Those VA Loans and Ginny Mae Loans Were ALso Securitized

Probably the most misunderstood aspect of the securitization process is that the banks are able to claim there was no securitization when in fact there was. This is especially true in GSE’s like Fannie, Freddie, Ginny and the VA. When you are researching loans you hit a brick wall when you get to the GSE. And there are terms thrown around like smoke and mirrors that this was or this is a Fannie loan and that therefore the loan was not securitized. This is wrong.

None of the GSE’s are lenders. They don’t loan money to anyone. So if the allegation is made that this was a Fannie or Freddie or VA loan from the start, then the originator was not the lender and neither was Fannie or Freddie or any other GSE. These are strictly guarantee agencies who don’t part with a nickle until the loan is foreclosed and the home is sold. THEN they guarantee up a certain amount and pay it out, drawing from the US Treasury as necessary.

All the loans that were considered GSE loans from the start constitute an admission that the loan was securitized or subjected to claims of securitization. Fannie and Freddie for example have a Master Trustee agreement in which they do nothing but they serve as the Master Trustee for asset-backed pools that have a regular trustee (who also does nothing). These pools are REMIC trusts.

As you can see from the attached files,if you will read them carefully, you will see that the custom and practice of the GSE was, if it guaranteed the loan, to serve as either the conduit or the Master trustee for an asset backed pool where the trust beneficiaries funded the origination or acquisition of the loan. This is a factor that did not get adequately covered in Shack’s excellent opinion recently in New York where he chastised Chase and others for playing with the ownership of the loan to suit the need for foreclosure instead of presenting facts that would protect the people who are actually taking a loss.

see Pooled_Loans_and_Securitizations_032309 and VA-FinancialPolicyVolumeVIChapter06

 

Another Small Fry Thrown Under the Bus

Another Small Fry Thrown Under the Bus

Editor’s Comment:

It is a familiar playbook in drug enforcement, police corruption, and now corruption arising out of the millions of faked, fraudulent Foreclosures — find a guy low down in the chain and throw him under the bus. This guy was making millions on False Inspections. But the government is complicit in an active way in public settlements like the Missouri settlement announced yesterday when they forgive and condone the continuing fraud arising from those who made False Appraisal Reports, false loan documents, false loan assignments, false Notices of Default, false monthly statements on loans that were paid in full several times over.

And the system will continue until we, the people stop it. We are divided politically by concept, polarized by slogans when we agree on virtually all of the details that our current elected officials refuse to acknowledge. It is destroying the social and business fabric of our country. But as long as politicians can be bought without going to prison, the Banks will get to keep both the money advanced by investors for loans and the homes foreclosed after the loan balance had been
Paid in full.

As long as we focus on our differences — even where there are none — they keep us from discovering our similarities and the pension funds, savings and 401k funds, the city, county and state operating funds will be cut slashing budgets in a country that can afford it except that we let the banks hold the purse-strings of power. It is too late to assess blame individually. It is time for a clean sweep.

Florida Man Pleads Guilty to Fabricating Thousands of Foreclosure Inspection Reports, Faces Up to 20 Years in Prison
http://4closurefraud.org/2012/09/19/florida-man-pleads-guilty-to-fabricating-thousands-of-foreclosure-inspection-reports-faces-up-to-20-years-in-prison/


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Countrywide settlement pays fraction to investors – Shell Game Continues

EDITOR’S NOTE: The shell game continues. While the media picks up stories about “settlements” giving rise to the presumption that Countrywide Home Loans and Bank of America and the rest of the securitization players committed various violations of statutes, duties, rules and regulations, the main point gets lost. Where is this money going and WHY? What is the tacit or express admission in paying that money and what effect does it have on the average homeowner sitting with a loan whose obligation is being paid in these settlements?

Think about it. If Bank of America, which now owns Countrywide, is paying “fractions” to investors who purchased mortgage bonds then who is it that owns the underlying mortgages and loans? Did Bank of America pay the investors do it under a reservation of rights (subrogation) to enforce the underlying loans? If not, then why are they foreclosing? All evidence is to the contrary. There is no subrogation under these purchases, insurance, credit default swaps or any other contract — not that I ever saw and not that my sources in the industry tell me was ever even contemplated much less executed. The same holds true for all those bonds the Federal Reserve is holding.

If Bank of America is paying “fractions” to investors who purchased mortgage bonds, why was it a fraction? Is it because the value of the bond was much lower than the price paid by the investor? Is it just a convenient settlement? Or is it because the investors have also received funds from other sources?

This is what I am referring to when I address “factual constipation.” How are these payments being allocated? Did the owners of the bonds actually have any definable interest in the underlying mortgage loans? If they did, why are these payments not being allocated to the obligations or payments due under those underlying mortgage loans? If they didn’t, why did they get paid anything? How will we ever know without getting a full accounting from all the parties that claim some stake or ownership interest or receivable interest in me is underlying mortgage loans?

It is black letter law as well as common law dating back centuries that nobody can collect the same debt more than once. If they do collect more than once there is a clear right of action by the borrower to collect the excess payment through a lawsuit for unjust enrichment, breach of contract and other causes of action. Here we have an intentional act designed to collect the same debt multiple times. In my opinion this does not merely indicate the presence of an action for fraud, it clearly shows an interstate pattern of racketeering that at one time in our history had the Department of Justice and the FBI busy putting people in jail.

Only in America where the news has turned into an entertainment blitz used by those with the most power and the most money to get their message across, even if it is a total lie. Somehow many if not most people have the impression that the borrowers and the securitized mortgages executed between 2001 and 2009 are not entitled to the relief that any other debtor is entitled to receive––that is the obligation has been reduced for any reason, the borrowers should get credit and if any party receives money in excess of the net amount due after credits, the creditor becomes the debtor owing money to the former borrower.

The bullet point that is being used to distort the perception of our citizens and policymakers is that these borrowers should not get a  “free house.” Without getting a full accounting from all parties that advanced funds to and from the original investors who purchased mortgage bonds or collateralized debt obligations and related hedge products, there is no way of knowing the amount of the credit which is due to the borrower. Yes, it is possible that the amount received by the various intermediaries in the securitization chain exceeded the original obligation due from the borrower.

In that case, the borrower owes nothing to the originating lender or the successors to that lender. But if there is still a class of investor or institution that can prove a loss resulting from the nonpayment of the obligation by the borrower (as opposed to non-payment from other parties in the securitization chain) then the law allows that party to recover the loss from those that caused it.  That probably includes the borrower, which means that we are not seeking a free house, we are seeking a truthful accounting.

BUT the fact that this obligation theoretically exists does not mean and never did mean under any legal decision in existence that the obligation should be paid to anybody who claims it. By all substantive and procedural law, the obligation is payable to one who proves the obligation and to one who proves it is owed to them and nobody else.

Yet in the view of many judges the challenge by the borrower is viewed as a delay tactic or an attempt to use technical deficiencies to a gain a free house on a lawn that the borrower sought but could not pay.  No doubt this is true in some cases. But in nearly all the cases, armies of salespeople using names like “loan expert” pounded on doors and rang the phones of people who had no thought of borrowing money on homes, in many cases, that were debt-free and had been in the family for generations. Now many of those homes are bank owned property.

The simple question that needs to be posed to anyone who looks at the borrower as anything other than a victim is which is more likely? Did the owners of 20 million homes enter into a conspiracy to defraud the financial system, half society and our taxpayers? Did these people have the sophistication, education, knowledge, experience or training to pull off such a caper? Or is it more likely that the Wall Street titans stepped over the line and instead of increasing liquidity for the benefit of consumers and small businesses, used their position to deplete the resources of unsuspecting citizens, pension funds, financial institutions and governmental units from the top federal levels down to the smallest local geographical areas?

Countrywide settlement pays fraction to investors

By ALAN ZIBEL (AP) – Aug 3, 2010

WASHINGTON — Former shareholders of fallen mortgage giant Countrywide Financial Corp. are in line to recoup a fraction of their investments now that a Los Angeles judge has approved a settlement worth more than $600 million settlement.

The payoff doesn’t come close to compensating for the money lost by investors. But it could prompt more lenders to settle legal disputes at the center of the housing bust.

Bank of America, which bought Countrywide two years ago, agreed to pay $600 million to end a class-action case filed against the company. KPMG, Countrywide’s accounting firm, will pay $24 million.

Several New York pension funds who served as lead plaintiffs alleged that Countrywide hid how risky its business had become during the housing market’s boom years. Calabasas, Calif.-based Countrywide was once the nation’s largest mortgage lender.

The agreement stands to return about 40 cents per share of Countrywide’s common stock, before legal fees and expenses. Consider that the stock peaked at $45 a share in February 2007, before the financial crisis. So an investor who held 100 shares could bank on receiving $40 for an investment that was once worth $4,500.

Shareholders did receive 0.1822 shares of Bank of America’s stock for each share of Countrywide they owned when Bank of America acquired Countrywide. That worked out to about one share for every 5.5 shares of Countrywide stock. Shares of Bank of America closed at $14.34 on Tuesday. So that same 100 shares of Countrywide would be worth about $261 today in Bank of America stock.

Add the $40 from the settlement and those shares are now worth little more than $300.

Lawyers for the pension funds are requesting $56 million, or 4 cents per share, for fees and other costs.

Investors “will be compensated for a significant portion of the legal damages that they suffered as a result of what we believe was a violation of the securities laws,” said Joel Bernstein, a lawyer for the pension funds. “They won’t be compensated for every penny of that.”

Bank of America has been trying to put Countrywide’s legal problems behind it. In June, the Charlotte, N.C.-based company agreed to pay $108 million to settle the Federal Trade Commission’s charges that Countrywide collected outsized fees from about 200,000 borrowers facing foreclosure.

It reached a settlement Monday primarily to keep legal fees from escalating, a bank spokeswoman said.

“Countrywide denies all allegations of wrongdoing and any liability under the federal securities laws,” said Shirley Norton, a spokeswoman for Bank of America. “We agreed to the settlement to avoid the additional expense and uncertainty associated with continued litigation.”

Plaintiffs attorneys have pursed lawsuits against numerous lenders and investment banks in the wake of the housing market’s devastating downturn, and the Countrywide settlement could encourage even more such cases, said Paul Hodgson, a senior research associate at The Corporate Library, an independent corporate governance research firm.

“There are a lot of suits out there waiting to get launched,” Hodgson said. “I think this is the opening of the floodgates.”

Former Countrywide CEO Angelo Mozilo, former President David Sambol, former CFO Eric Sieracki and former board members were named in the litigation but are not contributing to the settlement.

But it does not end their legal problems. More than a year ago the Securities and Exchange Commission brought civil fraud charges against Mozilo and the two other former executives. Mozilo, the most high-profile individual to face charges from the government in the aftermath of the financial crisis, has denied any wrongdoing.

For Countrywide, “This is only a chapter and not the end of the book,” said John Coffee, a securities law professor at Columbia University.

Mortgage bond holders taking collective action

SHELL GAME CONTINUES. WHO HAS THE BOND? WHO HAS THE RECEIVABLE? WHO HAS THE SECURITY INTEREST? WHO IS GETTING PAID? WHERE ARE THE MONTHLY PAYMENTS GOING? FANNIE MAE AND FREDDIE MAC ARE BIG PLAYERS, AS IS THE FEDERAL RESERVE. ARE THEY THE ONES REALLY FORECLOSING UNDER COVER OF SECURITIZATION?

EDITOR’S NOTE: Another entry under the category of “I told you so.” Sooner or later the investors were going to figure out that they had real claims against the investment bankers and other intermediary entities in the illusion of the securitization chain, together with the servicers and other players at the loan closing. Not long ago investors would not talk with each other. Now they are banding together. Things change. This development will lead to further unraveling of the factual constipation that those players arrogantly thought they keep a lid on. The inevitable and only logical outcome here is the entry of real facts portraying the reality of these transactions.

The current reality is very simple: the investors were tricked, the borrowers were tricked, and the intermediaries took all the money. The ONLY way this can be fixed from a National perspective is to bring the borrowers and the investors together, realizing that they both have the same interests — recovery from their financial ruin. Investors need to bring certainty to what is left of their “investments.” They need to know the value of their investments and how best to recover that value. Without that they can’t bring a specific action for damages. Without that they can’t fire the intermediaries and get an honest deal launched with borrowers on property that just isn’t worth what was advertised.

There is no way to avoid principal reduction in some form because it is already there. The value is down to where it should have been at the beginning and it isn’t going up. Investors, sellers,, buyers and borrowers need to accept this fact and government, including the judiciary, need to realize that this wasn’t normal market movement, this was cornering the market and manipulating it. The investors will prove that in their own lawsuits.

A direct approach from investors to borrowers will eliminate the ridiculous fees being sucked out of what is left of these deals, and allow the investors to recoup far more than  what they are being offered. Most homeowners would be willing to accept a principal reduction that splits the loss fairly between the investors and borrowers if they were able to get fair terms.

The difference is night and day. What would have been zero recovery for the investor could be as much as $100,000 or more in a genuine modified or new mortgage. And with cooperation between borrower and investors the security interest, which is in my opinion completely invalid and unenforceable, could be perfected, title cleared and the marketplace renewed with confidence in contract , property laws and the rights of consumers and investors. Community banks could fund the new mortgages  giving the investors an immediate exist or the investors could hold the paper through REAL special purpose vehicles that were REALLY created and REALLY existing.

Mortgage bond holders get legal edge; buybacks seen

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Wed Jul 21, 2010 2:44pm EDT

By Al Yoon

NEW YORK July 21 (Reuters) – U.S. mortgage bond investors have quietly banded together to gain the long-sought power needed to challenge loan servicers over losses the investors claim resulted from violations in securities contracts.

A group holding a third of the $1.5 trillion mortgage bond market has topped the key 25 percent threshold for voting rights on 2,300 “private-label” mortgage bonds, said Talcott Franklin, a Dallas-based lawyer who is shepherding the effort.

Reaching that threshold gives holders the means to identify misrepresentations in loans, and possibly force repurchases by banks, Franklin said.

Banks are already grappling with repurchase demands from Fannie Mae and Freddie Mac, the U.S.-backed mortgage finance giants.

The investors, which include some of the largest in the nation, claim they have been unfairly taking losses as the housing market crumbled and defaulted loans hammered their bonds. Requests to servicers that collect and distribute payments — which include big banks — to investigate loans are often referred to clauses that prohibit action by individuals, investors have said.

Since loan servicers, lenders and loan sellers sometimes are affiliated, there are conflicts of interest when asking the companies to ferret out the loans that destined their private mortgage bonds for losses, Franklin said in a July 20 letter to trustees, who act on behalf of bondholders.

“There’s a lot of smoke out there about whether these loans were properly written, and about whether the servicing is appropriate and whether recoveries are maximized” for bondholders, Franklin said in an interview.

He wouldn’t disclose his clients, but said they represent more than $500 billion in securities managed for pension funds, 401(k) plans, endowments, and governments. The securities are private mortgage bonds issued by Wall Street firms that helped trigger the worst financial crisis since the 1930s.

Franklin’s effort, using a clearinghouse model to aggregate positions, is a milestone for investors who have been unable to organize. Some have wanted to fire servicers but couldn’t gather the necessary voting rights.

“Investors have finally reached a mechanism whereby they can act collectively to enforce their contractual rights,” said one portfolio manager involved in the effort, who declined to be named. “The trustees, the people that made representations and warranties to the trust, and the servicers have taken advantage of a very fractured asset management industry to perpetuate a circle of silence around these securities.”

Laurie Goodman, a senior managing director at Amherst Securities Group in New York, said at an industry conference last week, “Reps and warranties are not enforced.”

Increased pressure from bondholders comes as Fannie Mae and Freddie Mac have been collecting billions of dollars from lender repurchases of loans in government-backed securities. With Fannie and Freddie also big buyers of Wall Street mortgage bonds, their regulator this month used its subpoena power to seek documents and see if it could recoup losses for the two companies, which have received tens of billions in taxpayer-funded bailouts.

Some U.S. Federal Home Loan banks and at least one hedge fund are looking to force repurchases or collect for losses.

Investors are eager to scrutinize loans against reps and warranties in ways haven’t been able to before. Where 50 percent voting rights are required for an action, the investors in the clearinghouse have power in more than 900 deals.

Franklin said the investors are hoping for a cooperative effort with servicers and trustees. While he did not disclose recipients of the letter, some of the biggest trustees include Bank of New York, US Bank and Deutsche Bank.

A Bank of New York spokesman declined to say if the firm received the trustee letter. US Bancorp and Deutsche Bank spokesmen did not immediately return calls.

“You have a trustee surrounded by smoke, steadfastly claiming there is no fire, and what the letter gets to is there is fire,” the portfolio manager said. “And we are now directing you … to take these steps to put out the fire and to do so by investigating and putting loans back to the seller.”

Servicers are most likely to spot a breach of a bond’s warranty, Franklin said in the letter.

Violations could be substantial, he said. In an Ambac Assurance Corp review of 695 defaulted subprime loans sold to a mortgage trust by a servicer, nearly 80 percent broke one or more warranties, he said in the letter, citing an Ambac lawsuit against EMC Mortgage Corp.

The investors are also now empowered to scrutinize how servicers decide on either modifying a loan for a troubled borrower, or proceed with foreclosure, Franklin said. Improper foreclosures may be done to save costs of creating a loan modification, he asserted. (Editing by Leslie Adler)

NON-DISCLOSURE DETAILS FROM THE OTHER SIDE

ONE MORE QUESTION TO ASK IN DISCOVERY: WHAT ENTITIES WERE CREATED OR EMPLOYED IN THE TRADING OF MORTGAGE BONDS, CDO’S, SYNTHETIC CDO’S OR TOTAL RETURN SWAPS (NEW TERM)?

EDITOR’S COMMENT: LOUISE STORY, in her article in the New York Times continues to dig deeper into the games played by Wall Street firms. You’ll remember that the executives of the major Wall Street firms were spouting off the message that the risks and consequences were unknown to them. They didn’t know anything was wrong. Maybe they were stupid or distracted. And maybe they were just plain lying. The risks to these fine gentlemen and their companies are now enormous. If the veil of non-disclosure (opaque, in Wall Street jargon) continues to be eroded, they move closer and closer to root changes in Wall Street and both criminal and civil liability. It also leads inevitably to the conclusion that the loans and the bonds were bogus.

Yes it is true that money exchanged hands — but not in any of the ways that most people imagine and not in any way that was disclosed as required by TILA, state law, Securities Laws and other applicable statutes, rules and regulations. They continue to pursue foreclosure principally for the purpose of distracting everyone from the truth — that the transactions were wrong in every conceivable way and they knew it.

If there was nothing wrong with these innovative financial products why were they “off-balance sheet.” If there isn’t any problem with them now, then why can’t they produce an accounting, like any other situation, and say “this person borrowed money and didn’t pay it back. We will lose money if they don’t — here is the proof.” If everything was proper and appropriate, then why are we seeing revealed new entities and new layers of deception as Ms. Story and other reporters dig deeper and deeper?

The answer is simple: they were hiding the truth in circular transactions that were partially off balance sheet and partially on. I wonder how many borrowers would be charged with fraud for doing that? Now, thanks to Louise Story, we have some new names to research — Pyxis, Steers, Parcs, and unnamed “customer trades. They all amount to the same thing.

The bonds and the loans claimed to be attached to the bonds were being bought and sold in and out of the investment banking firm that created them. If they produce the real accounting the depth and scope of their fraud will become obvious to everyone, including the Judges that say we won’t give a borrower a free house. What these Judges are doing is ignoring the reality that they are giving a free house and a free ride to companies with no interest in the transaction. And they are directly contributing to a title mess that will take decades to untangle.

August 9, 2010

Merrill’s Risk Disclosure Dodges Are Unearthed

By LOUISE STORY

It was named after a faint constellation in the southern sky: Pyxis, the Mariner’s Compass. But it helped to steer the mighty Merrill Lynch toward disaster.

Barely visible to any but a few inside Merrill, Pyxis was created at the height of the mortgage mania as a sink for subprime securities. Intended for one purpose and operated off the books, this entity and others like it at Merrill helped the bank obscure the outsize risks it was taking.

The Pyxis story is about who knew what and when on Wall Street — and who did not. Publicly, banks vastly underestimated their exposure to the dangerous mortgage investments they were creating. Privately, trading executives often knew far more about the perils than they let on.

Only after the housing bubble began to deflate did Merrill and other banks begin to clearly divulge the many billions of dollars of troubled securities that were linked to them, often through opaque vehicles like Pyxis.

In the third quarter of 2007, for instance, Merrill reported that its potential exposure to certain subprime investments was $15.2 billion. Three months later, it said that exposure was actually $46 billion.

At the time, Merrill said it had initially excluded the difference because it thought it had protected itself with various hedges.

But many of those hedges later failed, and Merrill, the brokerage giant that brought Wall Street to Main Street, soon collapsed into the arms of Bank of America.

“It’s like the parable of the blind man and the elephant: you had some people feeling the trunk and some the legs, and there was nobody putting it all together,” Gary Witt, a former managing director at Moody’s Investors Service who now teaches at Temple University, said of the situation at Merrill and other banks.

Wall Street has come a long way since the dark days of 2008, when the near collapse of American finance heralded the end of flush times for many people. But even now, two years on, regulators are still trying to piece together how so much went so wrong on Wall Street.

The Securities and Exchange Commission is investigating whether banks adequately disclosed their financial risks during the boom and subsequent bust. The question has taken on new urgency now that Citigroup has agreed to pay $75 million to settle S.E.C. claims that it misled investors about its exposure to collateralized debt obligations, or C.D.O.’s.

As Merrill did with vehicles like Pyxis, Citigroup shifted much of the risks associated with its C.D.O.’s off its books, only to have those risks boomerang. Jessica Oppenheim, a spokeswoman for Bank of America, declined to comment.

Such financial tactics, and the S.E.C.’s inquiry into banks’ disclosures, raise thorny questions for policy makers. The investigation throws an uncomfortable spotlight on the vast network of hedge funds and “special purpose vehicles” that financial companies still use to finance their operations and the investments they create.

The recent overhaul of financial regulation did little to address this shadow banking system. Nor does it address whether banking executives should be required to disclose more about the risks their banks take.

Most Wall Street firms disclosed little about their mortgage holdings before the crisis, in part because many executives thought the investments were safe. But in some cases, executives failed to grasp the potential dangers partly because the risks were obscured, even to them, via off-balance-sheet programs.

Executives’ decisions about what to disclose may have been clouded by hopes that the market would recover, analysts said.

“There was probably some misplaced optimism that it would work out,” said John McDonald, a banking analyst with Sanford C. Bernstein & Company. “But in a time of high uncertainty, maybe the disclosure burden should be pushed towards greater disclosure.”

The Pyxis episode begins in 2006, when the overheated and overleveraged housing market was beginning its painful decline.

During the bubble years, many Wall Street banks built a lucrative business packaging home mortgages into bonds and other investments. But few players were bigger than Merrill Lynch, which became a leader in creating C.D.O.’s

Initially, Merrill often relied on credit insurance from the American International Group to make certain parts of its C.D.O.’s attractive to investors. But when A.I.G. stopped writing those policies in early 2006 because of concerns over the housing market, Merrill ended up holding on to more of those pieces itself.

So that summer, Merrill Lynch created a group of three traders to reduce its exposure to the fast-sinking mortgage market. According to three former employees with direct knowledge of this group, the traders first tried sell the vestigial C.D.O. investments. If that did not work, they tried to find a foreign bank to finance their own purchase of the C.D.O.’s. If that failed, they turned to Pyxis or similar programs, called Steers and Parcs, as well as to custom trades.

These programs generally issued short-term I.O.U.’s to investors and then used that money to buy various assets, including the leftover C.D.O. pieces.

But there was a catch. In forming Pyxis and the other programs, Merrill guaranteed the notes they issued by agreeing to take back any securities put in the programs that turned out to be of poor quality. In other words, these vehicles were essentially buying pieces of C.D.O.’s from Merrill using the proceeds of notes guaranteed by Merrill and leaving Merrill on the hook for any losses.

To further complicate the matter, Merrill traders sometimes used the cash inside new C.D.O.’s to buy the Pyxis notes, meaning that the C.D.O.’s were investing in Pyxis, even as Pyxis was investing in C.D.O.’s.

“It was circular, yes, but it was all ultimately tied to Merrill,” said a former Merrill employee, who asked to remain anonymous so as not to jeopardize ongoing business with Merrill.

To provide the guarantee that made all of this work, Merrill entered into a derivatives contract known as a total return swap, obliging it to cover any losses at Pyxis. Citigroup used similar arrangements that the S.E.C. now says should have been disclosed to shareholders in the summer of 2007.

One difficulty for the S.E.C. and other investigators is determining exactly when banks should have disclosed more about their mortgage holdings. Banks are required to disclose only what they expect their exposure to be. If they believe they are fully hedged, they can even report that they have no exposure at all. Being wrong is no crime.

Moreover, banks can lump all sorts of trades together in their financial statements and are not required to disclose the full face value of many derivatives, including the type of guarantees that Merrill used.

“Should they have told us all of their subprime mortgage exposure?” said Jeffery Harte, an analyst with Sandler O’Neill. “Nobody knew that was going to be such a huge problem. The next step is they would be giving us their entire trading book.”

Still, Mr. Harte and other analysts said they were surprised in 2007 by Merrill’s escalating exposure and its initial decision not to disclose the full extent of its mortgage holdings. Greater disclosure about Merrill’s mortgage holdings and programs like Pyxis might have raised red flags to senior executives and shareholders, who could have demanded that Merrill stop producing the risky securities that later brought the firm down.

Former Merrill employees said it would have been virtually impossible for Merrill to continue to carry out so many C.D.O. deals in 2006 without the likes of Pyxis. Those lucrative deals helped fatten profits in the short term — and hence the annual bonuses paid to its employees. In 2006, even as the seeds of its undoing were being planted, Merrill Lynch paid out more than $5 billion in bonuses.

It was not until the autumn of 2007 that Pyxis and its brethren set off alarm bells outside Merrill. C.D.O. specialists at Moody’s pieced together the role of Pyxis and warned Moody’s analysts who rated Merrill’s debt. Merrill soon preannounced a quarterly loss, and Moody’s downgraded the firm’s credit rating. By late 2007, Merrill had added pages of detailed disclosures to its earnings releases.

It was too late. The risks inside Merrill, virtually invisible a year earlier, had already mortally wounded one of Wall Street’s proudest names.

WORLD HUNGER PROVIDES PROOF OF FINANCIAL DERIVATIVES INFLATING PRICES

One of the hardest things for people to get their minds around is how borrowers were defrauded. The nagging question keeps coming to mind “But you DID sign the loan and take the money, didn’t you?” Yes you did, but you did it because of a representation and virtual guarantee from several parties at the closing table who knew the appraisal was a lie, that you were believing it, that you relied on it, and that you never would have done a deal where the real appraised fair market value was far less than the amount of the loan.

So then the question becomes “How can you be sure the appraisal was inflated? Were all appraisals inflated? How do you know that?” Answers: Read on, YES, Read On, in that order.

I start with the proposition that the only legitimate factors that cause changes in housing prices (up or down) are changes in supply and demand, rising costs or labor and materials and related services. Anything else is a manipulation UNLESS it is thoroughly disclosed in language that a normal reasonable person would understand. Even if such disclosure is made and the deal goes through BOTH parties would be defrauding someone by definition, to wit: they are agreeing that the stated price or value of the property is inflated but they are doing the deal anyway.

How could anyone inflate the price of a house without everyone knowing it? ANSWER: By inflating the entire market in that geographical area. Note that during the securitization era, ONLY the places that were targeted had sharply rising prices, sometimes from one month to the next. Other places, like Seneca Falls, NY (highlighted in NY Times article) were not not affected by either the boom or bust except indirectly where they are dealing with decreased services from the state and county resulting from budget deficits resulting from an expectation of rising revenues based upon the apparent rise in tax appraised value.

How does one inflate values of any commodity or property in the entire relevant marketplace? ANSWER: By creating false liquidity (i.e, availability of money) and by speculation pushing up the “value” of the derivatives and other hedge products which in turn raises the value of the actual commodity, or in our case, the actual house. Since the cost of the money decreases, despite government attempts to raise interest rates, and speculation is allowed without supervision, the speculators control the market on the way up and on the way down. They win on both sides because they are controlling the events. That is not a free market. That is a privately controlled market.

So the reason I am sure that false appraisals were the rule, not just the norm are as follows:

  1. There was no abnormal trends or changes in demand, supply, or costs — except that supply actually outpaced demand by a factor of at least 200%. Thus prices should have probably dropped as developers increased competition for buyers. There is no observable reason for prices to rise, much less at the pace seen in the period 2002-2007. By all public accounts it will be at least 2030 before the current inventory of houses are sold. This level of overbuilding is unprecedented and cannot be tied to an expectation of increased demand but rather an expectation that the seller controlled the transaction and collectively with loan brokers, originators, aggregators, and investment bankers would do anything to close the deal even if it meant having the borrower sign for a loan that called for NO PAYMENTS.
  2. 8,000 certified licensed appraisers signed a petition to Congress in 2005 complaining they were being coerced into justifying the deal rather than actually estimating fair market value. They feared they would be blacklisted from all the deals because an honest appraisal would have slowed down sales of homes and sales of financial products to borrowers.
  3. This was a complete reversal of practices existing before the securitization era. The value of the collateral was the Lender’s only guarantee of repayment. hence the tendency was to minimize the estimate of fair market value. Once the risk of repayment was eliminated “lenders” (i.e., mortgage brokers and originators) were under pressure to close loan transactions dollar volumes. The easiest way of doing that was to increase the value of the properties. The more this practice took hold of meeting the contract terms  which were always disclosed to the appraiser (contrary to prior practice) the easier it became, since the “comparables” used by the appraisers were produced by the same practice, incentives and pressures. As the mortgage bonds were sold in increasing dollar volumes, the pressure to place investment dollars increased exponentially. Incentives for mortgage brokers and originators to close deals at any level of risk or terms increased proportionately. Marketing and selling of loan products became big business, with large fees and apparently no risk as the managers of such companies perceived it. The upward pressure to increase the size of loans directly resulted in an upward pressure on sale prices and the perception of “value” in the marketplace. A snowball effect was thus created producing a spike in housing prices that is completely unprecedented in the history of housing since the 1870’s when such measurements began to  be recorded. No other boom or bust cycle in any part of the country had ever experienced spikes of this magnitude.
  4. Starting 3-4 loan products in the 1970’s, the number of possible loan products has skyrocketed to over 400 different kinds of loans — a bewildering array that increases asymmetry of information — causing the buyer to depend and rely upon the more sophisticated side (“lender”) for information about the loan product they were steered into.
  5. The number of loan originating companies masquerading as actual lenders went from 1 (Household Finance, now HSBC) to hundreds during the entire securitization period (circa 1990-2008) and then back down again as most of them went out of business, liquidated, or went bankrupt. New business start-ups would not  have flooded the market but for the virtual certainty of high fees without regard to whether the product worked or not (i.e., whether the loan was repaid or not).
  6. The amount of money attributable to derivatives that increased availability of loans increased from zero in 1983 to more than $30 trillion in 2007 — twice the Gross National Product of this country.
  7. I see no reason for price increases other than the flood of money into certain marketplaces, which in turn gave some color of verification of an appraisal that was plainly wrong, inflated, and where fees for such appraisals increased geometrically.

Yes they were virtually all inflated. That was the requirement. Just as the rating agencies falsely inflated the value and risk of the mortgage bonds that were used to attract the $30 trillion in capital used to flood the marketplace, the appraisers likewise inflated the appraisals of the value and thus the risk to the borrowers AND investors. The proof is simply in the present situation where prices have fallen by as much as 80%. This is further corroborated by the price levels before the flood of money into the marketplace. The final verification is that median income was flat during this period. Most economists and housing experts agree that ultimately median income is the main determinant in housing prices.

How do I know this is true? It is the only workable explanation that is being offered, even including comments, reports and statements issued by the financial services industry.

For an example of how this has worked against the poorest, starving people of the world, see the following, which demonstrates that the Wall Street process, if unregulated, leads to bizarre social and financial consequences.

//

Johann Hari: How Goldman gambled on starvation

Speculators set up a casino where the chips were the stomachs of millions. What does it say about our system that we can so casually inflict so much pain?

Friday, 2 July 2010

Is Your Bank In Trouble?
Free list Of Banks Doomed To Fail.The Banks and Brokers X List.

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By now, you probably think your opinion of Goldman Sachs and its swarm of Wall Street allies has rock-bottomed at raw loathing. You’re wrong. There’s more. It turns out that the most destructive of all their recent acts has barely been discussed at all. Here’s the rest. This is the story of how some of the richest people in the world – Goldman, Deutsche Bank, the traders at Merrill Lynch, and more – have caused the starvation of some of the poorest people in the world.

It starts with an apparent mystery. At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn’t afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it “a silent mass murder”, entirely due to “man-made actions.”

Earlier this year I was in Ethiopia, one of the worst-hit countries, and people there remember the food crisis as if they had been struck by a tsunami. “My children stopped growing,” a woman my age called Abiba Getaneh, told me. “I felt like battery acid had been poured into my stomach as I starved. I took my two daughters out of school and got into debt. If it had gone on much longer, I think my baby would have died.”

Most of the explanations we were given at the time have turned out to be false. It didn’t happen because supply fell: the International Grain Council says global production of wheat actually increased during that period, for example. It isn’t because demand grew either: as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent. Other factors – like the rise of biofuels, and the spike in the oil price – made a contribution, but they aren’t enough on their own to explain such a violent shift.

To understand the biggest cause, you have to plough through some concepts that will make your head ache – but not half as much as they made the poor world’s stomachs ache.

For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk. Farmer Giles can agree in January to sell his crop to a trader in August at a fixed price. If he has a great summer, he’ll lose some cash, but if there’s a lousy summer or the global price collapses, he’ll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked.

Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into “derivatives” that could be bought and sold among traders who had nothing to do with agriculture. A market in “food speculation” was born.

So Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that contract can be sold on to speculators, who treat the contract itself as an object of potential wealth. Goldman Sachs can buy it and sell it on for £20,000 to Deutsche Bank, who sell it on for £30,000 to Merrill Lynch – and on and on until it seems to bear almost no relationship to Farmer Giles’s crop at all.

If this seems mystifying, it is. John Lanchester, in his superb guide to the world of finance, Whoops! Why Everybody Owes Everyone and No One Can Pay, explains: “Finance, like other forms of human behaviour, underwent a change in the 20th century, a shift equivalent to the emergence of modernism in the arts – a break with common sense, a turn towards self-referentiality and abstraction and notions that couldn’t be explained in workaday English.” Poetry found its break with realism when T S Eliot wrote “The Wasteland”. Finance found its Wasteland moment in the 1970s, when it began to be dominated by complex financial instruments that even the people selling them didn’t fully understand.

So what has this got to do with the bread on Abiba’s plate? Until deregulation, the price for food was set by the forces of supply and demand for food itself. (This was already deeply imperfect: it left a billion people hungry.) But after deregulation, it was no longer just a market in food. It became, at the same time, a market in food contracts based on theoretical future crops – and the speculators drove the price through the roof.

Here’s how it happened. In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world’s frightened investors stampeded on to this ground.

So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.

When I asked Merrill Lynch’s spokesman to comment on the charge of causing mass hunger, he said: “Huh. I didn’t know about that.” He later emailed to say: “I am going to decline comment.” Deutsche Bank also refused to comment. Goldman Sachs were more detailed, saying they sold their index in early 2007 and pointing out that “serious analyses … have concluded index funds did not cause a bubble in commodity futures prices”, offering as evidence a statement by the OECD.

How do we know this is wrong? As Professor Ghosh points out, some vital crops are not traded on the futures markets, including millet, cassava, and potatoes. Their price rose a little during this period – but only a fraction as much as the ones affected by speculation. Her research shows that speculation was “the main cause” of the rise.

So it has come to this. The world’s wealthiest speculators set up a casino where the chips were the stomachs of hundreds of millions of innocent people. They gambled on increasing starvation, and won. Their Wasteland moment created a real wasteland. What does it say about our political and economic system that we can so casually inflict so much pain?

If we don’t re-regulate, it is only a matter of time before this all happens again. How many people would it kill next time? The moves to restore the pre-1990s rules on commodities trading have been stunningly sluggish. In the US, the House has passed some regulation, but there are fears that the Senate – drenched in speculator-donations – may dilute it into meaninglessness. The EU is lagging far behind even this, while in Britain, where most of this “trade” takes place, advocacy groups are worried that David Cameron’s government will block reform entirely to please his own friends and donors in the City.

Only one force can stop another speculation-starvation-bubble. The decent people in developed countries need to shout louder than the lobbyists from Goldman Sachs. The World Development Movement is launching a week of pressure this summer as crucial decisions on this are taken: text WDM to 82055 to find out what you can do.

The last time I spoke to her, Abiba said: “We can’t go through that another time. Please – make sure they never, never do that to us again.”

REMIC EVASION of TAXES AND FRAUD

I like this post from a reader in Colorado. Besides knowing what he is talking about, he raises some good issues. For example the original issue discount. Normally it is the fee for the underwriter. But this is a cover for a fee on steroids. They took money from the investor and then “bought” (without any paperwork conveying legal title) a bunch of loans that would produce the receivable income that the investor was looking for.

So let’s look at receivable income for a second and you’ll understand where the real money was made and why I call it an undisclosed tier 2 Yield Spread Premium due back to the borrower, or apportionable between the borrower and the investor. Receivable income consists or a complex maze designed to keep prying eyes from understanding what theya re looking at. But it isn’t really that hard if you take a few hours (or months) to really analyze it.

Under some twisted theory, most foreclosures are proceeding under the assumption that the receivable issue doesn’t matter. The fact that the principal balance of most loans were, if properly accounted for, paid off 10 times over, seems not to matter to Judges or even lawyers. “You borrowed the money didn’t you. How can you expect to get away with this?” A loaded question if I ever heard one. The borrower was a vehicle for the commission of a simple common law and statutory fraud. They lied to him and now they are trying to steal his house — the same way they lied to the investor and stole all the money.

  1. Receivable income is the income the investor expects. So for example if the deal is 7% and the investor puts up $1 million the investor is expecting $70,000 per year in receivable income PLUS of course the principal investment (which we all know never happened).

  2. Receivable income from loans is nominal — i.e., in name only. So if you have a $500,000 loan to a borrower who has an income of $12,000 per year, and the interest rate is stated as 16%, then the nominal receivable income is $80,000 per year, which everyone knows is a lie.

  3. The Yield Spread premium is achieved exactly that way. The investment banker takes $1,000,000 from an investor and then buys a mortgage with a nominal income of $80,000 which would be enough to pay the investor the annual receivable income the investor expects, plus fees for servicing the loan. So in our little example here, the investment banker only had to commit $500,000 to the borrower even though he took $1 million from the investor. His yield spread premium fee is therefore the same amount as the loan itself.  Would the investor have parted with the money if the investor was told the truth? Certainly not. Would the borrower sign up for a deal where he was sure to be thrown out on the street? Certainly not. In legal lingo, we call that fraud. And it never could have happened without defrauding BOTH the investor and the borrower.

  4. Then you have the actual receivable income which is the sum of all payments made on the pool, reduced by fees for servicing and other forms of chicanery. As more and more people default, the ACTUAL receivables go down, but the servicing fees stay the same or even increase, since the servicer is entitled to a higher fee for servicing a non-performing loan. You might ask where the servicer gets its money if the borrower isn’t paying. The answer is that the servicer is getting paid out of the proceeds of payments made by OTHER borrowers. In the end most of the ACTUAL income was eaten up by these service fees from the various securitization participants.

  5. Then you have a “credit event.” In these nutty deals a credit event is declared by investment banker who then makes a claim against insurance or counter-parties in credit default swaps, or buys (through the Master Servicer) the good loans (for repackaging and sale). The beauty of this is that upon declaration of a decrease in value of the pool, the underwriter gets to collect money on a bet that the underwriter would, acting in its own self interest, declare a write down of the pool and collect the money. Where did the money come from to pay for all these credit enhancements, insurance, credit default swaps, etc? ANSWER: From the original transaction wherein the investor put up $1 million and the investment banker only funded $500,000 (i.e., the undisclosed tier 2 yield spread premium).

  6. Under the terms of the securitization documents it might appear that the investor is entitled to be paid from third party payments. Both equitably, since the investors put up the money and legally, since that was the deal, they should have been paid. But they were not. So the third party payments are another expected receivable that materialized but was not paid to the creditor of the mortgage loan by the agents for the creditor. In other words, his bookkeepers stole the money.

Very good info on the securitization structure and thought provoking for sure. Could you explain the significance of the Original Issue Discount reporting for REMICs and how it applies to securitization?

It seems to me that the REMIC exemptions were to evade billions in taxes for the gain on sale of the loans to the static pool which never actually happened per the requirements for true sales. Such reporting was handled in the yearly publication 938 from the IRS. A review of this reporting history reveals some very interesting aspects that raise some questions.

Here are the years 2007, 2008 and 2009:

2009 reported in 2010
http://www.irs.gov/pub/irs-pdf/p938.pdf

2008? is missing and reverts to the 2009 file?? Don’t believe me. try it.
http://www.irs.gov/pub/irs-prior/p938–2009.pdf

2007 reported in 2008
http://www.irs.gov/pub/irs-prior/p938–2007.pdf

A review of 2007 shows reporting of numerous securitization trusts owned by varying entities, 08 is obviously missing and concealed, and 2009 shows that most reporting is now by Fannie/Freddie/Ginnie, JP Morgan, CIti, BofA and a few new entities like the Jeffries trusts etc.

Would this be simply reporting that no discount is now being applied and all the losses or discount is credited to the GSEs and big banks, or does it mean the trusts no longer exist and the ones not paid with swaps are being resecuritized?

Some of the tell tale signs of some issues with the REMIC status especially in the WAMU loans is a 10.3 Billion dollar tax claim by the IRS in the BK. It is further that the balance of the entire loan portfolio of WAMU transferred to JPM for zero consideration. A total of 191 Billion of loans transferred proven by an FDIC accounting should be enough to challenge legal standing in any event.

I believe that all of the securitized loans were charged back to WAMU’s balance sheet prior to the sale of the assets and transferred to JPM along with the derivative contracts for each and every one of them. [EDITOR’S NOTE: PRECISELY CORRECT]

The derivatives seem to be accounted for in a separate mention in the balance sheet implying that the zeroing of the loans is a separate act from the derivatives. Add to that the IRS claim which can be attributed to the gain on sale clawback from the voiding of the REMIC status and things seem to fit.

I would agree the free house claim is a tough river to row but the unjust enrichment by allowing 191 billion in loans to be collected with no Article III standing not only should trump that but additionally forever strip them of standing to ever enforce the contract.

The collection is Federal Racketeering at the highest level, money laundering and antitrust. Where are the tobacco litigators that want to handle this issue for the homeowners? How about an attorney with political aspirations that would surely gain support for saving millions of homes for this one simple case?

Documents and more info on the FDIC litigation fund extended to JPM to fight consumers can be found here:

http://www.wamuloanfraud.com

You can also find my open letter to Sheila Bair asking her to personally respond to my request here:

http://4closurefraud.org/2010/06/09/an-open-letter-to-sheila-bair-of-the-federal-deposit-insurance-corporation-fdic-re-foreclosures/

Any insight into the REMIC and Pub. 938 info is certainly appreciated

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