I can tell you there is MAJOR, MAJOR panic happening “behind the scenes” since I have started this site I have not seen this kind of activity!All I can say is don’t stop what ever you are doing GMAC or not…
I haven’t seen the following story get much national press (Ok, none. After all, isn’t Lindsey Lohan still in the news?) but if it continues to escalate, we will. The short & sweet of the matter is that it appears most banks do not have clear title to the homes they are foreclosing. In their mad rush to capitalize on the housing bubble, bankers skipped many of the legal steps necessary to have a clear title if things went badly, which is now, and the mortgages that were bundled then securitized as MBSs (mortgage backed securities) may actually belong to the homeowners.If this plays out as described below some banks will go belly-up, which should have happened a long time ago. Since the Treasury & the Federal Reserve will not let their buddies down, however, I am certain that it is already being sorted out in back room deals. “To hell with the LAW” they will say, Shitibank is on the brink of failure.
A member of Congress has already sent a letter to the Florida Supreme Court requesting it make an order to abate all foreclosure procedures until Florida can complete investigations into the matter. A portion of Representative Grayson’s letter is below.
I respectfully request that you abate all foreclosures involving these firms until the Attorney General of the state of Florida has finished his investigations of those firms for document fraud.
I have included a court order, in which Chase, WAMU, and Shapiro and Fishman are excoriated by a judge for document fraud on the court. In this case, Chase attempted to foreclose on a home, when the mortgage note was actually owned by Fannie Mae.
Taking someone’s home should not be done lightly. And it should certainly be done in accordance with the law.
This original post can be found here
Ok, we now appear to have a pattern of conduct here where organizations trying to foreclose on homeowners are in fact submitting forged (that is, willfully known to be false) affidavits to courts around the nation.
First we had GMAC, now it appears we have JPM/Chase. Everyone’s scrambling on this, of course.
But as I pointed out, the real panic is likely still to come, because I have reason to believe (but cannot yet prove) that many if not most of the non-agency securitizations were defective at the outset.
Worse, they’re now trying to cover it up. I am amassing more and more information on the mess, and what I’m seeing is increasingly looking like a pattern of conduct that may well go far beyond “innocent mistakes” or “accidents.”
So let’s take a close look at this problem, and how we can fix it.
There’s a real visceral outrage at letting people have a “free house.” But is it really a perversity of justice if that’s what happens in point of fact – or effect? Maybe not.
Look, if I want to write you a signature loan for $200,000, I have every right to do it. If you don’t pay I’m screwed in such a case, because I have no security interest.
I am working on a special project & need your help to gather as many MERS Assignments as we can possibly get.
What is especially needed are the Certifying Officers signing these assignments for MERS. I don’t care if it’s old, new, signed, undated, unmarked, lender has gone bankrupt ages ago…I just want them ALL!
Readers of my articles will recall that I have warned as far back as December 2006, that the global banks will collapse when the Financial Tsunami hits the global economy in 2007. And as they say, the rest is history.
Quantitative Easing (QE I) spearheaded by the Chairman of delayed the inevitable demise of the fiat shadow money banking system slightly over 18 months.
That is why in November of 2009, I was so confident to warn my readers that by the end of the first quarter of 2010 at the earliest or by the second quarter of 2010 at the latest, the global economy will go into a tailspin. The recent alarm that the US economy has slowed down and in the words of Bernanke “the recent pace of growth is less vigorous than we expected” has all but vindicated my analysis. He warned that the outlook is uncertain and the economy “remains vulnerable to unexpected developments”.
Obviously, Bernanke’s words do not reveal the full extent of the fear that has gripped central bankers and the financial elites that assembled at the annual gathering at Jackson Hole, Wyoming. But, you can take it from me that they are very afraid.
Why?
Let me be plain and blunt. The “unexpected developments” Bernanke referred to is the collapse of the global banks. This is FED speak and to those in the loop, this is the dire warning.
So many renowned economists have misdiagnosed the objective and consequences of quantitative easing. Central bankers’ scribes and the global mass media hoodwinked the people by saying that QE will enable the banks to lend monies to cash-starved companies and jump start the economy. The low interest rate regime would encourage all and sundry to borrow, consume and invest.
This was the fairy tale.
Then, there were some economists who were worried that as a result of the FED’s printing press (electronic or otherwise) working overtime, hyper-inflation would set in soon after.
But nothing happened. The multiplier effect of fractional reserve banking did not take off. Bank lending in fact stalled.
Why?
What happened?
Let me explain in simple terms step by step.
1) All the global banks were up to their eye-balls in toxic assets. All the AAA mortgage-backed securities etc. were in fact JUNK. But in the balance sheets of the banks and their special purpose vehicles (SPVs), they were stated to be worth US$ TRILLIONS.
2) The collapse of Lehman Bros and AIG exposed this ugly truth. All the global banks had liabilities in the US$ Trillions. They were all INSOLVENT. The central banks the world over conspired and agreed not to reveal the total liabilities of the global banks as that would cause a run on these banks, as happened in the case of Northern Rock in the U.K.
3) A devious scheme was devised by the FED, led by Bernanke to assist the global banks to unload systematically and in tranches the toxic assets so as to allow the banks to comply with RESERVE REQUIREMENTS under the fractional reserve banking system, and to continue their banking business. This is the essence of the bailout of the global banks by central bankers.
4) This devious scheme was effected by the FED’s quantitative easing (QE) – the purchase of toxic assets from the banks. The FED created “money out of thin air” and used that “money” to buy the toxic assets at face or book value from the banks, notwithstanding they were all junks and at the most, worth maybe ten cents to the dollar. Now, the FED is “loaded” with toxic assets once owned by the global banks. But these banks cannot declare and or admit to this state of affairs. Hence, this financial charade.
5) If we are to follow simple logic, the exercise would result in the global banks flushed with cash to enable them to lend to desperate consumers and cash-starved businesses. But the money did not go out as loans. Where did the money go?
6) It went back to the FED as reserves, and since the FED bought US$ trillions worth of toxic wastes, the “money” (it was merely book entries in the Fed’s books) that these global banks had were treated as “Excess Reserves”. This is a misnomer because it gave the ILLUSION that the banks are cash-rich and under the fractional reserve system would be able to lend out trillions worth of loans. But they did not. Why?
7) Because the global banks still have US$ trillions worth of toxic wastes in their balance sheets. They are still insolvent under the fractional reserve banking laws. The public must not be aware of this as otherwise, it would trigger a massive run on all the global banks!
8) Bernanke, the US Treasury and the global central bankers were all praying and hoping that given time (their estimation was 12 to 18 months) the housing market would recover and asset prices would resume to the levels before the crisis. .
Let me explain: A House was sold for say US$500,000. Borrower has a mortgage of US$450,000 or more. The house is now worth US$200,000 or less. Multiply this by the millions of houses sold between 2000 and 2008 and you will appreciate the extent of the financial black-hole. There is no way that any of the global banks can get out of this gigantic mess. And there is also no way that the FED and the global central bankers through QE can continue to buy such toxic wastes without showing their hands and exposing the lie that these banks are solvent.
It is my estimation that they have to QE up to US$20 trillion at the minimum. The FED and no central banker would dare “create such an amount of money out of thin air” without arousing the suspicions and or panic of sovereign creditors, investors and depositors. It is as good as declaring officially that all the banks are BANKRUPT.
9) But there is no other solution in the short and middle term except another bout of quantitative easing, QE II. Given the above caveat, QE II cannot exceed the amount of the previous QE without opening the proverbial Pandora Box.
10) But it is also a given that the FED will embark on QE II, as under the fractional reserve banking system, if the FED does not purchase additional toxic wastes, the global banks (faced with mounting foreclosures, etc.) will fall short of their reserve requirements.
11) You will also recall that the FED at the height of the crisis announced that interest will be paid on the so-called “excess reserves” of the global banks, thus enabling these banks to “earn” interest. So what we have is a merry-go-round of monies moving from the right pocket to the left pocket at the click of the computer mouse. The FED creates money, uses it to buy toxic assets, and the same money is then returned to the FED by the global banks to earn interest. By this fiction of QE, banks are flushed with cash which enable them to earn interest. Is it any wonder that these banks have declared record profits?
12) The global banks get rid of some of their toxic wastes at full value and at no costs, and get paid for unloading the toxic wastes via interest payments. Additionally, some of the “monies” are used by these banks to purchase US Treasuries (which also pay interests) which in turn allows the US Treasury to continue its deficit spending. THIS IS THE BAILOUT RIP OFF of the century.
Now that you fully understand this SCAM, it is left to be seen how the FED will get away with the next round of quantitative easing – QE II.
Obviously, the FED and the other central banks are hoping that in time, asset prices will recover and resume their previous values before the crisis. This is a fantasy. QE II will fail just as QE I failed to save the banks.
The patient is in intensive care and is for all intent and purposes brain dead, although the heart is still pumping albeit faintly. The Too Big To Fail Banks cannot be rescued and must be allowed to be liquidated. It will be painful, but it is necessary before there is recovery. This is a given.
Warning:
When the ball hits the ceiling fan, sometime early 2011 at the earliest, there will be massive bank runs.
I expect that the FED and other central banks will pre-empt such a run and will do the following:
1) Disallow cash withdrawals from banks beyond a certain amount, say US$1,000 per day; 2) Disallow cash transactions up to a certain amount, say US$10,000 for certain transactions; 3) Transactions (investments) for metals (gold and silver) will be restricted; 4) Worst-case scenario – the confiscation of gold AS HAPPENED IN WORLD WAR II. 5) Imposition of capital controls etc.; 6) Legislations that will compel most daily commercial transactions to be conducted through Debit and or Credit Cards; 7) Legislations to make it a criminal offence for any contraventions of the above.
Solution:
Maintain a bank balance sufficient to enable you to comply with the above potential impositions.
Start diversifying your assets away from dollar assets. Have foreign currencies in sufficient quantities in those jurisdictions where the above anticipated impositions are least likely to be implemented.
CONCLUSION
There will be a financial tsunami (round two) the likes of which the world has never seen.
The Treasury Dept.’s mortgage relief program isn’t just failing, it’s actively funneling money from homeowners to bankers, and Treasury likes it that way.
The Treasury Department’s plan to help struggling homeowners has been failing miserably for months. The program is poorly designed, has been poorly implemented and only a tiny percentage of borrowers eligible for help have actually received any meaningful assistance. The initiative lowers monthly payments for borrowers, but fails to reduce their overall debt burden, often increasing that burden, funneling money to banks that borrowers could have saved by simply renting a different home. But according to recent startling admissions from top Treasury officials, the mortgage plan was actually not really about helping borrowers at all. Instead, it was simply one element of a broader effort to pump money into big banks and shield them from losses on bad loans. That’s right: Treasury openly admitted that its only serious program purporting to help ordinary citizens was actually a cynical move to help Wall Street megabanks.
Treasury Secretary Timothy Geithner has long made it clear his financial repair plan was based on allowing large banks to “earn” their way back to health. By creating conditions where banks could make easy profits, Getithner and top officials at the Federal Reserve hoped to limit the amount of money taxpayers would have to directly inject into the banks. This was never the best strategy for fixing the financial sector, but it wasn’t outright predation, either. But now the Treasury Department is making explicit that it was—and remains—willing to let those so-called “earnings” come directly at the expense of people hit hardest by the recession: struggling borrowers trying to stay in their homes.
This account comes secondhand from a cadre of bloggers who were invited to speak on “deep background” with a handful of Treasury officials—meaning that bloggers would get to speak frankly with top-level folks, but not quote them directly, or attribute views to specific people. But the accounts are all generally distressing, particularly this one from economics whiz Steve Waldman:
The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system,” “the economy,” and “ordinary Americans.”
Here’s how Geithner’s Home Affordability Modification Program (HAMP) works, or rather, doesn’t work. Troubled borrowers can apply to their banks for relief on monthly mortgage payments. Banks who agree to participate in HAMP also agree to do a bunch of things to reduce the monthly payments for borrowers, from lowering interest rates to extending the term of the loan. This is good for the bank, because they get to keep accepting payments from borrowers without taking a big loss on the loan.
But the deal is not so good for homeowners. Banks don’t actually have to reduce how much borrowers actually owe them—only how much they have to pay out every month. For borrowers who owe tens of thousands of dollars more than their home is worth, the deal just means that they’ll be pissing away their money to the bank more slowly than they were before. If a homeowner spends $3,000 a month on her mortgage, HAMP might help her get that payment down to $2,500. But if she still owes $50,000 more than her house is worth, the plan hasn’t actually helped her. Even if the borrower gets through HAMP’s three-month trial period, the plan has done nothing but convince her to funnel another $7,500 to a bank that doesn’t deserve it.
Most borrowers go into the program expecting real relief. After the trial period, most realize that it doesn’t actually help them, and end up walking away from the mortgage anyway. These borrowers would have been much better off simply finding a new place to rent without going through the HAMP rigamarole. This example is a good case, one where the bank doesn’t jack up the borrower’s long-term debt burden in exchange for lowering monthly payments
But the benefit to banks goes much deeper. On any given mortgage, it’s almost always in a bank’s best interest to cut a deal with borrowers. Losses from foreclosure are very high, and if a bank agrees to reduce a borrower’s debt burden, it will take an upfront hit, but one much lower than what it would ultimately take from foreclosure.
That logic changes dramatically when millions of loans are defaulting at once. Under those circumstances, bank balance sheets are so fragile they literally cannot afford to absorb lots of losses all at once. But if those foreclosures unravel slowly, over time, the bank can still stay afloat, even if it has to bear greater costs further down the line. As former Deutsche Bank executive Raj Date told me all the way back in July 2009:
If management is only seeking to maximize value for their existing shareholders, it’s possible that maybe they’re doing the right thing. If you’re able to let things bleed out slowly over time but still generate some earnings, if it bleeds slow enough, it doesn’t matter how long it takes, because you never have to issue more stock and dilute your shareholders. You could make an argument from the point of view of any bank management team that not taking a day-one hit is actually a smart idea.
Date, it should be emphasized, does not condone this strategy. He now heads the Cambridge Winter Center for Financial Institutions Policy, and is a staunch advocate of financial reform.
If, say, Wells Fargo had taken a $20 billion hit on its mortgage book in February 2009, it very well could have failed. But losing a few billion dollars here and there over the course of three or four years means that Wells Fargo can stay in business and keep paying out bonuses, even if it ultimately sees losses of $25 or $30 billion on its bad loans.
So HAMP is doing a great job if all you care about is the solvency of Wall Street banks. But if borrowers know from the get-go they’re not going to get a decent deal, they have no incentive to keep paying their mortgage. Instead of tapping out their savings and hitting up relatives for help with monthly payments, borrowers could have saved their money, walked away from the mortgage and found more sensible rental housing. The administration’s plan has effectively helped funnel more money to Wall Street at the expense of homeowners. And now the Treasury Department is going around and telling bloggers this is actually a positive feature of the program, since it meant that big banks didn’t go out of business.
There were always other options for dealing with the banks and preventing foreclosures. Putting big, faltering banks into receivership—also known as “nationalization”—has been a powerful policy tool used by every administration from Franklin Delano Roosevelt to Ronald Reagan. When the government takes over a bank, it forces it to take those big losses upfront, wiping out shareholders in the process. Investors lose a lot of money (and they should, since they made a lousy investment), but the bank is cleaned up quickly and can start lending again. No silly games with borrowers, and no funky accounting gimmicks.
Most of the blame for the refusal to nationalize failing Wall Street titans lies with the Bush administration, although Obama had the opportunity to make a move early in his tenure, and Obama’s Treasury Secretary, Geithner, was a major bailout decision-maker on the Bush team as president of the New York Fed.
But Bush cannot be blamed for the HAMP nightmare, and plenty of other options were available for coping with foreclosure when Obama took office. One of the best solutions was just endorsed by the Cleveland Federal Reserve, in the face of prolonged and fervent opposition from the bank lobby. Unlike every other form of consumer debt, mortgages are immune from renegotiation in bankruptcy. If you file for bankruptcy, a judge literally cannot reduce how much you owe on your mortgage. The only way out of the debt is foreclosure, giving banks tremendous power in negotiations with borrowers.
This exemption is arbitrary and unfair, but the bank lobby contends it keeps mortgage rates lower. It’s just not true, as a new paper by Cleveland Fed economists Thomas J. Fitzpatrick IV and James B. Thomson makes clear. Family farms were exempted from bankruptcy until 1986, and bankers bloviated about the same imminent risk of unaffordable farm loans when Congress considered ending that status to prevent farm foreclosures.
When Congress did repeal the exemption, farm loans didn’t get any more expensive, and bankruptcy filings didn’t even increase very much. Instead, a flood of farmers entered into negotiations with banks to have their debt burden reduced. Banks took losses, but foreclosures were avoided. Society was better off, even if bank investors had to take a hit.
But instead, Treasury is actively encouraging troubled homeowners to subsidize giant banks. What’s worse, as Mike Konczal notes, they’re hoping to expand the program significantly.
There is a flip-side to the current HAMP nightmare, one that borrowers faced with mortgage problems should attend to closely and discuss with financial planners. In many cases, banks don’t actually want to foreclose quickly, because doing so entails taking losses right away, and most of them would rather drag those losses out over time. The accounting rules are so loose that banks can actually book phantom “income” on monthly payments that borrowers do not actually make. Some borrowers have been able to benefit from this situation by simply refusing to pay their mortgages. Since banks often want to delay repossessing the house in order to benefit from tricky accounting, borrowers can live rent-free in their homes for a year or more before the bank finally has to lower the hatchet. Of course, you won’t hear Treasury encouraging people to stop paying their mortgages. If too many people just stop paying, then banks are out a lot of money fast, sparking big, quick losses for banks — the exact situation HAMP is trying to avoid.
Borrowers who choose not to pay their mortgages don’t even have to feel guilty about it. Refusing to pay is actually modestly good for the economy, since instead of wasting their money on bank payments, borrowers have more cash to spend at other businesses, creating demand and encouraging job growth. By contrast, top-level Treasury officials who have enriched bankers on the backs of troubled borrowers should be looking for other lines of work.
Zach Carter is AlterNet’s economics editor. He is a fellow at Campaign for America’s Future, writes a weekly blog on the economy for the Media Consortium and is a frequent contributor to The Nation magazine.
OUR nation’s Congressional machinery was humming last week as legislators reconciled the differences between the labyrinthine financial reforms proposed by the Senate and the House and emerged early Friday morning with a voluminous new law in hand. They christened it the Dodd-Frank bill, after the heads of the Senate Banking and House Financial Services Committees who drove the process toward the finish line.
The bill is awash in so much minutiae that by late Friday its ultimate impact on the financial services industry was still unclear. Certainly, the bill, which the full Congress has yet to approve, is the most comprehensive in decades, touching hedge funds, private equity firms, derivatives and credit cards. But is it the “strong Wall Street reform bill,” that Christopher Dodd, the Connecticut Democrat, said it is?
For this law to be the groundbreaking remedy its architects claimed, it needed to do three things very well: protect consumers from abusive financial products, curb dangerous risk taking by institutions and cut big and interconnected financial entities down to size. So far, the report card is mixed.
On the final item, the bill fails completely. After President Obama signs it into law, the nation’s financial industry will still be dominated by a handful of institutions that are too large, too interconnected and too politically powerful to be allowed to go bankrupt if they make unwise decisions or make huge wrong-way bets.
Speaking of large and politically connected entities, Dodd-Frank does nothing about Fannie Mae and Freddie Mac, the $6.5 trillion mortgage finance behemoths that have been wards of the state for almost two years. That was apparently a bridge too far — not surprising, given the support that Mr. Dodd and Mr. Frank lent to Fannie and Freddie back in the good old days when the companies were growing their balance sheets to the bursting point.
So what does the bill do about abusive financial products and curbing financial firms’ appetites for excessive risk?
For consumers and individual investors, Dodd-Frank promises greater scrutiny on financial “innovations,” the products that line bankers’ pockets but can harm users. The creation of a Consumer Financial Protection Bureau within the Federal Reserve Board is intended to bring a much-needed consumer focus to a regulatory regime that was nowhere to be seen during the last 20 years.
It is good that the bill grants this bureau autonomy by assigning it separate financing and an independent director. But the structure of the bureau could have been stronger.
For example, the bill still lets the Office of the Comptroller of the Currency bar state consumer protections where no federal safeguards exist. This is a problem that was well known during the mortgage mania when the comptroller’s office beat back efforts by state authorities to curtail predatory lending.
And Dodd-Frank inexplicably exempts loans provided by auto dealers from the bureau’s oversight. This is as benighted as exempting loans underwritten by mortgage brokers.
Finally, the Financial Stability Oversight Council, the überregulator to be led by the Treasury secretary and made up of top financial regulators, can override the consumer protection bureau’s rules. If the council says a rule threatens the soundness or stability of the financial system, it can be revoked.
Given that financial regulators — and the comptroller’s office is not alone in this — often seem to think that threats to bank profitability can destabilize the financial system, the consumer protection bureau may have a tougher time doing its job than many suppose.
ONE part of the bill that will help consumers and investors is the section exempting high-quality mortgage loans from so-called risk retention requirements. These rules, intended to make mortgage originators more prudent in lending, force them to hold on to 5 percent of a mortgage security that they intend to sell to investors.
But Dodd-Frank sensibly removes high-quality mortgages — those made to creditworthy borrowers with low loan-to-value ratios — from the risk retention rule. Requiring that lenders keep a portion of these loans on their books would make loans more expensive for prudent borrowers; it would likely drive smaller lenders out of the business as well, causing further consolidation in an industry that is already dominated by a few powerful players.
“This goes a long way toward realigning incentives for good underwriting and risk retention where it needs to be retained,” said Jay Diamond, managing director at Annaly Capital Management. “With qualified mortgages, the risk retention is with the borrower who has skin in the game. It’s in the riskier mortgages, where the borrower doesn’t have as much at stake, that the originator should be keeping the risk.”
In the interests of curbing institutional risk-taking, Dodd-Frank rightly takes aim at derivatives and proprietary trading, in which banks make bets using their own money. On derivatives, the bill lets banks conduct trades for customers in interest rate swaps, foreign currency swaps, derivatives referencing gold and silver, and high-grade credit-default swaps. Banks will also be allowed to trade derivatives for themselves if hedging existing positions.
But trading in credit-default swaps referencing lower-grade securities, like subprime mortgages, will have to be run out of bank subsidiaries that are separately capitalized. These subsidiaries may have to raise capital from the parent company, diluting the bank’s existing shareholders.
Banks did win on the section of the bill restricting their investments in private equity firms and hedge funds to 3 percent of bank capital. That number is large enough so as not to be restrictive, and the bill lets banks continue to sponsor and organize such funds.
On proprietary trading, however, the bill gets tough on banks, said Ernest T. Patrikis, a partner at White & Case, by limiting their bets to United States Treasuries, government agency obligations and municipal issues. “Foreign exchange and gold and silver are out,” he said. “This is good for foreign banks if it applies to U.S. banks globally.”
That’s a big if. Even the Glass-Steagall legislation applied only domestically, he noted. Nevertheless, Mr. Patrikis concluded: “The bill is a win for consumers and bad for banks.”
Even so, last Friday, investors seemed to view the bill as positive for banks; an index of their stocks rose 2.7 percent on the day. That reaction is a bit of a mystery, given that higher costs, lower returns and capital raises lie ahead for financial institutions under Dodd-Frank.
Then again, maybe investors are already counting on the banks doing what they do best: figuring out ways around the new rules and restrictions.
A version of this article appeared in print on June 27, 2010, on page BU1 of the New York edition.
WASHINGTON -(Dow Jones)- Mortgage servicers on Thursday told U.S. House lawmakers that consecutive changes to the U.S. Treasury Department’s foreclosure prevention program have made it increasingly difficult to keep distressed borrowers in their homes.
Real-estate financial services consultant Edward Pinto described the Home Affordable Modification Program in two words: “numbing complexity.”
“At last count, HAMP had 800 requirements and servicers are expected to certify compliance,” he said. “With ever changing regulations, a constant need to re-evaluate past decisions in light of new regulations, and multiple appeals, it is no wonder that the HAMP pipeline became clogged through no substantial fault of servicers.”
HAMP was created to help financially strained borrowers avoid foreclosure, but the program’s lackluster performance has been mired in controversy, as some lawmakers are questioning whether the program should remain ongoing.
On Thursday, members of the House Oversight and Government Reform Committee held the second of two hearings to assess HAMP’s progress. This latest hearing primarily focused on what servicers are doing to ensure borrowers receive adequate relief.
Pinto, who served as Fannie Mae’s chief credit officer from 1987-1989, testified before the committee, along with J.P. Morgan Chase & Co.’s (JPM) head of home lending, David Lowman, and CitiMortgage Chief Executive Sanjiv Das. CitiMortgage is a unit of Citigroup Inc. (C). Bank of America (BAC) executive Barbara Desoer and Wells Fargo & Co. (WFC) executive Michael Heid were among others who testified.
According to Treasury’s most recent data, nearly one out of four homeowners offered help under the program have fallen out of HAMP. About 1.2 million trial modifications had been started under the plan and about 281,000 homeowners had been dropped by the end of April.
Many borrowers were expecting a mortgage modification when they ultimately didn’t qualify, Wells Fargo’s Heid said, adding that a lack of income documentation and failure to make all of the trial modification payments were the primary reasons some borrowers failed to receive a permanent modification.
Heid echoed the frustration expressed by Pinto and provided lawmakers with a “partial list” of more than 20 changes to the program since its inception in February 2009. “This has contributed to a level of complexity that has been difficult for customers to understand and for services to communicate and execute,” he said.
At the first hearing in March, Herbert Allison, Treasury’s assistant secretary for financial stability, acknowledged the program has had issues, including problems at some mortgage servicers, the difficulty for some borrowers to provide needed documentation, and “a process that has proven more complex administratively than originally conceived.”
Allison, responding to criticism from servicers, said Treasury took “swift and unprecedented action” in creating HAMP, which called for servicers to be recruited, policies and guidance to be developed; and that’s in addition to “mounting a massive effort to reach homeowners.”
Allison defended the administration’s actions, saying “there was little precedent on how to design a modification program of the scale required and limited data on which to base estimates of potential performance.” He added, “There was no existing infrastructure in the mortgage finance market or the government to carry out a national modification program at a loan level.”
Assessing HAMP’s impact on the industry, Allison said the program has changed the fundamentals of servicer duties from “collecting payments and processing foreclosures, to one that provides payment assistance to qualified homeowners.”
Servicers who testifed before lawmakers made several positive remarks about the program providing relief to many Americans. Still, they remain concerned that HAMP fails to address the financial circumstances and hardships of all borrowers.
The mortgage servicers told lawmakers that HAMP isn’t the only option, and each of them outlined their respective plans to assist borrowers with in-house initiatives that could be tailored to the needs of specific borrowers.
Pinto projected that the overall success of HAMP is likely to negatively impacted by high re-default rates. Pinto’s permanent mortgage re-default rate forecast is ten percentage points below the 50% that’s been projected by other mortgage sector observers.
Pinto based his projection on two statistics: most HAMP permanent modifications being made on loans with mortgage balances in excess of current home values and borrowers that received a permanent modification through May 2010 having a median total debt-to-income ratio of 64%.
“This leaves little money for food, clothing, taxes and other expenses,” Pinto said. “As a result, these borrowers are a worn-out furnace or roof replacement away from re-default.”
From left, Chester Higgins Jr./The New York Times; Andrew Harrer/Bloomberg News; Ramin Talaie for The New York Times
From left, Andrew Cuomo, the New York attorney general; Robert Khuzami, of the S.E.C.; and Preet Bharara, of the United States attorney’s office. The agencies are investigating Wall Street.
By NELSON D. SCHWARTZ and ERIC DASH
Published: May 13, 2010
It is starting to feel as if everyone on Wall Street is under investigation by someone for something.
News on Thursday that New York State prosecutors are examining whether eight banks hoodwinked credit ratings agencies opened yet another front in what is fast becoming the legal battle of a decade for the big names of finance.
Not since the conflicts at the center of Wall Street stock research were laid bare a decade ago, eventually resulting in a $1.4 billion industrywide settlement, have so many investigations swirled across the financial landscape.
Nearly two years after Washington rescued big banks with billions of taxpayer dollars, half a dozen government agencies are still trying, with mixed success, to peel back the layers of the collapse to determine who, if anyone, broke the rules.
The Securities and Exchange Commission, the Justice Department, the United States attorney’s office and more are examining how banks created, rated, sold and traded mortgage securities that turned out to be some of the worst investments ever devised.
Virtually all of the investigations, criminal as well as civil, are in their early stages, and investigators concede that their job is daunting. The S.E.C. has been examining major banks’ mortgage operations since last summer, but so far, it has filed a civil fraud claim against just one big player: Goldman Sachs. Goldman has vowed to fight.
But legal experts are already starting to handicap potential outcomes, not only for Goldman but for the broader industry as well. Many suggest that Wall Street banks may seek a global settlement akin to the 2002 agreement related to stock research. Indeed, Wall Street executives are already discussing among themselves what the broad contours of such a settlement might look like.
“I would be stunned if any of these cases go to trial,” said Frank Partnoy, a professor of law at the University of San Diego. “I think Wall Street needs to put this scandal behind it as quickly as possible and move on.”
As part of the 2002 settlement, 10 banks paid $1.4 billion total and pledged to change the way their analysts and investment bankers interacted to prevent conflicts of interest. This time, the price of any settlement would probably be higher and also come with a series of structural reforms.
David Boies, chairman of the law firm Boies, Schiller & Flexner, represented the government in its case against Microsoft and is now part of a federal challenge to California’s same-sex marriage ban. He said a settlement by banks might be painful but would ultimately be something Wall Street could live with. “The settlement may be bad for everyone, but not disastrous for anyone,” he said.
A settlement also would let the S.E.C. declare victory without having to bring a series of complex cases. The public, however, might never learn what really went wrong.
“The government doesn’t have the personnel to simultaneously prosecute several investment banks,” said John C. Coffee, a Columbia Law School professor.
The latest salvo came on Thursday from Andrew M. Cuomo, the New York attorney general. His office began an investigation into whether banks misled major ratings agencies to inflate the grades of subprime-linked investments.
Many Americans are probably already wondering why this has taken so long. The answer is that these cases are tricky, like the investments at the center of them.
But regulators also concede that they were reluctant to pursue banks aggressively until the financial industry stabilized. The S.E.C., for one, is now eager to prove that it is on its game after failing to spot the global Ponzi scheme orchestrated by Bernard L. Madoff, or head off the Wall Street excesses that nearly sank the entire economy.
The stakes are high for both sides. At a minimum, the failure to secure a civil verdict, or at least a mammoth settlement, would be another humiliation for regulators.
Wall Street wants to put this season of scandal behind it. That is particularly so given the debate over new financial regulations that is under way on Capitol Hill. The steady flow of new allegations could strengthen calls for tougher rules.
Even worse would be a criminal charge, which could put a firm out of business even if that firm were ultimately found not guilty, as was the case with the accounting giant Arthur Andersen after the fraud at Enron.
“No firm in the financial services field has the stomach for a criminal trial,” Mr. Coffee said.
Bankers have been reluctant until now to take their case to the public. But that is changing as Wall Street chieftains like Lloyd C. Blankfein of Goldman take to the airwaves and New York politicians warn that the city’s economy will be endangered by the attack on some of the city’s biggest employers and taxpayers.
“In New York, Wall Street is Main Street,” Gov. David A. Paterson has said. “You don’t hear anybody in New England complaining about clam chowder.”
There are broader political consequences as well. At the top, there is President Obama, who was backed by much of Wall Street in 2008. Many of those supporters now privately say they are disillusioned and frustrated by his attacks on their industry, which remains a vital source of campaign contributions for both parties.
Closer to home, the man who hopes to succeed Mr. Paterson, Mr. Cuomo, is painting himself as the new sheriff of Wall Street. Another attorney general, Eliot Spitzer, rode a series of Wall Street investigations to the governor’s mansion in 2006.
But ultimately, it is what Wall Street does best — making money — that is already on trial in the court of public opinion.
Put simply, the allegations against Wall Street were prompted by evidence that the firms may have devised and sold securities to investors without telling them they were simultaneously betting against them.
Wall Street firms typically play both sides of trades, whether to help buyers and sellers of everything from simple stocks to complicated derivatives complete their transactions, or to make proprietary bets on whether they would rise or fall.
These activities form half of the four-legged stool on which Wall Street’s profits and revenue rest, the others being advising on mergers and acquisitions and helping companies issue stocks, bonds and other securities.
“This case is a huge deal. It has the potential to be the mother of all Wall Street investigations,” said Mr. Partnoy of the University of San Diego. “The worry is that the government will go after dealings that Wall Street thought were insulated from review.”
Even some Wall Street executives concede that all the scrutiny makes proprietary trading a bit dubious. “The 20 guys in the room with the shades drawn are toast,” one senior executive of a major bank said.
First Posted: 05-16-10 08:00 PM | Updated: 05-17-10 05:46 PM
Arthur Delaney
arthur@huffingtonpost.com | HuffPost Reporting
Huge raucous crowds converged outside bank employees’ houses on Sunday afternoon to demand banks stop lobbying against Wall Street reform.
“Bank of America: bad for America!” shouted community leaders outside the house of Bank of America deputy general counsel Gregory Baer.
The Chicago-based grassroots organization National People’s Action, in coordination with the SEIU, bused more than 700 workers from 20 states to Baer’s neighborhood, one of the wealthiest corners of Washington. The action kicks off several days of protests targeting K Street for lobbyists’ role in financial reform.
Baer himself went unnoticed until a neighbor outed him. The mob booed loudly as he walked into his house. “I don’t have time for you,” he said, according to Trenda Kennedy of Springfield, Ill. who used a bullhorn to tell the crowd about her trouble getting a mortgage modification from Baer’s bank.
Kennedy told HuffPost she’d been making reduced monthly payments thanks to a trial modification via the Home Affordable Modification Program. She said that when the bank turned her down for a permanent mod, she was told she still owed all the money she’d been paying during the trial. She said she’s been notified of several sheriff’s sale dates but has somehow managed to keep her home.
“Every time I’m inches away from losing my house, by some miracle it’s been pushed off,” said Kennedy, who is a member of Illinois People’s Action.
Passersby and dogwalkers smiled at the sight of people gathered all over Baer’s lawn and blocking the road. Baer’s neighbor from across the street won little sympathy when he angrily yelled at protesters for waking up his two-year-old daughter. Kennedy was one of several people who used a bullhorn to tell personal bank horror stories.
Baer, formerly a senior official at the Treasury department, is a lawyer for the bank’s regulator and public policy legal group. Bank of America declined to comment.
“Bank of America came to the homes of everyday Americans when you spread predatory loans in neighborhoods across, the country, when you financed payday-lending storefronts, when your reckless behavior sent the economy to the brink of disaster, and when your bank-owned properties littered neighborhoods from coast to coast,” said a letter the group asked Baer to deliver to CEO Brian Moynihan. “You’ve created a historic mess and have been unreceptive to very polite, very formal and very consistent requests to fix the problems you helped create.”
The group also protested outside the house of Peter Scher, a lobbyist for JPMorgan Chase. Nobody answered the door.
UPDATE 5/17/10: Bank of America says Baer didn’t say “I don’t have time for you.”
“He did not make that comment to the crowd,” said a spokeswoman in an email. “Actually, Mr. Baer was away from his home and he returned home after his teenage son called him. Mr. Baer did say as he was walking up to his home that he needed to get inside his home to be with his son who was frightened and upset over what was going on outside.”
The bank also disputes the groups’ characterization of its lobbying and its efforts to help the economic recovery. “Bank of America supports financial regulatory reform, and has noted this publicly many times. We are committed to supporting and stimulating the economic recovery in our communities,” the spokeswoman wrote. “We are also vigorously modifying home loans and credit card balances for consumer and business customers in addition to eliminating debit card overdraft fees — steps that are necessary to help customers overcome financial challenges and succeed in this economy. Please visit [this page] for more information.”
Here’s our attempt to lay out exactly what’s known about which banks are being investigated by whom and for what. We’re going to keep updating this page, so please send usstories or details we’ve missed. Related:Covering the Bank Investigations: A Cautionary Tale
What has been reported
What the bank has said
Citigroup
Citing “a person familiar with the matter,” The Wall Street Journal has reported that Citigroup is under “early-stage criminal scrutiny” by the Department of Justice. Also citing unnamed sources, Fox Business reported on May 12 that the SEC has an active civil investigation into Citigroup and has subpoenaed the firm, but has not issued any Wells notices. A report on May 12th by the Journal cited unnamed sources saying that the Department of Justice is scrutinizing a few CDO deals that Morgan Stanley bet against–but which were underwritten by Citigroup and UBS. Neither the SEC nor the Justice Department have confirmed these reports.
Citing two anonymous sources, The New York Times has reported that New York Attorney General Andrew Cuomo is investigating eight banks to determine whether they misled rating agencies in order to get higher ratings for their mortgage-related products; Citigroup has been named as one of the banks. Subpoenas were issued on May 12, according to the Times and the Dow Jones Newswires, both of which relied on anonymous sourcing for their reports.
Citigroup has declined to comment to us and other outlets.
Credit Agricole
Credit Agricole has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating separately.
Credit Agricole did not immediately respond to the Times’ request for comment and has not yet responded to ours.
Credit Suisse
Credit Suisse has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating.
Credit Suisse declined to comment to the Times about the New York attorney general’s investigation.
Deutsche Bank
Citing “a person familiar with the matter,” The Wall Street Journal has reported that Deutsche Bank is under “early-stage criminal scrutiny” by the Department of Justice. Also citing unnamed sources, Fox Business reported on May 12 that the SEC has an active civil investigation into Deutsche and has subpoenaed the firm, but has not issued any Wells notices. Neither agency has confirmed these reports.
Deutsche Bank has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating separately.
Deutsche Bank declined to comment to Fox, the Journal, and the Times about possible investigations.
Goldman Sachs
The SEC has brought a civil fraud lawsuit against Goldman, alleging that the investment bank made “materially misleading statements and omissions” when it allowed a hedge fund to help create and bet against a CDO, called Abacus, without disclosing the hedge fund’s role to investors.
The Wall Street Journal, citing “people familiar with the probe,” reported in April that the Justice Department has been conducting a criminal investigation into Goldman’s CDO dealings following a referral from the SEC. Neither agency has confirmed this, but the AP, citing another unnamed source, has reported the same thing. Since then, many news organizations–including the The New York Times, ABC News and the Washington Post–have also reported on the criminal probe, citing unnamed sources. No charges have been brought.
Goldman Sachs has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating separately.
After the reports of a criminal investigation, a Goldman Sachs spokesman declined to confirm that the bank had been contacted by the DOJ but also told several news outlets that “given the recent focus on the firm, we’re not surprised by the report of an inquiry. We would cooperate fully with any request for information.”
The bank has declined to comment to us on the New York attorney general’s investigation.
JP Morgan Chase
Citing “a person familiar with the matter,” The Wall Street Journal has also reported that JPMorgan Chase has received civil subpoenas from the SEC and is under “early-stage criminal scrutiny” by the Department of Justice. Neither the SEC nor the Justice Department has confirmed these reports.
A JPMorgan spokesman told the Journal that the bank “hasn’t been contacted” by federal prosecutors and isn’t aware of a criminal investigation.
Merrill Lynch (now part of Bank of America)
Merrill has not been named in any SEC investigations. But as we pointed out, a lawsuit brought by a Dutch bank asserts that Merrill Lynch did a CDO deal that was “precisely” like Goldman’s. The SEC has declined to comment on whether it is investigating the deal.
Merrill Lynch has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating.
Merrill has said its CDO deal was not like Goldman’s, calling Goldman’s Abacus deal an “entirely different transaction.”
The bank did not immediately return the Times’ request for comment about the investigation by Coumo, but when we called and asked, a spokesman from Bank of America, which merged with Merrill, said, “We are cooperating with the attorney general’s office on this matter.”
Morgan Stanley
Citing “people familiar with the matter,” The Wall Street Journal reported on May 12 that the Justice Department has been conducting a criminal investigation into Morgan Stanley’s CDO dealings, including its role in helping design and betting against two sets of CDOs from 2006 known as Jackson and Buchanan. The Justice Department declined to comment. No charges have been brought, and according to the Journal, the probe is “at a preliminary stage.” A Morgan Stanley spokeswoman said the bank had “no knowledge of a Justice Department investigation into these transactions.” The Journal reported that the SEC has subpoenaed Morgan Stanley on several occasions, but the bank says it has received no Wells notices, which would indicate pending SEC charges.
Morgan Stanley has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating.
A Morgan Stanley spokeswoman said on May 12that the firm has “not been contacted by the Justice Department about the transactions being raised by The Wall Street Journal, and we have no knowledge of a Justice Department investigation into these transactions.”
The investment bank declined to comment to the Times about the Coumo’s investigation.
UBS
Citing “a person familiar with the matter,” The Wall Street Journal reported that UBS has received civil subpoenas from the SEC and is under “early-stage criminal scrutiny” by the Department of Justice. In a report on May 12, the Journal reported that the Justice Department is scrutinizing a few CDO deals that Morgan Stanley helped design and bet against–but which were marketed by Citigroup and UBS. Neither the SEC nor the Justice Department has confirmed these reports. The firm has not disclosed that it has gotten any Wells notices.
UBS has also been named as one of the banks New York Attorney General Andrew Cuomo is investigating.
A UBS spokesman has declined to comment on any of the investigations.
NEW YORK — The New York attorney general has launched an investigation into eight banks to determine whether they misled ratings agencies about mortgage securities, according to a person familiar with the investigation.
Attorney General Andrew Cuomo is trying to figure out if banks provided the agencies with false information in order to get better ratings on the risky securities, said the person, who spoke on condition of anonymity because the investigation has not been made public.
Cuomo’s office is investigating Goldman Sachs Group Inc., Morgan Stanley, UBS AG, Citigroup Inc., Credit Suisse, Deutsche Bank, Credit Agricole and Merrill Lynch, which is now part of Bank of America Corp.
Three frustrated homeowners in New York City are suing JPMorgan Chase over the bank’s failure to permanently modify their mortgages under the Obama administration’s plan to help homeowners avoid foreclosure.
The complaint, filed in federal court in New York, says the plaintiffs, who are represented by attorneys with the nonprofit Urban Justice Center, relied on promises by Chase that they could have their loans modified if they made reduced payments per the Home Affordable Modification Program (HAMP). Despite making payments on time, they’ve received foreclosure threats but no modifications.
One of the plaintiffs, Alex Lam, a 35-year-old restaurant manager, alleges Chase told him to actually stop making payments in order to be eligible for help. In early 2009, Lam contacted Washington Mutual (since absorbed by Chase) about a modification after his adjustable-rate mortgage blew up in his face. He was told he didn’t qualify for help because he was current on his payments.
“Mr. Lam was specifically told that if he stopped making payments for several months, he could be considered for a modification,” the says the complaint.
The next big surprise came in December, when, after making trial payments of $1,568 for the previous six months, Lam was told he owed the bank $12,000. When he protested, Chase relented and told Lam to apply once again for a mod, this time under HAMP. He made his payments until March, when Chase told him he’d failed HAMP’s opaque “Net Present Value” test, meaning the bank determined the investors who owned the loan would make more money via foreclosure than modification. Lam alleges Chase used bogus inputs for the NPV test and that Chase refuses to show its work.
Lam called the situation “very upsetting” in an interview with HuffPost. “I trusted them because they’re a big bank. I did whatever they asked me to.”
HuffPost asked Lam what he wanted from suing Chase.
“Just to get a modification, that’s all I’m asking for,” he said. “Since day one, that’s all I’m asking for.”
HAMP lawsuits have been flying. Last week a 91-year-old veteran of three wars named Peter Ruplenas sued Bank of America over mortgage mod malfeasance in West Virginia.
In April, Faiz and Khadija Jahani of California sued Chase for reasons similar to Lam’s — the bank told them to stop making payments to qualify for help, then foreclosed. A similar case is brewing in Seattle.
Homeowners are supposed to be eligible for HAMP mods if they’re having trouble making monthly payments, owe less than $729,750, took out the loan before January 2009, and if their payment on their first mortgage is more than 31 percent of their income. In theory, if homeowners make reduced payments (typically $500 cheaper) for three months, they are put in “permanent” modifications that last for five years.
But the banks voluntarily participating in HAMP have given permanent mods to just 230,000 homeowners in the program’s first year, a far cry from the three to four million officials said HAMP would help. Meanwhile, frustrated homeowners’ stories of lost paperwork, dishonesty, and incompetence by banks are piling up.
A Chase spokesman declined to comment on the lawsuit.
The financial crisis has spawned hundreds of criminal prosecutions for alleged fraud. Yet so far, defendants have been mostly minor players such as real-estate agents, mortgage brokers, borrowers and a few low-level bank employees. No senior executives at large financial institutions face criminal charges.
Thats in stark contrast to prosecutions during the savings and loan scandal two decades ago, when the government’s strategy targeted and snagged some of banking’s most powerful players. The approach back then succeeded in sending scores of S&L executives to prison, as well as junk-bond king Michael Milken and business tycoon Charles Keating Jr.
One explanation for the difference may be that key bank regulators — who did the detective work during the S&L crisis and sent more than 1,000 criminal referrals to prosecutors — have this time left reporting fraud up to the banks themselves.
Spokesmen for two chief regulators, the Comptroller of the Currency and the Office of Thrift Supervision, say that they have not sent prosecutors a single case for criminal prosecution.
An OTS spokesman said the agency, much like the banks themselves, does not see much evidence of criminal fraud inside the financial institutions. The spokesman, Bill Ruberry, citing the agency’s enforcement director, said, “There may be some isolated cases, but certainly there’s no widespread patterns.”
That surprises William K. Black, a former OTS official who helped coordinate criminal investigations during the S&L crisis.
“Dear God,” Black said when told bank regulators haven’t made any criminal referrals. “Not a single one?”
Black sees many signs the the government is less aggressive than during the S&L era — and could result in more bad behavior.
“This crisis was not bad luck,” he said. “It was done to us. When you bring those convictions, you hope that at least for a while to deter.”
Banks have reported massive amounts of fraud to the Treasury Department but have not held themselves — or their top executives — responsible, instead pinning blame on borrowers, independent mortgage brokers, and others.
That may account for the dearth of prosections against big fry. For instance, in California, among states where the mortgage meltdown hit hardest, the Huffington Post Investigative Fund identified 170 mortgage fraud prosecutions in federal courts. Only two are against employees of a regulated lender.
An Investigative Fund analysis shows that two-thirds of the 170 prosecutions are against mortgage brokers, real-estate professionals or borrowers — the same groups blamed by the banks when they report suspicious activities to regulators.
Besides the absence of criminal referrals, other plausible factors for the lack of major prosecutions may include a skittishness among prosecutors about filing cases they could have trouble winning, and a severe decline in investigative resources. The FBI dramatically shifted resources away from white-collar crime after the 2001 terrorist attacks.
To be sure, there are also notable differences between the S&L and current financial crisis, in the behavior of lenders during both periods, and between civil allegations of fraud and proving that someone committed a crime — all of which could account for the lack of big prosecutions.
But interviews with several law enforcement authorities suggest another explanation: A lack of active assistance to prosecutors by bank regulators who played key roles during the S&L crackdown. Those regulators sent detailed reports to prosecutors of known and suspicious criminal activity.
“Only the regulators can make a lot of these cases,” Black said. “The FBI can make a few, but the regulators are the ones that understand the industry.”
Under intense political pressure in the late 1980s, the Justice Department and thrift regulators developed a strategy to thoroughly investigate failed S&Ls for evidence of fraud and to focus their resources on the highest ranking executives.
In the early years, between 1987 and 1989, there were more than 300 prosecutions. Some bank executives were already behind bars. In 1989, Woody Lemons, chairman of Vernon Savings and Loan in Texas, was sentenced to 30 years.
In June 1990, then-OTS director Timothy Ryan told Congress that his agency had established criminal-referral units in each of 12 district offices. In addition, more than 30 OTS employees were assigned as full-time agents of grand juries or assistant US attorneys to help prosecutions. And the agency prioritized prosecutions to a Top 100 list, targeting senior S&L executives and directors.
While data on criminal referrals during the S&L crisis is spotty, the Government Accountability Office reported that in the first ten months of 1992 alone — a random snapshot — financial regulators sent the Justice Department more than 1,000 cases for criminal prosecution.
One study showed that 35 percent of criminal referrals in Texas — ground zero for the S&L problems — were against officers and directors.
This time, prosecutors are relying more heavily on banks to report suspicious activity to the Treasury Department. Banks are required to report known or suspected criminal violations, including fraud, on Suspicious Activity Reports designed for the purpose. In effect, the reports, which can be many pages in length, provide substantive leads for criminal investigations.
Black scoffs at the strategy of leaving it to banks to ferret out all the fraud. “Institutions will not make criminal referrals against the people who control the institutions,” said Black.
A white-collar criminologist and law professor at the University of Missouri-Kansas City, he argues that there’s ample evidence of fraud. Insiders working for lenders openly referred to loans they made without proof of income as “liar loans.” Many banks actively sought inflated appraisals in their rush to make as many loans as possible. As previously reported by the Investigative Fund, such lending practices contributed to the demise of Washington Mutual.
Not everyone agrees that such a case can be successful. Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. An investor in loans who documents fraud can force a bank to buy the loan back. But convincing a jury that executives intended to make fraudulent loans, and thus should be held criminally responsible, may be too difficult of a hurdle for prosecutors.
“It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said.
So far, only sporadic news reports suggest that the Justice Department has ongoing criminal investigations against major banks such as Washington Mutual and Countrywide, as well as investment bank Goldman Sachs.
Fewer Cops on the Beat
The Justice Department, in response to written questions from the Investigative Fund, acknowledged the absence of criminal referrals from financial regulators. Months into the financial crisis, a new Financial Fraud Enforcement Task Force, formed by President Obama last fall, was trying to work out communication problems between Justice and the regulatory agencies, according to the head of the task force, Robb Adkins. Adkins has said that criminal referrals from regulators have been “too often the exception to the rule.”
At a Congressional hearing in December, Assistant Attorney General Lanny Breuer was asked why there have been no criminal cases brought yet against CEOs. “Don’t for a moment think [these cases] aren’t being investigated,” Breuer replied. “They are complicated cases. It took a long time in hatching them and developing them. But they will be brought.”
The system that tracks Suspicious Activity Reports, or SARs, detected a dramatic increase in mortgage fraud starting in 2003, when reports of mortgage fraud nearly doubled within a year from 5,400 to 9,500. By 2007, the number had exploded to 53,000. During those same years, many mortgage lenders dramatically lowered their lending standards. Banks often required no proof of income. Borrowers could even get loans without be able to repay them.
Yet in their reports, banks overwhelmingly have blamed others for fraud. Whenever a borrower’s income was wrong on a loan application, the banks fingered borrowers 87 percent of the time and independent mortgage brokers 64 percent of the time, according to a 2006 Treasury analysis of the SARs. But the bank’s own employees were almost never blamed — only about four times in every 1,000 reports.
That might explain why so few prosecutions have targeted bank insiders.
Another reason for fewer prosecutions against bank employees is that the Federal Bureau of Investigation has far fewer agents working on the current crisis. Deputy Director John Pistole testified before Congress last year that the bureau had 1,000 people working on the S&L crisis at its height. That compares to about 240 agents working on mortgage fraud cases last year.
The FBI dramatically shifted its resources away from white-collar crime and to terrorism after the Sept. 11 attacks.
“We just didn’t have the cops on the beat” during the recent crisis, said Sen. Ted Kaufman, the Delaware Democrat who conducted a hearing on the lack of criminal prosecutions. “I was around during the savings and loan crisis [as a Congressional aide] and we had a lot more folks working it when it went down.”
Even with additional funding from Congress, which Kaufman helped push through, the FBI is budgeted to have 377 people working mortgage fraud cases this year, about a third as many as during the S&L investigations.
Charges Harder to Prove?
Charges in the recent banking crisis may be harder to prove, said Robert H. Tillman, who teaches at St. John’s University and who analyzed data about S&L prosecutions. Savings and loan executives who were convicted often personally approved large commercial loans for projects doomed to fail. Some would use federally insured deposits to pay themselves excessive salaries or to lend money to their own real estate projects. A few even took kickbacks.
This time, lending executives may have encouraged the making of bad loans, but they generally did not personally approve the loans, Tillman said. They didn’t send emails telling the troops to make fraudulent loans but paid big commissions to loan offers who made risky loans. Then the executives were able to reap huge bonuses for making the company look so profitable.
So far, the biggest cases have been civil lawsuits brought by the Securities and Exchange Commission, including most recently a highly publicized securities fraud case against Goldman Sachs and one of its vice presidents, Fabrice P. Tourre. News reports suggest that a referral from the SEC’s enforcement division to the Justice Department has led to a criminal inquiry.
Typically, federal authorities deal with massive financial scandals by picking a few cases they are confident they can win, said Henry Pontell, an expert on fraud at the University of California — Irvine.
This time, the administration may have been more focused on saving failing banks — and an entire financial system — than in prosecuting bank executives, Pontell said. Giving billions in bailout dollars to executives who encouraged fraudulent practices not only could complicate a case, it could prove embarrasing, he added.
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Yes, banks are ramping up loan modifications and ramping up short sales and ramping up deeds in lieu of foreclosure, but the plain fact is that as the systems are oiled, the loans are moving through faster, and the pig in the python is showing its face.
We won’t get the numbers until next week, but sources tell me they will likely be a new monthly record.
Tens of thousands of loans have been hitting the “notice of trustee sale” bin, and that means they are coming to foreclosure.
The actual foreclosure numbers have been down recently because of all the modification efforts, but as we see more loans not qualifying for modifications and more loans defaulting on modifications, the foreclosure numbers rise.
And this is just the beginning.
All the uniform policies and practices that the government has put in place, whether on modifications or short sales, will quicken the process. Foreclosures, which can now take 2 years plus to complete, will happen in less than a year, start to finish.
Clearly the Administration knew of the impending rise in foreclosures, as it revamped its modification, refinance and short sale programs last month, increasing incentives all around and pushing for principal write down. The big question of course is how will the new wave affect home prices, especially in the hardest hit markets.
I pushed Fannie Mae’s chief economist Doug Duncan on this in an interview today on the mortgage giant’s new National Housing Survey. He cited the over 5 million mortgages out there that are seriously delinquent, and said that while the 30-day delinquencies seem to have peaked, “certainly some of the foreclosure backlogs are working their way through the system at this point.” He also said home prices will dip again before hitting bottom later this year.
Yesterday we saw a big bump in the Realtors’ Pending Home Sales Index, but my sources tell me that was largely driven by contracts on short sales, which have a far lower rate of closing than regular sale contracts. Estimates are that only about 35 percent of short sale contracts go to closing versus 80 percent of conventional sale contracts.
The home buyer tax credit deadline is 24 days away, and that is pushing some of the numbers up, but not as much as some had hoped.
Credit Suisse’s Dan Oppenheim noted an uptick in buyer traffic in March thanks to the credit, but his survey of real estate agents found, “buyers remain hesitant due to employment concerns. Most of the demand occurred at the low-end of the market.”
Continue reading …iSTOCKANALYST
Huge raucous crowds converged outside bank employees’ houses on Sunday afternoon to demand banks stop lobbying against Wall Street reform.
Thats in stark contrast to prosecutions during the savings and loan scandal two decades ago, when the government’s strategy targeted and snagged some of banking’s most powerful players. The approach back then succeeded in sending scores of S&L executives to prison, as well as junk-bond king Michael Milken and business tycoon Charles Keating Jr.
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