Tier 2 Yield Spread Premium Confirmed: Wells Fargo to Pay $11 Million to Investors



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Prices “Marked Up” 70% Over Values Shown on Books

If Investor-lenders got their money back from the investment banker, then where is the debt from the home borrower (if the creditor is satisfied)? It might be nowhere. The SEC is calling it a price-gouging “mark-up” which is the same thing as the extra compensation paid to mortgage brokers. If the extra money paid to the investment banker was justified by the difference between the actual interest rate and viability, life and status of the loan to the homeowner and the rate “disclosed” to the investor — there are two causes of action using the same pot of money.

The investors won here because they were defrauded by price gouging, pretending the mortgage backed securities were not only mortgage-backed (when they weren’t), pretending that there was an existing receivable in the “asset-backed” pool (which there was not), pretending that the promissory note and security instrument (mortgage or deed of trust) were valid and enforceable, and pretending that the true expected rate of return on investment (interest payments and principal) were properly disclosed to the investor-lenders.

In point of fact the investment banker quickly launched a program in which huge fees of 40% or more could be retained by the investment bank while at the same time stating that the investor was getting a safe return on  its investment– all of which raises the question about who gets title to the house. 

The reality is that the nominal rate of return on most mortgages was significantly higher than the real return expected by investors and in fact the actual payments to creditors was largely accomplished by payments from the pool itself (PONZI scheme) and by servicers continuing payments to preserve their “right” and intention to mark down the house for foreclosure sale and apply both contractual and non-contractual fees to the sale, making the house THEIR house instead of using it protect the investors’ position. This difference was achieved by sleight of hand.

By translating the real DOLLAR return to the investor from the percentage used in the prospectus, Wall Street was able to, by example, take $100,000 million and keep $50 million of it for themselves, contrary to any reasonable interpretation of the Prospectus or PSA. The Math is simple.

Take a pension fund who wants to earn 6% in a market where only 5% is available. Thus on the $100,000,000 investment they are expecting a return of $6,000,000 per year (at 6%). Wall Street packaged up loans with an average nominal interest rate of 12% which means that the risk of non-payment was raised far beyond the tolerance of the investor. But the investor-lender didn’t know how their money was being used in the real world. Wall Street bundled $50,000,000 worth of “loans” with an average rate on the note of 12% which equals the $6,000,000 — the amount the investor wanted. Wall Street knew those loans were at maximum risk or certainty of default which is the opposite of the AAA rating from S&P or Fitch. But they didn’t care because the worse the loan, the higher the NOMINAL (in name only) rate of interest stated on the note, the more spread there was against which they could charge their exorbitant fees.

At the end of the day, the pension fund parted with $100 million and never received anything real in return. Under the best circumstances in a court of equity the investor-lenders would have a shot at enforcing some liability and lien on the homeowners in the $50 million package. But because of appraisal fraud where the value of the homes were pumped up intentionally to make THAT also look like something it wasn’t, the reality for investors is that by making collection attempts directly against the homeonwers they would be pursuing properties whose combined value is more likely than not under $25,000,000, which after real expenses and distressed sales could fall far below that amount even if the loan was still performing.

Making a secret profit from the difference between what the interest SHOULD have been and what it was, as nominally stated on the note, is called a yield spread premium (YSP) Most people think of yield spread premiums as the amount paid to mortgage brokers as their reward for getting the borrower to a take a loan whose interest is higher than the interest rate the borrowers could get elsewhere, or even from the same “lender” because their credit score and history qualified them for a lower interest rate. The mortgage broker is paid an actual fee if he is successful in getting the borrower to accept a higher cost loan product.

But here we see a story (below) where the investment banker paid itself a yield spread premium in some cases equal to or greater than the amount funded for the loan. That fee must be disclosed under federal and most state lending laws. The failure to disclose provides the borrower with a right of rescission and a right to damages and treble damages plus attorney fees and costs. That is the tier 2 YSP. It is the same pot of money as the “excessive mark-up” of the securities to the investor-lenders. The investors are collecting, thus raising the issue of whether the deal is now closed out, paid in full, despite little or no participation from the borrower or whether BOTH the investor-lender and the borrower have equally valid and meritorious claims against the same pot of money.

SEC charges Wachovia over CDOs

Wells Fargo agrees to settle charges and pay more than $11 million

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) — The Securities and Exchange Commission on Tuesday charged Wachovia Corp. with overpricing mortgage-bond deals, in the first of what could be several suits the regulator brings to clamp down on Wall Street practices.

Wells Fargo & Co. (NYSE:WFC) , which now owns Wachovia, agreed to settle the SEC’s charges by paying more than $11 million in disgorgement and penalties, much of which the agency said will be returned to harmed investors.

“Wachovia caused significant losses to the Zuni Indians and other investors by violating basic investor-protection rules — don’t charge secret excessive markups, and don’t use stale prices when telling buyers that assets are priced at fair-market value,” said SEC Division of Enforcement Director Robert Khuzami.

Subpoena for IPO-poised Pandora

Online-music streaming service Pandora, which plans an initial public offering, says it has been subpoenaed in an investigation probing information-sharing by mobile applications. John Letzing and Stacey Delo discuss.

The agency is focusing on the amounts Wachovia charged for collateralized debt obligations, and the inquiry is part of a broader probe into Wall Street sales of $1 trillion worth of CDOs.

CDOs are a type of security often made up of the riskier portions of mortgage-backed securities. Read about CDOs role in the financial crisis.

The SEC’s order found that Wachovia violated securities laws by charging “undisclosed excessive markups” in shares of CDOs to the Zuni Indian Tribe and to an individual investor.

According to the SEC, Wachovia allegedly marked down $5.5 million of equity to 52.7 cents on the dollar after the deal closed and it was unable to find a buyer. Months later, the SEC said, the Zuni Indian Tribe and individual investor paid 90 cents and 95 cents on the dollar for the securities, the agency added. Read about Merrill Lynch and CDO disclosures

“Unbeknownst to them, these prices were over 70 percent higher than the price at which the equity had been marked for accounting purposes,” the SEC said.

The settlement follows a Manhattan federal judge ruling on Friday, dismissing three shareholder lawsuits accusing Wachovia and former executives there of misrepresenting the bank’s exposure to risky mortgage loans, according to a Reuters report. Shareholders claimed Wachovia loosened underwriting guidelines and marketed the loans aggressively, the report said.

Last year, the SEC and Goldman Sachs Group Inc. (NYSE:GS)  agreed to a $550 million settlement over CDOs. As part of the settlement, Goldman acknowledged that marketing materials for a CDO it sold were “incomplete” and that it should have revealed the role hedge-fund firm Paulson & Co. played in constructing the vehicle. Read about Goldman settlement with SEC over CDOs

11 Responses

  1. This segment was curiously inserted on this article? Also, a month ago, there was another link that I followed which was a frenetic call to brace for an impending end of america “www.endofamerica2.com”
    a matter that this site would not loosely endorse. Please monitor what gets published from your site….

    “Subpoena for IPO-poised Pandora
    Online-music streaming service Pandora, which plans an initial public offering, says it has been subpoenaed in an investigation probing information-sharing by mobile applications. John Letzing and Stacey Delo discuss.”

  2. But the apparency is that prices increase when in actuality the money=credit=debt has increased so you have more money=credit=debt chasing the same thing. Or Inflation, hence prices continue to rise. But if you stop the credit, one way or the other via default or excess leverage or people not taking on such credit, that ends it. So prices go down. Then we have Gov’t giving tax credits to prop up the price or keep it from falling or to try to continue. But, it doesn’t work as people start to figure it out or they are priced out of the game, hence defaults.

  3. The law of supply and demand does not take into account Money or Credit. It assumes these are constant.

    So, number 3 states

    3. If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.

    So where is if demand increases, and supply of money=credit increases, prices increase?

    Or, if supply of money=credit=debt increases, then it leads to increased prices?

  4. from 2009:


    “Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.”

    In other words FRAUD, Greed, and no ethics or morals committed by the financial institutions. You jack wagon, Krugman.

  5. ok, I’m thinking thru this and including ya’ll.


    “The theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market and none of them has the capacity to significantly influence prices of goods and services. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices. Quite often a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the theory works well in situations reflecting these assumptions.”

    “The assumption fails because some individual buyers or sellers have the ability to influence prices”

    Housing market based on previous sales of comparable houses in the neighborhood. Sell a few houses above the past market, and the ball gets rolling and couple it with easy credit, NINJA Loans, it affects all loans.


    The four basic laws of supply and demand are:

    [1] If demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity.

    2. If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and quantity.

    3. If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.

    4. If supply decreases and demand remains unchanged, then it leads to higher price and lower quantity.

    “3. If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.”

    How do you do number 3? Give easy credit, anybody can buy a house if you fog a mirror, you can get a loan. I was constantly saying to myself during the 2003-2005 time period, where are all these home buyers coming from? Where were they 5 years ago, 10 years ago? Were are they now? No credit or loans anymore.

    Hence, credit cards, buy now pay later, on the macro economic scale, this jacks up all prices as it increases demand.

  6. OK, I understand now. I happened to run across while searching Google for “lending of credit is not lending of money”.

    So our Gov’t and Federal Reverse Bank are all looking at the macro economics , while we at the micro level get screwed.



  7. Sounds like the amount of 11 Million is but a small fine for Wells Fargo. They’ll make that back and then some when they seize some more houses. ( I’d say less then 30 houses.)

  8. What gets me and boils my blood, is these articles and commissions and reports by these experts never mention and get down to the basic. The basic is somebody signed a contract to buy a home, or for that matter a car or credit card, anything now securitized. So, that basic has to be there, that is the actual exchange and product if you will.

    So, all these reports, blah blah blah, financial inguiry commission or whatever, state to big to manage, didn’t view risk properly, lack of regulation, blah, blah, blah. It all amounts to FOOKING FRUAD god damn it. Looking for loopholes and it’s not stated in the rules – this means GOD DAMN FRAUD, playing by not the rules, it is really just fraud.

    So what gets me yet still, what about the basic, the guy that signed the home mortgage, he is still out. They all blah blah about the secondary market AND not the BASIC, god damn it. SO these fooks get made whole on the secondary market but us guys that signed the contract get screwed.

  9. S he SEC knows about the appraisal fraud and they are still allowing foreclosures to continue. ruining lives of our families. we have lost everything in this mess of asppraisal fraud. this is undeniable the worst fraud that has occured to the the american people in every state. how can this ocntinuew with out us doing something. when will this injustice end?

  10. Show me the PATTERN!

  11. Wikipedia actually has easy to follow info on collateral debt obligations.

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