring loans and for aspects of the securitization process. They reported up to Marano. Testimony shows Marano would have known about the decisions his head traders were making. When asked about these accusations, Nierenberg’s, Marano’s, and Verschleiser’s current employers had no comment. The defendants’ lawyers at Greenberg Traurig LLP failed to respond to calls for comment.

A public hearing is currently scheduled to be held by the New York State assembly regarding whether legal action should be brought against banks for misleading insurers about mortgage related securities. If approved, the New York Attorney General will likely be asked to bring criminal fraud charges against these banks. Now we must wait and see if JPMorgan will settle or go to trial — or if the bank tries to claw back tens of millions of dollars in pay from the former Bear executives.

The Atlantic