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New Questions Raised in Mortgage Financing

EDITOR’S COMMENT: I worked on Wall Street and I was an investment banker. I know the mentality. If money is sitting there, they will take it and worry about it later. This article is the tip of the iceberg and it belongs on Page 1. I agree with the NY Times editorial staff about how important this article is. It didn’t get blocked because it was about Bear Stearns, which is defunct. But the story is the same for all the mega banks. They screwed the investors, stole the money, then screwed the investors again, along with the homeowners, and stole the house. And it is still going on.

The “secret pocketing of money” is no secret amongst those who work on Wall Street. To them it was a game and they won and each time a news article comes out missing the point again they have another laugh. Unfortunately the regulators and legislators are buying the spin in the media instead of investigating the facts.

Fictitious “Bonds” (i.e., non-existent) were sold by fictitious “trusts” or “SPV’s” (i.e. non-existent) on the CLAIM that each SPV or Trust consisted of a fictitious pool (i.e., non-existent) each pool containing fictitious “assets” consisting of the fictitious (i.e. non-existent) obligations of homeowners who had been “loaned money” from a fictitious company pretending to be a bank or lender. The practice on Wall Street was called “selling forward” which means you are selling something you don’t have, like selling short, which is selling a stock before you buy it.

THEN a fictitious transaction (i.e., non-existent) was recorded and reported between the party pretending to be a lender but who was acting, at most, as a mortgage broker (unregistered and unregulated). This was the promissory note and mortgage deed or deed of trust. The transaction described in the note and mortgage never happened and was never meant to happen. All the “securitized”loans were table funded, so none of the “lenders” were creditors. They were fee based servicers. The REAL transaction was never committed to writing or recorded or reported.


The pretender at the closing merely transmitted a flat data file like a spread sheet with various pieces of data that the originator inserted manually. If they changed the date of the loan from the closing date tot eh recording date, they now had a second loan to sell to a second loan aggregator, who knew what was going on because they were giving the orders on what to write, when to write it and who to send it to.

The ACTUAL TRANSACTION between the homeowner and the ACTUAL source of funds was never disclosed to either the lender nor the borrower nor ever committed to writing. Hence the representation that there ever was a secured loan was false, and through no fault of the borrower. The documentation from the closing was neither lost nor destroyed but often described as one or both. The sole reason they didn’t want to produce the original documentation was that it would not conform to the deal proposed to the investor and did not conform to the deal made with the borrower. Better to say you lost it or accidentally destroyed it than to admit criminal fraud.

The effect was obvious. The investment bank took the money from the investors and the money paid by borrowers and the money paid by third parties through insurance, credit default swaps, and under cover of cross collateralization and over-collateralization kept the money, obscuring the fact that they were neither paying nor allocating money received to the investor who was the payee of the money nor the borrower who was the obligee.

Thus neither one knew the true status of the loan. The investor was kept in the dark about the continuing receipt of money by the investment firm, and the borrower was kept in the dark (a) about the real lender not being paid money that came in and which was required to be paid against the borrower’s obligation and (b) about the ALLOCATION or ACCOUNTING for the money that the investment bank was receiving and disbursing in the name of the payor (borrower) and payee (lender/investor).

On an arbitrary basis, computations were made an strategies employed to give the appearance of a normal mortgage market but in fact that was all a fiction. The end result is that the investors and insurers were defrauded out of billions fo dollars on losses that never occurred and paid to parties who had no insurable or ownership interest. The very existence of Notice of Default, Acceleration and Notices of Sale, Complaints for foreclosure was and remains a fiction that cannot be supported by the facts. The strategy employed by the pretender lenders is to use the documents describing fictitious transactions as a substitute for alleging real facts and THEN introducing the documents as proof of those facts alleged.

Judges relying on their law school days or when they practiced law before this historical scheme was developed, are ruling on the basis of presumed facts that do not exist. They are presuming those facts based upon documents that describe transactions that do not exist. The sole hook on which they hang their hat is whether the borrower received the benefit of the loan. But Judges to themselves, the judicial system and most importantly the title recording system a disservice when they presume that the documents are anything more than ink on paper without any value, derived or otherwise.



Banks have been fighting with disgruntled bond investors and insurers for months, arguing that they do not need to buy back soured mortgages they placed inside securities before the financial crisis.

Now, it turns out, some of those banks may have secretly collected partial payments on those same mortgages several years ago and pocketed that money.

At least that is a theory being pursued by plaintiffs’ lawyers in some of the largest mortgage bond lawsuits, in which banks are accused of filling mortgage bonds with loans that did not belong there.

The theory surfaced in a recently unsealed lawsuit against a mortgage unit at Bear Stearns, the failed investment bank that is now part of JPMorgan Chase.

In the suit, the Ambac Assurance Corporation, which insured some mortgage bonds created by Bear Stearns, contends that the bank was partly compensated by loan originators for mortgages that became delinquent shortly after they were packaged into securities. Bear Stearns’s mortgage desk kept the payments, according to the suit, rather than apply them to the bonds that contained the delinquent loans.

Interviews with more than a dozen former workers at several big banks, including Lehman Brothers and Deutsche Bank, suggest that several banks received millions of dollars at a time in such payments, known as early-payment-default settlements.

But the money trail of these settlements is murky. It is unclear how much of the money was added to bankers’ profits — and bonuses — and how much was forwarded to buy out bad loans from mortgage bonds.

Whether or not the settlement payments were shared with mortgage investors, they are likely to be used in court to show that Wall Street banks knew about the growing stream of mortgages that had missed payments within their first 90 days, a common sign of mortgage fraud. That sort of evidence may matter to government investigators at places like the Securities and Exchange Commission, which is looking into whether banks misrepresented the sorts of mortgages placed in bonds.

At Bear Stearns, there seems to have been some knowledge of the failing loans, according to the Ambac case. Ambac says there is evidence of more than 100 early-default settlements for batches of loans that soured quickly. An example in that case describes an $11 million payment for one batch of loans. For another batch of “at least 12 loans,” there was a $2.6 million payment.

Ambac’s case was filed in federal court, but a judge there ruled this week that the case belonged in a different jurisdiction. Erik Haas, a lawyer for Ambac, said the company planned to refile in state court.

JPMorgan Chase, which bought Bear Stearns three years ago, said Ambac was a sophisticated investor that knowingly took risks in its deals.

“We do not believe Ambac’s claims are meritorious and intend to defend Bear vigorously,” said Jennifer Zuccarelli, a JPMorgan spokeswoman. Ms. Zuccarelli would not comment on Bear Stearns’s use of settlement payments.

Banks like JPMorgan face lawsuits brought by insurance companies and large asset managers that had purchased mortgage bonds when housing was booming. These investors want to return the bonds to the banks and get their money back. The banks disagree, saying the buyers of these securities were sophisticated investors who bought the bonds with open eyes and should have understood the risks.

Some lawyers in those cases said the accusation against Bear Stearns, if true, would be a stunning instance of wrongdoing, because it would indicate that its mortgage operation essentially double-dipped: selling a mortgage into a mortgage bond at full price and also pocketing a settlement for that same mortgage when it went sour.

“If they knew the loans were defaulting, the money should have been passed on to investors,” said Jerry Silk, a lawyer with Bernstein Litowitz who is representing numerous mortgage investors in suits against banks. “We’ve heard this a lot, and we’re trying to prove it. It would be a home run for us.”

The search for a home run has compelled mortgage bond investors to look back to when they first bought their investments. Around 2005, the number of mortgages that went bad began rising. Bankers were in the middle, between the firms that originated the loans and the investors who bought bonds with them.

Mortgage originators at that time did not have enough cash to buy back the loans in full. So banks offered a deal: if the originators gave them a partial cash payment, or a discount on future loan purchases, the banks would drop their requests that originators repurchase the delinquent loans.

This helped the mortgage companies preserve cash, and it appeased the bankers. But, in many cases, it is unclear if the partial payments benefited holders of the mortgage trusts that held the relevant mortgages.

It seems there was no standard accounting of the payments among the various banks, particularly in cases where banks received future discounts or other benefits instead of cash.

At the mortgage company New Century, for instance, banks agreed to reduce the number of souring loans they returned to the originator in exchange for the right to buy some of the originator’s next batch of loans, according to testimony given to Michael Missal, a lawyer with K&L Gates who prepared New Century’s bankruptcy report.

That deal with New Century was valuable to banks because they needed more mortgages to keep their lucrative mortgage bond machines going.

It is also unclear whether the banks had a legal obligation to pass the benefits from early-default settlements to the mortgage investors.

Workers who negotiated some of these settlements at Bear Stearns or at other Wall Street firms said last week that they did not know where the payments ended up. “The further and further I get from that business, the more I realized how siloed we were,” said one former mortgage salesman at Lehman Brothers who spoke only on the condition of anonymity. “No one knew what anyone else was doing.”

A former Bear Stearns worker, who negotiated such settlements between it and originators, said: “I was the messenger of the bad news. I was going back to these originators to say ‘Listen, we purchased some of these and they’re having problems.’ ”

“But,” this worker said, after he received the settlements, “I had no visibility into where the money went when I sent it up the food chain.”

Even Ambac’s lawyers at first did not know the extent of the payments at issue, but the company filed an amended complaint describing them after learning some new information from the producer of a coming documentary about Bear Stearns, “Confidence Game.”

Tracing such payments is tricky because of the large number of players in the mortgage machine: mortgage originators sold loans to banks, and then the banks packaged them into mortgage bonds to sell to mortgage investors. The originators did not generally communicate with mortgage investors, so neither side knows exactly what Wall Street’s middlemen did with the money or side agreements.

Tom Capasse, a principal at Waterfall Asset Management in New York, ran models to spot early signs of trouble in the bonds he purchased. He said that about 75 percent of the time that he found a problem, the bank that created the deal came forward without prompting and repurchased the bonds.

But a quarter of the time, Mr. Capasse said, he had to report a missed payment and raise questions about the loans for them to be repurchased by the bank. Banks, he said, might not have minded if other investors did not report such problems. “Banks were facing a death spiral in terms of early mortgage defaults,” he said, “so they just didn’t buy them back.”

16 Responses

  1. Ian

    You have to understand the structuring of MBS trust. The higher tranches were protected by credit enhancement of the lower tranches. Any defaults would be absorbed by the lower tranches. But, if all performed as planned — the lower tranches would reap a a higher interest rate return since they were paid ONLY AFTER the higher tranches were paid in full. All performed as planned.

    However, defaults were so fast and rapid that this caused what is called a “trigger event”. That means the the higher tranches –which were (also) protected by default swaps — demanded immediate payment. Since this could not be accomplished due to the massive “trigger events” — the government stepped in to bail out insurers such as AIG — to perform their obligations of swap protection — that is — payment in full to higher tranche holders.

    When the trusts were originally set up — the higher tranches held about 80% of the collateral investment by “investors.” The lower tranches — in return for a high rate of return — IF trust performed as expected — put up very little in investment capital in exchange for a high rate of return upon performance.

    These lower tranche holders did likely lose their capital investment — but they put up very little capital to begin with. These lower tranche holders were were not protected by credit default swaps.
    They put up little investment in hopes of a high return. In addition, these lower tranche holders– were also likely – simultaneously – the swap providers — those waiting in the wings to purchase collection rights should individual mortgage loans default. It is these “investors” — who likely hold collection rights due to dual investments in lower tranches and credit default swaps — that swapped out collection rights from the trust.

    The upper tranche holders have been returned principal invested in full. It is the lower tranche holders who are concealing themselves and their simultaneous relatively low principal investment — coordinated with swap defaults — that transfer OUT collection rights.

    I have no objection to any investors trying to collect what they THINK is owed to them. I object to concealment of their identity.

  2. Louise that’s funny they will steal
    otherwise like they just can’t help
    it. And It is fo true… Like a drug addict … It’s the same truely… I once had a very Candis conversation with a hardened drug addict he told me that no matter who you meet or have in your life your mins works like this ” how can I screw this person to get what I need to feed my
    addiction” and guess what drug addicts may be in recovery for a while but then an extremely high percentage go right back to it
    it is imperative we maintain laws and regulation and close monitoring because it will get more and more out of control to the point of mayhem
    that’s why we have methadone clinics but jail works well too at leAst they can’t hurt anyone for a while.

  3. I tried again to forward the email I received about judges and their pensions, this time to Livinglies@WordPress.com and it said delivery failed. If someone will post the correct address I will send it again.

  4. ANONYMOUS- I am a little foggy on your explanation regarding all investors being paid in full by bailout money. I have read a number of the suits filed on behalf of investors, and the common thread as I read it seems to be that for instance TIAA-CREF purchased say one billion dollars of mortgage backed securities which are now worth $300 million. They are now worth $300 million because of the default rate of the mortgages in the trust, which in turn is because the mortgages due not comply with the stated underwriting standards in the prospectus as represented and warranteed to investors. So the investors are suing under breaches in the reps and warrantees provisions, claiming that they were seriously mislead as to what they were buying. They were buying garbage, as it turns out, so the value of their investments collapsed by 70-100%. Please illuminate further, I try to chase down every single item which I do not understand, and try to understand it.

  5. Hi zurenarrh

    Sure it was not all refinances — but certainly enough to warrant investigation by authorities.

    Every situation will likely differ — and only authorities will be able to dig deeper.

    But, this is fraud — and discovery of it — should allow you to amend your complaint. And, your case is a good example that warrants investigation!!

  6. to BSE
    I tried to forward to Livinglies.com , Livinglies-store.com but it comes back alias name, what am I
    missing from the address? Post it and I’ll send it there. Meanwhile I’ll type the e mail in in part
    “… This is just some quick search info on Maricopa County pensions. NO WONDER THE JUDGES AND COPS BREAK ANY LAW TO HELP THE BANKS. 2 years ago they had $680 milliion in their retirement, now they have $260 million. They know if the banks lose there will be nothing left for them. The pensions were so vested in real estate mortgages, both US and foreign. tthe pension fund is going down almost twice as fast as the rest of us.
    They are backed in a corner and must either rip us off or go broke. The attached documents just scratch of what we need to discover. Once we can verify the judge is writing orders in violation of state law AND protects his investment, we have sufficient grounds for Qui Tam, Whistleblower, RICO and HOBBS on the judges .”

  7. marillynhelyn,

    Your comment is interesting.
    Please send a copy of the email with the heading to either Neil or post directly on this web site.


    Your comment on this post describes EXACTLY what happened to me. I did a refinance with Countrywide, but the loan that Countrywide was supposed to pay off at the outset did not get paid off and recorded as paid until a year after the refinance closing.

    We got letters of default and letters threatening foreclosure from the people Countrywide was supposed to pay off. I have always wondered why that happened. Your comment sheds some light on that.

    Any more comments/info on that situation? Has that happened to anyone else here on the site? How pervasive was this phenomenon? Was this done with EVERY refinance?

    Needless to say, this little bit of tomfoolery was not good for my credit rating and did not help my efforts to find employment at the time of the refinance. This is addressed in my lawsuit, by the way. But at the time I wrote the complaint, I was not aware of the scam you mentioned below.

  9. I am trying to track down when the law changed so that the owner of the note no longer had to surrender the original to the Court BEFORE a judgment was issued. Can anyone help me find that?

    Or did it ever change? Is all of this just a diversion to “customary practice or industry standard” the banks and GSEs allowed among themselves and no one objected?

    I can only find ages-old references to the mandatory original note surrender, which, of course, was to protect the borrower from having the note negotiated/enforced later.

  10. Well — long overdue analysis as to insurance fraud — which I have been saying for quite some time.

    But, let’s get the story straight. Insurers — and there were many types of insurers — were being saddled with insurance demands for Non-Compliant loans. Non-compliant loans did NOT just include early payment defaults (in fact many loans were falsely labeled early payment default (EPD) and probably the least of concern as to “non-compliant” loans.

    Rather, non-compliant loans included ANY loan that had missing documents, predatory lending, breach of representation, etc. One of the favored documents to withhold was — the mortgage title insurance policy!!!! (which borrowers pay for). Why?? because the title agency already paid the insurance proceeds on the loan – due to missing documents. Then, insurance demands is placed on agencies such as AMBAC — for securitized trusts that were securitized loans that were ALREADY FALSELY placed in default.

    Now, for anyone who had a refinance — this is what would happen. Just before refinance is completed — the prior “lender” (really the servicer) — would falsely report the loan as in default. Insurance is collected. Payoff check at closing is pocketed — and there were many “players” in the pocketing game.

    Borrower is left with a new refinance with prior mortgage not being paid off. Borrower is in default before they were EVER actually in default. New “buyer” of falsely placed default loan (via refinance) — securitizes the loan again — hmmm — did we not say loans are in multiple trusts????

    The insurance scam occurred at many levels — including PMI for Freddie/Fannie loans (believe there is a US Attorney investigation).

    Now let’s think — who was harmed more — the borrowers — or the investors??? As far as I know — investors have been returned their principal investment — with a little help from the US Treasury. And, the investors — are the very parties that “pocketed” payoff checks — with the blessing of the banks.

    Borrowers — well they were left falsely in default — before they even missed a payment — and with multiple mortgages owed – to who knows where..

    The author writes — “selling a mortgage into a mortgage bond at full price and also pocketing a settlement for that same mortgage when it went sour..” The author is close to the truth — but not on target — the pocketing occurred BEFORE the loan went sour. “Sour” loans were manufactured.
    And, that is why — no one knows where real mortgage loan collection rights lie — because all must continue to cover the insurance fraud. That is the pandora’s box — and “investors” held the box. Mind you — banks were investors too — big time.

    Investors — There are no “gifts” in the risk/return world of investments. The higher the risk — the higher the potential rate of return — but, the risk is high. Did you read any prospectus??? Where did you “invest” the pocketed proceeds?? The borrowers were defrauded — but investors knew the “profile” of the borrowers — who were “TRAPPED” into believing they could sell their falsely appraised home — or refinance at a reasonable rate. Both options were pulled out from under the feet of the homeowners.

    Investors??? Sorry if you did not earn your 14% interest return. But — you have been paid your principal back (and a whole lot more). You will now have to settle for what you should have earned as a return on investments in the first place — the market rate — think, maybe about 5% instead of 14%.

    Not buying the investors “hardship” story line.

  11. marillynhelyn,

    Q? “Does anyone know what the Judges’ pensions in New York and in Florida are invested in?”

    A. Doesn’t really matter in the end ,, China will bail on our debt and GSE holdings before QE2 ends .. at that point we start going into hyper inflation mode as we’ll have a huge-er-er imbalance between the buyers and sellers.. it’ll get to the point where the postage to send you a default letter is more than the loan payoff.. In the end if we just play the delay and wait game (and prepare for going the Argentina (1999) or USSR (1989) route) we’ll be ok.

  12. It really is the old confidence game: I sell you an invisible asset, and you pay good money for it. As I have seen before on the Internet, the Wall Street bankers (as least a few of them) admit that they need regulation, because they will steal otherwise. Burmese8@yahoo.com


  14. What the judges dont know is that they are gonna loose even more with the banksters.

    Why you ask
    With the banksters they loose their pensions anyways and the People in the community.

    Going against the Banksters at least they will have the people on their side.

    Just ask Arnold Shwartzenegger and all the Congresspeople and Senators who lost in the last election. Those who went with the banksters lost their seats or finished their terms in disgrace.

    is it Barak Hussein Obama or Barak Hussnei Mubarak.


  15. I received an e mail today with the heading
    “Judges have a vested interest in your losing”
    talking about the Judges in Maricopa County Pensions..

    No wonder the judges and cops will break any law to help the bankks. 2 years ago they had
    $680 million in their retirement , now they have $260 million.

    They know if the banks lose there will be nothing left for them.

    I would like to forward the e mail to you but I am not quite sure how,

    Does anyone know what the Judges’ pensions in New York and in Florida are invested in?

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