Whistleblower Speaks On Fraudclosure

Submitted by Tyler Durden on 10/19/2010 07:49 -0500

Mortgage Backed Securities
Mortgage Loans
Ratings Agencies

Zero Hedge has been approached by an individual who participated directly in the various aspects of what is now broadly known as Fraudclosure. The below narrative recounts his experience in the due diligence process of selecting loans for the MBS pipeline. And far more than just legalese “technicalities” or a broad abrogation of property rights, as he points out there is a far more palpable issue for all those who hold Mortgage Backed Securities or other pool aggregations of mortgage loans: “we have no idea what is in those packages.” This coming from the person who helped pick, diligence and sort through the various loans…
Full exposition:
The truth behind the foreclosure crisis.

Yes, I am choosing to remain an anonymous coward. I just have been waiting this shoe to drop for a long time. The last thing I want to do is have to explain myself and get my ass sued for defamation. Not worth it.

This much I can tell you. We have no idea what is in those packages. I personally packaged billions in MBS which have been placed on public shelves. Those assets were underwritten by Goldman, Morgan or name your investment bank.

I started packaging loans as early as 2003, at the beginning of the crisis. After working for a large aggregator in New York, I joined GMAC. Those were good times. I worked directly with the traders to package assets that we would buy from our institutional clients and broker channel. It was the trader’s responsibility to close the deal with the underwriter. He would then hand the deal to the securitization group where it was managed by an asset specialist and a securitisation manager. We take the pool to the ratings agencies, S&P, Fitch, or Moody`s where we get levels of overcollateralization required for the waterfall of public tranche offerings.


Then, we worked with underwriters of the deal to perform due diligence. That is where this process breaks down. They use sampling to verify the makeup of the pools. There is a lot of pressure to get the deals done in a timely manner so they don’t have time to check every asset. The most I’ve ever checked on a deal is 30%. We’ve done some pools that came back very different from what the trader originally told us. I’ll give a personal example and show how it relates to the foreclosure crisis.

I put together a large subprime deal where we said that the percentage of Stated income assets was 10%. Out of a pool of over 500 assets, we ran our due diligence and pulled a sample of 50 assets, we had over 25% of the assets come back as stated income. Well, we got another 50 assets and still came back with 22% stated. It was obvious to me and the underwriter that the stated income levels were higher than originally reported.

How did we handle this issue? We threw all the stated income assets out of the deal. In this case we threw out 22 assets and packaged the deal as 10%. In fact that is how we would typically handle issues where we had discrepancies. I told my boss on several occasions that it was a real fishy way of doing things, but as everyone was also doing it, my coworkers, the guys from Goldman, the agencies, I just kind of went along with it.

We securitized that deal and put 10% stated on the deal-book. S&P put their name on the package. Goldman underwrote that deal and sent it out to hedge funds and pension funds. What the hell?

That deal was one of the worse deals that we did. Many other deals did come in as reported. Some might have been only 15%, or 12% instead of 10% stated. In most of those cases, we might have only thrown out a couple of assets. And, it may have mathematically worked out assuming that the sample is representative of the population, but it still leads me to my big problem, that there were far too many instances of incorrectly labeled loans, incorrect documentation such that the pool information which went on the deal-book could be very different from the actual makeup of the pool.

Don’t get me wrong, I’m not saying that all deals are incorrect, most aren’t. I’m saying that many are, and we have no way of knowing which deals are tainted. Fortunately, most deals have been seasoned a bit which make them easier to value, but the foreclosure documentation is just one instance where my shady skepticism has been vindicated. I knew there was shit floating around in the pools we were putting together, but the sampling technique and level of due diligence was never going to clean it out.

Due Diligence of lack thereof

That is one of the big fights that the we had with the i-bank underwriting the deal. We would always try to reduce the sampling size. The agencies would stand on the sidelines, and put the stamp of goodness on the pool so long as we were in agreement with the underwriters.

Now going back to the foreclosure mess, when doing the due diligence, we would often find assets that were missing a document here and there (and these were just the ones that we were catching). We had the same response to the bad docs as we did the stated income discrepancies, i.e. just throw those assets out.

I’m no expert, but I do know that statistically, if there is a problem with the sample, there is an overwhelming likelihood of having problems with the population. If you are checking the meat and find out its bad, you don’t just throw out the piece that you checked. It means you have a problem. Check everything.

During the heyday of securitization, due diligence was something that we tried to limit. The underwriters were really looking for instances of egregious fraud. They did not set out to intentionally fraud investors, they just thought that by throwing out the offending assets, the pool would be made whole so to speak.

Loan Documents

Foreclosure and other loan docs make the issue more complex. We would buy assets all over the country and package them up. Every state has its own laws as to the documentation required. We do have lawyers who are experts in the ins and outs of loan documents, but in all honesty, we relied on the threat of reps and warrants to help us feel comfortable.

We didn’t check every single loan document for every single legally required piece of information. Yea, we’d check for the important things, but we couldn’t and didn’t check for every single clause on every single loan document. We couldn’t. And now we are finding out that we should have.

But, as I said before, we have no idea what is in those packages.

29 Responses

  1. ANON and Bob G., if you get a jewelers loupe, you can tell if the impression (writing) is done with an ink jet or a ball point. Even this isn’t fool proof since they have signature machines (not new). You can also compare the paper to the papers tendered to the buyer at the closing. if the bond is different, that is, the grain and brand of the paper, is inconsistent with the originals the buyer left with, they are indeed fakes. Both sets of documents should have theoretically come off the same printer/same ream of paper. Also, paper ages, yellows, accumulates odors; think of how many different weights and grades of paper there are. Very distinguishable.

  2. Careful re: ballpoint pen impression of signature on the note

    I have learned prior that in some instances the banksters are
    ‘lightly tracing’ signatures to create that ‘impression’ on the newly re-created notes.

    So—don’t count on the ballpoint pen impression!!

  3. Bob G

    Thanks Again!!!

  4. Politico is reporting that the Banks are all talking to the state AGs and, get this, republicans in Congress. Banks want a settlement, pay some fine(with our money), and accept some changes to foreclosure processes.

    GD republicans! I hope the AGs do t buy it.

  5. Bob G

    Thanks. Substitution of documents issue. Appears to be a big problem with authenticating originals – without expert – Neil’s area.

    But – my focus is conveyance – if not conveyed properly – does not even matter whether note is original or not. Will never get all access to documents – and trail of chain. It is the courts that are blocking this access and discovery. This is why we need AG intervention. Heard AG talk today that their focus is title. Whatever their focus – hope they get moving quickly. It is long past due for them to get involved.

    Believe you asked question before that was a state particular issue. But, if I can help in any other way – let me know. Thanks again.

  6. ANON – a little more on the copier serial number.

    I believe that when you go to a closing, you sign a printed note, not a photocopied note. The printed note from the printer shouldn’t have any UV detectable serial number on its paper. I would ask for all original papers that I signed at the closing, from all the printed forms. If they produce them, the other signatures and ink are unlikely to match up with the purported original note, and all the papers will have the same copier serial numbers. Originals from the printer shouldn’t have any serial numbers on the paper.

  7. ANON

    I think Neil addressed this once, didn’t he? I think he examined a purported note and found no ballpoint pen impression on the note’s underside.

    Additionally, I would test the signature ink with a wet fingertip to see if it smudged. If it’s a blue ink signature, I would say that I signed it in black ink, and vice versa. I believe that the paper can be tested with ultraviolet light. It is my understanding that every copier in the U.S. has a serial number signature that will display on a paper copy when exposed to some sort of UV light. It’s a Secret Service requirement. And if I signed the document, it should have my fingerprints on it, and could be tested for it. Also, I suppose that one could depose the document custodians that archived and produced the note. Finally, you would depose the closing agents and asked them what they did with the original note. I just met with a closing atty who said “yeah, we scan the originals upstairs and then we destroy them. and we’re still doing it. I don’t know why people are still doing these securitized deals.”

    Hope the above helps. Could use some of your help as well.

  8. And, to respond to Tyler Durden (above) – Okay – that tells us why the “deals” were not rated accurately – but, what happened to those loans that you knew were tossed out – you mean tossed out of aggregate reporting? but still remained in deal? – or vice-versa??- tossed out of deal – but still remained in aggregate reporting??

  9. Bob G.

    Been here for quite some time. Need help from you. Not for me – but someone else – and you seem to know quite a lot. My focus has always been the false securitization and legal standing. But….

    Please – and need as soon as possible – HOW do you know if a note is the original – and/or or copy of the original??? Copies have been changed.

    Thanks – greatly appreciate.

  10. Gwen

    I don’t think this guy/gal is an expert at anything. The best this person can tell is what they did on their summer vacation. The note is not worthless. A min value can be established easily. It’s the real value of the house. There are a lot better defenses than the one you’re contemplating.

    The face value of the note is prima facie evidence of its worth. But that’s not the issue. You need to prove that the forecloser lacks standing or that you were somehow defrauded or that it violated one or more statutes. How many victories have you seen where the homeowner prevailed on statutory violations? I don’t know of any that put the homeowner in the catbird seat and got him a discharge of the note or a major writedown in principal.

    Moreover the whistleblower herein is merely a clerk. There is no expert testimony that I can see that would be admissible or helpful.

    Just my 2 cents.

    Would you be willing to testify as an expert that there is no way to determin the value of a particular note at any point in time after it allegedly went into oneofthese trusts? If that is the case, which is what I believe you are saying, then that type of expert opinion could be used in seveal ways. First, as an affirmative defense to foreclosure if the note is claimed to be in the trust, that the note has questionable value if any, and therefore there is no right to foreclose upon a note whose value cannot be determined. Second, if you are not in foreclosure, but in a loan mod situation or a quiet title action seeking a declaratory judgment on the vaue of the note for purposes of quieting title or modifying the note, that again, no determination can be made with any degree of certainty and therefore, as a judge could make a determination under summary judgment as a matter of law–the note cannot be proved to have any value whatsoever. If you can giv me that affidavit–or anyone else, i believe it is worth a sot folks to see what happens in a court of law. I for one am wlling to try it in my own quiet title action. please let me know l i will follow up on the comments below

  12. @ Colleen Collins,

    If your home is vacant, simply move back into it like others are doing.

  13. Jose, can a mortgage analysis and quiet title suit be effective before foreclosure? If so, on what would borrowers not in foreclosure base quiet title? To recover payments made to the wrong party?

  14. Lucy

    We don’t have time for “interesting or entertaining stuff.” We need information and tools and action.

    Every decent American who believes that he or she is a moral person needs to set that all aside for now, for this battle. These bastards have put your house “in play.” The question is, who is going to get the “Free House?” The big crooks or the little crooks? (Sorry, couldn’t help myself. LOL.)

    These Big Crooks have set the moral tone and the rules of engagement in this battle. Do unto them what they do unto you…and do it before they do it unto you.

    Like the Civil War in the 19th Century, a time for rehabilitation, reconciliation and reconstruction is not for now, it is for later. Now is the time for battle.

  15. I keep remembering Neil’s Miranda Rights. I don’t trust the online information gathering sites, as they might be there for nefarious datamining. Too paranoid? Maybe, but I am taking Neil’s advice and refusing to give any more information than I have to, choosing instead to use the QWR, squeezing details out of the bank.

    Name, rank, and serial number is all anyone gets from me.

  16. Any news, minor or major, that supports our cause is good for us. Some news might be for purely entertainment value but I’ll take it.

    I’m still waiting for the day when we can see these crooks put in jail where they belong !!!

    I’m way past the stage of being right or wrong, I want the satisfaction of seeings these bastard inJAIL,serving time behind bars.

  17. Actions to quiet title, make it simple, get you Mortgage Analysis and get a lawyer, and sue the pants off. If you know of any one who have lost their home, they should read this and other blogs and hire a lawyer, sue for quiet title, wrongful foreclosure, etc. No matter what they cannot erase the fraud on the public records and all the documentation the generated.

    who cares if you get the house back or not, get justice and in the process some $$$$$$$$$$

  18. Thanx Lucy. I read it…but so what? First, I too am somewhat skeptical. The guy doesn’t sound too articulate. Secondly, where’s the play here? I’m not an MBS investor. I’m shooting to quiet titles. Everybody else here seems to want to get rid of their notes. How does this guy’s bean spilling help us? And so what if he did what he said he did. Doesn’t sound like fraud to me. Pretty much what Microsoft does when it comes out with a new release of its operating system. They don’t guarantee anything. Fixes later, if really, really necessary. Nobody sues them, right?

  19. Bob G. and Simon,

    This article is from

    Very informative website and I enjoy reading it, especially the comments.

  20. Colleen,
    Why don’t you move back in and then fight the wrongful foreclosure?

  21. I am skeptical of this anonymous source.

  22. This is useless testimony, as far as I can determine. What is the practical use of it for anyone on this blog?


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