DENNINGER DEAD ON: Logical Fallacies And Foreclosuregate


The Market Ticker – Logical Fallacies And Foreclosuregate

Today, October 31, 2010, 36 minutes ago | genesisGo to full article

Of perhaps, more-broadly, the entire housing bubble and collapse.

Even before some of the nation’s biggest mortgage lenders were forced to suspend foreclosure proceedings because of faulty paperwork, it was becoming clear that the Obama administration’s year-old effort to pump life into the housing market was falling short.

It wasn’t “falling short.”  It was intentionally designed to produce lots of pretty colored candy in the form of “Hopium” but never actual results.  HAMP and its pals never came with any sort of teeth in the form of actual punishment for non-compliance by the financial industry, and thus we have seen lots of things like this:

  • Homeowners being told not to pay – on purpose – so as to “qualify” for help.  They are then denied a modification.
  • Homeowners who are put on trial plans but then send documents two, three, four or more times – with certified mail return receipts – and their servicers claim they “lost” them.  Never mind that the homeowner has signature proof they were delivered.  There is then no legal enforcement of that receipt – even though under virtually every form of legal agreement known to man a return receipt is proof of notice being received.
  • Homeowners who are strung along for months on “trials” and then denied a permanent modification.  When the denial is rendered the entirety of the difference between the original payment and the trial is immediately due and payable, plus late fees and penalties for not making the original payments! This happens even though the homeowner is paying as directed on the trial modification.
  • Homeowners who are foreclosed on while on trials that allegedly are intended to “save their homes.”

If true modifications – that is, real help – were the point of this entire exercise, rather than jerking people off and milking them for even more money when they can’t pay, these actions would have exposed the servicers involved to severe financial penalties.

They haven’t.

An even bigger source of worry is the $426 billion in so-called second liens — home equity loans, second mortgages and other loans “junior” to the primary mortgage — that sit on the balance sheets of Bank of America, JPMorgan Chase, Wells Fargo and Citigroup.

The nation’s four biggest banks report that less than 4.5 percent of these loans are delinquent, according to Weiss Ratings. But some mortgage finance analysts like Joshua Rosner of Graham Fisher & Co remain skeptical. “Are the second liens properly reserved for? The banks say they are but that’s debatable,” said Rosner.

Debatable?  That’s laughable. 70% of the dollar volume of HELOCs is in the so-called “Sand States” – California, Nevada, Arizona and Florida.  All of those loans behind an underwater first that is not being paid are in fact worth zero if the first forecloses.  Why?  Because the first has priority – and the HELOC gets nothing on a foreclosure until the entire balance of the first mortgage has been paid.

Then we have seconds that have not been reaffirmed in bankruptcy – and are discharged – but the servcicers are sending monthly statements to the homeowner!  They’re not “demanding” payment – but it’s damn sleazy to attempt to get someone to reconfirm a debt by making even a small payment against it without warning the consumer that’s what they’d be doing. Of course there is no such warning enclosed; I’ve seen some of these “statements.”

Reuters found that after talking to nearly two-dozen housing experts, mortgage traders, lawyers, securities experts and others, there is broad agreement about what a solution to the mortgage crisis might look like. They say a fix must allow many borrowers to stay in their homes, compensate disgruntled mortgage investors and allow banks to take write down loans without causing a repeat of the financial crisis of 2008.

Oh, so we can’t make the banks pay for their sins?  It’s not enough that they defrauded people up front by making loans they knew were no good and sold them on to investors.  We have to protect them from the consequences of that act, lest we “repeat the financial crisis of 2008.”

The standoff between banks, borrowers and bond investors benefits few. The only ones who stand to gain from such recalcitrance are the bloggers, pundits and polemicists who throw around catcalls like “banksters” to describe Wall Street bankers and “freeloaders” to describe borrowers who have stopped making mortgage payments.

What do you call someone who makes knowingly bad loans and then sells them to investors while actively concealing that they’re crap? This is not an “allegation” – it has been testified to – voluntarily – under oath. How many times do we have to do this?

These mortgages were sold to Fannie Mae, Freddie Mac and other investors. Although we did not underwrite these mortgages, Citi did rep and warrant to the investors that the mortgages were underwritten to Citi credit guidelines.

In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets. This situation represented a large potential risk to the shareholders of Citigroup.

I started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group.

We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production.

Is that clear enough?

This is sworn testimony, and incidentally, there is attached a copy of an email that was sent to the Board on the matter.  It was quite clear and unambiguous.

That we are still arguing over “everyone giving a bit” is an outrage.  This was quite-clearly intentional conduct since it continued beyond where these warnings were issued.  Since when do you get to rob people and say “oh, well, we’ll share the loss”?

“To ultimately resolve this, you are going to have to come up with some solution for the second liens the banks own,” said Bill Frey of Greenwich Financial Services, a firm that specializes in mortgage investing and which has been at the forefront of fighting for the rights of institutional investors. “No one wants the banks to fail, but the banks are going to have to write down second liens.”

I want the banks to fail.  I want those who made the crap loans to eat them.  I want those who are sitting on losses and fraudulently claiming they are “money good” to recognize the truth.  I want regulators, accountants, and auditors to force this into the open.

I want to know how much the damage actually is, because until we admit to it and clear it we cannot have a true economic recovery, as the proper clearing price for homes cannot be reached.  We will thus sit in a quagmire with all sorts of monetary and fiscal games being played which will continue to distort the markets and prevent a true economic recovery from taking place.

“We’re years late in dealing with this and that has made the problem much worse,” said Janet Tavakoli, a Chicago-based derivatives consultant who has been a long-time critic of the way banks packaged and sold mortgage bonds during the housing boom. “Entire neighborhoods are devastated and many innocent homeowners with sound mortgages are underwater.”

Now this I disagree with – although in general Janet and I do agree.

What do I disagree with?  The premise that “innocent homeowners with sound mortgages are underwater.”

No they’re not.

The homeowner who bought into a fraud-induced bubble may be personally innocent, but their mortgage was not and is not sound.

It was written for an unsupportable value and backed by an unsupportable appraisal.  Said appraisal failed to take into account the ramp job in prices that was driven by speculative fervor and the prevalence of loan products that were impossible to pay as agreed. That the borrower/buyer didn’t know this doesn’t change the fact that the loan was unsound at origination – it only defines who’s fault it is that the loan was originated in the first place.

The fact of the matter is that if you bought a house during the bubble you overpaid for it.  You overpaid because banks, appraisers and financial firms on Wall Street, including most particularly those who were securitizing loans they knew were crap, as Citibank’s former chief underwriter has admitted to under oath, caused those price ramps.  You overpaid and your loan was thus unsound as it was not backed by the collateral claimed even if you personally are blameless.  Those in the “industry” misled you, and while some of them may have been duped themselves it is now a matter of sworn testimony that at minimum the sellers of the money knew what they were doing was unsupportable and wrong.

That’s right America – you were fleeced.  Even those of you who didn’t use “Liar Loans” and other exotic products, who didn’t treat your house as an ATM, and who didn’t play games with your income and other financials.  You were ripped off by all those who did, and more importantly, those who enabled them, which are the nation’s largest financial institutions.

This is not speculation or arithmetic that arrives at an indisputable conclusion.

It is now sworn testimony by former executives backed up with documents sent to top corporate management.

It is now fact.

The alternative of doing nothing and waiting for the economy to bail out the housing market seems dim.

The true alternative is to force these institutions to eat the crap they tried to foist off on others.  If this causes them fail, then so be it.  They have it coming – they caused this, and they should not get away with it.

“Share the pain” sounds great – until you realize that what this really means is that those who did nothing wrong but bought a bubble house will get hosed for tens or even hundreds of thousands of dollars.  Pension funds – that is, you – will get hosed for huge amounts of money as a consequence of buying something not based on speculative fervor, but because the seller of that financial product lied about what was contained in it.

This will hurt you even if you never bought or sold a house during that time period at all.

The fact is that without the money flow provided by these knowingly-bad loans the bubble could not have inflated to anywhere near the degree it did, and by 2006, it was documented that at least one of the largest banks in the nation knew they were both making and reselling trash – while claiming it was all “AAA” grade and perfectly good paper.

We must not allow them to get away with it; the entirety of this fiasco must fall on those who were responsible for making – not just allowing – it to happen.

15 Responses

  1. As far as the current CA AG, Jerry Brown has very close ties to Goldman-Sachs: his sister Kathleen works there now. And during the development of the ‘CA AG Stipulated Settlement Agreement’, where did Kathleen work? Why at CountryWide and then Bank of America.

    Can you guess what happened to ALL those modifications that were agreed to by BofA purportedly in that settlement? Any of the tens of thousands of those ‘AG Mod’ modification contracts that were accepted by borrowers have led to foreclosures because BofA ‘canceled’ the contracts. [Their word is ‘canceled’, proper legal term is ‘breached’.]

    Did AG Jerry crow about making CountryWide agree to the settlement? YOU BET HE DID.

    Did AG Jerry force CountryWide/BofA to honor the modifications they offered to supposedly comply with the settlement? YOU BET HE DID NOT!

    Jerry is helping the bankers all he can. That settlement agreement was so toothless, all it really was is a slap on the wrist and a token payment to the state coffers in the way of a fine for the fraud that they had been accused of committing.

  2. As an addendum to my earlier comment, the finance industry is clearly now perturbed at the intrusive potential of an effective HAMP. I emphasize that the HAMP is not effective–a temporary respite for a handful is public relations–not a program. But the mere prospect presents a problem which must be overcome by tightening up on the anti-modification provisions in the servicing agreements. Now of course, these are effectively ancillary contract provisions that alter the actual terms of the note–but are not disclosed therein.

    The standard is that modification is “allowed” only to those who are in default. the reality is that this feature is relied upon by the servicer-collection agencies to actually demand that homeowners default prior to opening discussion of modifications.

    This has a bad smell–but its now precedent. Another term is “Industry Practice”. So the 60 default requirement must be enshrined across all servicing agreements to achieve that defense to any assertion that it violates consumer protections.

    Sooo the securitization docs will mandate that homeowners default prior to any discussions at all. Industry practice. There are a couple added features that are needed to tighten the rules however. First the catch-up payments need some tweeking. it is possible to skip a payment through any number of reasons. Dad drops dead from a heart-attack and Mom is off-guard for a month? In the hospital? Etc.

    Now this represents a real opportunity for the servicers to real in that house! Mom missed the payment. So how can the servicer best take advantage while doing Goldman’s version of “God’s Work.”

    Easy, alter the wording in all the docs: notes and securitization to clarify that no payment can be accepted unless it is the “correct amount”. Now couple this with a second provision: “whenever a payment incurs a penalty, that penalty will be calculated using daily compounded interest”–as will the amount of the late payment. No wire transfers allowed unless there is a large and complicated fee. Now Mom must get exactly the right amount into the servicer’s hands in a manner that the servicer finds acceptable. The late payment must be made by certified check acceptable to the servicer. [for argument’s sake lets assume that it is possible that a late payment is acceptable] First she must call them to get the perfect payment amount! Good luck there. Now assuming the call is made successfully, she must be sure that the certified check is exactly the predicted amount, arrives on exactly the right day, and is processed at exactly the right time on the day received. Now if the eyes of the needles allign magically–Mom might make it, but more likely shes on the glide path to a very profitable foreclosure.

    Now there is one loophole left to be closed that the homeowner might use to avoid the trap. Auto-payments. Dad drops over and the checks keep going out—problem here. So the servicer rules must also prohibit auto-payments to keep that trap well-oiled. well guess what the servicer already has that covered. If the payments are option payments prohibit auto-payments! So if there is any way that the payment might change–interest rates, elected overpays, 15 year vs 30 yr amortization, ie 4-option ARMs, then no autopays allowed. Snail-mail only.

    Feel that bananna peal yet?

    So take a trip, get sick, or drop dead, the servicer has the house in 60 days. The more equity the better—-more room to fully absorb all the foreclosure fees and still have a few cents left for the investors.

    Seem unreal?

    Seem unfair?

    Its God’s Work.

    The foregoing is not speculative future thought. it was tested tried and is now “industry practice”.

    Now that they have seized the marginal homeowners’ assets, who is left? Good credits that are refinancing to take advantage of those low interest rates. Tea Party middle class 50-60 something folks that refinance that old $100,000 mortgage on a $300,000 home. That is the new prime target. In fact, its the only target!

    Get ready, the barbarions are at the gate.

  3. All this proof of fraud on this site, and there is no state moratorium??!!

    Why AGs?

  4. All this proof of fraud on this site, and their is no state moratorium??!!

    Why AGs?

  5. As to my quote:

    “….eroding of loyalty towards those that are supposed to be protecting us from such abuses including due process…..”

    I wasn’t even aware of this next case before the so called supreme court. This could be another game changer that tips the scale towards revolution in the streets…from the LA Times:

    “If AT&T has its way before the Supreme Court, any business that issues a contract to customers would be able to prevent them from joining class-action lawsuits, taking away arguably the most powerful legal tool available to the little guy.

    This is a very important issue,” he said. “And this Supreme Court has indicated a measure of hostility toward class actions.”

    Matthew Kaufman, a Los Angeles attorney who focuses on arbitration law, agreed with that perspective.

    “This is a very conservative court that’s pro-business, and class actions are not good for business,” he said.,0,639054.column

  6. […] Logical Fallacies And Foreclosuregate […]

  7. Financial Fraud and gov’t bailouts, yet another violation of our rights. Add it to the list of gov’t violations of our right:
    They violate the 1st Amendment by placing protesters in cages, banning books like “America Deceived II” and censoring the internet.
    They violate the 2nd Amendment by confiscating guns.
    They violate the 4th and 5th Amendment by molesting airline passengers.
    They violate the entire Constitution by starting undeclared wars for foreign countries.
    Impeach Obama and sweep out the Congress, except Ron Paul.
    (Last link of Banned Book):

  8. The problem is people are starting to see the wizard behind the curtain. My note says: in return for a loan (common definition: to let out (money) for temporary use on condition of repayment with interest) that I have received, Ok so I thought I was being “loaned” the money, somebody was going to their account and saying here, take the money buy a house. However, I go to my mortgage and they have a definintion for “loan” it states, “means the debt evidenced by the note.” WHAT????? Well that is just dandy, I loaned my self the money. A promissory note is money, when Citi was holding the note they told me I had an asset with the bank the same amount as the “loan”. The dollar is a public promissory note but we consider it “money”. Very confussing. My point is this madness will keep happening unitl we call ‘bull biscuits’ on these guys once and for all.

  9. linda ..
    that is a …pretty accurate .. dup em if you got em, dup’d we were

  10. Is it called “fiefdom?”

    The condition of the feudal service is paying them interest and tending “their” land.

  11. David C. Breidenbach, left out of your apt description of the cycle of the servicer’s gaming of events is another gross abuse of the homeowner by the servicer. Why are some folks in a mod trial for three months before getting the boot, while others are in for six or eight before finding out the bad news? The answer lies in the tonnage of financial documentation that the hapless homeowner (not actually homeowners) had to supply to be considered in the first place. Showing the banks exactly to the nickle how much money one has and where it is kept is like inviting a robber into the vault the day before the crime. It’s the banker’s neutron bomb….al that’s left for the non-homeowner is the curb and empty pockets.

    Linda, I think what we’re witnessing is one of two things….both paths filled with pain and turmoil, but necessary. Either the death gurgle of our society just before collapse, or the days leading up to the point of people deciding they’re not going to take it anymore, and taking matters into their own hands and effecting change ….as in revolution. Either way, it’s obvious that it’s necessary, as the over-reach by the TPTB has crossed all reasonable bounds and is only getting worse.

    I actually hope it’s the latter, because I, like Karl Denninger, want to see the mega-banks fail, each and every one of them. I want to see at least 40,000 white collar felons carted off to prison, to use Bill Black’s estimate of how many should be convicted. I’m over this whole usurious and abusive world where families are so easily swept out into the street due to fraudulent paperwork and tricks in the fine print.

    Whenever there are significant inequalities such as we’re seeing today, combined with a further eroding of loyalty towards those that are supposed to be protecting us from such abuses including due process or the lack thereof, it would seem to me that we’re whisltling past the cemetary, and it’s only a matter of time for a reckoning. Bring it on.

  12. This commentary is still not fully focusing on the worst aspect of this which will be a recurring problem. The securitization documents were set up by the originators and big bank securitizers underwriters such that they could predict the recovery of the cash flows—-which were speeded by a key provision. That provision was that the servicer was not allowed to “modify” the loans unless the borrower went into default. This is a trap. The homeowner gets in a bind as a result of a job loss, change or transfer—-and requests a modification or delay from the sewrvicer as people have for generations from local banks. However, the servicer representative gleefully tells the unsuspecting homeowner; ” stop making payments for 2 months in order to qualify to discuss modification” . The homeowner does this and immediately the loan is transferred for collection from the bank to the servicer or a servicer /3rd party debt collector joint venture and the game is on. The servicer or debt collector jerks the homeowner around for what appears as modification discussions—-and all the while the foreclosure docs are being drawn up –supporting documents including Assignments of Mortgage and fake Notes are “created” and then the homeowner is told that he doesn’t qualify a day before or even after foreclosure is filed.

    This was the intended purpose of the 60 day default clause in the securitization documents in the 1st place because as we all now know : the loans were “designed to fail”–just like the trusts and MBS that were created to collect on insurance and swaps.

    There is nothing being done today to prevent this aggressive predation from occurring again. In fact it is hard to see how any securitizer and servicer agreements would fail to recreate this very valuable opportunity to bait n switch once again. “Go with what works!”

    Bottom line is that homeowners cannot simply assume at a loan closing that the old rules apply. There is no expectation that the loan will operate as marketed. No expectation that it is a bargained deal that is in the homeowners interest. No expectation that overreaching will be prevented by govt intervention anywhere at any level–federal, state or local judiciary. Homeowners beware; that supposed loan agreement is actually a form of commercial so-called “net net lease” that is designed to avoid landlord tenant rules, and allow securitization to occur and both homeowners and MBS investors to suffer a bait and switch business model.

    Anybody who has dealt with the servicers or their attorneys will quickly agree that the treatment they receive is more akin to a landlord dealing with a bad tenant than a lender dealing with a homeowner with equity. And for those Tea Partiers that don’t get it yet, the same treatment applies whether the house is worth $1.5 million or $75,000. It is also irrelevant whether the equity is 5% 0r 50%. In either case, the servicer sees a tenant. This is the ditch where the American Dream has landed. Either you own your own estate in the Hamptons [or an offshore tax haven more likely] or you are a tenant. There is no middle ground. And after they have consumed all the homes, they will be after the farmland that they don’t already own. Tenant farmer come to mind?

  13. Thomas Jefferson, (Attributed)
    3rd president of US (1743 – 1826)

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

  14. “Ripped off by those who did and those who enabled.’

    Even worse, the income being altered and the 1003 removed from you closing documents.

    No. No. No crime here.

    Pack your bags deadbeat.

  15. I agree with the premise here. Yes, banks must fail, if we look at it this way. But I have a feeling that premise is based on the thinking that there is a moral compass, that there is a right and a wrong applied to the standard practice of how things operate in commerce and especially in the United States. And yes, that is the way things should be…at least how we were brought up to believe. I am beginning to see that we are naive if we think like that and that we will continue to be taken advantage of if we go along with that program.

    We’ve seen over and over again here with these big institutions, that they have their own rules and ways of doing business that has nothing whatsoever to do with morality or the public’s rules: our Constitution. We are naive and the cartels know it. We are still, by and large, a nation that believes in goodness and charitable giving. Nothing wrong with that when you know that there is another side of the equation. We have been intentionally sheltered from that other side. You can call it evil, if you like. We are just now waking up to that other side and it appears to us unconscionable that they do this to us, yet they have been doing it for, perhaps, centuries.

    Thus, while we are just now waking up to the fact that banks are literally stealing from us and we have been going along with it without question, one could classify banks as the charities that we have been obligingly giving to for years. They supposedly fulfill our American dream of home ownership, entrepreneurship, and employ our young people. They purport to do good things in the communities and save us from disasters. Yes, to a certain extent.

    We are fooling ourselves if we think they are conducting business in any other way than that which benefits themselves.
    I am certainly not a banker as a discerning person can see,
    but there is something that continues to puzzle the mind.

    Where did all those mortgage interest payments, fees, and funds go that they borrowed from the Feds nine times? Where’s the “bailout” money? Why do they need more?

    What if we saw that all the banks are doing is laundering money?

    If banks keep two sets of records on a single mortgage, one private that is zeroed out, and one public, that shows money owed, what is to prevent them from doing the same thing with their entire set of books? They show the public they are broke on paper when they are really shoring up billions upon billions? They are possibly the most creative creatures on earth. They create profits and they create losses. They gain on both.

    What is to say that banks are not laundering and investing those funds in nameless places? They intentionally become insolvent to cut their legal losses, then the FDIC, taxpayers or whomever comes to the rescue, because they scare us and convince us that the entire economy will fail without them. I mean, really, all the average person needs a bank for is to cash a check and that’s because we don’t get paid in real money.

    Thus, when they “fail,” they are not really failing, they are merely reorganizing and starting over again. The plot is designed so that either way they win. It’s like a milking machine and we are all cows. I really do think it’s all a huge perpetual scam that feeds on itself.

    What do YOU think?

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