If trust in capital markets is to return, investors must be able to believe due diligence has been conducted

by GRETCHEN MORGENSON 05:55 AM Jul 14, 2010

Investors who lost billions on boatloads of faulty mortgage securities have had a hard time holding Wall Street accountable for selling the things in the first place.

For the most part, banks have said they cannot be called out in court on any of this because they had no idea that so many of these loans went to people who lacked the resources to make even their first mortgage payment.

Wall Street firms were intimately involved in the financing, bundling and sales of these loans, so their defence rings hollow. They provided hundreds of millions of dollars in credit to dubious underwriters and some even had their own people on site at the loan factories. Many Wall Street firms owned mortgage lenders outright.

Because many of the worst lenders are now out of business, investors in search of recoveries have turned to the banks that packaged the loans into securities. But successfully arguing that Wall Street aided lenders in a fraud is tough under United States federal securities laws. This is largely a result of Supreme Court decisions barring investors from bringing federal securities fraud cases that accuse underwriters and other third parties as enablers.

Where there’s a will, however, there’s a way. And state courts are proving to be a more fruitful place for mortgage investors seeking redress, legal experts say.

Late last month, for example, Massachusetts Attorney-General Martha Coakley extracted US$102 million ($140 million) from Morgan Stanley in a case involving Morgan’s extensive financing of loans made by New Century, a notorious and now-defunct lender that was based in California.

Morgan packaged the loans into securities and sold them to clients, even after its due diligence uncovered problems with the underlying mortgages that New Century fed to the firm, Ms Coakley said. In settling the matter, Morgan neither admitted nor denied the allegations. The investigation is continuing.

On Friday, an investment management firm that lost US$1.2 billion in mortgage securities it bought for clients filed suit in Massachusetts state court against 15 banks, accusing them of abetting a fraud.

The firm, Cambridge Place Investment Management of Concord, Massachusetts, purchased US$2 billion in mortgage securities from the banks and it says the banks misrepresented the risks in the underlying loans – both in prospectuses and sales pitches (see box).

The complaint says the banks misled Cambridge Place by maintaining that the mortgages in the securities it bought had met strict underwriting requirements related to the borrowers’ ability to repay the loans. Cambridge also contends it relied on the banks’ claims of having conducted due diligence to verify the quality of the loans bundled into the securities.

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Former Treasury Secretary Henry Paulson

· While Paulson was CEO of Goldman Sachs, (May, 1999 – June, 2006) at the height of the boom, in 2006, Goldman  underwrote $76.5 billion in mortgage-backed securities, or 7% of the entire market. Of that $76.5 billion, $29.3 billion was subprime and another $29.8 billion was what’s called “Alt-A” paper. Alt-A mortgages are characterized, mainly, by lack of documentation and lack of equity: no income verification, no asset verification, little-to-no cash down. Thus, 38% of the mortgage-backed securities Goldman underwrote were subprime, and more than three-fourths of their securities were what is called “non-prime,” i.e., either subprime or Alt-A.

· The Paulson-era Goldman Sachs bonds have an average delinquency rate of almost 22% – higher than most of the other bonds. Many GSAMP (Goldman Sachs Alternative Mortgage Product) trusts have been cut to junk bond status and are selling at less than 47% of the original investment.

· Goldman set a Wall Street record for securities firm’s profits in 2007.

· Goldman’s biggest creditor was AIG (through financial guarantee insurance) so Goldman was a major beneficiary of the 2008 bailout of AIG.

· Goldman profited from the losses in its subprime portfolios by using derivatives to bet that the value of the mortgage securities would continue to fall. (Goldman says: “Less than 1% of bonds had this protection.’”)

· Paulson’s Compensation? Goldman paid a salary to Paulson of $38.5 million for 2005. Paulson also regularly received bonuses of over $10 million.

“While we regret that we participated in the market euphoria and failed to raise a responsible voice, we are proud of the way our firm managed the risk it assumed on behalf of our client before and during the financial crisis,” Lloyd Blankfein, CEO Goldman Sachs, Testifying Before Congress, June, 2010 (This quote is now called “the greatest non-apology of all times.”)

“Penalizing Wall Street for packaging mortgage loans is not the answer to the problem.” Henry Paulson, October 16, 2009, Georgetown University

“But it sure is a good place to start.”

Lynn Szymoniak, July 13, 2010, West Palm Beach, FL

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Mortgage Investors Suing For MBS FRAUD… Is your Trust named?

I will try to get the details as to what happened and by which ‘MILL’. They know exactly “BY LAW” if there is no objection to the sale they have 10 days before they can enter and take title!

Here is another form of Palmetto Bugs at their Best!

Foreclosure wait period can lead to problems

That angered Meyers, who contends that amounted to trespassing because GMAC couldn’t legally take ownership for another week.

“They should have played by the rules and they didn’t,” she said.

Neither the bank’s attorneys or the real estate agent involved in the case returned calls Friday. But foreclosure experts said while the lock-changing was done unusually quickly, it appears the lender and its representatives acted within their rights to secure and protect the property.

Still, experts said the episode highlights a little-known and sometimes gray area of the foreclosure auction process: A waiting period before winning bidders can take possession.

“It has caused some problems,” said Shari Olefson, a Fort Lauderdale real estate attorney and author of “Foreclosure Nation: Mortgaging the American Dream,” Olefson is not involved in the Meyers’ case.

State law requires winning bidders to wait at least 10 full days before they can take title to a foreclosed property, in case there are any objections to the auction or new filings in the foreclosure court case. The waiting period begins when a court clerk issues a certificate of sale, usually on the same day as the auction.

If there are no objections or new court filings at the end of that 10-day window, then the clerk can issue a certificate of title.

But winning bidders, usually lenders, or their representatives sometimes change locks, board up windows and take other action to secure the property before that time is up — especially if they suspect it is abandoned or vacant, experts say.

“They’re mostly worried about further damage to the property,” said Dawn Bates-Buchanan, managing attorney of Gulf Coast Legal Services Inc. in Bradenton.
Read more: http://www.bradenton.com/2010/07/12/2424215/foreclosure-wait-period-can-lead.html#ixzz0tZMQ8Esm