HuffPost: Let’s Set the Record Straight on Bank of America: Open the Books!

While we welcome Bank of America’s response to our two-part essay, “Foreclose on the Foreclosure Fraudsters,” it does not actually respond to any of the facts or analytical points we made. Indeed, it does not engage the issues we raised. Bank of America’s response contains some useful data on foreclosures that supports points we have made in prior articles, but overwhelmingly it is a plea for sympathy; Bank of America says it is beset by deadbeat borrowers and it is distressed that it is criticized when it forecloses on their homes. Bank of America portrays itself as the victim of an ungrateful public.

Bank of America Should be Placed in Receivership NOW

We argued that the FDIC should place Bank of America in receivership and the federal banking agencies should impose a moratorium on foreclosures until the mortgage servicers correct their systems, which currently often rely on massive fraud and perjury. There can be no assurance that foreclosures are lawful until the banks actually find the mortgage “wet ink” notes signed by debtors to prove they are the true beneficial owner of the mortgage debts, which is required to seize property. We also called on the banks to identify and compensate homeowners who were fraudulently induced to borrow by the lenders and their agents through a number of fraudulent practices variously marketed by lenders as “no doc”, liar, and NINJA loans (all subspecies of what the industry aptly called “liar’s” loans).

We showed that outside studies by a wide range of parties showed massive fraud by the bank.

The demands by investors that Bank of America repurchase loans and securities sold under false “reps and warranties” may cause exceptional losses if those making the demands document the broader fraud by the lenders. The article “Bank of America Resists Rebuying Bad Loans” shows that Bank of America’s potential loss exposure to Fannie and Freddie is staggering: “[Bank of America] said it sold $1.2 trillion in loans to the government-controlled housing giants from 2004 to 2008 and has thus far received $18 billion in repurchase claims on those loans.”

The company is fighting the groups that are demanding that it repurchase the toxic mortgages. Its CEO, Brian Moynihan counters their claims with the following analogy:

Such investors are like “people who come back and say, ‘I bought a Chevy Vega, but I want it to be a Mercedes with a 12-cylinder [engine],'” Mr. Moynihan said in October. “We’re not putting up with that.”

One-third of its subprime business is in default and Mr. Moynihan thinks Countrywide was selling Vegas? If one third of Vegas crashed and burned within three years of being purchased the metaphor might be apt and completely incriminating. We argued that putting Bank of America into receivership is the proper remedy for its substantial violations of the law and for its continuing reliance on unsafe and unsound practices. Outside reviews have documented the most extensive and financially harmful violations of law and unsafe banking practices and conditions in history.

As argued in a recent article by Jonathon Weil, the bank is nearing a “tipping point” as markets recognize it is “cooking the books,” vastly overstating the value of its assets as it refuses to recognize the true scale of losses on its purchase of Countrywide. Ironically, it still carries on its books $4.4 billion of fictional “goodwill” value created by overpaying for Countrywide (a notorious control fraud), as well as $142 billion of home equity loans that are worth far less. A more honest accounting of “good will” and of the value of home equity loans would take a big bite out of Bank of America’s market capitalization ($116 billion), which has lost 41 percent of its value since April 15. The markets are moving ever closer to shutting down the institution, but Moynihan is not “putting up with” the demand by investors for Bank of America to come clean on its fraudulent practices.

Ms. Mairone’s Response Verifies Our Claims

Rebecca Mairone replied on behalf of Bank of America to our two-part post. Step back for a moment and consider the context of Bank of America’s response. We cite evidence that the bank has committed massive fraud, explain that this provides a legal basis for placing it in receivership, and call on the FDIC to do so. Bank of America chooses to respond publicly, but its response never contests its massive fraud or our demonstration that there is a legal basis for placing it in receivership.

Instead, Bank of America complains that we “do nothing to illuminate the challenges [BofA’s home mortgagees] face.” This is not our task; nevertheless, the claim is incorrect. We illuminate the problems posed by the fact that nonprime borrowers were frequently victims of mortgage fraud perpetrated by lenders as well as many other operatives in the unprecedented criminal lending and securities fraud of the past decade. This problem is typically ignored — at least by the financial sector and the mainstream media — so we did “illuminate” the problem and the cause of action borrowers could bring for “fraud in the inducement.”

We showed that the fraudulent senior officers that controlled home mortgage lenders created “liars,” and NINJA loan programs designed to induce millions of Americans to take out loans they could not afford to repay. The endemic underlying fraud in the origination and sale of nonprime loans is critical to understanding why loan defaults are massive, why borrowers were typically the victims of the fraud and lost their meager savings due to the frauds, why loan modifications typically fail, and why foreclosure fraud has been so common. The endemic fraud also hyper-inflated the bubble and helped cause the economic crisis and severe loss of employment. Over a million Bank of America borrowers face these “challenges” that we “illuminated.”

Bank of America’s response is guilty of what it criticizes; it ignores the fraud by nonprime lenders and sellers, particularly Bank of America’s frauds in both capacities. It does not seek to “illuminate” the frauds or the problems that arise from endemic mortgage fraud. We did not invent the “epidemic” of mortgage fraud. The FBI began testifying about that in 2004. The FBI predicted that it would cause a “crisis” if it were not stopped — and no one claims it was stopped. The mortgage industry’s own fraud experts opined publicly in 2006 that the type of loans that Countrywide decided to elevate to its favored product was an “open invitation to fraudsters” and fully deserved the phrase that the lenders used to describe the product: “liars’ loans”. (Bank of America chose to purchase Countrywide at a time when it was notorious for the awful quality of its mortgage loans.) It is the lenders and their agents, the loan brokers, that directed the lies in these liar’s loans and appraisals and it was the lenders that made fraudulent “reps and warranties” in order to sell the fraudulent loans on to others in the form of securities. Economists and white-collar criminologists share a belief in “revealed preferences.” The senior officers that control lenders provide an “open invitation to fraudsters” in the midst of an “epidemic” of fraud because they intend to profit from those frauds.

Instead of contesting its issuance and sale of massive numbers of fraudulent loans, Bank of America writes to provide data on delinquencies and foreclosures in support of its claim that it is the victim of Countrywide’s deadbeat borrowers who it tries in vain to help. Bank of America’s data, however, add support for the evidence of widespread mortgage fraud, particularly by Countrywide. Accounting control frauds maximize their (fictional) reported income by lending routinely to those who cannot afford to repay their loans. It is this aspect of the fraud scheme that is most counter-intuitive to those that do not study fraud, but to criminologists it provides the most distinctive markers of fraud. The senior officers that control fraudulent lenders maximize the bank’s reported short-term income, in order to maximize their compensation, by growing extremely rapidly through making loans at a premium yield. This strategy creates a “sure thing” (Akerlof & Romer 1993). The lender is sure to report record (fictional) profits in the short term and suffer enormous (real) losses in the longer term.

The Evidence Supports Our Claims of Fraud

If we are correct that Countrywide operated as a fraud we would expect to find the following:

  1. disproportionately large rates of loan delinquencies and defaults
  2. huge losses upon default, and
  3. fraudulent representations and appraisals.

We would also predict widespread fraud in the “reps and warranties” that Countrywide and Bank of America provided to purchasers of nonprime loans originated by Countrywide. As we emphasized in our initial posts, a wide range of financial entities have confirmed the widespread fraud in the reps and warranties. This is why Bank of America is being sued. The data they provided in its response to our blogs supports the first three predictions.

First, Bank of America admits to a 14 percent delinquency rate on its mortgages. That percentage is roughly seven times greater than the normal delinquency rate for prime loans. It is roughly three times the traditional rule of thumb for a fatal delinquency rate (5 percent) for a home lender. Losses upon default during this crisis are dramatically greater than the historic percentages, and loss reserves were at historic lows, so the traditional rule of thumb for fatal losses is unduly optimistic in this crisis.

Second, Bank of America’s response states that Countrywide-originated loans have caused 85 percent of total delinquencies. Bank of America was a massive mortgage lender before it acquired Countrywide, so taken together these data suggest that the delinquency/foreclosure rate for Countrywide-originated mortgages must have been well over 20 percent — over ten times the normal delinquency rate and four times the traditional rule of thumb for fatal losses. These exceptionally large rates of horrible loans, defaulting so quickly after origination, are a powerful indicator that Countrywide was engaged in accounting control fraud. Unfortunately, lenders that specialized in making nonprime loans were typically fraudulent. The result was a massive bubble and economic crisis.

Our conclusions are well-supported by many other analyses, many of which were conducted long ago. For example, Reuters reported in January 2008 that one-third of Countrywide’s subprime mortgages were already delinquent:

(Reuters) – Countrywide Financial Corp CFC.N, the largest U.S. mortgage lender, on Tuesday said more than one in three subprime mortgages were delinquent at year-end in the $1.48 billion portfolio of home loans it services.Countrywide said borrowers were delinquent on 33.64 percent of subprime loans it serviced as of December 31, up from 29.08 percent in September.

Foreclosures are now vastly more common and the losses lenders suffer upon foreclosure, particularly for nonprime loans, are catastrophic. For example, Bloomberg reported at the end of 2009 that foreclosures result in losses amounting to nearly three-fourths of the value of the loan:

For subprime loans, losses averaged 73 percent for a foreclosure compared with 59 percent for a short sale, Amherst [Securities Group LP] reported.

Third, Bank of America’s data indicate another form of deceit that is a typical consequence of accounting control fraud. Bank of America has delayed foreclosing, sometimes for years, on large numbers of loans that have no realistic chance of being brought current, even with the loan modifications it offered. This behavior would be irrational for an honest lender, for it would increase ultimate losses, but is a typical strategy for a lender controlled by fraudulent senior officers because it greatly delays loss recognition and allows them to extend their looting of the bank for years through bonuses paid on the basis of fictional reported “profits” after the bank has (in economic substance) failed. Bank of America’s response to us admit that, of their 1.3 million customers who are more than 60-days delinquent, 195,000 have not made a payment in two years. Of those loans which have not received a payment in two years, 56,000 are already vacant.

For the foreclosure sales in the period from Jul-Sep, 2010:

  • 80 percent of borrowers had not made a mortgage payment for more than one year
  • Average of 560 days in delinquent status (approximately 18 months)
  • 33 percent of properties were vacant

The traditional rule of thumb is that a home loses 1.5 percent of its value each month it is delinquent but not foreclosed and sold. Those losses are far greater when the property is vacant. The loss of value is not limited to the particular home; all homes in the neighborhood are harmed when homes are left vacant for long periods. Bank of America does not address this issue, but the time from foreclosure to sale has also grown dramatically, which means that the length of time that foreclosed homes remain vacant prior to sale has grown substantially. The industry calls this huge number of homes, which are not producing income to the lenders because of the extraordinary growth in delinquencies and the delay in sales even after foreclosure, the “shadow inventory.” Note that none of the government foreclosure relief programs mandated that Bank of America sit on these delinquent assets for an average of 18 months and allow them to be wasting assets.

The bank’s response primarily criticizes its borrowers as deadbeats, yet the data it provides support points we have made in our prior posts, including Bill Black’s posts about the banks working with the Chamber of Commerce and Chairman Bernanke to extort the Financial Accounting Standards Board (FASB) in order to destroy the integrity of the accounting rules requiring banks to recognize losses on their bad loans. We have explained why the fraudulent officers controlling many lenders followed a strategy of making bad loans at premium yields in order to maximize (fictional) accounting income and their bonuses. This dynamic drove the current crisis. These frauds hyper-inflated the housing bubble and caused trillions of dollars of losses.

The extortion of FASB was successful; Bank of America was one of the leaders of that extortion. It changed the accounting rules so that banks could often avoid recognizing losses on these fraudulent loans, until they actually sold the home taken back through foreclosure. This dishonorable accounting fiction creates perverse incentives for banks to do exactly what Bank of America has done — let bad assets waste away and make already severe losses catastrophic.

Check back in tomorrow for more…

While we welcome Bank of America’s response to our two-part essay, “Foreclose on the Foreclosure Fraudsters,” it does not actually respond to any of the facts or analytical points we made. Indeed, it…
While we welcome Bank of America’s response to our two-part essay, “Foreclose on the Foreclosure Fraudsters,” it does not actually respond to any of the facts or analytical points we made. Indeed, it…

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  1. Quantitative Easing Explained

  2. From Simple Planet:

    Saturday, November 6, 2010

    Plutocracy Now
    Every so often, Americans should stop everything they’re doing for a moment, and reflect upon the nature of their country. Specifically, upon what has traditionally been this country’s defining characteristic. Was it our capitalist economy? No, there are many capitalistic countries around the world and capitalism was not first formulated by Americans. What about our emphasis on personal freedom? Well, once again, many countries preach the virtues of freedom and many groups of people have fought for freedom well before America was formed. Surely it has been our diverse populace and our tolerance of all races, genders, sexual preferences… yeah, right. Personally, I would answer that it was our written Constitution and the democratic values embodied within it.

    No other country had ever codified the structures and processes of their governing institutions to such an extent in one single document. Many people focus on the Bill of Rights when speaking about the Constitution, but the first four Articles are just as important. They synthesized political ideas that were developed over hundreds of years by some of the most insightful thinkers, such as separation of federal powers, checks and balances, vertical division of powers (federalism), an independent judiciary and, of course, representative democracy. The latter emphasizes the notion that any policies enacted by the federal government must be authorized by the people, through their elected representatives who are held accountable to constituents every few years.

    So what’s the state of our Constitutional democracy today? Simple, it doesn’t exist. International corruption surveys typically rank the U.S. higher (less corrupt) than most other countries, but this simply proves how bad these surveys are at capturing the essence of real, hardcore corruption. We could write stacks of books on the prevalence of money in politics and the swarms of lobbyists who descend on Washington every single week, and many people have, but it’s simpler to just focus on the most egregious example of corruption. The most powerful, influential economic policy-making institution in the country, the Federal Reserve (“Fed”), is an unelected body that is completely unaccountable to the people. Well, let’s back up and start with the fact that this institution’s very existence is most likely unconstitutional. Here’s why:

    Article I, Section 8 of the Constitution states that Congress has the power to “coin money” and “regulate the value thereof”. The Supreme Court has long held that Congress can delegate its legislative powers to Executive agencies as long as it provides an “intelligible principle” to guide the agencies’ action. We don’t even have to reach the question of whether the Federal Reserve Act sets out an “intelligible principle”, however, because existing precedent states that Congress cannot delegate its powers to private institutions. Schecter Poultry (held “a delegation of its legislative authority to trade or industrial associations…would be utterly inconsistent with the constitutional prerogatives and duties of Congress). In that case, the Supreme Court struck down parts of FDR’s National Industrial Recovery Act which authorized these private organizations to draft “codes of fair competition” and submit them to the President for approval.

    The Fed, by it’s own admission, is an independent entity within the government “having both public purposes, and private aspects”. By “private aspects”, they mean the entire operation is wholly-owned by private member banks, who are paid dividends of 6% each year on their stock. Furthermore, the Fed’s decisions “do not have to be ratified by the President or anyone else in the executive or legislative branch of government” and the Fed “does not receive funding appropriated by Congress”. In 1982, the Ninth Circuit Court of Appeals confirmed this view when it held that “federal reserve banks are not federal instrumentalities… but are independent, privately owned and locally controlled corporations”. [The Legality of the Federal Reserve System, 5]. Yet, the Fed has exclusive control over the government’s ability to create money and regulate its value through the targeting of interest rates and open market operations (when the Fed buys an asset, it typically prints the purchase money out of thin air). How Congress can delegate its Consitutional powers to this independent, privately owned and unaccountable institution is beyond me.

    Still, the Constitutional issue is just the tip of the iceberg when it comes to this twisted institution’s embodiment of all things undemocratic. When Congress (and the people it represents) makes a valid delegation of its powers to an executive agency, it almost always retains a level of control through its powers of appropriations, impeachment and oversight. For some not-so-strange reason, the Fed isn’t appropriated any funds by Congress, and so it cannot be financially “starved” like any other agency. The members of the Fed’s Board of Governors also cannot be impeached by Congress, which is especially twisted, since the President of the United States can be impeached for “high crimes and misdameanors”. [The Legality of the Federal Reserve System, 8]. What about oversight? Well, a Congressional committee holds “hearings” every once in awhile to ask the Chairman a few irrelevant questions, but if this process is what passes for “oversight”, then we have truly gone off the deep end.

    Speaking of committees and oversight, when Fed Chairman Ben Bernanke testified under oath to Congress in July, he said in no uncertain words, “the Federal Reserve will not monetize the [federal] debt”. [1]. Fast forward to the day after mid-term elections, in which the American people clearly voted for LESS spending/printing, and the Fed announces its plan to monetize $900 billion in treasury bonds. [1]. The Chairman has proven his previous testimony before Congress to be a blatant lie, but instead of condemning the Fed’s recent actions, the federal government has welcomed it with open arms. That’s quite some oversight we have there. Perhaps the best way to oversee the Fed’s actions would be to actually figure out what in Lloyd Blankfein’s name it’s been doing.

    In this country, that’s easier said than done. The Government Accountability Office is not allowed to audit the Fed’s transactions for or with foreign governments, central banks, nonprivate international organizations or those made under the direction of the Federal Open Market Committee (“FOMC”). It just so happens that these are the types of transactions which are most influential on global and domestic financial markets, especially the open market operations. These operations are conducted by the FOMC, who is comprised of the Board of Governors (7 members appointed by President and confirmed by Senate) and five representatives from the regional Fed Banks. Although the President appoints the Board of Governors, he must choose from a list of candidates provided by private institutions, and the other five representatives are also typically nominated by private member banks. Talk about an organization with conflicts of interest, lack of transparency and lack of accountability all tightly woven into its very fabric!

    In the last two years, the almighty Fed has printed trillions of dollars in our name to buy worthless mortgage assets from “too big to fail” banks. It has lent these banks our hard-earned money at about 0% interest, so they could lend our own money back to us at 3%+. These banks also used our free money to ramp equity and commodity markets, which mostly benefitted the top 1% of our population who owns 43% of financial wealth [2], and conveniently, also owns the Fed. The latter has kept interest rates at next to nothing to punish savers and encourage speculation, making everything less affordable for average Americans who have seen their wages stay the same, decrease or disappear. What’s left standing is the perniciously powerful, highly secretive and entirely unaccountable Fed, who now epitomizes the state of American democracy.

    We have all become subject to the misguided and/or malicious whims of a few wealthy individuals operating the levers of economic policy, with no adequate means of challenging their power. Our most treasured contribution to poitical society has been reduced to a bunch of meaningless articles and amendments, containing equally meaningless words. We the people, in our pursuit of “a more perfect union”, have fallen into an age-old trap. Our economic policies, currency and laws are all manufactured by our very own private dictator, who amasses a fortune from our collective exploitation and destruction. Then, this despot continues to operate like nothing ever happened. We can scream “ABOLISH THE FED” all day, non-stop to every single politician at the top of our lungs, but it will never happen. The reality is that there is only one way back to a true democratic system now, and this path will require nothing less of us than the courage of our forefathers.

  3. Could livinglies get a petition started to the FDIC to put BOA into receivership? Just a thought.

  4. Great Article.1

    The banks are covering up the biggest Ponzi scheme in World History. They are jeopardizing the Security of the United States.

    They sold the same loans multiple times, Th

    Great article. The Genie is out of the bottle.
    It might be time to impeach Obama if he has anything to do with covering up this fraud. What will I tell my children that fraud is good thing? Just ask President Obama?

    G-D BLESS AMERICA.

  5. I once saw a show on Prisons in California. All the inmates said that they were the victims and that they everybody else was a criminal.

    FRAUDLOSUREGATE.

    Tip of the day for the employees of bank of amerifraud.

    dont pick up the soap in the showers. and try to get some vaseline.

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