Appraisal Fraud: Triaxx Inching Toward the Truth

Editor’s Comment: At the heart of the entire scam called securitization was the abandonment — in fact the avoidance of repayment of the loans. The idea was to make bigger and bigger loans without due any evidence of due diligence, so that the “lender” could claim plausible deniability and more importantly, make a claim for losses that were insured many times over. It was the perfect storm. Banks were using investor money to make bad loans on which the banks were raking in huge profits through multiple sales or insurance of the same loan portfolio. The only way the plan could fail was if the loans performed and the loan was in fact repaid.

For years, I have been pounding on the fact that the root of the method used was appraisal fraud, which as far as I can tell was present in nearly 100% of all loans subject to securitization, where loans were NOT bundled, and the securitization documents were ignored.

Now ICP Capital managing a vehicle called Triaxx, has countered the mountain of documents with real data sifted through algorithms on computers and they have come to the conclusion that loans were far outside the 80% LTV ratio that was presented to investors, that loans were never paid from the start (not even the first payment) and that probability of repayment was about zero on many loans. Soon, with some tweaking and investigation they will discover that repayment was never in the equation.

Thanks again to the learning curve of Gretchen Morgenson of the New York Times and her excellent investigations and articulation of her findings, we are all catching up with the BIG LIE. Banks made loans to lose money because they the money they were losing was the money of investors — pension funds etc. And at the same time they bet against the loans that were guaranteed to fail and put the money in their own pockets.

In classic PONZI scheme methodology, they used the continuing sales of false mortgage bonds to pay investors until the inevitable collapse.

Once this is established 2 things are inevitable — the investors will prove their case that they the mortgage bonds were fabricated and based upon lies, deceit and cheating.

And the other inevitable conclusion is that the money came from the investors and not from the named payee, lender or secured party on the notes and mortgages that were executed in the tens of millions during the mortgage meltdown decade.

But did the investor money come to the closing through the REMIC? The answer appears to be a big fat “NO” based upon a big fat LIE. And THAT is where the problem is that caused the banks and servicer to fabricate, forge, robo-sign, lie, cheat and steal in court the same way they did when they sold the investors and sold the borrowers on a deal doomed from inception.

Legally and practically all that means that the borrowers were equally defrauded by the false appraisals that are legally the representation of the “lender” not the borrower. But even more importantly it means that Wall Street cannot show that the money for funding or purchase of the loans ever actually came from the investment pools.

It turns out that the Wall Street was telling the truth when it denied the existence of the pools and the switched to a lie which we forced on them because it never occurred to us that they would blatantly cheat huge institutions that could do their own digging and litigating. 

The legal and accounting effect of all this is enormous. The Payees, Lenders and Secured Parties named in the closing were not the source of funding and therefore the documents that were signed must be construed as referring to a transaction that has never been completed because it was never funded.

The deception was complete when Wall Street investment bankers sent money down to closing agents without regard to any pool, REMIC, SPV or other specific collection of investors. The funding arrived from Wall Street a the same time as the papers were signed.

But in order to prevent allegations of false appraisals and predatory and deceptive lending from moving up the ladder, Wall Street made sure that there was NO CONNECTION between the PAYEE, LENDER or SECURED PARTY and either the investment bank or the so-called unfunded pool into which no assets were placed other than the occasional purchase or sale of a credit default swap.

FREE HOUSE?: As Arthur Meyer is fond of pointing out in his history of banking every 5 years, bankers always manage to step on a rake. The banks had severed the connection between the funding and the documents.

If the court follows the documents a windfall goes to someone in the alleged securitization documents WHO HAS ALREADY BEEN PAID.

If he follows the money, the loan is not secured by a perfected mortgage lien, which means that (1) the unsecured debt can be wiped out in its entirety by bankruptcy AND/or (2) with investors slow on the uptake, there might not be a creditor left to make a claim.

THE ULTIMATE AND RIGHT APPROACH TO PRINCIPAL REDUCTION: But as pointed out previously, there is a Tax liability that would put the federal, state and local budgets back in balance due from homeowners who got their “free house.” It would be a small fraction of the balance claimed on the original loan, but it would reflect the real valuation of the house, the real terms that should have applied, and a deduction for the predatory and deceptive lending practices employed.

BOA ET AL DEATHWATCH: The political third rail here is that 5-6 million homeowners might well have a right to return to their old homes with no mortgage — an event that would put our economy on steroids, end joblessness and crush the mega banks whose accounting and reporting to the SEC and shareholders has omitted the huge contingent liability to pay back the ill-gotten funds from reselling the same portfolio AS THEIR OWN  loans dozens of times.

Too Big to Fail may well be amended to “Too Fat to Jail”, a notion with historical traction even in our own society corrupted by money, influence peddling and lying politicians.

See Gretchen Morgenson’s Article at How to Find the Weeds in the Mortgage Pool

How to Find Weeds in a Mortgage Pool

IT sounds like the Domesday Book of the housing bust. In fact, it is a computerized compendium of millions of housing transactions — a decade’s worth from across the country — that could finally help us get to the bottom of troubled mortgage investments.

The system is an outgrowth of work done by a New York investment manager, Thomas Priore. In the boom years, his investment firm, ICP Capital, navigated the dangerous waters of collateralized debt obligations via an investment vehicle called Triaxx. Buyers of Triaxx C.D.O.’s did better than most, but Triaxx still incurred losses when the bottom fell out.

Now Triaxx’s database could help its managers and other investors identify bad mortgages and, perhaps, learn who snookered whom when questionable home loans were bundled into investments that later went bad.

Triaxx’s technology came to light only last month, in court documents filed in connection with the bankruptcy of Residential Capital. ResCap was the mortgage lending unit of GMAC, now known as Ally Financial. As an investor in mortgage securities, Triaxx gained access to a lot of information about loans that were pooled, including when those loans were made, where the properties are and how big the mortgage was, relative to the property’s value. After Triaxx fed such details into its system, dubious loans popped out.

Granted, Mr. Priore is no stranger to controversy. He and ICP spent two years defending themselves against a lawsuit by the Securities and Exchange Commission, which accused them of improperly generating “tens of millions of dollars in fees and undisclosed profits at the expense of clients and investors.” On Friday, ICP and Mr. Priore settled the matter. As is typical in such cases, they neither admitted nor denied the accusations. Mr. Priore paid $1.5 million. He declined to discuss the settlement.

But he did say that, looking ahead, he believed that Triaxx’s technology would help its investors recover money they deserved. Many other investors, unable or unwilling to dig through such data, have settled for pennies on the dollar.

“Our hope is that the technology will level the playing field for mortgage-backed investors and provide a superior method to manage residential mortgage risk in the future,” Mr. Priore said.

A step in that direction is Triaxx’s recent objection to a proposed settlement struck last May between ResCap and a group of large mortgage investors. Triaxx, which invested in mortgage loans originated by ResCap, criticized that settlement because it was based in part on estimated losses. Triaxx said the estimates had assumed that all the trusts that invested in ResCap paper were the same. Triaxx argued that a settlement based on estimated losses, rather than one based on an analysis of actual misrepresentations, unfairly rewards investors who bought ResCap’s riskier mortgages.

ResCap replied that it would be a herculean task to examine the loans in the trusts to determine the validity of each investor’s claims. But Triaxx noted that it took only seven weeks or so to do a forensic analysis of the roughly 20,000 loans held by the trusts in which it is an investor. Of its investments in loans with an original balance of $12.8 billion, Triaxx has identified approximately $2.17 billion with likely breaches. A lawyer for ResCap did not return a phone call on Friday seeking comment about problem loans.

John G. Moon, a lawyer at Miller & Wrubel who represents Mr. Priore’s firm, said: “Large institutions have been able to hide behind the expense of loan file review to evade responsibility for this very important national problem that we now have. Using years of data and cross-referencing it, Triaxx has figured out where the bad loans are.”

Triaxx, for example, said it had found loans that probably involved inflated appraisals. Those appraisals led to mortgages far exceeding the values of the underlying properties. As a result, investors who thought they were buying mortgages that didn’t exceed 80 percent of the properties’ value were instead buying highly risky loans that totaled well over 100 percent of the value.

Triaxx identifies these loans by analyzing 50 property sales in the same vicinity during the same period that the original mortgage was given. Then it compares the specific mortgage to 10 others that are most similar. The comparable transactions must involve the same type of property — a single-family home, for example — of roughly the same size. They must also be within a 5.5-mile radius. If the appraisal appears excessive, the system flags it.

Phony appraisals in its ResCap loans likely resulted in $1.29 billion in breaches, Triaxx told the court. Triaxx cited 50 possible cases; one involved a mortgage written in November 2006 on a home in Miami. It was a 1,036-square-foot single-family residence, and was appraised at $495,000. That appraisal supported a $396,000 mortgage, reflecting a relatively conservative 80 percent loan-to-value ratio.

But an analysis of 10 similar sales around that time suggested that the property was actually worth about $279,000. If that was indeed the case, that $396,000 mortgage represented a 142 percent loan-to-value ratio.

Perhaps the home had gold-plated bathroom fixtures and diamond-encrusted appliances. Probably not.

Triaxx’s system also points to loans on properties that were not owner-occupied, a breach of what investors were told would be in the pool when they bought it, Triaxx’s filing said. Such misrepresentations in loans underwritten by ResCap amounted to $352 million, Triaxx said.

The technology also kicks out mortgages on which borrowers failed to make even their first payments, loans that should never have wound up in the pools to begin with.

Although Triaxx is using its technology to try to recover losses, that system could also help investors looking to buy privately issued mortgage securities. After all, investors’ inability to analyze the loans in these pools during the mania led to enormous losses in the collapse. Now, deeply mistrustful of such securities, investors have pretty much abandoned the market.

Lenders and packagers of mortgage securities will undoubtedly fight the use of any technology like Triaxx’s to identify questionable loans. That battle will be interesting to watch. But investors should certainly welcome anything that brings transparency to this dysfunctional market.

11 Responses

  1. @ DW: do you mean: “VOID AB INITIO”???

  2. About that chain of title part in Sal’s post–I found this in a state where recording a mortgage is not required, that is, if the mortgagee doesn’t mind losing its lien position against a party who does record its lien. But it seems that the needs of society in one state dictate recording the intervening mortgages:

    “The Legislature deems that the needs of the society of this state require that persons claiming interests in real estate contrary to the apparent title as shown by the county records and decrees and judgments of the county courts and courts of general jurisdiction come forward and make public their claims and the basis thereof by filing of record a notice of such claim.This act shall be liberally construed to effect the legislative purpose of simplifying real estate transactions by permitting purchasers to rely upon the status of title as reflected by the county records and by the decrees and judgments of the aforementioned courts.”

    Since it is not the Court’s place to change the Legislature’s intent, could this be helpful to show breaching the chain of title when the servicer files a MERS assignment of mortgage while the note’s alleged indorsements show other parties who claimed interest in the mortgage? Or is it just a legally-empty comment?

    As Neil stated recently, mortgages don’t have to be recorded, but they do have to be in writing. Recording the mortgages alleged to be assigned in blank (no sweat, robos could take care of that) and traveling with the note in “recordable form” should not be overburdensome for the poor widdle servicers.

    I like this quote:

    U.S. v. Prudden, 424 F.2d. 1021; U.S. v. Tweel, 550 F. 2d. 297, 299, 300 (1977)

    Silence can only be equated with fraud when there is a legal and moral duty to speak or when an inquiry left unanswered would be intentionally misleading. We cannot condone this shocking conduct…

  3. Thank you Sal,

    Did Prudential limit its review to Goldman Sachs or are they doing the same review for other financial institutions, such as B of A, Chase or others? Was Prudential involved with any other bank?

    That takes care of Tnharry’s claim that fraudulent assignments were few and far between… but the great majority were done properly.

    Maybe Tennessee is a completely different animal altogether. Come to think of it, in the big scheme of things, TN cases do seem rather rare.

  4. what is that latin saying for “from fraud nothing follows”

  5. Prudential Files Suit Against Goldman

    There is so much information in this complaint regarding every aspect of the securitization process and how Goldman committed fraud at every angle of the transactions. I picked out just a sample regarding proof that the notes were never assigned to the trust and in fact some were assigned to third parties entirely.

    D. Evidence That Goldman’s Representations Concerning The Mortgage Loans’ Chain Of Title Were Systemically False

    126. Goldman’s representations about the valid transfer oftitle ofthe Mortgage Loans to the Trusts were false. In many instances, the collateral did not properly secure the underlying Mortgage Loans and the Trusts could not foreclose on delinquent borrowers because Goldman either lost, failed to timely create, or failed to timely deliver the paperwork necessary to prove title to the mortgages.

    127. Contrary to its representations, Goldman did not properly assign large numbers of the Mortgage Loans to the Trusts. In its rush to securitize loans and thereby offload risky collateral onto investors such as Prudential, Goldman did not comply with the strict rules governing assignment of mortgages and the transfer of promissory notes and loan files. Goldman lost much of the paperwork relating to the Mortgage Loans underlying the securitizations, or made no attempt to assign the Mortgage Loans and deliver the original mortgage notes to the issuing trusts, as represented.

    128. As part of its loan-level analysis of the Mortgage Loans underlying its Certificates, Prudential also examined ifthe chain ofmortgage assignments was complete with respect to the Mortgage Loans. The review demonstrates that Goldman’s representations regarding the title for the Mortgage Loans were false and misleading, and that Goldman fraudulently failed to disclose problems in the chain oftitle for the Mortgage Loans.

    129. As discussed in Section IV, this analysis could not have been performed by investors before 2010, because investors were not able to identifY the specific properties at issue at the time. Nor was it industry practice for investors to do an independent loan-level assessment • ofthe accuracy ofthe representations made in the Offering Materials-Prudential reasonably relied upon Goldman to represent the Mortgage Loans correctly in the Offering Materials.

    130. The review demonstrates, for each Securitization, (a) how many Mortgage Loans are currently held by the RMBS trust; (b) how many are held in the MERS electronic-recording system; (c) how many are still held in the originator’s name; and (d) how many were assigned to a third party. Loans that are still held by the originator, or were assigned to a third party other than the Trust or MERS, violate Goldman’s representations that the loans would be assigned to the Trust (or, in some cases, would be held by MERS).

    132. In sum, among the 9,252 Loans for which sufficient data were available to • conduct this analysis, 562 loans were improperly assigned to a third party (other than MERS) and 3,159 were still held in the originator’s name-an over 40% defective rate. Further, ofthe loans that were nominally assigned to the Trust, over 58% are missing necessary intervening assignments. Each ofthese loans also represent breaches ofGoldman’s representations.

    133. As with the occupancy and appraisal analysis discussed above, the consistency and size of Goldman’s title-related misrepresentations confirms that, in addition to the originators, Goldman itself systemically abandoned sound underwriting and securitization practices.

    134. Goldman also defrauded Prudential by stating that an assignment to MERS ensured that each Trust could foreclose upon the underlying collateral; these representations were false. As multiple courts have held, because the actual mortgage note is typically not transferred to MERS, no interest is acquired by it and it cannot bring a foreclosure action. See, • e.g., Bank ofNew Yorkv. Silverberg, 86 A.D.3d 274 (N.Y. App. Div. 2d Dep’t 2011). In February 2011, MERS instructed its lender members to stop foreclosing in the name ofMERS in light ofoverwhelming authority that beneficial ownership ofan underlying mortgage cannot be
    transferred to MERS. Goldman’s representations in the Offering Materials that MERS would be the “beneficial owner” ofeach Mortgage were false. As MERS Recommended Foreclosure Procedure 8 provides, “MERS does not create or transfer beneficial interests in mortgage loans or create electronic assignments ofthe mortgage.”


    “…But, his premise is also based on the theory that the note conforms to the UCC. I do not think it does. I do not think there was EVER a valid note. All you have is a modification of debt that masqueraded as valid “note.” Indeed, with the refinance the prior MORTGAGE was never (validly) discharged/cancelled, and the subprime “loan” just modified it’s terms. I am more concerned about the MORTGAGE — rather than the “fake” note.

    Too many are ASSUMING that the Note is valid under the UCC. It is NOT, since the prior note was NEVER PAID, and the prior Mortgage was never validly discharged. In effect, borrowers not only owe the last “loan” in question, but also the loan prior to the loan in question. A situation that likely destroys borrowers “credit” indefinitely. You do not cancel a “NOTE”, a note is marked “PAID”. You cancel/discharge/satisfy the Mortgage/Deed of Trust. But, again, I think that there are some very important issues here. Homeowners, who have been foreclosed upon, need PROOF, that the foreclosure was valid, by a valid creditor, and that all proper documents have been legally and validly filed in order to make sure that NOTHING remains outstanding. This is especially important as notes were not valid “notes” and instead “debt collections loans”, that MUST be properly disposed of — outside the valid mortgage/loan arena.

    With a good attorney — I think foreclosure victims could establish a class action based on inadequacy of proper documentation that a valid foreclosure took place. Once a court/and or process allows a foreclosure, they are not concerned as to whether all is properly documented by the PROPER party. They do not know what happens AFTER the foreclosure occurs.

    The statute of limitations is important. If you suspect fraud, you must act.

    We are finding much evidence that prior loans to foreclosure in question were NEVER PAID and mortgage NEVER DISCHARGED. This makes the last “mortgage refinance” you got, and subsequent foreclosure, invalid and illegal.”

    “…you need to establish a breach of chain of title. Combined with the fact that NOTE was never a valid note, it could be important. But, you must look at prior loan — prior mortgage — and all documents filed. You cannot, and should not, try to establish an invalid chain of title based only on the last refinance.

    I have always said from the very beginning of the mortgage crisis, whoever “funded” your loan when you purchased your home, that party never relinquished its rights — despite a refinance. Forget the investors — they are not the mortgagee. The mortgagee from onset is the party who remains your mortgagee. And, in case of new purchase — this may even go beyond — to the mortgagee of the prior homeowners of the property.

    Neil does makes sense on one issue — the argument must first be directed against the mortgage lien. Then he ruins it by “assuming” a valid note. He just does not get it — invalid “debt collection” notes did NOT require funding from anyone. Neil is very backwards on this — there can be no mortgage lien if there was never a valid note. Courts are very difficult. But, it is true that you need some PROOF —- which means, you must scour records — ALL records, for flaws. You must trace your “loan” to the inception of the purchase of the home. You must do diligent and extensive research on the affiliations, mergers, acquisitions, of any parties on any documents. This is a difficult task — that even most attorneys are not up to. You must get cancelled checks, you must try to get information from GSEs under the FOIA. You must go into court with some important discrepancy that exists in your documents. And, believe me, they exist.

    The problem with too many is that they remained focused on the SAME issue, they are not willing to branch out and LOOK AGAIN. Neil is like that. You know, the old saying — “too focused on your old ways.”

  7. so when do we start insisting that the criminality of all this must be taken seriously, where do we start Neil, anyone, someone. thats what it is going to take, which media will get this story out right now, the truth.

  8. Yep same old, same old

    How many mountains of evidence will it take to motivate the dispensers of justice…..there will never be enough

  9. Right, E.Tolle—no more “livin’ the dream”—it’s “livin’ the perpetual nightmare”—and we have to learn to like it…or else!

  10. I want all of us to send this ” Inching towards the truth” to all the newspapers, wallstreet, congress, Gov, politions, FDIC, whoever, everyone….scream it …make noise…..start expecting results, expecting change…..or all of us will make change happen, things need to be different, if something is stolen, and it is proven in a coart of law it is a judges job to give it back…if this judge does not do his job…then he is at fault…and should loose his job…if he has done something illigal he needs to be in jail along with all the others, bankers loan officers…I expect better, I will do my part…thank you for all the info…jaime

  11. OK, yet another eureka moment! Now we truly have the smoking gun….again!

    When will it finally dawn on the majority of us that nothing whatsoever is going to happen to effect change as long as the Goldmans, the Chases, and the B of A’s ARE the White House, the DOJ, and Congress? There simply is NO difference!

    When the good guys are the bad guys, it’s a lose – lose situation.

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