Karl Denninger…Weekend Roundup: Foreclosuregate Status

EDITOR’S NOTE: This probably applies to private student loans too. The government guarantee is a nullity if the participating member bank did not actually make the loan. Hence the student loan is dischargeable in bankruptcy or already paid in full. Think about it.

Posted 2010-10-23 22:02
by Karl Denninger
in Foreclosuregate

There is a very important audio interview on KOH that you need to listen to.

It’s two hours, and that’s a lot.  But it’s important.

In particular, listen to the couple of minutes starting at 12:30 in.  Then listen to 6:30, and 42:30, right around 50:00 and then again at 70:00 and finally, at 78:00 in.

Pay attention to what’s being said here.

First: The assertion is made that the lenders and holders of the notes were paid in full. That is, they have no economic damage from the default (!) due to the way they structured the deals.

Second: The assertion is made that there was fraud in the inducement in all of these loans, in that there is an implied duty of dealing in good faith in all contracts that was violated by the banks that made knowingly bad loans – which we now have sworn testimony on. While this is not settled by any means, there is currently pending litigation on this point, and if this approach wins, well, then you go – those contracts are voidable.

Third: The allegation is made that the banks were not stupid – they knew the mathematics (as we all do now) and intentionally crashed the market. That just compounds the second point.

Fourth: MERS has given sworn testimony that they have no economic interest and have nothing to transfer. Oh wait a second….. then how the hell do they transfer a deed they don’t have (even though they’re listed as Mortgagee) to someone who then forecloses – or alternatively, forecloses themselves on behalf of someone else?

Incidentally, FDN has picked up on this tooDon’t expect the entire “fraud in the inducement” line of inquiry to remain quiet for very long, and again, if this wins at trial – even once – you’re gonna get this:


The MERS problem is also outlined in a rather long and exhaustive paper in the Cincinnati Law Review. The salient point is here:

With these services on offer, the mortgage finance industry quickly and wholeheartedly embraced recording and foreclosing its mortgage loans in MERS’s name, rather than the actual parties in interest. Instead of legislation or a landmark court ruling, mortgage industry insiders report that the key development in the acceptance of MERS was the endorsement of credit rating agencies such as Moody’s, Standard and Poor’s, and Fitch Investment. 71 For example, in 1999-before any significant appellate judicial opinion on the subject-Moody’s Investors Services issued a report concluding that MERS’s mechanism to put creditors on notice of a mortgage would not be harmed. 72 Moody’s concluded without citation to any court opinion, or even to any state recording statute, that “subsequent creditors of the entity selling the mortgages to the MBS [mortgage backed securities] transactions [sic] should not be able to contest the conveyance of the mortgages based on lack of notice. 73

Got that?

The agencies concluded without any legal justification whatsoever that this was all ok.

Since when does a ratings agency trump State Law?

There’s been an awful lot of flip-flopping on many of these points in the last week.  In particular, you’ve got people who were all over the fraud side of this that suddenly got very quiet.

One wonders why – and note, it’s not that they’re repudiating what they formerly said, it’s that they’re saying nothing at all, and some are now trying to throw this back on the borrowers, making all sorts of claims of “unethical” behavior on their part.

Let me be clear on my position: This entire bubble was predicated on fraud – up and down the line.  I’ll simply quote Bill Black, since he’s more concise than I can be:

Nothing short of removing all senior officers who directed, committed, or acquiesced in fraud can be effective against control fraud. We repeat: Foreclosure fraud is the necessary outcome of the epidemic of mortgage fraud that began early this decade. The banks that are foreclosing on fraudulently originated mortgages frequently cannot produce legitimate documents and have committed “fraud in the inducement.” Now, only fraud will let them take the homes. Many of the required documents do not exist, and those that do exist would provide proof of the fraud that was involved in loan origination, securitization, and marketing. This in turn would allow investors to force the banks to buy-back the fraudulent securities. In other words, to keep the investors at bay the foreclosing banks must manufacture fake documents. If the original documents do not exist the securities might be ruled no good. If the original docs do exist they will demonstrate that proper underwriting was not done — so the securities might be no good. Foreclosure fraud is the only thing standing between the banks and Armageddon.

There’s only one solution to all of this: Take all of the big banks into receivership.

Force these securities to be examined, those with fraudulent originations beyond their specifications to be unwound and put back on the securitizers.

This will detonate them.  Since they’re in receivership, their stockholders will wind up wiped out and their bondholders will take the hit as they are crammed down into equity.

Where intentional fraud is found in the inducement, as has been alleged by Citibank’s former chief underwriter in over 80% of production for 2007, people need to go to prison.  A lot of people.  And while this does not necessarily mean “free houses” it sure does mean recission of the deal – and if that winds up forcing renegotiation of the terms (including principal), then so be it.

The more time goes on the deeper this rabbit hole gets and the more fraud we find evidence of.  Contrary to the professed claims in the media, this is not getting clearer and headed more toward “clerical errors” – it is headed more toward the entire financial system being one gigantic pyramid of fraudulent transactions layered upon each other, none of which were unwound during the so-called “bailouts.”

Instead, it appears that government decided to attempt to perpetuate the debt and fraud ponzi schemes – likely because, arithmetic or not, they knew that letting it all into the light of day would mean incalculable and insatiable demands for prosecution – at least figurative if not literal heads on pikes.

If you think the idiocy and downplaying of reality is limited to the bankster apologists on CNBS, you’re wrong.  We also can look to Housingwire, which put forth a pure fantasy piece that included the following:

The real fact is that the ‘robo-signing’ scandal is a procedural one, albeit one that offends the very nature of due process.


The injured parties from this gross abuse of process are limited to the court, who has seen its rule of law mocked; and potentially investors, who must ultimately pay for the added time and expense of re-filing.

Forgery is not a “procedural issue.”  It’s a felony act of perjury.  Mocking the rule of law is not a procedural matter – it goes to the very heart of our legal system, not to mention The Constitution. There is this pesky thing called The 5th Amendment.  I know that the mortgage and housing industries think that such matters lack substance in this case but I’m quite sure that if the people decided to start stringing up lenders, bankers, and builders from lampposts en-masse, they’d change their tune about “procedural issues” and due process rights in a big damn hurry.

Within minutes of the ‘robo-signing’ scandal, seemingly, commentators were giving credence to long-standing claims regarding the validity of MERS as a foreclosing party, who really owns the note, as well as highlighting put-back risks — a span of issues that are distinctly and utterly separate from the procedural challenges encompassed by ‘robo-signing.’

Nonsense.  The entire “robo-signing” thing is part and parcel of the industry’s inability to produce factual documentation right up front. There are only two reasons not to produce the original paperwork, properly endorsed, instead of all this robo garbage:

  1. You don’t have it because you never got it, and you’re trying to cover that up.
  2. You don’t have it because you intentionally destroyed it or are hiding it, as producing it would document that you did something fraudulent earlier on in the process (like at origination, for instance), and you’re trying to cover that up.

In short, there is no other explanation.  A few lost pieces of paper here and there?  Sure.  A system that can’t produce any of the paperwork, properly endorsed over?  That’s not accident – it’s an intentional act.  Period.

In other words: massive GSE putbacks? Yes. Massive private-label putbacks? Eh, probably not so much. In either case, however, hardly does this seem to be the sort of end-of-the-world scenario that so many have painted recently.

Really?  Remember, Lehman wasn’t so much the end of the world for Lehman per-se, as it wasn’t that big a firm.  Rather it was the cascading credit default exposure that everyone was worried about.

Does anyone recall us actually fixing that by forcing it all onto regulated exchanges, where margin was maintained on a nightly basis so we know that everyone’s good for the crap they’re holding?  Oh, I seem to remember that didn’t happen.

Funny how everyone forgets that the nuclear device that started all this crap is still sitting on the board room table, it’s still ticking, and someone still has tape over the timer window so nobody can see how many more “ticks” we’ve got.

The real brewing issue in the markets currently — and quietly — is one of investor confidence, borne most lately of horrible remittance reporting. Investors have had it with inaccurate reports from servicers, and some are threatening to ditch MBS markets altogether.

Getting lied to repeatedly has a way of doing that.  You know, things like Clayton being revealed to have done diligence on these loans and finding them bogus, but then having them shoved into the securities anyway – without disclosure to the buyers. Or Citibank’s chief underwriter stating under oath that eighty percent of production violated reps and warranties in 2007.  Eighty percent?! Then you add stiff-arming to this by the securitizers for the original loan data.  Gee, I wonder why they wouldn’t want anyone to look after their own people testified that they packaged up loans they knew were dogcrap and sold them on to investors!

The third real issue facing mortgage markets today, quite frankly, is that political reality is allowed to subsume actual reality. This is the outcome that sees the mortgage industry eat its own, if it comes to pass.

In a word, bull****.

The “industry” should eat its own.  What integrity does a fraud-laced process have?  What sort of weight does someone who refuses to disclose what they did earlier on to a buyer command with a new buyer?  Zero, that’s what.  Getting rooked once is a bad thing.  If you get rooked twice it’s your own fault for trusting someone who has proved, through their own conduct, that they will **** you as long and as hard as they think they can get away with. That is, buyers of these securities appear to now know for a fact that they were sold crap on purpose without proper disclosure.

None of these banks has any reason to expect that any of these buyers would ever do business with them again under any set of terms or conditions.  In fact, this alone ought to be enough to put them all out of business – permanently.

The reality here is that what we have is a bunch of piranhas in a tank that have been feasting on Americans for two decades.  Now the Americans are down to bare femurs, tibia, fibula and ribcages – they’re out of assets to strip and out of payments to poach.

So now we get to the fun part, where the ravenous piranha, devoid of any sense of ethics and willing to eat literally anything, turn on their buddies and start tearing them apart.

7 Responses

  1. […] DENNINGER: ALL SECURITIZED LOANS PAID IN FULL « Livinglies's Weblog […]

  2. I guess the people of the US are going to have to contact their representatives whether it be senators or house reps and make it clear that we want justice to prevail. These big bank thieves and liars need to be put completely out of business and tried and sentenced for the felonies they have committed. This scam starts at the origination point of the mortgage loan. The big bad banks knew they were going to sell these loans into a securitized trust, so they did not care if the loan was bad and probably would not be paid back. That was going to be the investor’s problem. The investors may have been pension funds or 401K investments, the big bad banks did not care. I moved my accounts out of BofA today into a small, local, well-run neighborhood bank that gives me great service.
    The US is losing its credibility because of this nightmare. The big banks in Japan, China, Germany, UK and Brazil are not going to want to do business with us.
    Throw the big banks to the wolves where they belong.

  3. Dave,
    Can’t you use the deposition Arnold already made in 2009? Or does one have to depose him in your own suit?


  4. Fantastic commentary!!

    Let the banks fail.
    Bring on the rescissions!

    He’s right. I’m not trusting banks ever again.

  5. There is no longer a viable contract if the note was fully satisfied, Who cares where the money came from?

    The judges are starting to realize that the MORAL HAZARD issue is no more than a fake argument. The foreclosure mill attorneys are currently in court promoting the interest of undisclosed parties even to themselves. In Non Judicial States these lawyers are still bringing up many different versions of affidavits, appointments of trustees, and even promissory notes.

    The bankers have it made, they have bought the white house, the department of justice, congress, senate, our local court houses, our state governments and legislators, but they have not been able to destroy our will and determination. We will prevail!!!!!

  6. Peterson gets to the core of the problem but misses the diffusion point … agency.

    Agency will be the key here. In quiet title, you will have to depose Hultman or Arnold whenever you find MERS conveying or receiving anything on your “Assignment of Deed of Trust” or mortgage. In most of these documents, it clearly says, “For Value Received” ….

    What value? If MERS is bankruptcy remote and has no assets and no liabilities and no income and no expenses … it certainly can’t OWN anything now can it? So your question to them is … “The assignment says, FOR VALUE RECEIVED. What did you pay for it? If they say, we didn’t pay anything for it. Then you say, “So you’re saying it is worth ZERO, right?” They of course will argue that. But the point it, if MERS doesn’t own it, they can’t convey it.

    #24 of Deeds of Trust (generally) SUBSTITUTE TRUSTEE, clearly reserves that right to the lender. It does NOT say (in most cases) “or lenders successors and assigns” and it definitely does not say MERS. This establishes agency by contract.

    Agency and quiet title work hand in hand because of the transfer in the chain of title. Defeat agency and you’ve won!

  7. In contract law there is a concept called “acceptance of the benefits.” This bars recision of the contract. However, I would argue that the actual benefits accepted were far less than those represented by Wall Street, and thus the loan should be crammed down to the actual value of the benefits accepted.

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