If you have been following the news you must have noticed a few things in connection with what the press euphemistically refers to as “mortgage related claims.” The first is that estimates of losses from those claims (which by the way are claims of FRAUD) are growing monthly. Standard and Poor’s now has estimated over $100 billion in future payouts for settlements and judgments plus of course the cost of defending suits from all the people, companies, institutions and government agencies who claim that the investment banks committed fraud — not just some breach of contract or breach of fiduciary duties. The current estimates are double the payouts that have already occurred, and using past history as the best indicator of future events, both the payouts and the estimates will continue to rise.
The reason is simple — claimants are filing meritorious claims that result in jury verdicts of fraud (Countrywide) and settlements that keep rising. The fact that the claims are based in fraud is especially dangerous for the banks’ position because of exposure to punitive, treble, or exemplary damages. I can easily see myself or some other lawyer in closing argument to a jury. The argument would be that tens of billions in payouts did not stop the investment bank from continuing their illicit behavior; thus the jury must come up with a figure that will put a stop to the fraud. When homeowners start suing investment banks for fraud, instead of merely defending Foreclosures, the risk to investment banks increases exponentially.
So far the FRAUD claims against investment banks (broker-dealers) has come from pension funds and other investors, insurers like AIG and AMBAC, agencies like Fannie, Freddie and NHMA and others at the top levels of the world of finance. THEY ALLEGE FRAUD. The details of the fraud break down into two categories.
The first category is that the investors money was used for the benefit of the investment bank instead of the investors who bought mortgage bonds. The allegations here are that the mortgage loans created under the false representations of securitizations are unenforceable by the investors. What they are saying is that the banks executed a plan different from the one they promised investors who were at all times the real lenders. Specifically, the Banks left the investors, insurers and others sitting with empty pieces of paper (mortgage bonds etc) with fictional paper that was unenforceable against the borrowers. THINK ABOUT THAT. The lenders are claiming the loan papers are unenforceable. That leaves the intermediaries pushing ahead with foreclosure on unenforceable paper as though the investment banks had done the lending instead of the investors.
The second category is related to the first. The allegation is that the investors’ money was “mismanaged” FRAUDULENTLY (not negligently, or in breach of contract or breach of fiduciary duties). Specifically, the investment banks diverted the money from the intended use (funding trusts of asset pools consisting of mortgage loans) ; and that even more specifically that the trusts were never funded with the investor money. The investors thought they were buying mortgage bonds issued by the trust but in fact they were depositing money with the investment bank selling the mortgage bonds. The trust was ignored. The trust was never funded, the so-called trustee never had a trust account and the trust never had the capital to originate or buy loans. THINK ABOUT THAT.
So the conclusion that is inescapable, which is why we are seeing huge settlements and a verdict from a jury, is that the lenders themselves are saying the loan documents are fabricated unenforceable documents, notwithstanding the fact that so many Foreclosures have occurred. It seems that the judiciary and lawyers representing homeowners have not caught up with investors and insurers who have performed their own forensic audits, and arrived at the conclusion that although they gave money for loans, they didn’t get any account receivable from anyone who could pay, or anyone who would pay. The investor lenders received promises from the investment banks, but the investors’ agents, the investment banks, intentionally diverted the loan papers to themselves rather than the investor lenders.
The simple way of saying this is that the investors or the trusts should have been on the note and mortgage either at origination or acquisition in a real transaction. The fictitious claims of the trusts’ ownership of loans is a hoax based upon the fact that the trust never received the investor money with which it could fund the origination or acquisition of loans — and even if it had, the loan paperwork was diverted from naming the trust on the note and mortgage to some strawman for the investment banks’ own “proprietary trading account.”
The result was a huge infusion of capital into the market that produced a market inversion that had never been seen before. The prices of homes, as reported by pretender lender (strawman) appraisals, rocketed up in a spike that dwarfed any previous move in home prices since records started (in the 1880’s). The Case Schiller graph looks like someone’s hand slipped. While prices of homes and prices of loans were rocketing higher and higher, the VALUE of the homes were DECREASING both because of loss in median income and because the crash was building — the house of cards depicted on 60 Minutes had to fall. Borrowers were defrauded by the representation that they had a contract in which the values used were reliable when in fact appraisals were knowingly inflated to seduce borrowers into signing loan documents that failed to name the actual lender and whose terms differed from the terms that the lender was offering — or thought it was lending.
It is axiomatic in the law that a wrongdoer should not be permitted to profit from their wrongdoing. The benefit of the bargain in the contract the homeowners thought they agreed to, was never present and the investment banks knew it — they were betting on the failure of the deals at the same time they were selling bogus mortgage bonds to investors and bogus loan documents to borrowers.
So I predict that the largest claims are yet to come —- only this time with borrowers joining in the claims against the investment banks and doing what I suggested dozens of times since 2007 — joining forces with the investors and comparing notes, pardon the pun. The ultimate number of payouts is impossible to predict but the potential liability is obviously in the trillions of dollars.
Top U.S. banks face further mortgage payouts of up to $104B • Eight leading U.S. banks could have to pay a further $56.5-104B to settle mortgage-related claims, S&P reckons. • However, the largest banks have estimated capital buffers of $155B combined, which would be enough to absorb the losses. • S&P doesn’t expect the legal liabilities to hurt the banks’ ratings. • Banks: JPM, BAC, C, MS, WFC, GS • ETFs: FAS, XLF, FAZ, UYG, VFH, IYF, SEF, IYG, FXO, PFI, KBWB, RWW, FINU, RYF, PSCF, FNCL, FINZ
Filed under: foreclosure