Federal Judge Narrows Options: Baltimore vs. Wells Fargo

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.
January 9, 2010

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.

11 Responses

  1. […] for bad loans which have resulted in foreclosures costing the city tens of millions of dollars. See here for analysis of the original dismissal. Green Book Supplement Available “The Green Book” 2010 supplement, the Bible outlining […]

  2. […] http://livinglies.wordpress.com/2010/01/09/federal-judge-narrows-options-baltimore-vs-wells-fargo/A pure real estate bubble, driven by low interest rates • The old system is GONE, not to come back anytime soon • Over 95% new mortgages in past six months government flights from Sydney to Ayers Rock guaranteed • Fannie and Freddie are de facto nationalized … […]

  3. How to Fix the U.S. Mortgage Market

    We are in the midst of the bursting of several related bubbles, including the “super bubble”
    that encompassed the entire international financial system. The epicenter of the crisis is the
    complex and poorly financed US housing market
    * Key and related issues that need to be addressed include:
    • Minimizing delinquencies which lead to foreclosures
    • Maintaining mortgage finance availability
    • Minimizing the likelihood that home prices will “over-correct” and go too low
    • Reducing the negative macroeconomic impacts of the decline of home values
    • Reducing the negative impact of existing mortgage backed securitizations and derivative
    financial products on the financial system
    * Comprehensive mortgage reform is required, with three key elements:
    1. Reducing interest rates for ALL mortgage borrowers
    2. Directly lowering the number of homes with negative equity
    3. Introducing a new mortgage system that properly aligns incentives – the Danish Model
    Many problems led to the current situation, including
    • Systematic poor underwriting of credit risk due to improper incentives and poor
    accounting rules (e,g., originators often not “on the hook” for any portion of credit risk)
    • GSE business model based on positive returns accruing to the private sector with downside risk held by the government (heads we win, tails you lose)
    • Excessive demand for poorly designed MBSs and CDOs as part of the financial bubble;
    lax evaluation of the underlying risks in these securitizations by the ratings agencies
    • A pure real estate bubble, driven by low interest rates
    • The old system is GONE, not to come back anytime soon
    • Over 95% new mortgages in past six months government guaranteed
    • Fannie and Freddie are de facto nationalized
    • Comprehensive reform faces complex obstacles
    • Worsening economic fundamentals greatly exacerbate foreclosures and home price drops
    • Tranche warfare between different owners of mortgage backed securities and ensuing
    uncertain legal liabilities impede workouts of troubled loans
    • It is difficult to simultaneously reduce the number of homeowners with negative equity,
    meet standards of fairness, and provide sound incentives for homeowners
    • Repetitive practical difficulties of timing and scale bedevil all proposals; regulators are
    multiple, overlapping and uncoordinated
    Lowers mortgage interest rates
    • Key to preventing overshooting on the downside of housing prices
    • Needs to be available to full range of borrowers, not just high FICO, high downpayment
    borrowers that currently qualify for agency mortgages
    2. Limits unnecessary foreclosures by reducing number of homes with negative equity
    • Negative equity must be addressed – there is no other way to limit foreclosures or to
    avoid excessively low prices for years to come
    • Policies must address issues of fairness and homeowners who have no realistic way to afford current home
    • Must be done at scale, promptly
    3. Puts the system moving forward on a sound basis with well-aligned incentives. Cleanly
    separates credit risk and interest risk
    • Advisors to homeowners (brokers and mortgage bankers) should evaluate and share
    credit risk – can this person afford this home?
    • Bond-holders should manage interest rate risk over time – what happens when interest
    rates rise or fall, the yield curve changes, or volatility increases or decreases?


  4. Well said Libra 99 but they are not exactly paid for yet. You see to gain leverage in this entire scheme some of the intemediaries in the securitization chain invested judges retirements in the pools that all of the ARM loans are floating in. It makes no sense why we are still trying to rely on a judiciary that is predisposed to the idea that “borrowers can’t rely on rights they have or exercise thereof in an attempt to escape a debt that they owe”, thus upsetting the nutrality/impartiality of the judiciary and making the very purpose for which they exercise their sole discretion without a jury for a “fair and just” decision futile.

  5. Richard
    where can I get a copy of the GSE Model?

  6. Unfortunately, most lawyers are not business people and have little understanding about the business world when attempting to draft their complaints.

    Wells Fargo is and has been major “player” in the GSE Business Model”. It is that Business Model that has been called “fatally flawed” by many. When one participates in a franchise that they know to be “fatally flawed” just for the pecuinary interest inherent therein is the cause of action for those adversly affected.

    The municipalities adversly affected have yet to identify the culprit……….the “GSE Business Model” and the various players involved are only incidental. Perhaps if the lawyers properly identified the problem (the Model) , perhaps the judges could understand the complaint.

  7. To: Paul from Atlanta…You have a “whole lot reading” to do here on this website, if you think WELLS FARGO was not to blame! What do you do, work for them? This was an organized scheme to make these mortgages fail! You best start with,”Anatomy of a Train Wreck”! In the column to the right here!

  8. This Judge should go and do a live inspection in the very city that his claims of unemployment, disregard for the law and drug offenses are all just symptom’s of a much larger problem. When city planners and engineers, devise a plan to create equality in lending and put a stop to the predatory lending then maybe the Judge would be more willing to force change. I would like to point out that “Wells Fargo” is not totally responsible, it should help in the same percentage as other predatory lenders in the same area! I my self live in an area that though the economy is tight home prices are holding steady, not selling and buying like the good old days, none the less it is what it is.
    To the degree that banks have usurious predatory loans that failed, they should at least help these areas for redevelopment equally. I do not mean to disrespect the ‘Judge’s Decision” and for total respect, change is going to be needed no matter what is said or who say’s it. community’s need our help and we need their’s. This is going to be an issue for a long time, and with the state of the “Big banks lending [ not ]” policy’s, I would advise every one move your money to your local small bank. That and almost all of that will send the proper message.
    One more thing, the big four banks have choked credit lines to small business;s and forced many out of “BUSINESS” thus job loss’s, and tax revenue declines will continue to diminish opportunity’s creating more of the things the Judge have mentioned above.
    Thank the Fairness and non one sided decisions from the Judaical system in Baltimore. Help is needed every where across the US.

  9. Somebody please do a Youtube video on these criminal Judges…

  10. To say these Judges are “infected” is an understatement; more like they’re all bought and paid for.


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