Student Loans Are The Next Major Crack in Our Finance

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Disclosure to Student Borrowers: www.nytimes.com/2012/04/08/opinion/sunday/disclosure-to-student-borrowers.html?_r=1&ref=todayspaper

Editor’s Comment: 

“We have created a world of finance in which it is more lucrative to lose money and get paid by the government, than to make money and contribute to society.  In the Soviet Union the government ostensibly owned everything; in America the government is a vehicle for the banks to own everything.”—Neil F Garfield LivingLies.me

While the story below is far too kind to both Dimon and JPMorgan, it hits the bulls-eye on the current trends. And if we think that it will stop at student loans we are kidding ourselves or worse. The entire student loan mess, totaling more than $1 trillion now, was again caused by the false use of Securitzation, the abuse of government guaranteed loans, and the misinterpretation of the rules governing discharge ability of debt in bankruptcy.

First we had student loans in which the government provided financing so that our population would maintain its superior position of education, innovation and the brains of the world in getting technological and mechanical things to work right, work well and create new opportunities.

Then the banks moved in and said we will provide the loans. But there was a catch. Instead of the “private student” loan being low interest, it became a vehicle for raising rates to credit card levels — meaning the chance of anyone being able to repay the loan principal was correspondingly diminished by the increase in the payments of interest.

So the banks made sure that they couldn’t lose money by (a) selling off the debt in securitization packages and (b) passing along the government guarantee of the debt.  This was combined with the nondischargability of the debt in bankruptcy to the investors who purchased these seemingly high value high yielding bonds from noncapitalized entities that had absolutely no capacity to pay off the bonds.  The only way these issuers of student debt bonds could even hope to pay the interest or the principal was by using the investors’ own money, or by receiving the money from one of several sources — only one of which was the student borrower.

The fact that the banks managed to buy congressional support to insert themselves into the student loan process is stupid enough. But things got worse than that for the students, their families and the taxpayers. It’s as though the courts got stupid when these exotic forms of finance hit the market.

Here is the bottom line: students who took private loans were encouraged and sold on an aggressive basis to borrow money not only for tuition and books, but for housing and living expenses that could have been covered in part by part-time work. So, like the housing mess, Wall Street was aggressively selling money based upon eventual taxpayer bailouts.

Next, the banks, disregarding the reason for government guaranteed loans or exemption from discharge ability of student loan debt, elected to change the risk through securitization. Not only were the banks not on the hook, but they were once again betting on what they already knew — there was no way these loans were going to get repaid because the amount of the loans far exceeded the value of the potential jobs. In short, the same story as appraisal fraud of the homes, where the prices of homes and loans were artificially inflated while the values were declining at precipitous rate.

Like the housing fraud, the securitization was merely trick accounting without any real documentation or justification.  There are two final results that should happen but can’t because Congress is virtually owned by the banks. First, the guarantee should not apply if the risk intended to be protected is no longer present or has significantly changed. And second, with the guarantee gone, there is no reason to maintain the exemption by which student loans cannot be discharged in bankruptcy. Based on current law and cases, these are obvious conclusions that will be probably never happen. Instead, the banks will claim losses that are not their own, collect taxpayer guarantees or bailouts, and receive proceeds of insurance, credit default swaps and other credit enhancements.

Congratulations. We have created a world of finance in which it is more lucrative to lose money and get paid by the government, than to make money and contribute to the society for which these banks are allowed to exist ostensibly for the purpose of providing capital to a growing economy. So the economy is in the toilet and the government keeps paying the banks to slap us.

Did JPMorgan Pop The Student Loan Bubble?

Back in 2006, contrary to conventional wisdom, many financial professionals were well aware of the subprime bubble, and that the trajectory of home prices was unsustainable. However, because there was no way to know just when it would pop, few if any dared to bet against the herd (those who did, and did so early despite all odds, made greater than 100-1 returns). Fast forward to today, when the most comparable to subprime, cheap credit-induced bubble, is that of student loans (for extended literature on why the non-dischargeable student loan bubble will “create a generation of wage slavery” read this and much of the easily accessible literature on the topic elsewhere) which have now surpassed $1 trillion in notional. Yet oddly enough, just like in the case of the subprime bubble, so in the ongoing expansion of the credit bubble manifested in this case by student loans, we have an early warning that the party is almost over, coming from the most unexpected of sources: JPMorgan.

Recall that in October 2006, 5 months before New Century started the March 2007 collapsing dominoes that ultimately translated to the bursting of both the housing and credit bubbles several short months later, culminating with the failure of Bear, Lehman, AIG, The Reserve Fund, and the near end of capitalism ‘we know it’, it was JPMorgan who sounded a red alert, and proceeded to pull entirely out of the Subprime space. From Fortune, two weeks before the Lehman failure: “It was the second week of October 2006. William King, then J.P. Morgan’s chief of securitized products, was vacationing in Rwanda. One evening CEO Jamie Dimon tracked him down to fire a red alert. “Billy, I really want you to watch out for subprime!” Dimon’s voice crackled over King’s hotel phone. “We need to sell a lot of our positions. I’ve seen it before. This stuff could go up in smoke!” Dimon was right (as was Goldman, but that’s another story), while most of his competitors piled on into this latest ponzi scheme of epic greed, whose only resolution would be a wholesale taxpayer bailout. We all know how that chapter ended (or hasn’t – after all everyone is still demanding another $1 trillion from the Fed at least to get their S&P limit up fix, and then another, and another). And now, over 5 years later, history repeats itself: JPM is officially getting out of student loans. If history serves, what happens next will not be pretty.

American Banker brings us the full story:

U.S. Bancorp (USB) is pulling out of the private student loans market and JPMorgan Chase (JPM) is sharply reducing its lending, as banking regulators step up their scrutiny of the products.

JPMorgan Chase will limit student lending to existing customers starting in July, a bank spokesman told American Banker on Friday. The bank laid off 24 employees who make sales calls to colleges as part of its decision.

The official reason:

“The private student loan market is continuing to decline, so we decided to focus on Chase customers,” spokesman Thomas Kelly says.

Ah yes, focusing on customers, and providing liquidity no doubt, courtesy of Blythe Masters. Joking aside, what JPMorgan is explicitly telling us is that it can’t make money lending out to the one group of the population where demand for credit money is virtually infinite (after all 46% of America’s 16-24 year olds are out of a job: what else are they going to?), and furthermore, with debt being non-dischargable, this is about as safe a carry trade as any, even when faced with the prospect of bankruptcy. What JPM is implicitly saying, is that the party is over, and all private sector originators are hunkering down, in anticipation of the hammer falling. Or if they aren’t, they should be.

JPM is not alone:

Minneapolis-based U.S. Bank sent a letter to participating colleges and universities saying that it would no longer be accepting student loan applications as of March 29, a spokesman told American Banker on Friday.

“We are in fact exiting the private student lending business,” U.S. Bank spokesman Thomas Joyce said, adding that the bank’s business was too small to be worthwhile.

“The reasoning is we’re a very small player, less than 1.5% of market share,” Joyce adds. “It’s a very small business for the bank, and we’ve decided to make a strategic shift and move resources.”

Which, however, is not to say that there will be no source of student loans. On Friday alone we found out that in February the US government added another $11 billion in student debt to the Federal tally, a run-rate which is now well over $10 billion a month an accelerating: a rate of change which is almost as great as the increase in Apple market cap. So who will be left picking up the pieces? Why the Consumer Financial Protection Bureau, funded by none other than Ben Bernanke, and headed by the same Richard Cordray that Obama shoved into his spot over Republican protests, when taking advantage of a recessed Congress.

“What we are likely to see over the next few months is a lot of private education lenders rethinking the product, particularly if it appears that the CFPB is going to become more activist,” says Kevin Petrasic, a partner with law firm Paul Hastings.

“Historically there’s been a patchwork of regulation towards private student lenders,” he adds. “The CFPB allows for a more uniform and consistent approach and identification of the issues. It also provides a network, effectively a data-gathering base that is going to enable the agency to get all the stories that are out there.”

The CFPB recently began accepting student loan complaints on its website.

“I think there’s going to be a lot of emphasis and focus … in terms of what is deemed to be fair and what is over the line with collections and marketing,” Petrasic says, warning that “the challenge for the CFPB in this area is going to be trying to figure out how to set consumer protection standards without essentially eviscerating availability of the product.”

And with all private players stepping out very actively, it only leaves the government, with its extensive system of ‘checks and balances’, to hand out loans to America’s ever more destitute students, with the reckless abandon of a Wells Fargo NINJA-specialized loan officer in 2005. What will be hilarious in 2014, when taxpayers are fuming at the latest multi-trillion bailout, now that we know that $270 billion in student loans are at least 30 days delinquent which can only have one very sad ending, is that the government will have no evil banker scapegoats to blame loose lending standards on. And why would they: after all it is this administration’s sworn Keynesian duty to make every student a debt slave in perpetuity, but only after they buy a lifetime supply of iPads. Then again by 2014 we will have far greater problems (and for most in the administration, it will be “someone else’s problem”).

For now, our advice – just do what Jamie Dimon is doing: duck and hide for cover.

Oh, and if there is a cheap student loan synthetic short out there, which has the same upside potential as the ABX did in late 2006, please advise.

29 Responses

  1. “…exotic forms of finance,…” means “exotic forms” of THEFT !!

  2. but OWS is a tool of the DNC. look at its beginnings – ACORN, SEIU, other union involvement and resources.

  3. @Niedermeyer,

    I’m not going to gang up on you. E. Toile (bless his heart, as they say down south) is doing a fine job clearing up a few incoherences as it is but…

    “If we can pull back from the financial brink for a few more years the courts may fix this …” A few more years? Just for the hell of it, can you narrow it down a tad, you know, to build us up, encourage us, I don’t know, give us something positive to hang out hats one?

    Just in case you haven’t noticed, I think we’re kinda running out of years…

  4. @neidermeyer, the anarchy I desire? What do we have now?

    Anarchy: “a situation in which there is a total lack of organization or control.” Oh I see….we do in fact have organization and control….unfortunately that control is in the hands of Goldman Sachs et al.

    Better yet the definition that says, “Absence of any cohesive principle, such as a common standard or purpose.” I guess that one fails big time as well, as we all know that there’s a very cohesive bankster purpose afoot here.

    You bet I’ll take Argentina over this crap any day. And I know that won’t come easy. But there comes a time when you realize that things are simply way too far over the fulcrum….and there’s no righting the deal as is. Romney? OMG&ROTFLMAO!

    It’s also funny you mentioned Argentina, as I’m looking into South America as we speak. Costa Rica looks nice. Anything’s better than rule by and for the 1%.

  5. @ E. Tolle ,

    You may get the anarchy you desire ,, God help us all. If you can’t see who owns OWS and directs their rhetoric you will surely be shocked when your eyes are opened. Change must come from within the existing system … and from the proper channels… If we can pull back from the financial brink for a few more years the courts may fix this … it’s a long shot but do we really want to become Argentina?

  6. Latest NY appeals ruling is bad news for BofA in monoline cases

    Ordinarily, there’s not much reason to get excited about a state intermediate appeals court upholding a procedural ruling by a trial court judge. But in the litigation between bond insurers and mortgage-backed securities issuers, decisions are not only magnified by the tens of billions of dollars at stake, but also by the paucity of precedent. Almost every ruling is groundbreaking, which means that decisions have an impact far beyond a single case.

    With that in mind, there are two reasons why a ruling Thursday by the New York Appellate Division, First Department, is a setback for Bank of America: timing and authority.

    Without much comment, the state appeals court affirmed two rulings by New York State Supreme Court Justice Eileen Bransten, who last fall denied motions by Bank of America to sever and consolidate successor liability claims against the bank in four bond insurer cases against Countrywide. “The court properly exercised its discretion in denying defendant’s motion to sever plaintiffs’ successor liability claims from the primary claims and to consolidate them, for purposes of discovery, in a single action,” the appellate decision said. “The successor liability actions are at completely different stages of discovery, and consolidation would result in undue delay.”

    Delay was one of BofA’s primary objectives in the motion to consolidate the monolines’ claims against it. Successor liability, as I’ve explained, means that when Bank of America acquired Countrywide, it took on legal responsibility for all the wrongs committed by the onetime mortgage giant. That’s a tougher question than you might think. When Stanford Law School professor Robert Daines analyzed BofA’s successor liability in connection with the bank’s proposed $8.5 billion put-back settlement with Countrywide MBS investors, it took him 58 pages to conclude that BofA probably wasn’t liable, but might be if a judge concluded its acquisition of Countrywide was a de facto merger under New York state law. Even the applicable state law, however, is a matter of judgment: U.S. District Judge Mariana Pfaelzer, who’s presiding over the consolidated Countrywide MBS litigation in federal court in Los Angeles, has applied Delaware law in dismissing successor liability claims against BofA.

    BofA’s liability for Countrywide’s failings is a crucial issue for monolines and MBS investors. The bank claims that Countrywide’s remaining assets are worth less than $4 billion, a tiny fraction of what MBS plaintiffs believe they’re owed for the deficient securities they bought. If Bank of America were able to restrict its MBS payouts to Countrywide’s assets, it could conceivably throw the subsidiary into Chapter 11 and let creditors fight over the remains.

    But BofA has enough concerns about its own liability for Countrywide’s alleged wrongs that it kicked in $8.5 billion for the proposed put-back settlement and has put aside billions more in reserves for MBS losses. Its motion to sever and consolidate the monoline successor liability claims pending against it in New York state court also indicates that BofA is in no hurry for a definitive ruling that takes into account a full record. (Pfaelzer’s successor liability decisions have all been on motions to dismiss, when plaintiffs don’t have the benefit of deposition testimony and document discovery to back up their arguments.) The bank’s New York state-court motion would have slowed down MBIA, which is already deep in discovery on successor liability, to permit later-to-file bond insurers to catch up.

    Instead, the appellate ruling means that MBIA can press onward and wrap up discovery. One of the looming issues, you’ll recall, is whether the insurer’s lawyers at Quinn Emanuel Urquhart & Sullivan can depose BofA CEO Brian Moynihan; Bransten still hasn’t ruled on MBIA’s motion to compel his testimony. But as BofA’s lawyers at O’Melveny & Myers disclosed in the spat over Moynihan’s deposition, lots of other bank officials — including former CEO Ken Lewis, former chief risk officer Amy Brinkley, and CFO Joseph Price — have been or will be questioned about whether the Countrywide acquisition was a de facto merger. Document production is almost complete, expert reports are underway, and summary judgment motions are due on Aug. 3. That’s not a long way off for Bank of America, considering that Bransten’s ruling will affect parallel successor liability claims by Ambac, Financial Guaranty Insurance, and Syncora.

    It’s also significant that the state appeals court has once again endorsed a ruling by Bransten, who has established herself as the leading state-court judge in the monoline MBS litigation. Bransten has not yet been overturned on a substantive MBS ruling. That’s significant as the First Department considers appeals and cross appeals of Bransten’s loss causation decisions from earlier this year. It’s also important because the New York justice, unlike Pfaelzer in federal court, is generally sympathetic toward the bond insurers. If I were Bank of America, I wouldn’t be looking forward to the prospect of a precedent-setting Bransten ruling on successor liability.

    The bank still has a chance to move to stay the MBIA successor liability issue after discovery is closed, since the First Department ruling addressed only whether the claims should be consolidated for discovery. BofA may ask Bransten to hold off on a summary judgment ruling in MBIA’s case until the other bond insurers have caught up. The judge has previously expressed concern about giving MBIA the day in court it deserves, however, so it would be a surprise if she halted MBIA’s case at the brink of a crucial ruling.

  7. Neidermeyer, as to your thoughts on OWS, make sure you loosen your belt buckle on occasion, wouldn’t want the air flow cut off to your head completely.

    Your rant is amusing, telling, and couldn’t be further off the mark. OWS not only “gets it”, we aim to do something about it. Romney, Obama, and any third party candidate are all going to take what you have as if it belongs to them. Of that there is no doubt. The belief in voting for a fix is dangerous and delusional.

    We are ALL the 99%.

  8. @carie ,

    OWS is directed by the executive branch … they are a campaign exercise ,, meant to build anti-republican sentiment , particularly against Mitt Romney… Van Jones and Obama both know the full extent of the “mortgage” issue but they don’t want to harm their major contributors/banks … don’t expect OWS to suddenly “get it” … they are a sideshow ,, a distraction… The actual OWS people on the ground are “useful idiots” to the administration …

  9. from article I just posted:

    “It’s truly great that these folks are doing something,” said Ron Etter, nodding toward the Occupiers as they approached the next house on the tour. “No one else is.”

    Now if only OWS can understand that there are no mortgages…then we’ll really see something…

  10. And for those of you who lament that “government” isn’t going after the culprits, SEC appears to have no qualms going personally after the Directors and Officers. Granted, it doesn’t make front page. Still, we want heads, heads are sought after.

    As I keep saying, I see progress…

    Not trickling down to us fast enough though but… progress nevertheless.

    Here it is, from Directors and Officers Diary site.

    http://www.dandodiary.com/

  11. Excerpts from Wilmers diatribe. Go to the link given below to read the whole thing.

    .

    Where it all began to go downhill:

    ll this began to change in the 1970s and especially the early 1980s as these banks grew and began a pattern of investing in areas where they possessed little knowledge – a trend, which culminated in money center banks forfeiting their mantle of leadership and tarnishing the reputation of the banking industry as a whole.

    One might trace the beginning of this chain of events to the market dislocations caused by the OPEC-led increase in world oil prices. But panics and price bubbles have long been a feature of banking and investing, dating at least from the time of the 1637 Dutch Tulip Mania. Historically, however, the financial system has righted itself, responsibly, in the aftermath of such events. That was not the case, starting in the 1980s.

    In a desire to expand their franchises, money center banks sought alternative investments and extended themselves into unchartered territories. Loans to energy companies (“oil patch” loans), shipping firms, and lessdeveloped countries (LDCs) became the flavor of the day. In venturing into these lines of lending, they chose to ignore the strong and prescient 1977 warning by Federal Reserve Board Chairman Arthur Burns, who observed that “under the circumstances, many countries will be forced to borrow heavily, and lending institutions may well be tempted to extend credit more generously than is prudent.”

    He even calls out some specific villains:

    So it is that the crisis was orchestrated by so many who should have, instead, been sounding the alarm – not only bankers but also regulators, rating firms, government agencies, private enterprises and investors. That a former U.S. Senator, Governor and CEO of a big six financial institution was at the helm of MF Global on the eve of its demise due to trading losses, or that the largest-ever Ponzi scheme was run by the former chairman of a major stock exchange will long be remembered by the public. The repercussions have stretched beyond banking, creating an atmosphere of fear affecting and inhibiting those who should be leading us toward a better post-crisis economy.

    It really is epic, and these excerpts aren’t enough to do it justice. Read the whole thing here >

    Read more: http://www.businessinsider.com/mt-bank-ceo-robert-wilmers-letter-2012-4#ixzz1rabAiLY5

  12. I haven’t read the long (long) letter written by Robert Wilmers, M&T CEO (bank) but he seems to understand quite well why Wall Street cannot remain as it is. He even gives some very telling numbers of ines paid by banks (in excess of 430 billions) since 2002.

    Click below to read some excerpts of that letter.

    http://www.businessinsider.com/mt-bank-ceo-robert-wilmers-letter-2012-4#ixzz1rTDH3pLr

  13. And the sba loans are also on the plate……. No small business to prosper, no student loans for our badly needed new life for American children that we were depending on for economic growth, remember the middle class is due to be wiped out………sad America

  14. Hello – I wonder if this will be approved…

    The loan is a fraud from inception. It is marketed as a loan. Ask your loan company to produce the accounting showing their full disbursement of the funds from their pockets to the college. They can not because that is not what happened.

    Your signature creates money in this country and only when you go to a window at the FED MOB does it magically become credit money! So when you borrowed money to attend college, you borrowed it against your signature and we obfuscate this fact calling it a promissory note.

    Would you pay back your neighbor for borrowing money out of your savings account? Well you are when you borrow money from your own self and then you owe the interest to the banker for the privilege!!!!

    At this point, I’d like to work with people on the ground on how to totally cancel this fraud against me. Anyone else interested about doing something for real about this?

  15. Joanne- while I don’t have the total foreclosure numbers available, I was thinking the other day, how at one point, I had read a quote from Moody’s Ratings Agency: “we didn’t rate ALL the MBS, we only rated 43,500 MBS” (and each with 1500- 8000 loans inside, at lease on paper) So I was wondering how many mortgages in total we are talking about. Something else for your letter. I do know that at the onset of this swindle, there were 13- 13,4 trillion dollars worth of mortgages outstanding. That was the total of all residential mortgages in the US.

  16. All, the BIG MEDIA could help us dramatically by engaging in disclosure of this horrific crime. Fox had an attorney on the other day I posted here, that is a good start to helping us fight this crime and I hope the beginning of fighting this crime.

    Matt Weidner asking for signatures here!
    Written by Matthew D. Weidner, Esq. on Apr 08, 2012 01:56 pm

    This is a letter from a candidate running for the Florida House, Peter Nehr. Please help him out here! Dear Friend, Thank you for your active and continued support. I’m writing today to ask for your help with my campaign for re-election to the Florida House of Representatives. The State of Florida allows a candidate …
    http://mattweidnerlaw.com/blog/2012/04/please-help-we-need-your-signatures-today-to-support-peter-nehr/?utm_source=rss&utm_medium=rss&utm_campaign=please-help-we-need-your-signatures-today-to-support-peter-nehr

  17. Off topic but worth reading. Once in a while, we need something like that to comfort ourselves that the fight is worth it.

    The actual opinjion is posted on http://www.nakedcapitalism.com/

    Monday, April 9, 2012

    Judge Rules Wells Fargo Engages in “Reprehensible,” Systemic Accounting Abuses on Mortgages, Hit with $3.1 Million Punitive Damages for One Loan

    One of our ongoing frustrations about media coverage of the mortgage mess is its failure to pay much attention to ample evidence of substantial servicer overcharges to borrowers. It’s bad enough that that happens, but far worse is that when servicers are told that they’ve been caught out, they refuse to make corrections and stonewall court-ordered remedies.

    The facts that have surfaced in before one bankruptcy judge, Elizabeth Magner of the Eastern District of Louisiana, and one servicer, Wells Fargo, should give industry defenders pause. Wells, as we have pointed out repeatedly, has an annoying habit of piously claiming it is better than other servicers when it engages in the same indefensible conduct as its peers. So if you were to take Wells at its word, the conduct of other servicers is at least as bad as what has taken place in this jurisdiction, if not worse. Remember, servicers are highly routinized operations, so if something, it is almost certain to be standard practice. And Wells has admitted that in this case.

    Here is a snippet of background from another case in Magner’s courtas recounted by the Center for Public Integrity:

    In an April 2008 ruling, Elizabeth Magner, a U.S. bankruptcy judge in New Orleans, rejected the two charges [for broker price opinions charged when the parish in which the home was located was evacuated thanks to Hurricane Katrina] as invalid. She also disallowed 43 home inspections, 39 late charges, and thousands of dollars in legal fees charged to the Stewarts’ account.

    Almost every disallowed fee was imposed while the Stewarts were making regular monthly payments on their home…

    Magner determined that Wells Fargo had been “duplicitous and misleading” and ordered the bank to pay $27,000 in damages and attorneys’ fees. She also took the unusual step of requiring the servicer to audit about 400 home loan files in cases in the Eastern District of Louisiana.

    Wells fought successfully to keep the results of the audit under seal, and last summer a federal appeals court overturned the part of Magner’s ruling that required the audit. But two people familiar with the results told iWatch News that Wells Fargo’s audit had turned up accounting errors in nearly every loan file it reviewed.

    The latest example of Wells bad behavior in Magner’s courtroom that has come to a resolution of sorts is another case of Wells overcharging a borrower. In this suit, Jones v. Wells Fargo, filed in 2007, involved a borrower having to sue Wells to recoup overcharges by Wells plus actual damages, plus a request for punitive damages. The ruling sets forth the sorry history in some detail and I strongly suggest you read it in full.

    In Re Jones

    Jones was awarded over $24,000 plus interest on the overcharges. Manger determined then that additional amounts were due because Wells had violated the bankruptcy stay because it applied payments made during the bankruptcy to charges that had not been authorized by the court and thus in violation of the plan of reorganization. She ruled Wells’ conduct to be willful and egregious. The ruling noted (emphasis ours):
    Despite assessing postpetition charges, Wells Fargo withheld this fact from its borrower and diverted payments made by the trustee and Debtor to satisfy claims not authorized by the plan or Court. Wells Fargo admitted that these actions were part of its normal course of conduct, practiced in perhaps thousands of cases.
    Wells agreed with Magner to remedy certain “systemic problems” with its record keeping. In this ruling, the court also awarded Jones over $67,000 in compensatory sanctions.

    Four months after the initial ruling on this case, the Stewart case (the one with the clearly bogus broker price opinions) was filed. The violations were identical to the ones in the Jones case, and this took place after Wells had agreed to fix this sort of accounting problem . Among other things, applying payments to fees first, when they are required to go to principal, interest, and escrow first, which resulted in improper amortization, which then led to additional interest, default fees and costs being incurred. Those additional charges were done without obtaining approval of the court and were flat out not permitted (this is a blatant violation of well established procedures in bankruptcy, hence the vehemence of Magner’s reaction. And notice this comment from her ruling:

    The evidence established the utilization of this application method for every Wells Fargo mortgage loan in bankruptcy.

    To make a long story short, Wells repeatedly engaged in scorched earth tactics:

    While every litigant has a right to pursue appeal, Wells Fargo’s style of litigation was particularly vexing. After agreeing at trial to the initial injunctive relief in order to escape a punitive damage award, Wells Fargo changed its position and appealed. This resulted in:

    1. A total of seven (7) days spent in the original trial, status conferences, and hearings before this Court;
    2. Eighteen (18) post-trial, pre-remand motions or responsive pleadings filed by Wells Fargo, requiring nine (9) memoranda and nine (9) objections or responsive pleadings;
    3. Eight (8) appeals or notices of appeal to the District Court by Wells Fargo, with fifteen (15) assignments of error and fifty-seven (57) sub-assignments of error, requiring 261 pages in briefing, and resulting in a delay of 493 days from the date the Amended Judgment was entered to the date the Fifth Circuit dismissed Wells Fargo’s appeal for lack of jurisdiction;47 and
    4. Twenty-two (22) issues raised by Wells Fargo for remand, requiring 161 pages of briefing from the parties in the District Court and 269 additional days since the Fifth Circuit dismissed Wells Fargo’s appeal.

    The above was only the first round of litigation contained in this case….

    The judge also describes Wells’ “reprehensible” conduct:

    Wells Fargo has taken the position that every debtor in the district should be made to challenge, by separate suit, the proofs of claim or motions for relief from the automatic stay it files. It has steadfastly refused to audit its pleadings or proofs of claim for errors and has refused to voluntarily correct any errors that come to light except through threat of litigation. Although its own representatives have admitted that it routinely misapplied payments on loans and improperly charged fees, they have refused to correct past errors. They stubbornly insist on limiting any change in their conduct prospectively, even as they seek to collect on loans in other cases for amounts owed in error.

    Wells Fargo’s conduct is clandestine. Rather than provide Jones with a complete history
    of his debt on an ongoing basis, Wells Fargo simply stopped communicating with Jones once it
    deemed him in default. At that point in time, fees and costs were assessed against his account and satisfied with postpetition payments intended for other debt without notice. Only through litigation was this practice discovered. Wells Fargo admitted to the same practices for all other loans in bankruptcy or default. As a result, it is unlikely that most debtors will be able to discern problems with their accounts without extensive discovery….

    Over eighty (80%) of the chapter 13 debtors in this district have incomes of less than
    $40,000.00 per year. The burden of extensive discovery and delay is particularly overwhelming. In this Court’s experience, it takes four (4) to six (6) months for Wells Fargo to produce a simple accounting of a loan’s history and over four (4) court hearings. Most debtors simply do not have the personal resources to demand the production of a simple accounting for their loans, much less verify its accuracy, through a litigation process.

    Wells Fargo has taken advantage of borrowers who rely on it to accurately apply payments
    and calculate the amounts owed. But perhaps more disturbing is Wells Fargo’s refusal to voluntarily correct its errors. It prefers to rely on the ignorance of borrowers or their inability to fund a challenge to its demands, rather than voluntarily relinquish gains obtained through improper accounting methods. Wells Fargo’s conduct was a breach of its contractual obligations to its borrowers. More importantly, when exposed, it revealed its true corporate character by denying any obligation to correct its past transgressions and mounting a legal assault ensure it never had to.

    Society requires that those in business conduct themselves with honestly and fair dealing. Thus, there is a strong societal interest in deterring such future conduct through the imposition of punitive relief….

    The word “predatory” is not adequate to describe Wells’ conduct. The bank is not simply willing to steal from consumers, via blatant, institutionalized violations of its own agreements on mortgages and later on bankruptcy plans. It has absolutely no respect for the law, whether it be contracts or court procedures. It’s a band of marauders that our society treats as legitimate because the perpetrators wear suits and can afford to hire lobbyists. And the Federal government and state attorneys general are certain to have emboldened Wells and its brethren by rewarding them rather than treating them like the criminals they are.

  18. No specific data because it’s being covered up and obfuscated…”they” don’t want us to know the whole truth…as usual…because knowledge is power…”they” don’t want the debt slaves to gain power by knowing the whole truth…

  19. @Joann,

    You put the finger on one of my biggest gripes: we don’t have specifics to go buy. Last year, for example, we read (once) that JP Morgan was facing about 10,000 homeowners’ lawsuits. I have tried to find curent number, not just for JPM but for every single actor in this mortgage debacle. Can’t find any. So, we’re left (intentionally?) in the dark, without anything to give us hope.

    I want to know how much of my tax paer’s money is going toward paying defense costs of the banks being sued. It seems that every single cent I earn is going into banks’ pockets, whether directly or indirectly. Not only do i have to pay my own legal expenses of fighting banks but I also have to swallow theirs by paying taxes that end up misappropriated without my say in anything..

    When I say that it will blow, not only do I believe it but I can’t wait for it to happen. And it has gone so far in one direction that I’m very afraid the only way to redress this situation will be systematic nationalizations and years of dictatorship.

  20. @tnharry,

    I concur with Janet. If you had listened to Greenberger and Guilford testify before Congress yesterday on the oil price scandals we are currently facing, you would have realized that the system is irremediably broken… at every single level because of runnway and unregulated speculation. It is what caused the mortgage crisis, what is causing the student loans debacle and what is deeply ailing this country. The next major crisis we will have is food and water. It’s not being “all doom and gloom” but the common sense consequence of not addressing everything at once.

    Mortgages are only one aspect of the greatest financial scandal ever visited upon humanity but it didn’t happen in a vacuum. Pointing out all of this system’s deficiencies may serve to implement radical corrective measures and prevent what America is historically known for always doing: correcting things piece meal without ever addressing the root cause of the problem. Greed will always exist. Allowing it to run rampant by destroying everything that, at one time, worked for the greater good does not have to be.

    Understand that the “greater good” means that everyone has a fair chance. Doesn’t mean that everyone will take it but at least, it will be offered. Today, it no longer is the case. I hope you don’t have kids or you have a lot of money at your disposal because one thing is certain: unless they were fortunate enough to be born among the 1%, right now, their future is extremely bleak. And so is yours. Or mine.

  21. Just wondering where is the data on how many homes total foreclosed from mid 2006. Can’t find it anywhere. How many are in default or stage of foreclosure right now? Never hear the figures anymore. Where are those numbers? Anyone? I would like to use them in a letter and properly quote them. Also how many vacant homes are there – census or otherwise?

    Obviously college grads won’t be buying them anytime soon. They are living in groups and not even getting married anymore. If you went broke before you forecosed you won’t be buying anytime soon either.

    Brokers, agents, investors, flippers, and speculators who “bought too much house” ran not walked out years ago and held on to the cash. I wonder if they are buying now? Maybe they are but something tells me no – they are still waiting for an even bigger drop and will get their wish. More and more homeowners have less and less to liquidate in a sale even if not underwater….yet.

  22. tnharry- I would wager that Neil posted the student debt article and commentary (not his first post on this topic), to illustrate the similarity between securitized student debt and securitized home mortgages. Makes sense to me.

  23. the burden for discharge is still VERY high – it’s not just unemployed or underemployed in most jurisdictions, it’s nearly unemployable. lower the burden for discharge of student loans and allow mortgage modifications in BK. those two things alone will do more to help struggling people than any stimulus programs.

  24. While it is a common perception that student loans are “non-dischargeable” within the bankruptcy court filings, that is not entirely true. Student Loans ARE dischargeable in certain situations, where the Court is convinced that leaving the loans as non-dischargeable debt will pose an undue burden on the debtor. You can make this case if you are unemployed or grossly underemployed, have been unemployed or underemployed for some time, and declare that there are no prospects for reasonable employment that make repayment a realistic prospect, the Court can and will discharge the debt. You would have to be in a Chapter 7 and have no assets, as far as I can ascertain.

    Is the current system of “student loans” predatory? Of course it is. It is yet another variant of the Goldman Sachs hydra-headed octopus monster, with the tentacle suction cups sucking the blood out of all of you. There is a perfectly reasonable solution, now that the NDAA has been signed into law, allowing for indefinite detention: have the federal marshals go pick up Jamie Dimon and his counterparts in a raid, cuff them, take them to a prisoner airplane and drop them at Gitmo. When word gets back that Dimon and his buddies are having breakfast with the Afghans in Cuba, then Wall Street’s behavior changes really, really fast. Perfectly legal, now that indefinite detention without warrant is the law of the land.

  25. funny – what did i do to piss you off?

  26. funny

    what’d i do to piss you off?

  27. i think the people should discuss, how big a scumbag tnharry really is

  28. what does this have to do with mortgages? i know it’s hard coming up with content day in and day out, but this is just odd.

    doesn’t matter really – by the 5th comment the people will be discussing what they want anyway. Neil just just put up a blank post every so often and let the commenters run with it.

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