“Keep your fingers crossed but I think we will price this just before the market falls off a cliff,” a Deutsche Bank manager wrote in February 2007

Internal emails indicate Deutsche Bank knew they were bankrolling toxic mortgages by Ameriquest and others

Internal emails indicate Deutsche Bank knew they were bankrolling toxic mortgages by Ameriquest and others

iWatch

In 2007, the report says, Deutsche Bank rushed to sell off mortgage-backed investments amid worries that the market for subprime loans was deteriorating.

“Keep your fingers crossed but I think we will price this just before the market falls off a cliff,” a Deutsche Bank manager wrote in February 2007 about a deal stocked with securities created from raw material produced by Ameriquest and other subprime lenders.

Deutsche Bank Analyst: Overpay For Our Assets, Or You’ll Regret It

By Zachary Roth – February 12, 2009, 3:49PM

For a while now, it’s seemed like Wall Street’s message to government has been: We screwed up. But if you don’t rescue us on our terms, you’re all gonna be in trouble.

But you don’t usually see that expressed quite as clearly as it was in a research memo sent out yesterday by a senior Deutsche Bank analyst, and obtained by TPMmuckraker.

In the memo — one of Deutsche’s daily “Economic Notes” sent out to the firm’s clients, and to some members of the press — Joseph LaVorgna, the bank’s chief US economist, essentially, appears to warn that if the government doesn’t pay high prices for the toxic assets on the books of Deutsche and other big firms, there will be massive consequences for the US economy.

Writes LaVorgna:

One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the
economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives.

We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.

One leading economist described the memo to TPMmuckraker as a “ransom note” to the US government. And David Kotok of Cumberland Advisors, who writes such research memos for his own clients, acknowledged that the memo, like all such communications, could be interpreted as an attempt to influence policy-makers.

Still, seeing the memo as a threat to the government to drive the softest of bargains wouldn’t be entirely fair. Kotok that cautioned that the effects of a single analyst’s memo are limited: “Joe LaVorgna doesn’t have enough clout to hold the US government hostage.”

LaVorgna himself was blunt: “I don’t write editorials,” he told TPMmuckraker.

At the very least, the memo can be seen as a frank statement of position from the chief economist of a major bank: if the government doesn’t cave and buy up all the banks’ toxic assets at inflated prices, the country will suffer.

Nice fix we’ve got ourselves into.


ALLSTATE FILES SUIT LAYING OUT ALL THE ALLEGATIONS YOU NEED

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

REQUIRED READING

2.24.2011 Chase -Allstate-Complaint

JUST LOOKING AT THE TABLE OF CONTENT WILL TELL YOU WHAT YOU NEED TO KNOW

NATURE OF ACTION …………………………………………………………………………………………………….1
PARTIES ………………………………………………………………………………………………………………………..7
JURISDICTION AND VENUE ……………………………………………………………………………………….16
BACKGROUND ……………………………………………………………………………………………………………17
A.    THE MECHANICS OF MORTGAGE SECURITIZATION …………………………………….17
B.    SECURITIZATION OF MORTGAGE LOANS: THE TRADITIONAL MODEL ……..19
C.    THE SYSTEMIC VIOLATION OF UNDERWRITING AND APPRAISAL STANDARDS IN THE MORTGAGE SECURITIZATION INDUSTRY …………………..21
D.    DEFENDANTS WERE AN INTEGRATED VERTICAL OPERATION CONTROLLING EVERY ASPECT OF THE SECURITIZATION PROCESS…………..24
(1)    JPMorgan Defendants……………………………………………………………………..24 (2)

WaMu Defendants ………………………………………………………………………….26 (3)

Bear Stearns Defendants ………………………………………………………………….27
E.    DEFENDANTS’ OFFERING MATERIALS…………………………………………………………..29 (1)

The JPMorgan Offerings………………………………………………………………….29 (2)

The WaMu Offerings………………………………………………………………………30 (3)

The Long-Beach Offering………………………………………………………………..32 (4)

The Bear Stearns Offerings………………………………………………………………32
SUBSTANTIVE ALLEGATIONS …………………………………………………………………………………..34
I.    THE OFFERING MATERIALS CONTAINED UNTRUE STATEMENTS OF MATERIAL FACT AND OMISSIONS ABOUT THE MORTGAGE ORIGINATORS’ UNDERWRITING STANDARDS AND PRACTICES, AND MATERIAL CHARACTERISTICS OF THE MORTGAGE LOAN POOLS ……………..34
A.    Defendants’ Misrepresentations Regarding Underwriting Standards And Practices …………………………………………………………………………………………………..34
(1)    JPMorgan Defendants’ Misrepresentations Regarding Underwriting Standards And Practices………………………………………………35
i
(2)    WaMu Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………………………………35
(3)    Long Beach Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………….36
(4)    Bear Stearns Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………….39
B.    Defendants’ Misrepresentations Regarding Owner-Occupancy Statistics …………40
(1)    JPMorgan Defendants’ Misrepresentations Regarding Owner- Occupancy Statistics ……………………………………………………………………….40
(2)    WaMu Defendants’ Misrepresentations Regarding Owner Occupancy Statistics ……………………………………………………………………….41
(3)    Bear Stearns Defendants’ Misrepresentations Regarding Owner Occupancy Statistics ……………………………………………………………………….41
C.    Defendants’ Misrepresentations Regarding Loan-to-Value and Combined Loan-to-Value Ratios…………………………………………………………………………………42
(1)    JPMorgan Defendants’ Misrepresentations Regarding LTV and CLTV Ratios………………………………………………………………………………….42
(2)    WaMu Defendants’ Misrepresentations Regarding LTV and CLTV Ratios ……………………………………………………………………………………………42
(3)    Bear Stearns Defendants’ Misrepresentations Regarding LTV and CLTV Ratios………………………………………………………………………………….43
D.    Defendants’ Misrepresentations Regarding Debt-to-Income Ratios …………………44
(1)    JPMorgan Defendants’ Misrepresentations Regarding Debt-to- Income Ratios ………………………………………………………………………………..44
(2)    WaMu Defendants’ Misrepresentations Regarding Debt-to-Income Ratios ……………………………………………………………………………………………44
(3)    Bear Stearns Defendants’ Misrepresentations Regarding Debt-to- Income Ratios ………………………………………………………………………………..45
E.    Defendants’ Misrepresentations Regarding Credit Ratings……………………………..46
(1)    JPMorgan Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….46
(2)    WaMu Defendants’ Misrepresentations Regarding Credit Ratings………..47 ii
(3)    Long Beach Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….48
(4)    Bear Stearns Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….48
F.    Defendants’ Misrepresentations Regarding Credit Enhancements……………………49
(1)    JPMorgan Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..49
(2)    WaMu Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..50
(3)    Long Beach Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..50
(4)    Bear Stearns Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..51
G.    Defendants’ Misrepresentations Regarding Underwriting Exceptions………………51
(1)    JPMorgan Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………51
(2)    WaMu Defendants’ Misrepresentations Regarding Underwriting Exceptions ……………………………………………………………………………………..52
(3)    Long Beach Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………53
(4)    Bear Stearns Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………53
H.    Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………………………………………….53
(1)    JPMorgan Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………..54
(2)    WaMu Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………..54
(3)    Bear Stearns Defendants’ Misrepresentations Regarding Alternative Documentation Loans …………………………………………………….55
I.    Defendants’ Misrepresentations Regarding Full-Documentation Loans……………55
iii
J.    Defendants’ Misrepresentations Regarding Adverse Selection of Mortgage Loans ……………………………………………………………………………………………………….56
K.    Defendants’ Failure to Disclose the Negative Results of Due Diligence …………..57
II.    ALL OF DEFENDANTS’ REPRESENTATIONS WERE UNTRUE AND MISLEADING BECAUSE DEFENDANTS SYSTEMATICALLY IGNORED THEIR OWN UNDERWRITING GUIDELINES ……………………………………………………58
A.    Evidence Demonstrates Defendants’ Underwriting Abandonment: High Default Rates And Plummeting Credit Ratings ……………………………………………..59
B.    Statistical Evidence of Faulty Underwriting: Borrowers Did Not Actually Occupy The Mortgaged Properties As Represented……………………………………….62
(1)    The JPMorgan Offerings………………………………………………………………….64 (2)

The WaMu Offerings………………………………………………………………………64 (3)

The Bear Stearns Offerings………………………………………………………………65
C.    Statistical Evidence of Faulty Underwriting: The Loan-to-Value Ratios In The Offering Materials Were Inaccurate ………………………………………………………65
(1)    The JPMorgan Offerings………………………………………………………………….66 (2)    T

he WaMu Offerings………………………………………………………………………68 (3)

The Bear Stearns Offerings………………………………………………………………71
D.    Other Statistical Evidence Demonstrates That The Problems In Defendants’ Loans Were Tied To Underwriting Guideline Abandonment………..72
E.    Evidence Demonstrates That Credit Ratings Were A Garbage-In, Garbage-Out Process …………………………………………………………………………………75
F.    Evidence From Defendants’ Own Documents And Former Employees Demonstrates That The Representations In Defendants’ Offering Materials Were False ……………………………………………………………………………………………….76
(1)    The JPMorgan Offerings………………………………………………………………….76 (2)

The WaMu Offerings………………………………………………………………………80 (3)

The Long Beach Offerings……………………………………………………………….87 (4)

The Bear Stearns Offerings………………………………………………………………92
iv
G.    Evidence From Defendants’ Third-Party Due Diligence Firm Demonstrates That Defendants Were Originating Defective Loans………………….94
H.    Evidence Of Other Investigations Demonstrates The Falsity Of Defendants’ Representations ………………………………………………………………………97
(1)    The WaMu and Long Beach Offerings………………………………………………97
(2)    The Bear Stearns Offerings………………………………………………………………99
III.    DEFENDANTS’ REPRESENTATIONS CONCERNING UNAFFILIATED ORIGINATORS’ UNDERWRITING GUIDELINES WERE ALSO FALSE ……………102
A.    Countrywide ……………………………………………………………………………………………104
(1)    Defendants’ Misrepresentations Concerning Countrywide’s Underwriting Practices…………………………………………………………………..104
(2)    These Representations Were Untrue And Misleading………………………..105 B.

GreenPoint ……………………………………………………………………………………………..109
(1)    Defendants’ Misrepresentations Concerning GreenPoint’s Underwriting Practices…………………………………………………………………..109
(2)    These Representations Were Untrue And Misleading………………………..111 C.    PHH……………………………………………………………………………………………………….115
(1)    Defendants’ Misrepresentations Concerning PHH’s Underwriting Practices ………………………………………………………………………………………115
(2)    These Representations Were Untrue And Misleading………………………..116 D.

Option One……………………………………………………………………………………………..118
(1)    Defendants’ Misrepresentations Concerning Option One’s Underwriting Practices…………………………………………………………………..118
(2)    These Representations Were Untrue and Misleading:………………………..120 E.    Fremont ………………………………………………………………………………………………….122
(1)    Defendants’ Misrepresentations Concerning Fremont’s Underwriting Practices…………………………………………………………………..122
(2)    These Representations Were Untrue and Misleading…………………………124 IV.

THE DEFENDANTS KNEW THEIR REPRESENTATIONS WERE FALSE ………….126
v
A.    The Statistical Evidence Is Itself Persuasive Evidence Defendants Knew Or Recklessly Disregarded The Falsity Of Their Representations………………….126
B.    Evidence From Third Party Due Diligence Firms Demonstrates That Defendants Knew Defective Loans Were Being Securitized …………………………127
C.    Evidence Of Defendants’ Influence Over The Appraisal Process Demonstrates That Defendants Knew The Appraisals Were Falsely Inflated …………………………………………………………………………………………………..130
D.    Evidence Of Internal Documents And Former Employee Testimony Demonstrates That Defendants Knew Their Representations Were False ……….131
(1) (2) (3) (4)
JPMorgan Defendants Knew Their Representations Were False…………131 WaMu Defendants Knew Their Representations Were False ……………..133 Long Beach Defendants Knew Their Representations Were False………138 Bear Stearns Defendants Knew Their Representations Were False ……..140
V.    ALLSTATE’S DETRIMENTAL RELIANCE AND DAMAGES ……………………………144

VI.    TOLLING OF THE SECURITIES ACT OF 1933 CLAIMS …………………………………..146

FIRST CAUSE OF ACTION …………………………………………………………………………………………149

SECOND CAUSE OF ACTION …………………………………………………………………………………….150

THIRD CAUSE OF ACTION………………………………………………………………………………………..152

FOURTH CAUSE OF ACTION …………………………………………………………………………………….155

FIFTH CAUSE OF ACTION …………………………………………………………………………………………157

PRAYER FOR RELIEF ………………………………………………………………………………………………..157

JURY TRIAL DEMANDED………………………………………………………………………………………….158

Option ARMs Come Back into Center Stage: 350,000 Active Option ARMs with over 200,000 in California. 78 Percent of Option ARMs have yet to hit Recast Dates.

Option ARMs Come Back into Center Stage: 350,000 Active Option ARMs with over 200,000 in California. 78 Percent of Option ARMs have yet to hit Recast Dates.

Option ARMs are the gift that keeps on giving this holiday season.  As it turns out, these pesky toxic mortgages are still sitting waiting to hit recast periods.  Like a street vendor taco these things went down nicely and appeared cheap but came with a hefty aftermath.  The last option ARMs were made in 2007 yet they are still causing much pain in the housing market.  Attorney General Jerry Brown has requested data from the top 10 issuers of option ARMs with a deadline date of November 23.  It’ll be interesting to see what is released from the AG’s office.  However, Standard & Poors issued a report on option ARMs last week and found that much of the problems with these loans are still to come.

One of the stunning points found was that 93 percent of option ARM borrowers decided to go with the negative amortization option otherwise known as the “minimum payment” option.  This is something we have established from many fronts and data sets.  The bottom line is the vast majority went with negative amortization and this grew the actual balance owed.  Yet one of the new findings in the report was that 78 percent of all outstanding option ARMs have yet to hit major recast points.  Given that 58 percent of option ARMs are here in California, this is a one state wrecking ball:

In total, some 350,000 option ARMs are still active nationwide.  Over 200,000 of these loans are here in California.  The most risky option as we have established with option ARMs is the negative amortization payment:

Now why was this payment such a poor choice?  Well as the California housing market fell by 50 percent from its peak, the actual balance on many option ARMs was going up.  So not only is the home underwater from the initial starting point, the loan taken out on the home has increased on 90+ percent of these borrowers.  This is like negative equity squared.  So deep are these loans in negative equity territory that not even HAMP can save them.  Oh, and speaking of HAMP, it is turning out to be a colossal failure as expected:

“(NY Times) Capitol Hill aides in regular contact with senior Treasury officials say a consensus has emerged inside the department that the program has proved inadequate, necessitating a new approach. But discussions have yet to reach the point of mapping out new options, the aides say.

“People who work on this on a day-to-day basis are vested enough in it that they think there’s a need to do a course correction rather than a wholesale rethink,” said a Senate Democratic aide, who spoke on the condition he not be named for fear of angering the administration. “But at senior levels, where people are looking at this and thinking ‘Good God,’ there’s a sense that we need to think about doing something more.”

I know many delusional folks in California were thinking that somehow the quiet on the option ARM front had to do with the masterful success of HAMP.  Of course, these loans never qualified for HAMP but that is beside the point.  HAMP is failing because of a simple reason.  Negative equity.  Here in California, we have millions underwater.  Those with option ARMs are not only underwater, they are going to have massive spikes in their monthly payments at a time when the California unemployment rate is the highest in record keeping history.  The problem is Wall Street has sucked up all the taxpayer bailouts and for what?  To keep the crony welfare investment banks ticking?  Trillions of dollars out the door and the real economy is still troubled.  HAMP had the naïve premise that the only problem was high interest rates and the problem with the housing market was toxic mortgages.  Well, the actual problem is thousands of homes are still valued at bubble prices and with stagnant wages for a decade, people can’t afford homes without going massively into debt.  Prime, near prime, and subprime means little when you have no income and that is why even prime defaults are spiking.  The option ARM had such an allure for the gold rush California home speculator because it sidestepped that tiny little caveat of income.  It allowed maximum leverage without the valid income support.  80 percent of option ARMs went stated income.  In other words, people made crap up like saying they made $200,000 when they were pulling $75,000 to qualify for that $600,000 home:

“(CNN) There is another little problem that many option-ARM borrowers seeking refinancing would face: “Upwards of 80% of were stated-income loans,” said Westerback.

These are the so-called “liar loans” in which lenders did not verify that borrowers earned as much money as they said they did. Lenders may not be able to modify mortgages because many of the borrowers’ income could not stand up to the scrutiny. Borrowers may also not want to go through underwriting again because they could be held legally liable for deliberate inaccuracies on their original applications.

Add to those conditions the still fragile economy and high unemployment rates, and you have a recipe for disaster.”

As people chime in about stabilization, California is still hovering near the bottom in terms of prices.  The only reason we have seen prices move slightly up is because the massive jump into foreclosed homes, the home buyer tax credit, Fed buying securities to lower mortgage rates, and all these phony moratoriums that we are now seeing are basically delaying reality for many.  Inventory is artificially low because of the shadow inventory.

People ask for a solution.  Here it is:  We should have (and still should) break up the banks into pieces that are small enough to fail.  Bring back Glass-Steagall with some teeth.  Commercial and investment banking should be put into silos that don’t even come close to one another.  Banks that need to fail should.  After all, the government now backs 90+ percent of all mortgages so why do we even need them?  A quick assessment should have been made from day one on housing.  Those that couldn’t afford their homes should have gotten assistance into rentals.  Here’s a thought.  Why didn’t we create a program where those who had no way of paying on an overpriced home were given a tax break to rent a place in an empty commercial real estate development?  Right there you kill two birds with one stone.  Of course, those on Wall Street and those in our government are two sides of the same coin.  For the past three decades they have systematically neutered our government to the point of it being a bread and circus spectacle.

You think the 200,000 option ARM borrowers in California are sitting in a good spot?  Let us look at negative equity rates for a few metro areas since this is the largest predictor of future foreclosures:

If you look at the Inland Empire and the Phoenix metro area, they virtually reflect one another.  In fact, both areas have negative equity rates of 54% of all mortgage holders.  This is incredible.  Half of all borrowers are underwater in these big regions.  But look at the largest block of mortgages in California clustered in the Los Angeles-Long Beach area.  1.5 million mortgages and 400,000+ are underwater.  You think this is going to bode well for home prices as option ARMs hit their recast dates in stride from 2010 to 2012?  I put in a more normal area of Dallas above and you can see what a normal market looks like.  Even there, you can see that negative equity is still an issue.  But compare that to California and it is another story completely.  What does this mean?  The middle market is certainly going to take major hits once these loans hit their recast dates.  If they don’t qualify for HAMP, then what?  S&P in their report gives an example of a hypothetical $400,000 mortgage:

The payment flat out doubles at the recast date.  Do you think people are going to be able to come up with an extra $1,200 per month with no problems?  You know what the typical mortgage payment for a home bought last month in California totaled?  $1,097.  That is the price of the hypothetical increase in the priciest state in the U.S.  So yes sales are happening but at a much lower end.  How is this going to help those in negative equity on more expensive homes?  Take a look at the raw numbers for the state:

34 percent of all California mortgages are underwater.  You can rest assured that 80+ percent of those option ARMs are underwater.  As the above highlights, those mortgages are still here and they are still toxic.

Option ARMs fall under a bigger umbrella of Alt-A loans.  California has over 700,000 active Alt-A loans.  The bulk of the 200,000+ California option ARMs fall under this category.  But the bulk of these loans are also toxic mortgage waste.  These will go off as well.  These are actually part of the shadow inventory including those who simply stop paying but banks sit back and do absolutely nothing.  Is that really a solution?  Take a look at where the Alt-A loans are in California:

Los Angeles and Orange counties hold the biggest number of Alt-A and option ARM loans.  Do you really think this is a bottom?  It might be for a home in the Inland Empire selling for $100,000 or $150,000 depending on local area dynamics.  But many cities in Los Angeles and Orange County are vastly overpriced.  The above dynamics look similar to how subprime was building up in 2006 and 2007 before the market imploded.  Yet somehow things are now different.

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