Livinglies's Weblog

Editor’s Note: Baltimore decided to take on one of the worst “Club 100” players in the mortgage meltdown, Wells Fargo. The thrust of their argument is that Wells Fargo targeted poor people and made a bad situation worse, causing collateral damage all over the city. Baltimore will now file a narrower amended complaint, but the Judge is clearly not sympathetic. The Judge is obviously infected with the myth that this was mortgage business when it was all about securities sales. The County’s mistake and the State’s mistake is not going after billions in taxes resulting from “off-record” transfers of interests in real property and millions of dollars in fees that have been missed by failure of the real players to register that they were doing business in the state.

But this goes beyond that All cities, counties and states and even the nation have been directly damaged by a securities scheme that created vapor and called it money. This private creation of money supply has burgeoned from zero in 1983 to over $600 trillion, dwarfing the actual money supply of $50 trillion worldwide (1/4 attributable to the U.S.). For Baltimore readers or others in similar situations in their states you might want to forward a copy of this to your city and county attorney.

Here is what happened and what should be alleged:

1. Wells Fargo was part of a chain of participants starting with the selling party of mortgage backed securities to investors under false pretenses, with misrepresentations as to the value, quality, viability and durability of the issuance of bonds that were backed with ownership of percentage interests in a group of mortgage loans and ending with the selling party of securities to homeowners under false pretenses, with misrepresentations as to value, quality, viability and durability of the issuance of notes that were backed by ownership in real property.
2. These participants should be referred to as intermediaries acting in concert with named and unnamed, known and unknown conduits and co-conspirators in the securitization chain, each performing a function enabling the masterminds of the scheme to claim plausible deniability.
3. All participants in the securitization chain had actual knowledge or sufficient information to know that the pools of loans would fail.
4. All participants in the securitization chain were acting as part of a securitization scheme in which only the money of institutional investors and only the property of unsophisticated homeowners were put at risk.
5. All participants in the securitization chain participated in the creation, promotion and solicitation of documents and, money and property that prevented or obscured the investors and homeowners from ever knowing or having access to the actual financial transactions, profits, fees, rebates, kickbacks and tax evasion or avoidance schemes sending a substantial portion of the investor’s funds to off-shore vehicles frequently located in the Bahamas or Cayman Islands, which were dubbed structured investment vehicles that were treated as trusts with an agent named as trustee for the beneficiaries that included all or most of the securitization participants.
6. None of the transactions with investors or homeowners would ever have occurred if the securitization participants had disclosed the real nature of their activities.
7. All of the transactions contemplated the failure of the pool of assets that was nominally transmitted or assigned to special purpose vehicles created by the investment banking participant in the securitization chain.
8. A substantial portion of the entire aggregate of financial products created by the securitization were designed to fail. For example: if a homeowner was induced to issue an instrument that would be used as a negotiable instrument, the terms of the instrument contained provisions that would eventually require the homeowner to make payments that exceeded the homeowner’s gross annual income.
9. The investment banking participants in the securitization scheme created sham weekly trading auctions to give the false impression of liquidity of the investor’s securities.
10. The originators of the transaction with homeowners created sham ” rising market conditions” to give the false impression of liquidity of the financial loan product and underlying asset. In fact, the apparent rising prices were created by forcing money into a system, overpaying securitization participants compared with conventional generation of financial loan products, and creating procedures to emulate conventional underwriting procedures wherein none of the parties named in the transactions had any stake or risk in the transaction but were false and intentionally represented to be the true parties to the transactions with investors and homeowners.
11. In all cases the securities, instruments and documents were obtained by fraud in the inducement and fraud in the execution.
12. In all cases the value of “assets” described as security was either nonexistent or was substantially less than what was represented.
13. In all cases the underwriting process was virtually abandoned except the retention of parts that would enhance the sham transactions.
14. Investors, specifically, were duped by the subterfuge of including apparently high quality loans covering a sufficient number of “toxic” transactions that were guaranteed to fail — a goal of the securitization participants who had purchased insurance contracts “betting” against the pool thus indirectly betting in favor of multiple “defaults” by homeowners.
15. The securitization participants also “rigged the system” by arranging for “foreclosures” on underlying assets wherein the intermediary participants would conduct said foreclosures, keep the title and keep the proceeds fo sale of foreclosed properties contrary to the interests of the investors or the homeowners.
16. Specifically the securitization participants targeted audiences of homeowners that were neither highly educated nor highly sophisticated in real estate transactions, loans or mortgages. The securitization went though entire communities, block by block soliciting homeowners to purchase these faulty and fraudulent securities or financial loan products.
17. Many of the communities selected by the securitization participants as targets for this scheme were older, established communities wherein a substantial number of homeowners had either paid in full for their homes or had substantial equity in their homes.
18. Many of the targets were “new” communities wherein developers became part of the securitization scheme enhancing the appearance of rising prices by raising the purchase price while at the same time setting up on-site or off-site relationships where financial loan products would be offered in which the first payments were affordable but would eventually skyrocket past any capability of the homeowner to pay.
19. The securitization knew or must have have known that when these communities were foreclosed en masse, the effect on the community, the city , the county and the state would be devastating as the demands on social services rose and revenues declined, forcing the respective government to reduce services when they were needed most.
20. All efforts by Federal, State, County and local government and organizations at settling the issues failed because the plan of the securitization participants was to get title and possession to the target homes, and to retain the benefit of all the profits and fees diverted from the securitization chain, which included in most cases, insurance proceeds that vastly exceeded the value of the home or even the nominal value of the financial loan product purchased by the homeowner.
21. In many if not most cases, proceeds from federal bailouts or purchases, together with insurance and other payments and credits allocable to the securitized loan products and pools were retained by the securitization participants but accepted them as payment for the “toxic assets.” The amount paid was 100 cents on the dollar which means that either no money is due under the obligations created or that they have been substantially reduced. In all cases, the claims of the intermediary securitization participants in foreclosure are false both as to their status as creditors and the amount claimed as due.
22. The collateral damage to non-targeted homeowners included lower valuations of their own homes because of the artificially inflated of inventory of homes offered for sale arising from the foreclosures.
23. As a direct and proximate result of the above scheme, the City of Baltimore has suffered lost revenues and increased obligations for social services, as well as deterioration of the good-will value of the city as a target place to live or work. All of these consequences were foreseeable, known or must have been known by the securitization participants.

Federal Judge Rejects Suit by Baltimore Against Bank

A federal judge this week tossed out a lawsuit by Baltimore against Wells Fargo, ruling that the city could not prove that the bank’s lending practices had resulted in broad damage to poor neighborhoods.

Baltimore officials have accused the bank of tipping hundreds of black homeowners into foreclosure by singling them out for high-interest subprime mortgages.

But the city’s claims are “even more implausible,” Judge J. Frederick Motz of Federal District Court wrote, “when considered against the background of other factors leading to the deterioration of the inner city, such as extensive unemployment, lack of educational opportunity and choice, irresponsible parenting, disrespect for the law, widespread drug use and violence.”

Officials with Wells Fargo, one of the nation’s largest banks, have declined to give interviews on the lawsuit. But Cara Heiden, co-president of Wells Fargo Home Mortgage, said in a statement after the ruling, “From the beginning, we have consistently maintained that Baltimore’s economic problems could not be attributed to the small numbers of foreclosures Wells Fargo has done in Baltimore.”

Judge Motz left the legal door ajar for Baltimore, saying city officials could file a more limited complaint detailing specific damages caused in specific neighborhoods. Lawyers for Baltimore said they would do so.

“We are not saying that Wells is responsible for a catastrophe in Baltimore and all the deterioration of the neighborhoods,” said John P. Relman, a lawyer representing the city. “We are simply saying that they are engaged in illegal conduct.”

Mr. Relman promised that the city would detail the costs it incurred, including boarding up foreclosed and abandoned properties, responding to fires and dispatching police officers to evict squatters. And he said the city would point to the damage to the home values for surrounding homeowners, about which there is extensive academic literature.

The Baltimore lawsuit included affidavits from former Wells Fargo loan officers who said the bank had systematically singled out black applicants for high-interest subprime mortgages.

The judge’s decision was a blow to a growing number of efforts by cities and states to hold banks accountable for some of the loose lending practices of the past decade.

In Memphis, city officials last week filed a lawsuit against Wells Fargo, saying the bank’s lending practices had wreaked havoc in predominantly black neighborhoods. In Illinois, the state attorney general filed a lawsuit accusing Wells Fargo of marketing high-cost mortgage loans to black and Latino customers while selling lower-cost loans to white borrowers with similar incomes.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: Baltimore, John p. Relman, Judge J. Frederick Motz, Michael, New York Times, Powell, securitization, subprime mortgages, Wells Fargo |