Modifications: Interest reduction, Principal reduction, Payment reduction, and Term increase

In the financial world we don’t measure just the amount of principal. For example if I increased your mortgage principal by $100,000 and gave you 100 years to pay without interest it would be nearly equivalent to zero principal too (especially factoring in inflation). A reduction in the interest rate has an effect on the overall amount of money due from the borrower if (and this is an important if) the borrower is given 40 years to pay AND they intend to live in the house for that period of time. To the borrower the reduction in interest rate and the extension of the period in which it is due lowers the monthly payment which is all that he or she normally cares about.

Nonetheless you are generally correct. And THAT is because the average time anyone lives in a house is 5-7 years, during which an interest reduction would not equate to much of a principal reduction even with inflation factored in. Unsophisticated borrowers get caught in exactly that trap when they do a modification where the monthly payments decline. But when they want to refinance or sell the home they find themselves in a new bind — having to come to the table with cash to sell their home because the mortgage is upside down.

So the question that must be answered is what are the intentions of the homeowner. The only heuristic guide (rule of thumb) that seems to hold true is that if the house has been in the family for generations, it is indeed likely that they will continue to own the property. In that event calculations of interest and inflation, present value etc. make a big difference. But for most people, the only thing that cures their position of being upside down (ignoring the fact that they probably don’t owe the full amount demanded anyway) is by a direct principal reduction.

THAT is the reason why I push so hard on getting credit for receipt of insurance and other loss sharing arrangements, including FDIC, servicer advances etc. Get credit for those and you have a principal CORRECTION (i.e., you get to the truth) instead of a principal REDUCTION, which presumes the old balance was actually due. It isn’t due and it is probable that there is nothing due on the debt, in addition to the fact that it is not secured by the property because the mortgage and note do NOT describe any actual transaction that took place between the parties to the note and the mortgage.

British Government Getting Tough on Bankers

The Barclay Libor rigging scandal is apparently the straw that broke the Camel’s back in Great Britain. With various investigations of their co-conspirators in artificially creating moments in interest rates, the scam is unraveling. And in the balance, lies between $500 and $600 TRILLION dollars. How could that much money be effected when all the money in the world amounts to less than $70 Trillion? What the hell IS money anyway?

All these things are becoming less exotic and increasingly the subject of investigation, prosecution, conviction and sentencing in every place but the United States, where at this point in the savings and loan scandal of the 1980’s more than 800 people were already in jail. The British authorities are leading the way in Europe taking their cue from Iceland of all places, where prosecution of bankers has become the nation’s goal — bringing justice to the marketplace and bringing back certainty that those who play with the free Markets will be punished.

Iceland’s surge back to prosperity has been painful but they did it it because they forced the banks to accept “debt forgiveness” which is to say they merely forced the banks to admit that the debtors had been placed so far in debt with no assets or income to pay for the debt that it was
NOT going to get repaid anyway. That meant some of the assets on the balance sheets of the three biggest banks were worthless. Three banks failed and everyone held their breadth. Nothing bad happened. In fact the rest of the banking sector is prospering along with the rest of the Iceland economy.

In the U.S. Regulators and prosecutors seem to remain completely invested in the myth that bringing the banks and bankers to justice will bring down the entire financial system. It isn’t so and we know that because wherever the governments have cracked down on the financial services industry the economy got better — Iceland being only the latest example.

Back to the question: how could some reptilian behavior create more money than government allows and why is the government allowing it anyway? How could all the currency in the world be $70 trillion and the amount of money effected by the Barclay manipulation of Libor be ten times that amount, which is to to say ten times all the money the world? The answer is that it can’t. And the longer we pretend that it can, the longer and deeper will be the recession. The more we pretend that those exotic securities sitting in bank balance sheets are actually worth all that money, the longer we prolong the agony of the society that allows banks to exist. Those banks relying on fake assets should fail. It is that simple.

See Gretchen Morgenson’s article in the Sunday business section of the New York Times for a clear explanation of right and wrong and how the British are trying to get it right.

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Don’t be so fast to leave your home just because you are “behind”. Those payments might not be due at all or if they are, they are probably not owed to the people you are paying.

We are very pleased with the responses from our devoted readers, many of whom are direct contributors to this site. The insights, forms and analysis from the many soldiers — lawyers and laymen alike has made this site the premier resource for assisting distressed homeowners in gaining relief — sometimes total relief — from Mortgages based upon false appraisals, using predatory lending practices and withholding vital information from borrowers at the closing table.

How many borrowers would have signed on the dotted line if they had known that they were signing a ticket for unprecedented and unjustified fees and profits earned by unknown parties — sometimes as much as the mortgage itself?

How many investors would have put up the money if they had known that only some of it was being used to fund mortgage transactions and that the rest was being kept as fees, profits and reserves to pay them out of their own money? EDUCATE YOURSELF! DOWNLOAD THE ATTORNEY WORKBOOK WITH FORMS, DISCUSSION, PRESENTATION SLIDES, GRAPHS, GLOSSARY AND STATUTES OR BUY THE LAWYER\’S DVD CLE FULL-DAY SEMINAR SET

The victims here are all homeowners and all consumers and all investors and all  taxpayers. The companies seeking to foreclose never owned the mortgage, note or obligation. They have no right to your property or the proceeds of sale to your property. Use this blogsite as your resource to educate yourself. Consult with local counsel. AT LEAST START WITH A LOAN SPECIFIC TITLE SEARCH WITHOUT COMMENTARY AND SEE FOR YOURSELF WHERE THE BREAKS ARE IN THE CHAIN OF TITLE. SUBSCRIBE AS A MEMBER TO GET MULTIPLE BENEFITS AND DISCOUNTS Get a forensic review NOT just a “TILA loan audit” and challenge EVERYTHING!




EDITOR’S COMMENT: LOUISE STORY, in her article in the New York Times continues to dig deeper into the games played by Wall Street firms. You’ll remember that the executives of the major Wall Street firms were spouting off the message that the risks and consequences were unknown to them. They didn’t know anything was wrong. Maybe they were stupid or distracted. And maybe they were just plain lying. The risks to these fine gentlemen and their companies are now enormous. If the veil of non-disclosure (opaque, in Wall Street jargon) continues to be eroded, they move closer and closer to root changes in Wall Street and both criminal and civil liability. It also leads inevitably to the conclusion that the loans and the bonds were bogus.

Yes it is true that money exchanged hands — but not in any of the ways that most people imagine and not in any way that was disclosed as required by TILA, state law, Securities Laws and other applicable statutes, rules and regulations. They continue to pursue foreclosure principally for the purpose of distracting everyone from the truth — that the transactions were wrong in every conceivable way and they knew it.

If there was nothing wrong with these innovative financial products why were they “off-balance sheet.” If there isn’t any problem with them now, then why can’t they produce an accounting, like any other situation, and say “this person borrowed money and didn’t pay it back. We will lose money if they don’t — here is the proof.” If everything was proper and appropriate, then why are we seeing revealed new entities and new layers of deception as Ms. Story and other reporters dig deeper and deeper?

The answer is simple: they were hiding the truth in circular transactions that were partially off balance sheet and partially on. I wonder how many borrowers would be charged with fraud for doing that? Now, thanks to Louise Story, we have some new names to research — Pyxis, Steers, Parcs, and unnamed “customer trades. They all amount to the same thing.

The bonds and the loans claimed to be attached to the bonds were being bought and sold in and out of the investment banking firm that created them. If they produce the real accounting the depth and scope of their fraud will become obvious to everyone, including the Judges that say we won’t give a borrower a free house. What these Judges are doing is ignoring the reality that they are giving a free house and a free ride to companies with no interest in the transaction. And they are directly contributing to a title mess that will take decades to untangle.

August 9, 2010

Merrill’s Risk Disclosure Dodges Are Unearthed


It was named after a faint constellation in the southern sky: Pyxis, the Mariner’s Compass. But it helped to steer the mighty Merrill Lynch toward disaster.

Barely visible to any but a few inside Merrill, Pyxis was created at the height of the mortgage mania as a sink for subprime securities. Intended for one purpose and operated off the books, this entity and others like it at Merrill helped the bank obscure the outsize risks it was taking.

The Pyxis story is about who knew what and when on Wall Street — and who did not. Publicly, banks vastly underestimated their exposure to the dangerous mortgage investments they were creating. Privately, trading executives often knew far more about the perils than they let on.

Only after the housing bubble began to deflate did Merrill and other banks begin to clearly divulge the many billions of dollars of troubled securities that were linked to them, often through opaque vehicles like Pyxis.

In the third quarter of 2007, for instance, Merrill reported that its potential exposure to certain subprime investments was $15.2 billion. Three months later, it said that exposure was actually $46 billion.

At the time, Merrill said it had initially excluded the difference because it thought it had protected itself with various hedges.

But many of those hedges later failed, and Merrill, the brokerage giant that brought Wall Street to Main Street, soon collapsed into the arms of Bank of America.

“It’s like the parable of the blind man and the elephant: you had some people feeling the trunk and some the legs, and there was nobody putting it all together,” Gary Witt, a former managing director at Moody’s Investors Service who now teaches at Temple University, said of the situation at Merrill and other banks.

Wall Street has come a long way since the dark days of 2008, when the near collapse of American finance heralded the end of flush times for many people. But even now, two years on, regulators are still trying to piece together how so much went so wrong on Wall Street.

The Securities and Exchange Commission is investigating whether banks adequately disclosed their financial risks during the boom and subsequent bust. The question has taken on new urgency now that Citigroup has agreed to pay $75 million to settle S.E.C. claims that it misled investors about its exposure to collateralized debt obligations, or C.D.O.’s.

As Merrill did with vehicles like Pyxis, Citigroup shifted much of the risks associated with its C.D.O.’s off its books, only to have those risks boomerang. Jessica Oppenheim, a spokeswoman for Bank of America, declined to comment.

Such financial tactics, and the S.E.C.’s inquiry into banks’ disclosures, raise thorny questions for policy makers. The investigation throws an uncomfortable spotlight on the vast network of hedge funds and “special purpose vehicles” that financial companies still use to finance their operations and the investments they create.

The recent overhaul of financial regulation did little to address this shadow banking system. Nor does it address whether banking executives should be required to disclose more about the risks their banks take.

Most Wall Street firms disclosed little about their mortgage holdings before the crisis, in part because many executives thought the investments were safe. But in some cases, executives failed to grasp the potential dangers partly because the risks were obscured, even to them, via off-balance-sheet programs.

Executives’ decisions about what to disclose may have been clouded by hopes that the market would recover, analysts said.

“There was probably some misplaced optimism that it would work out,” said John McDonald, a banking analyst with Sanford C. Bernstein & Company. “But in a time of high uncertainty, maybe the disclosure burden should be pushed towards greater disclosure.”

The Pyxis episode begins in 2006, when the overheated and overleveraged housing market was beginning its painful decline.

During the bubble years, many Wall Street banks built a lucrative business packaging home mortgages into bonds and other investments. But few players were bigger than Merrill Lynch, which became a leader in creating C.D.O.’s

Initially, Merrill often relied on credit insurance from the American International Group to make certain parts of its C.D.O.’s attractive to investors. But when A.I.G. stopped writing those policies in early 2006 because of concerns over the housing market, Merrill ended up holding on to more of those pieces itself.

So that summer, Merrill Lynch created a group of three traders to reduce its exposure to the fast-sinking mortgage market. According to three former employees with direct knowledge of this group, the traders first tried sell the vestigial C.D.O. investments. If that did not work, they tried to find a foreign bank to finance their own purchase of the C.D.O.’s. If that failed, they turned to Pyxis or similar programs, called Steers and Parcs, as well as to custom trades.

These programs generally issued short-term I.O.U.’s to investors and then used that money to buy various assets, including the leftover C.D.O. pieces.

But there was a catch. In forming Pyxis and the other programs, Merrill guaranteed the notes they issued by agreeing to take back any securities put in the programs that turned out to be of poor quality. In other words, these vehicles were essentially buying pieces of C.D.O.’s from Merrill using the proceeds of notes guaranteed by Merrill and leaving Merrill on the hook for any losses.

To further complicate the matter, Merrill traders sometimes used the cash inside new C.D.O.’s to buy the Pyxis notes, meaning that the C.D.O.’s were investing in Pyxis, even as Pyxis was investing in C.D.O.’s.

“It was circular, yes, but it was all ultimately tied to Merrill,” said a former Merrill employee, who asked to remain anonymous so as not to jeopardize ongoing business with Merrill.

To provide the guarantee that made all of this work, Merrill entered into a derivatives contract known as a total return swap, obliging it to cover any losses at Pyxis. Citigroup used similar arrangements that the S.E.C. now says should have been disclosed to shareholders in the summer of 2007.

One difficulty for the S.E.C. and other investigators is determining exactly when banks should have disclosed more about their mortgage holdings. Banks are required to disclose only what they expect their exposure to be. If they believe they are fully hedged, they can even report that they have no exposure at all. Being wrong is no crime.

Moreover, banks can lump all sorts of trades together in their financial statements and are not required to disclose the full face value of many derivatives, including the type of guarantees that Merrill used.

“Should they have told us all of their subprime mortgage exposure?” said Jeffery Harte, an analyst with Sandler O’Neill. “Nobody knew that was going to be such a huge problem. The next step is they would be giving us their entire trading book.”

Still, Mr. Harte and other analysts said they were surprised in 2007 by Merrill’s escalating exposure and its initial decision not to disclose the full extent of its mortgage holdings. Greater disclosure about Merrill’s mortgage holdings and programs like Pyxis might have raised red flags to senior executives and shareholders, who could have demanded that Merrill stop producing the risky securities that later brought the firm down.

Former Merrill employees said it would have been virtually impossible for Merrill to continue to carry out so many C.D.O. deals in 2006 without the likes of Pyxis. Those lucrative deals helped fatten profits in the short term — and hence the annual bonuses paid to its employees. In 2006, even as the seeds of its undoing were being planted, Merrill Lynch paid out more than $5 billion in bonuses.

It was not until the autumn of 2007 that Pyxis and its brethren set off alarm bells outside Merrill. C.D.O. specialists at Moody’s pieced together the role of Pyxis and warned Moody’s analysts who rated Merrill’s debt. Merrill soon preannounced a quarterly loss, and Moody’s downgraded the firm’s credit rating. By late 2007, Merrill had added pages of detailed disclosures to its earnings releases.

It was too late. The risks inside Merrill, virtually invisible a year earlier, had already mortally wounded one of Wall Street’s proudest names.

Tax Apocalypse for States and Federal Government Can be Reversed: Show Me the Money!

SEE states-look-beyond-borders-to-collect-owed-taxes







As we have repeatedly stated on this blog, the trigger for the huge deficits was the housing nightmare conjured up for us by Wall Street. Banks made trillions of dollars in profits that were never taxed. The tax laws are already in place. Everyone is paying taxes, why are they not paying taxes? If they did, a substantial portion of the deficits would vanish. Each day we let the bankers control our state executives and legislators, we fall deeper and deeper in debt, we lose more social services and it endangers our ability to maintain strong military and law enforcement.

The argument that these unregulated transactions are somehow exempt from state taxation is bogus. There is also the prospect of collecting huge damage awards similar to the tobacco litigation. I’ve done my part, contacting the State Treasurers and Legislators all over the country, it is time for you to do the same. It’s time for you to look up your governor, State Treasurer, Commissioner of Banking, Commissioner of Insurance, State Commerce Commission, Secretary of State and write tot hem demanding that they pursue registration fees, taxes, fines, and penalties from the parties who say they conducted “out-of-state” transactions relating to real property within our borders. If that doesn’t work, march in the streets.

The tax, fee, penalty and other revenue due from Wall Street is easily collectible against their alleged “holding” of mortgages in each state. One fell swoop: collect the revenue, stabilize the state budget, renew social services, revitalize community banks within the state, settle the foreclosure mess, stabilize the housing market and return homeowners to something close to the position they were in before they were defrauded by fraud, predatory lending and illegal practices securitizing loans that were too bad to ever succeed, even if the homeowner could afford the house.

Residential Funding Real Estate Holdings, LLC – Option One Mortgage Corporation

from June Reyno:

Once all of this information has been compiled with all their names, titles, addresses, signatures, company affiliation– we should then begin submitting these (i.e. notary public signatures) to various state agencies for confirmation and verification that these “people” are actually who say they are on the paper closing statements (if it can be found) along with the foreclosure processing paperwork from the mortgage servicers. The real class liars in the industry.

These notary public “signatures” can in fact be confirmed because they must be registered with the State Dept. We can demand a “viewing” of that persons’ notary journal in their possession at all times and no one elses. And, whether the named person as it is typewritten in the foreclosure dcouments…”Vice President” who signed payoff statements from the Bank actually holds that “typed in” title and whether they were actually and physically present at the time the notary public verified identification of that person.

By the looks of the hundreds of fradulent paperwork I have personally examined thus far and viewing the names of people pushing foreclosure we do mistakenly think (and the judges mistakenly think this way too unfortunately) that nothing except hard, cold cash green money was exchanged at the closing table to purchase the collaterallized debt obligation. No such thing with securitization is there?

I’m betting with the sensible majority that no one ever paid or had any kind of “liquid cash” to show at closing and that it is by paper appearance only to convince and mislead others that these impostors paid for the property they actually stole from the homeowner upon foreclosure and that the investor was similarly ripped off who put up the money so that only a select few companies by design (going back decades + could line their pockets in the future with billions and billions of $$$ in profit to throw into their corporate treasure chest collected from suffering hardworking middle income American taxpayers!

A perfect example of equity stripping is our San Diego home we lived in for 20+ years. It was foreclosed on 2 years before and we didn’t know it because we sought bankrutpcy protection. We were evicted from our home and thrown out on the street by the foreclosure mill lawyers hired by the Bank and their realtor cohorts March 14, 2009. They succeeded because the pretender lender submitted false forged documents to the court and the Judges.

We purchased the house for $192,900 in July 1989. Our principal balance was reduced to $164,000 under a new loan with Washington Mutual. Throughout the refinancing period in which we borrowed from our equity period we were paying an average amount of about $1,500-$2,500 per month over the course of 20+ years. In April 2006, our house came in on an inflated appraisal value of $650,000. From that, we drew out about $34,000 on equity at refinance which all went back to the economy and for the purpose of preserving our good credit standing with our creditors. The principal balance came to $588,000 according to Option One Mortgage Corporation. Residential Funding Real Estate Holdings, LLC unlawfully purchased the property without notice by bidding against themselves on the auction (again without our knowledge and we were under bankrutpcy protection) for $361,200 when they foreclosed and assigned the house to Litton Loan Servicing/Option One Mortgage/Quality Loan Servicing San Diego. In March 2009 (when I was unlawfully charged with trespassing, vandalism and re-entry of property believing we were protected under the the BK laws and after and unlawful Judgement from the UD Court and was placed under arrest by the San Diego Police Dept.) Island Source II, LLC purchased the house for $211,500 (claiming they are [innocent] Bonafide Purchasers of value under CC 1161(a) for $211,500.

This month, March 12, 2010 Island Source II, LLC dba: Homecomings Financial Network in Minnetonka MN sold it to “InSource Financial Services, Huntington New York”, again, and again in violation of the Bankruptcy automatic stay; selling and transferring this time to a community homebuyer for $385,000 despite our opposition noticesand letters stating our intent to preserve interest filed with the County Recorder’s Office. The Judges [innocently] joined in on the pretender lenders fraud upon the court. Later, our appellate lawyer whom we trusted followed them to go against our interest and helped them to continue living the lie.

We were stripped of $450,000+ in equity.

Is this you?

Our house payment at last refinance in May 2006 $3,919.60 then in April 2008 the ARM adjusted to $5,800.00 monthly payment. Whaaat! Our house was sold and wrongfully foreclosed like millions of other American families who were steered into securitized mortgage loans without their knowledge but no Judge or the court or law enforcement cared enough to help us correct these hurtful and malicious acts.

Where was our “Fiduciary ” Trustee as named in our mortgage contract that should have been of our choice to explain the terms of our mortgage contract to us at the closing table?

Man Sends Message to Banks-Bulldozes $350k House

 Sending Banks a Message – Cincinnati OH  – Click Here to View Video

“The average homeowner that can’t afford an attorney or can fight as long as we have, they don’t stand a chance,” he said. Hoskins said he’d gotten a $170,000 offer from someone to pay off the house, but the bank refused, saying they could get more from selling it in foreclosure.  

Hoskins told News 5’s Courtis Fuller that he issued the bank an ultimatum.  “I’ll tear it down before I let you take it,” Hoskins told them. And that’s exactly what Hoskins did.

Editors Note – The borrower actually had equity in his home. The house was apparently worth $350k in today’s market and the bank was only owed about $170k.

The Elephant in the Room – Well One of Many…

By Brad Keiser

For those of you who have been to our seminars, (coming to Southern California next month) You have heard me ask about Hank Paulson and Ben Bernanke…”Are they stupid or were they lying when they said everything was OK through out all of 2007 and most of 2008?” You have seen and heard why Neil and I declare we are of the belief that there is simply “not enough money in the world to solve this problem.”

Fannie Mae’s (FNM) 8k has an interesting slide of their questionable assets in the supplement. It can be found below along with the complete 2009 Second Quarter filing. The report describes FNM’s exposure to problematic classes of mortgages on their book. That total comes to almost $1 Trillion. (that’s with a “T”) The total book of business is about $2.7 Trillion, at least 30% and more likely as high as 50% of their book is troubled. The report muddles with the actual holdings, as there are overlaps in the descriptions. The actual numbers they provide include:

  • Negative Amortization Loans: $15B
  • Interest Only: $196B
  • Low Fico: $357B
  •  LTV>90%: $265B
  • Low Fico AND > 90% LTV: $25B
  • Alt-A: $269B
  • Sub Prime: $8B

Those numbers add up to $1.13 trillion. They are troubled for multiple reasons. For example, $25 billion are loans that have BOTH  high LTV and a FICO score less than 620. While there are varying degrees of toxicity when it comes to “toxic” assets these would be considered highly toxic.

 What might all this mean? Some trends are emerging. Based on historical private sector experience with these types of troubled loans, particulary those 30 % of Alt A/No doc and Negative Am loans that are non-owner occupied properties, one could expect that 50% of these borrowers will go into default. On the defaulted loans the losses will be conservatively about 50% of the outstanding loan balances. In other words, losses of 25% on the troubled book are reasonable assumptions. That would imply a loss over time on these loans of $275-$300B. And that does not include losses on Prime loans. And that is JUST Fannie. The Obama Administration has an estimate of $250B over four years for the full cost of cleaning up the ALL the GSE Agencies. These numbers suggest it could be double that, triple that or more.


This is ONLY Fannie…not Freddie or Ginnie or Sallie, not Citi, not BoA, not Wells Fargo, not numerous community banks who owned preferred shares in Fannie or Freddie that had their capital severly eroded when those preferred shares were wiped out last fall. How about the dwindling balance of FDIC reserves? Ladies and Gents we have a veritable herd of these elephants lingering in the room.

Gee no wonder Mr. Lockhart decided now would be a good time to step down from running Fannie, Hank Paulson is getting a tan somewhere now that he has saved Goldman Sachs(for the moment)and something tells me Uncle Ben Bernanke would not be heartbroken if he was replaced by Summers or whomever this fall and could simply go back to pontificating at Princeton.

In the interest of full disclosure I hold no position in Fannie or any of the stocks mentioned….I am long 1200 shares of Smith & Wesson.

Fannie 8k August 2009

Double click chart below to enlarge

Fannie Mae 8k Sup August 09

A Reality Check on Mortgage Modification: NY Times Gretchen Morgenson

Unfortunately, the bill would not only pay institutions handsomely for each modification they do — at $1,000 each, a bounty that could reach $10 billion — but it would also create opportunities for mortgage servicers to profit at the expense of investors who own the loans.
Gretchen Morgenson deserves Kudos for her attempts to disclose the reality of the foreclosure scam that is ongoing. She is correctly identifying the factors that have enabled the predators and thieves to get paid multiple times and now to get immunity for their misdeeds that gave rise to the problems in first place. The sad irony is that few people are paying attention to this ticking time bomb. Title to property or other interests in real estate are strictly within the jurisdiction of STATE LAW. Federal legislators and administrators are blithely ignoring this basic fact. Thus their “New Rules” and potentially new statutes amount to nothing more than rearranging the deck chairs on the Titanic — after it became universally known on board that (a) the iceberg had been hit and (b) the ship was sinking.
Eventually (the lag time is usually a few years) legislators of each state will be faced with the fact that the hidden fall-out from this mess is that nobody who received title or proceeds from securitized loans, foreclosures or modifications did so with clean hands or clear title. Title insurers are already routinely denying coverage resulting from fraud. The free flow of commerce in the real estate market will again grind to a complete halt because nobody will know what they are buying and if some investor or other party is going to show up with the real note, the real mortgage, the real loan and proof they own it. Some forward-looking legislators in various states have contacted livlinglies looking for some guidance on this very issue. On the STATE level, they understand the problem. On the Federal level, they don’t care.
The problem with these “modifications” (actually new loans with new “lenders”) is that the old loans remain unaffected. The existing cloud on title to the property, the mortgage deed (or deed of trust), the note, the obligation, the purported assignments etc. is being compounded by attempts to allow impostors to foreclose on the mortgage, collect on the note, modify the loan, or approve a short sale. The time bomb is title in all states where securitized loans were recorded, foreclosed, modified or sold. The parties (other than the borrower and possibly the Trustee on the Deed of Trust) had actual knowledge that the “lender” was not the Lender, the terms of the obligation were already changed at the time of closing, the appraisal was false, the underwriting was negligent or fraudulent, the Good Faith Estimate was BY DEFINITION rendered neither in good faith nor even close to an accurate estimate, and the list goes on and on.
As Morgenson’s article points out, the dispute not-so-mysteriously remains between investor and other intermediaries (servicers, MERS etc.) because the the investors won’t, can’t and frankly don’t dare to engage the borrowers directly. If they did, they would be assuming liability for treble damages, interest, return of all interest, fees and other costs of closing and all hidden profits that were not disclosed at closing to the borrower. This would result in the perverse consequence of the investor potentially assuming a liability of perhaps $4 for every $1 he/she/it invested. But then again, that is no more perverse than the current intention to leave millions of borrowers owing more than their house is worth because they relied, reasonably, on the representations of the “lender” who it turns out wasn’t the Lender.
Thus the ONLY party who COULD make a claim as a holder in due course (investor) refuses to make that claim. And the ONLY parties seeking foreclosures, modifications and short sales, do not possess ANY financial interest in the loan nor any authority to foreclose, collect, modify or do anything else with the “loan.” This only underscores the more erudite legal theory that this was not a loan at all but a rather a securities issuance scheme in which the issuer was tricked and deceived into signing what he/she thought was a compliant loan and the buyer (of mortgage-backed securities) was tricked into putting up real money for a non existent security interest on an unenforceable note for a dubious obligation.
April 26, 2009
Fair Game

A Reality Check on Mortgage Modification

WE are almost two years into the housing storm and foreclosure floodwaters continue to rise. A record 800,000 homes received a default or auction notice in the first quarter, an increase of 9 percent from the fourth quarter of 2008, according to RealtyTrac. And one in five mortgage loans exceeded the value of the underlying property at the end of 2008, according to data from American CoreLogic Inc.

With figures like these, it’s only natural that many in Congress want to lend a hand to troubled borrowers. And so legislators have put together the Helping Families Save Their Homes Act of 2009, a bill that aims, among other things, to prod financial companies into modifying more troubled home loans.

Mortgage modifications are, in theory, appealing. But in reality, the most popular types of modifications — where delinquent amounts are simply tacked onto the mortgage — tend to default again later with distressing regularity.

Still, pushing loan modifications is a Congressional priority. The bill, which passed the House on March 5, may soon come to a vote in the Senate.

Unfortunately, the bill would not only pay institutions handsomely for each modification they do — at $1,000 each, a bounty that could reach $10 billion — but it would also create opportunities for mortgage servicers to profit at the expense of investors who own the loans.

And who are these investors? Sure, they include big-time speculators and market sophisticates. But because so many of these securities also found their way into portfolios of mutual funds and other professionally managed accounts, individual investors could be harmed if the bill becomes law.

Mortgage securities have covenants — known as pooling and servicing agreements — that define their terms. They require loan servicers to act in the best interests of investors when they make decisions about how much forbearance to give troubled borrowers. This requirement has led some servicers to reject loan modifications. Changing the terms of the mortgages, they contend, can hurt investors by reducing interest payments. Lawsuits could follow.

To deal with this, the new Congressional bill would protect servicers from potential suits brought by mortgage investors if loans were modified. The bill also says that servicers wouldn’t be obligated to repurchase loans from a pool because of a modification.

The danger, some investors and securitization lawyers say, is that these provisions might allow some financial companies that engaged in improper lending — and also happen to be loan servicers — to escape legal punishment.

For example, if the servicer of an abusive loan was also the initial lender, the bill would take that company off the hook for any future predatory lending suits. The safe harbor, therefore, could encourage servicers to modify their most poisonous loans, even if they are not yet near default, just to reduce their legal exposures.

And allowing servicers to void buyback requirements on loans they modify would eliminate any liability for breaches in representations and warranties on the loans they made to investors who subsequently bought into the pools.

“Main Street investors need to know that banks who received their tax money through government bailouts are going to profit again from the safe-harbor loan modification provisions at the expense of their mutual funds, 401(k)’s and pension investments,” said Thomas C. Priore, chief executive of ICP Capital, an investment firm that specializes in credit markets.

Another perverse incentive that the bill would create involves the problem of conflicting interests among investors who own the first mortgage on a property and holders of the second liens. First liens of any kind take priority and are supposed to be paid off before secondary obligations are. But many of the companies servicing loans today own second liens on the same properties whose first mortgages are held by investors in securitizations.

By removing any liability associated with modifying the first mortgage, the banks that own the second liens can expose investors to losses or reduced income while keeping their own interests in the second lien intact.

There is a lot of money riding on this conflict. Of the roughly $12 trillion mortgage market, $1 trillion is in second liens. The bulk of those liens — 70 percent — are held by banks, analysts say. And while the top four servicers administered 55 percent of first liens in the fourth quarter of 2008, they also held $440 billion in second liens.

“In corporate bankruptcies, banks are enforcing their positions as senior lien holders,” Mr. Priore said. “Yet they want mortgage investors who hold first liens to take a back seat to their subordinate interests.”

In addition to these downsides, it is not even clear that a safe harbor for servicers would encourage prudent loan modifications. Mortgage pool documents don’t restrict such changes. Typically, lawyers say, these agreements allow servicers to change the terms of a mortgage loan if it is in default or in imminent danger of defaulting.

Because servicers’ actions are dictated by the best interests of the investors in the mortgage pools, loan modifications that minimize the kinds of losses typically seen in foreclosure should be an easy sell. That may be why investor suits against servicers have been so rare.

James B. Lockhart III, director of the Federal Housing Finance Agency, said that while he has not taken a position on the bill or its safe-harbor provision, servicers can and should do far more in the way of loan modifications.

“There are definitely unintended consequences” to the legislation, Mr. Lockhart said. “We would hope that the servicers use the flexibility they already have in the pooling and servicing agreements and make the modifications they can. That is the No. 1 thing.”

Florida Petition Seeks Mediation of Foreclosures

As reported in the Florida Bar News dated March 1, 2009, The Supreme Court of Florida has received a petition to require foreclosure mediation. The article by Mark D Killian, managing editor states “Contending that prejudgment mediation could save more than 130,000 Florida homes from foreclosure  and assist more than 360,000 borrowers,” the plan is almost a verbatim acceptance of the plan submitted by Neil Garfield almost one year ago. The plan would apply to owner-occupied primary residential dwellings.

“The February petition urging the Court to invoke its emergency rule-making authority says one of ‘the most frustrating realities for many homeowners facing foreclosure is the inability to speak to a responsible decision-maker for the lender…” The proposed emergency rule, if accepted, would require the presence of the real lender by an authorized decision-maker at the time of the mediation. No telephone appearances would be accepted. The real lender and its authority to appear must be presented to the mediator prior to mediation.

However, the rule would stop short of imposing specific sanctions if the real lender does not show up or if the person appearing is no a responsible decision-maker. As stated elsewhere repeatedly on this blog it seems unlikely that the real lender will ever show up since that would mean all of the investors owning certificates of mortgage-backed securities, who at this point have been partially or completely paid by AIG-type insurance, federal bailout or who have trade their securities in private transactions. While one would be hopeful that the failure of the real lender to show up would result in dismissal of the foreclosure and the opening of the door for a quiet title action, it is also possible that Judge’s will exercise some discretion that doesn’t really exist. They could for example, accept the servicer as the real lender and as the authorized representative, leaving the borrower back in the same position as before the order directing the parties to mediation.

QUANTS — The Guys Behind the Guise

it follows that the investors are the ONLY parties with standing to make any claim on the mortgage, note or obligation. But they won’t make that claim because of the exposure to risk that could leave them with even more loss than the current loss on their investment. This leaves trillions of dollars in unclaimed proceeds. The question is who should get it. Obviously it was the financially sophisticated intermediaries who were able to step in and bluff the court system and recording offices into accepting fraudulent, fabricated and forged documentation.

98% of the foreclosures end up with these intermediaries getting title to property that they never financed and were handsomely paid for handling at one point or another.

50%-60% of “modifications end up in foreclosure anyway. Even with good payment terms a $300,000 mortgage on a $150,000 piece of property is not appealing to even the least sophisticated borrower.

Today’s NY Times report on Quants, if you read it carefully, will tell you a lot about how Wall Street almost pulled off the perfect crime. In fact, the complexity of the derivatives they created and the complex structure of personnel involved in their creation and valuation created a level of plausible deniability beyond the reach and beyond the comprehension of the newbie B-School graduates sitting at regulatory agencies, not having the faintest idea what they were looking at. Small wonder, Greenspan admitted that he didn’t understand them either but did nothing in 2005 because he was afraid of a global economic collapse, high unemployment, crashing industries and a general swoon in asset prices from housing to stocks. In hindsight he and everyone else admits we would have been far better off if we had bitten the bullet then than now. By allowing the problem to grow the fall was longer and deeper.

At the heart of the “complexity” (read that “lie”) was the use of computer algorithms that took spreadsheet projections to levels of “sophistication” never seen before. The result was that when a computer spit out a value for mortgage backed securities, it was impossible to audit by hand without perhaps 200 PhD’s spending the better part of a decade working it out in committees. So Wall Street got to create something that was treated as the equivalent of money and the value of this money was whatever Wall Street said. And with a little slight of hand with the rating agencies and false insurance policies from an entity (AIG) that couldn’t make good on the insurance, nobody questioned it because EVERYONE looked like they were making a ton of money.

In truth only the intermediaries were making money. Much like the stockbroker who churns an account making transaction fees until there is nothing left in the account and then moving on to the next victim. The Wall Street firms, whose stocks were traded publicly, had no risk whatsoever. They were essentially capitalized by investors in their stock, investors (Customers) in their financial products and when they found this opportunity, struck the mother load — everyone wanted a higher return and greater safety — at least that its how it was sold.

The Wall Street firms were quick to report their earnings because bonuses and stock options were directly affected and stockholders were happy with rising value of their investments in Wall Street firms. But those profits were in reality the proceeds of fraud and theft. And they were not disclosed to the borrowers contrary to the Truth in Lending Act. In a Machiavellian way, they were brilliant in this strategy — they were not even the issuers of the securities. The issuers were the people at a “loan closing” far away who were executing documentation that turned out to be used as the negotiable instruments that were later sold as unregulated securities. The fact that the notes were rendered non-negotiable and that pooling of the notes resulted in a loss of identity of the note which made the note unsecured, was possibly unknown but definitely irrelevant to the “masters of the universe” on Wall Street.

The end result was that the “borrowers”/issuers did not know what they were doing, who they were dealing with, what their real cost was on the deal (especially with inflated appraisals, much the same as inflated appraisals of the mortgage backed securities), and who was getting paid. It was a securities deal usually coupled with several financial products which takes them out of the realm of any “exemption” from Truth in Lending requirements. Thus the investors, who did not know what they were buying, are left with less than zero just as the borrowers are left with less than zero. Both are underwater and neither will ever completely recoup their investments regardless of any stimulus or quantitative easing from central banks.

Despite the computer driven valuations that were produced, the real value was zero for both investors and “borrowers”/issuers. And now the investors are log-jammed into a place where they either eat the entire loss or find a way to recover from the intermediaries. They can’t actually make a claim against the borrowers because even if they successfully established their status as holders in due course, that would mean they were taking the chance of being hit with all the defenses, claims and counterclaims under TILA, deceptive lending, securities violations, rescission, treble damages, usury and so forth. So investors are not making the claims — even when they are clearly identified as a single hedge fund. They are suing Countrywide or other intermediaries trying to recoup their bad investments from the group (the intermediary servicer, trustee or other interloper) who have no defenses, claims and counterclaims and who have no basis for claiming treble damages, interest, attorney fees and court costs.

This has left a void — the only parties who are actually losing money are the investors and borrowers who are now under water because of the inflated appraisals and tricky mortgage terms that were not disclosed. It goes without saying that under the single transaction doctrine, neither the investor nor the borrower would have ever made their part of the deal if there had been full disclosure of all of the above. That’s called fraud. Since the investors are the only parties who could claim they are losing money from “non-payment” on the note (assuming they were not paid by AIG, Federal bailout, other insurance or cross collateralization) it follows that the investors are the ONLY parties with standing to make any claim on the mortgage, note or obligation. But they won’t make that claim because of the exposure to risk that could leave them with even more loss than the current loss on their investment. This leaves trillions of dollars in unclaimed proceeds. The question is who should get it. Obviously it was the financially sophisticated intermediaries who were able step in and bluff the court system and recording offices into accepting fraudulent, fabricated and forged documentation. And they are getting their way. 98% of the foreclosures end up with these intermediaries getting title to property that they never financed and were handsomely paid for handling at one point or another.

THIS is why “borrower” should stand up and fight. The windfall here is to thieving companies who were already paid. If inequality is largely accepted as being at least partially responsible for the current financial crisis and if these intermediaries are not necessary to the health of the financial system (servicers, trustees etc.) then clearly the correction of that inequality, trillions of dollars, should move to the homeowners who were the victims of fraud and whose identities and signatures were used to create vast amounts of profits off of transactions that were falsely presented to both sides. With equity restored to homeowners and the end of foreclosures and declining home prices, perhaps a deal could be struck between the investors who lost out and then homeowners who now have their houses free and clear, so that the credit system could be restored with trust and confidence.

March 10, 2009

They Tried to Outsmart Wall Street

Emanuel Derman expected to feel a letdown when he left particle physics for a job on Wall Street in 1985.

After all, for almost 20 years, as a graduate student at Columbia and a postdoctoral fellow at institutions like Oxford and the University of Colorado, he had been a spear carrier in the quest to unify the forces of nature and establish the elusive and Einsteinian “theory of everything,” hobnobbing with Nobel laureates and other distinguished thinkers. How could managing money compare?

But the letdown never happened. Instead he fell in love with a corner of finance that dealt with stock options.

“Options theory is kind of deep in some way. It was very elegant; it had the quality of physics,” Dr. Derman explained recently with a tinge of wistfulness, sitting in his office at Columbia, where he is now a professor of finance and a risk management consultant with Prisma Capital Partners.

Dr. Derman, who spent 17 years at Goldman Sachs and became managing director, was a forerunner of the many physicists and other scientists who have flooded Wall Street in recent years, moving from a world in which a discrepancy of a few percentage points in a measurement can mean a Nobel Prize or unending mockery to a world in which a few percent one way can land you in jail and a few percent the other way can win you your own private Caribbean island.

They are known as “quants” because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.

This flood seems to be continuing, unabated by the ongoing economic collapse in this country and abroad. Last fall students filled a giant classroom at M.I.T. to overflowing for an evening workshop called “So You Want to Be a Quant.” Some quants analyze the stock market. Others churn out the computer models that analyze otherwise unmeasurable risks and profits of arcane deals, or run their own hedge funds and sift through vast universes of data for the slight disparities that can give them an edge.

Still others have opened an academic front, using complexity theory or artificial intelligence to better understand the behavior of humans in markets. In December the physics Web site, where physicists post their papers, added a section for papers on finance. Submissions on subjects like “the superstatistics of labor productivity” and “stochastic volatility models” have been streaming in.

Quants occupy a revealing niche in modern capitalism. They make a lot of money but not as much as the traders who tease them and treat them like geeks. Until recently they rarely made partner at places like Goldman Sachs. In some quarters they get blamed for the current breakdown — “All I can say is, beware of geeks bearing formulas,” Warren Buffett said on “The Charlie Rose Show” last fall. Even the quants tend to agree that what they do is not quite science.

As Dr. Derman put it in his book “My Life as a Quant: Reflections on Physics and Finance,” “In physics there may one day be a Theory of Everything; in finance and the social sciences, you’re lucky if there is a useable theory of anything.”

Asked to compare her work to physics, one quant, who requested anonymity because her company had not given her permission to talk to reporters, termed the market “a wild beast” that cannot be controlled, and then added: “It’s not like building a bridge. If you’re right more than half the time you’re winning the game.” There are a thousand physicists on Wall Street, she estimated, and many, she said, talk nostalgically about science. “They sold their souls to the devil,” she said, adding, “I haven’t met many quants who said they were in finance because they were in love with finance.”

The Physics of Money

Physicists began to follow the jobs from academia to Wall Street in the late 1970s, when the post-Sputnik boom in science spending had tapered off and the college teaching ranks had been filled with graduates from the 1960s. The result, as Dr. Derman said, was a pipeline with no jobs at the end. Things got even worse after the cold war ended and Congress canceled the Superconducting Supercollider, which would have been the world’s biggest particle accelerator, in 1993.

They arrived on Wall Street in the midst of a financial revolution. Among other things, galloping inflation had made finances more complicated and risky, and it required increasingly sophisticated mathematical expertise to parse even simple investments like bonds. Enter the quant.

“Bonds have a price and a stream of payments — a lot of numbers,” said Dr. Derman, whose first job was to write a computer program to calculate the prices of bond options. The first time he tried to show it off, the screen froze, but his boss was fascinated anyway by the graphical user interface, a novelty on Wall Street at the time.

Stock options, however, were where this revolution was to have its greatest, and paradigmatic, success. In the 1970s the late Fischer Black of Goldman Sachs, Myron S. Scholes of Stanford and Robert C. Merton of Harvard had figured out how to price and hedge these options in a way that seemed to guarantee profits. The so-called Black-Scholes model has been the quants’ gold standard ever since.

In the old days, Dr. Derman explained, if you thought a stock was going to go up, an option was a good deal. But with Black-Scholes, it doesn’t matter where the stock is going. Assuming that the price of the stock fluctuates randomly from day to day, the model provides a prescription for you to still win by buying and selling the underlying stock and its bonds.

“If you’re a trading desk,” Dr. Derman explained, “you don’t care if it goes up or down; you still have a recipe.”

The Black-Scholes equation resembles the kinds of differential equations physicists use to represent heat diffusion and other random processes in nature. Except, instead of molecules or atoms bouncing around randomly, it is the price of the underlying stock.

The price of a stock option, Dr. Derman explained, can be interpreted as a prediction by the market about how much bounce, or volatility, stock prices will have in the future.

But it gets more complicated than that. For example, markets are not perfectly efficient — prices do not always adjust to right level and people are not perfectly rational. Indeed, Dr. Derman said, the idea of a “right level” is “a bit of a fiction.” As a result, prices do not fluctuate according to Brownian motion. Rather, he said: “Markets tend to drift upward or cascade down. You get slow rises and dramatic falls.”

One consequence of this is something called the “volatility smile,” in which options that benefit from market drops cost more than options that benefit from market rises.

Another consequence is that when you need financial models the most — on days like Black Monday in 1987 when the Dow dropped 20 percent — they might break down. The risks of relying on simple models are heightened by investors’ desire to increase their leverage by playing with borrowed money. In that case one bad bet can doom a hedge fund. Dr. Merton and Dr. Scholes won the Nobel in economic science in 1997 for the stock options model. Only a year later Long Term Capital Management, a highly leveraged hedge fund whose directors included the two Nobelists, collapsed and had to be bailed out to the tune of $3.65 billion by a group of banks.

Afterward, a Merrill Lynch memorandum noted that the financial models “may provide a greater sense of security than warranted; therefore reliance on these models should be limited.”

That was a lesson apparently not learned.

Respect for Nerds

Given the state of the world, you might ask whether quants have any idea at all what they are doing.

Comparing quants to the scientists who had built the atomic bomb and therefore had a duty to warn the world of its dangers, a group of Wall Streeters and academics, led by Mike Brown, a former chairman of Nasdaq and chief financial officer of Microsoft, published a critique of modern finance on the Web site last fall calling on scientists to reinvent economics.

Lee Smolin, a physicist at the Perimeter Institute for Theoretical Physics in Waterloo, Ontario, who was one of the authors, said, “What is amazing to me as I learn about this is how flimsy was the theoretical basis of the claims that derivatives and other complex financial instruments reduced risk, when their use in fact brought on instabilities.”

But it is not so easy to get new ideas into the economic literature, many quants complain. J. Doyne Farmer, a physicist and professor at the Santa Fe Institute, and the founder and former chief scientist of the Prediction Company, said he was shocked when he started reading finance literature at how backward it was, comparing it to Middle-Ages theories of fire. “They were talking about phlogiston — not the right metaphor,” Dr. Farmer said.

One of the most outspoken critics is Nassim Nicholas Taleb, a former trader and now a professor at New York University. He got a rock-star reception at the World Economic Forum in Davos this winter. In his best-selling book “The Black Swan” (Random House, 2007), Dr. Taleb, who made a fortune trading currency on Black Monday, argues that finance and history are dominated by rare and unpredictable events.

“Every trader will tell you that every risk manager is a fraud,” he said, and options traders used to get along fine before Black-Scholes. “We never had any respect for nerds.”

Dr. Taleb has waged war against one element of modern economics in particular: the assumption that price fluctuations follow the familiar bell curve that describes, say, IQ scores or heights in a population, with a mean change and increasingly rare chances of larger or smaller ones, according to so-called Gaussian statistics named for the German mathematician Friedrich Gauss.

But many systems in nature, and finance, appear to be better described by the fractal statistics popularized by Benoit Mandelbrot of IBM, which look the same at every scale. An example is the 80-20 rule that 20 percent of the people do 80 percent of the work, or have 80 percent of the money. Within the blessed 20 percent the same rule applies, and so on. As a result the odds of game-changing outliers like Bill Gates’s fortune or a Black Monday are actually much greater than the quant models predict, rendering quants useless or even dangerous, Dr. Taleb said.

“I think physicists should go back to the physics department and leave Wall Street alone,” he said.

When Dr. Taleb asked someone to come up and debate him at a meeting of risk managers in Boston not too long ago, all he got was silence. Recalling the moment, Dr. Taleb grumbled, “Nobody will argue with me.”

Dr. Derman, who likes to say it is the models that are simple, not the world, maintains they can be a useful guide to thinking as long as you do not confuse them with real science — an approach Dr. Taleb scorned as “schizophrenic.”

Dr. Derman said, “Nobody ever took these models as playing chess with God.”

Do some people take the models too seriously? “Not the smart people,” he said.

Quants say that they should not be blamed for the actions of traders. They say they have been in the forefront of pointing out the models’ shortcomings.

“I regard quants to be the good guys,” said Eric R. Weinstein, a mathematical physicist who helps run the Natron Group, a hedge fund in Manhattan. “We did try to warn people,” he said. “This is a crisis caused by business decisions. This isn’t the result of pointy-headed guys from fancy schools who didn’t understand volatility or correlation.”

Nigel Goldenfeld, a physics professor at the University of Illinois and founder of NumeriX, which sells investment software, compared the financial meltdown to the Challenger space shuttle explosion, saying it was a failure of management and communication.

Prisoners of Wall Street

By their activities, quants admit that despite their misgivings they have at least given cover to some of the wilder schemes of their bosses, allowing traders to conduct business in a quasi-scientific language and take risks they did not understand.

Dr. Goldenfeld of Illinois said that when he posted scholarly articles, some of which were critical of financial models, on his company’s Web site, salespeople told him to take them down. The argument, he explained, was that “it made our company look bad to be associating with Jeremiahs saying that the models were all wrong.”

Dr. Goldenfeld took them down. In business, he explained, unlike in science, the customers are always right.

Quants, in short, are part of the system. “They get paid, a Faustian bargain everybody makes,” said Satyajit Das, a former trader and financial consultant in Australia, who likes to refer to them as “prisoners of Wall Street.”

“What do we use models for?” Mr. Das asked rhetorically. “Making money,” he answered. “That’s not what science is about.”

The recent debacle has only increased the hunger for scientists on Wall Street, according to Andrew Lo, an M.I.T. professor of financial engineering who organized the workshop there, with a panel of veteran quants.

The problem is not that there are too many physicists on Wall Street, he said, but that there are not enough. A graduate, he told the young recruits, can make $75,000 to $250,000 a year as a quant but can also be fired if things go sour. He said an investment banker had told him that Wall Street was not looking for Ph.D.’s, but what he called “P.S.D.s — poor, smart and a deep desire to get rich.”

He ended his presentation with a joke that has been told around M.I.T. for a long time, but seemed newly relevant; “What do you call a nerd in 10 years? Boss.”

World Savings Knew It was Acting Illegally and Committing Fraud


Editor’s Note: They all knew. It’s up to you to stand up and challenge them to prove the basic assertions — even the sending of a monthly statement is potentially an act of fraud since neither the servicer nor the party with whom they entered into the Pooling and Service Agreement had or have any authroity to continue.

Let’s Hear It For Sherriff Evans: Federal bailout act protections preempt State foreclosure

The only thing necessary for evil to triumph is for good men to do nothing

-Edmund Burke

Release Date: February 2, 2009
Contact: Ofc. John Roach, 313-224-0615
Evans halts sale of foreclosed homes
o Sheriff says move is necessary to ensure homeowners´ rights
o Federal bailout act protections preempt State foreclosure law, Evans says
DETROIT, MichiganSheriff Warren Evans announced today that he
is stopping all mortgage foreclosure sales handled through his
office and urged other Michigan sheriffs to take similar action.
Evans said a thorough review of federal law has determined that
to continue foreclosure sales would conflict with recently
enacted federal laws that provide protections for homeowners
facing foreclosure and which supercede Michigan foreclosure laws.

Evans said the Troubled Asset Relief Program (TARP) approved by
Congress last fall requires the Secretary of the Treasury to
implement a plan to mitigate foreclosures and to encourage
servicers of mortgages to modify loans to enable homeowners to
stay in their homes. Because federal law preempts state law, the
TARP provision preempts Michigan´s foreclosure law,
meaning foreclosures cannot move forward until efforts to modify
the mortgages of homes covered by TARP have been exhausted.
“After a great deal of research, I have determined there
is sufficient legal grounds for me – and for other
sheriffs – to halt mortgage foreclosure sales,”
Evans said. “I cannot in clear conscience allow one more
family to be put out of their home until I am satisfied they have
been afforded every option they are entitled to under the law to
avoid foreclosure. ”
As a result, Evans said, the foreclosure sales that have been
held every Wednesday and Thursday are being halted until further
notice. He said an average of 300-400 sales per week have been
held in recent weeks.
Wayne County has been in many ways, the epicenter of the
nation´s foreclosure and housing market crisis. In 1998,
the Sheriff´s Office processed 2,417 foreclosure sales.
That number increased significantly each year, reaching a peak of
26,314 in 2007, up 32 percent from the year before. Foreclosures
dipped somewhat in 2008 to just20under 20,000, due in part to a
temporary foreclosures moratorium by lenders Fannie Mae and
Freddie Mac that ended on Saturday.
Federal Bailout & Mortgage modifications
On October 3, 2008, the U.S. Congress enacted the
“Emergency Economic Stabilization Act of 2008” into
law, which is more commonly known as the $700 billion federal
bailout program. Its purpose is to provide authority to the
Treasury Secretary to restore liquidity to the U.S. Financial
Created as part of that Act, TARP was designed to purchase
troubled assets from financial institutions. In most case s, this
refers to bank foreclosed homes. This is particularly the case
when the money the lender should expect to recover is greater
than it would be under a foreclosure. That is the case for most
foreclosed homes in Wayne County.
Sheriffs don´t know who is covered by TARP
Evans said since he has no way of knowing which of the
approximately 300-400 homes that come up for sale each week in
Wayne County are covered by TARP protections and which are not,
his only course of action is to halt the foreclosure sales. Since
homeowners lose their rights to a property once a foreclosure
sale is complete, Evans said he and other sheriffs could be
allowing – under state law – the sale of some homes whose
purchasers have overriding protections under federal law to
obtain a mortgage modification.
Mortgage modifications could include the acquisition of a lower
interest rate, the forgiveness of past defaulted payments,
reduction of the monthly loan payment or perhaps the lowering of
the loan principle by ways of example. Any of the above actions
could mean the difference between families keeping their homes or
being forced out of them.
“For most people, their home is the greatest investment
they will make in life,” Evans said. “They have
taken a big risk on behalf of their families and our economy. As
a public official, I have both a legal and moral obligation to
make sure that all of their legal remedies have been exhausted
before they lose their home.”
Over the past several weeks, Evans has spoken to advocacy groups
who represent foreclosed homeowners, such as ACORN and Moratorium
Now, as well as mortgage lenders as he developed his strategy to
address the foreclosure crisis in Wayne County. Evans said his
office will work with lenders and with homeowners facing the
threat of foreclosure to make sure that homeowners are being
provided every option they are entitled to under the law to avoid
“The federal law is very clear,” Evans said.
“I am urging all Michigan sheriffs to join me in
implementing this moratorium on foreclosure sales to assure that
Michigan homeowners have every opportunity to renegotiate their
mortgages before they are subjected to foreclosure
proceedings. “

“System is Broken” — there is no clear title and no clear answers, which is why most foreclosure actions should fail or be reversed

Mortgage market clouds who owns woman’s house

Submitted by Jose Semedey — Thank You


The Atlanta Journal-Constitution

Sunday, January 25, 2009

Twenty years ago, Zella Mae Green bought a modest brick ranch house in DeKalb County with an American ideal in mind. The single mother of four, who raised her children working low-wage jobs, wanted to own something someday. And she wanted to pass something on.

“I was thinking that if anything would ever happen to me, the children would have a place they could come and stay,” said Green, a seamstress who is 68. “Their father passed away when they were young.”

Enlarge this image

Zella Mae Green has been in a stalemate with mortgage lenders for years trying to learn who holds the note on her Decatur home and how much she really owes.
Recent headlines:

* Dunwoody city hall, police station to relocate
* Decatur mayor to deliver ’state of the city’ speech
* DeKalb cities watch Doraville annexation vote

• DeKalb County news

Green says she has done her part, making payments on the house she bought for $40,000 to the series of lenders who have managed her mortgage over two decades.

But Citigroup and Wells Fargo say Green has failed miserably as a homeowner and is nine years behind on her payments. And they want to take the house.

“Nine years? There ain’t no way,” Green said. “Ain’t no way you can stay someplace for nine years without paying anything.”

Determining whether a homeowner is truly years behind on a mortgage seems like a straightforward question.

But Green and a string of lenders have been arguing about the matter in court for years now — with no resolution in sight. Her lawyer says the lenders have not even proven who owns the mortgage, let alone established how much Green owes.

Citigroup and Wells Fargo and the lawyers representing them declined to be interviewed for this article, citing pending litigation.

Green’s case illustrates the complexities of the modern mortgage market and just how difficult it can be to unwind the history of a mortgage. Most mortgages are originated by one lender, then sold — often repeatedly — to other lenders or groups of investors. Other companies are often brought in to process payments and manage escrow accounts.

For the thousands of homeowners who are behind on mortgage payments or in a dispute about how much is owed, getting accurate information about a loan can be difficult. Negotiating a resolution — especially when a series of lenders and managers has been involved — can be even harder.

“Here is a homeowner who wants to get her mortgage worked out so she can pay it,” said Howard Rothbloom, Green’s attorney. “She can’t get it done.”

Question of ownership

Green picked out her house 20 years ago. It’s a two-bedroom, one-bath brick ranch with about 1,000 square feet. Green borrowed $40,250 from All Georgia Mortgage at an interest rate of 10 percent in 1988. She felt sure she could handle the $353 payments with her job at J.C. Penney.

“I was excited about it because I knew one day it would be mine,” said Green, now a great-grandmother.

The home’s interior today is a reflection of Green. It’s adorned with fancy curtains and pillows she made — the kind she creates in her seamstress job for an upscale decorating company. And it’s the place her family gathers to enjoy Green’s home cooking.

Trouble with the mortgage began years ago, she said, when she mailed in money orders that she says were applied to the wrong account — something she believes went on for at least seven months.

The mortgage companies involved with the loan at that time have since sold it.

Green said she sought help from several housing agencies and attorneys over the years, trying to get credit for all the payments she has made. “They told me it’s the biggest mess they have ever seen,” she said.

All Georgia Mortgage Co. originated Green’s loan, but it has been owned or managed by at least seven parties over the years. Citigroup now says it owns the loan and Wells Fargo is managing the payments.

Green acknowledged paying her mortgage late sometimes over the years, but she said she always made up for it. She has filed for bankruptcy four times since 1989 — usually when a lender threatened foreclosure.

Lenders in Georgia can proceed with a foreclosure without the involvement of any court. Bankruptcy automatically stops a foreclosure, and the court generally serves as the forum for resolving mortgage disputes.

Green said the bankruptcies were the only way to try to figure out what happened to her payments and to keep her house.

Complicated accounts

Green’s case sounds extreme. But lawyers who represent homeowners say most mortgage lenders rely on such complicated accounting systems that experts have to be hired to even read the history of payments and charges.

“The payment histories are designed by these servicing companies to be gobbledygook,” said William J. Brennan Jr., an attorney at Atlanta Legal Aid and national expert on mortgage lending. “Knowing what somebody owes is crucial. They will give you a number, but if you want to see if that’s right — good luck.”

A payment history provided by lenders in Green’s case is complicated. It shows numerous credits on the same day for relatively small amounts, listed as “payment rec’d,” but shows no change in the account’s balance.

The history also appears to show her account being within months of being current, then suddenly more than seven years behind and then current again in 2000.

Green filed for bankruptcy protection for a fourth time in 2004 with the help of Rothbloom, an attorney with a successful record of challenging mortgage lenders.

“I’m just trying to find out two things: What Ms. Green’s proper loan balance is and who she owes it to,” Rothbloom said.

So far, who owns the mortgage has not been resolved.

A lender proves ownership of a mortgage by producing the “promissory note,” the document signed at closing in which the borrower agrees to the debt. The note is valuable and can be bought and sold by lenders. But like a personal check, it is only valuable in its original form.

Green’s lenders have admitted in court documents they can’t find her note. Legal experts say that’s a big deal.

“There is no excuse for the inability of mortgage lenders to know where the note is,” said Frank Alexander, an Emory University law professor and a leading expert on real estate law. “Without the note, you have virtually nothing. That is the one thing that is always locked in a vault.”

The lender says everybody knows that Citigroup owns the note. If Green thought otherwise, they say in court documents, why would she send Citigroup her payments?

Rothbloom says that’s not good enough. “Their answer is, ‘We have a copy,’” Rothbloom said. “My answer is, ‘I have a copy, too.’ “

Katherine Porter, a University of Iowa law professor, found in a study that lenders routinely fail to file required documents in bankruptcy cases to prove what consumers owe. And their accounting systems, she said, make it hard for them to track the history of payments over the life of a loan, especially when numerous lenders are involved.

Porter said Green’s case illustrates how complicated these cases can become.

“If she can’t get this information through litigation and with a skilled attorney, what happens to people facing foreclosure who sent their check in and can’t get the lender to admit it?” Porter said.

‘System is broken’

In legal filings, the lenders say Green has never been able to keep up with the payments. They cite her numerous bankruptcies and the fact that Green participated in a federal program designed to help struggling homeowners between 1997 and 2000.

Rothbloom said payment records appear to show her loan was current in 2000, when under the management of the U.S. Department of Housing and Urban Development. He said it’s possible HUD’s program transferred past-due payments to the end of the loan to allow Green to stay in the house.

“Anything is a possibility,” Rothbloom said. “That’s why we sued. To find out what’s going on.”

What Rothbloom knows, he said, is that Green has made every payment since 2004. Still, he has made no progress getting lenders to agree to a settlement in a case involving a house that DeKalb County values at $67,000.

“Why do they want this house?” Rothbloom said. “The answer is the system is broken.”




Red Flags

Critical loan processing activities, such as  verification of

income, employment, or deposit, is delegated to brokers.

Delegated underwriting allowed for correspondents that are new or

lack an established track record with the FI.

A growing number of loans is being repurchased due to

misrepresentations by the FI under purchase and sale agreements

with secondary market investors.  The originating FI may suffer

significant financial losses in the event of a large and

unforeseen fraud.

Third party mortgage loan fraud is not covered in standard

fidelity bond insurance.

Tax returns show RE taxes paid but no property is identified as


Alimony is paid but not disclosed.

Evidence of white out or other document alterations is observed.

Type or handwriting varies from other loan file documents or

handwriting is the same on documents that should have been

prepared by different people or entities.

Internal Controls/Best Practices

Review purchase and sales agreements with brokers, correspondents,
and secondary market investors to determine if general
representations and warranties contain appropriate fraud and
misrepresentation provisions.

Determine the FI’s responsibility for repurchasing and putting
back loans that were funded based on misrepresentations.

Check whether an endorsement or rider exists to the fidelity bond
that provides coverage of third party mortgage fraud.

Regularly document the FI’s review of insurance coverage.

Establish procedures to ensure the bonding company is notified of
a possible claim within the policy’s specified period.

Adopt detailed policies and procedures to ensure effective
controls are in place to set, validate, and clear conditions prior
to final approval processes.

Base underwriter compensation on loans reviewed and not loans

Establish effective pre-funding and post QC programs that include
sampling, portfolio analysis, appraisal, and income/down payment
verification practices.

As a part of the pre-funding QC process, use AVMs to corroborate
appraised values.

Employ internally developed or vendor-provided fraud detection

Institute corporate wide fraud awareness training.

Perform due diligence of brokers and correspondents.  Understand
the risks in their policies, procedures, and practices before
transacting business.

Determine how and when the FI reserves for fraud and ensure
compliance with FAS 5.

Review the FI’s litigation roster for existing and potential class
actions, and threatened litigation that may highlight a problem
with a particular broker, correspondent, or internal practices.

Review whistleblower and hot line reports, which may indicate
fraudulent activities.

Mortgage Brokers

A mortgage broker is an individual who, for a fee, originates and

places loans with an FI or an investor but does not service the


o Review the broker’s financial information as stringently
as for other RE borrowers.
o Ensure the FI’s broker agreements require brokers to act
as the FI’s representative/agent.
o Independently verify the broker’s background information
by checking business history outside of given references.
o Obtain a new credit report for the broker and check for
recent debt at other FIs.
o Obtain resumes of principal officers, primary loan
processors, and key employees.
o Conduct state license verification.
o Conduct criminal background checks and adverse data base
searches, i.e., MARI (fraud repository).

Conduct an annual re-certification of brokers.

Conduct pre-funding reviews on all new production utilizing a pre-
funding checklist.

Conduct QC underwriting reviews.

Base broker compensation incentives on something other than loan
volume, i.e., credit quality, documentation completeness,
prepayments, fraud, and compliance.

Establish measurable criteria that trigger recourse to the broker,
such as misrepresentation, fraud, early payment defaults, failure
to promptly deliver documents, and prepayments (loan churning).

Hold brokers and third party contract underwriters responsible for
gross negligence, willful misconduct, and errors/omissions that
materially restrict salability or reduce loan value.

Establish a broker scorecard to monitor volume, prepayments,
credit quality, fallout, FICO scores, LTVs, DTIs, delinquencies,
early payment defaults, foreclosures, fraud, documentation
deficiencies, repurchases, uninsured government loans, timely loan
package delivery, concentrations, and QC findings.

Perform detailed vintage analysis, and track delinquencies and
prepayments by number and dollar volume.

Closely monitor the total number of loans and products from a
single broker.

Establish an employee training program that provides instruction
on understanding common mortgage fraud schemes and the roles of a
mortgage broker, as well as recognizing red flags.

Establish a periodic audit of the brokered mortgage loan
operations with specific focus on the approval process.

Perform social security number validation procedures to validate
borrower identity.

Red Flags

No attempt is made to determine the financial condition of the

broker or obtain references and background information.

A close relationship exists between the broker, appraiser, and

lender, raising independence questions.

The broker acts as an advocate for the borrower instead of serving

as the FI’s representative/agent.

High “yield spread premiums” are paid by the FI.

Original documents are not provided to the funding FI within a

reasonable time.

An unusually high volume of loans with maximum loan to value

limits have been originated by one broker.

An uncommonly large number of foreclosures, delinquencies, early

payment defaults, prepayments, missing documents, fraud, high-risk

characteristics, QC findings, or compliance problems exist on

loans purchased from any broker.

A large volume of loans from one broker arrives using the same


High repurchase volume exists for a specific broker.

Numerous applications from a particular broker are provided

possessing unique similarities.

A high volume of loans exist in the name of trustees, holding

companies, or offshore companies.

An unusually large increase is noted in overall volume of loans

during a short time period.

Internal Controls/Best Practices5

Conduct an initial acceptance review and obtain documentation to

support broker approval.  Examples of actions to be taken include:


The mortgage application is the initial document completed by the
borrower that provides the FI with comprehensive information
concerning the borrower’s identity, financial position and
employment history.

Red Flags

The application is unsigned or undated.

Power of attorney is used.  Investigate why the borrower cannot
execute documents and if formal supporting documentation exists.

Signatures on credit documents are illegible and no supporting
identification exists.

Price and date of purchase is not indicated.

Borrower is selling his current residence, but does not provide
documents to support a sale.

Down payment is not in cash, i.e., source of deposit is a
promissory note or repayment of a personal loan.

Borrower has high income with little or no personal property.

Borrower’s age is not consistent with the number of years of

Borrower has an unreasonable accumulation of assets compared to
income or has a large amount of unsubstantiated assets.

Borrower claims to have no debt.

Borrower owns an excessive amount of RE.

New housing expense exceeds 150% of current housing expense.

A post office box is the only indicated address for the borrower’s

The same telephone number is used for the borrower’s home and

Application date and verification form dates are not consistent.

Patterns or similarities are apparent from applications received
from a specific seller or broker.

Certain brokers are unusually active in a soft RE market.

Concentration of loans to individuals related to a specific
project is noted.

Borrower does not guarantee the loan or will not sign in an
individual capacity.

Borrower’s income is not consistent with job type.

Employer is an unrealistic commuting distance from property.

Years of education is not consistent with borrower’s profession.

Borrower is buying investment properties with no primary

Transaction resulted in a large cash-out refi as a percent of the
loan amount.

Internal Controls/Best Practices

Establish an employee training program that provides instruction
on understanding common mortgage fraud schemes and recognizing red

Conduct pre-funding reviews on new production.

Closely monitor new brokers, correspondents, and products.
Scorecard criteria can be used to track performance.  Typical
tracking data includes:  default rates, pre-purchase cycle times,
loan quality indicators such as underwriting exceptions, and key
data changes prior to approval.

Verify the source of down payment funds by directly contacting the
FI where funds are shown deposited.

Closely analyze the borrower’s financial information for unusual
items or trends.

Independently verify employment by researching the location and
phone number of the business.

Employ pre-funding and post-closing reviews to detect any
inconsistencies within the transaction.

Conduct risk based QC audits prior to funding.

Ensure that prior liens are immediately paid from new loan

Assess the volume of critical post-closing missing documents,
determine the potential for repurchase recourse, and evaluate
reserve adequacy.

Monitor RE markets from the locale in which the FI’s mortgage
loans originated.

Establish a periodic independent audit of mortgage loan

Provide fraud updates/alerts to employees.

Review patterns on declined loans, i.e., individual social
security number, appraiser, RE agent, loan officer, broker, etc.

Establish a fraud hotline for anonymous fraud tips.

Increase the use of original supporting documentation on third
party transactions, i.e., wholesale and correspondent


An appraisal is a written report, independently and impartially
prepared by a qualified individual, stating an opinion of market
value of a property as of a specific date.

Red Flags

The appraiser is a frequent or large volume borrower at the FI.

The appraiser owns property in the project being appraised.  This
is a violation of the appraisal regulation and raises concerns
about appraiser independence and bias.

The most recent assessed tax value does not correlate with the
appraisal’s market value.

An appraiser is used who is not on the institution’s designated
list of approved appraisers.

The appraiser is from outside the area and may not be familiar
with local property values.  Understanding of local market nuances
is critical to an accurate property valuation.

An appraisal is ordered by a party to the transaction other than
the FI, such as the buyer, seller, or broker.

An appraisal is ordered before the sales contract is written.

Certain information is left blank such as the borrower, client, or

The appraised value is contingent upon curing some property
defects, i.e., drainage problems or a zoning change.

Comparables are not verified as recorded or are submitted by a
potentially biased party, such as the seller or broker.

Old comparables (9-12 months old) are used in a “hot” market.

Comparables are an excessive distance from the subject property or
are not in the subject property’s general area.

Comparables all contain similar value adjustments or are all
adjusted in the same direction.

All comparables are on properties appraised by the same appraiser.

Unusual or too few comparables are used.

Similar comparables are used across multiple transactions.

Comparables and valuations are stretched to attain desired loan-
to-value parameters.

Excessive adjustments are made in an urban or suburban area when
the marketing time is less than six months.

Appreciation is noted in a stable or declining areas.

Large unjustified valuation adjustments are shown.

The land constitutes a large percentage of the value.

The market approach greatly exceeds the replacement cost approach.

Overall adjustments are in excess of 25%.

Photos do not match the description of the property.

Photos of comparables look familiar.

Photos reveal items not disclosed in the appraisal, such as a
commercial property next door, railroad tracks, etc.

Items with the potential for negative valuation adjustments, i.e.,
power lines, railroad tracks, landfill, etc., are avoided in
appraisal photos.

Loan amounts are disclosed to the appraiser.

File documentation is inadequate to determine whether appraisals
were properly scrutinized or supported by additional appraisal

The appraisal fee is based on a percentage of the appraised value.

Independent reviews of external fee appraisals are never

One or more sales of the same property has occurred within a
specified period (6-12 months) and exceeds certain value increases
(10% or more value increase).

A fax of the appraisal is used in lieu of the original containing
signature and certification of appraiser.

Internal Controls/Best Practices

Establish an employee training program that provides a good
overview of common mortgage fraud schemes, the appraisal
regulation, the RE lending standards regulation, appraisal
techniques, and red flag recognition.

Implement a strong appraisal and evaluation compliance review
process that is incorporated into the pre-funding quality
assurance program.

Ensure reviewers identify violations of regulations and
noncompliance with RE lending standards and other interagency

Establish an approved appraiser list for use by retail, broker,
and correspondent origination channels.  This list should be
generated and controlled by a unit independent of production.

Obtain a current copy of each appraiser’s license or certificate.

Implement “watch” list and monitoring systems for appraisers who
exhibit suspect practices, issues, and values.  Include a post-
closing review to detect any transaction inconsistencies.

Establish a “suspended” or “terminated” list of appraisers who
have provided unreliable valuations or improper practices.

Implement controls to ensure that “terminated” appraisers are
prohibited from engaging in future transactions with the FI, and
its brokers and correspondents.

Implement third party appraisal controls to ensure compliance with
regulatory guidance, specifically as it applies to appraisals and
evaluations ordered by loan brokers, correspondents, or other FIs.

Develop appraisal requirements based on transaction risks.

Statistically test the appropriateness of appraisals obtained by
brokers and correspondents by obtaining independent AVMs and

Establish an independent appraisal review/collateral valuation
unit to research valuation discrepancies and provide technical

Review the appraisal’s three-year sales history to determine if
land flips are occurring.

Perform detailed research on each appraiser’s business history and
financial condition.

Physically verify the location and condition of selected subject
properties and comparables.

Monitor RE market values in areas that generate a high volume of
mortgage loans and where concentrations exist.

Employ pre- and post-closing QC reviews to detect inconsistencies
within the transaction and hold production units financially
accountable for proper documentation and quality.

Conduct periodic independent audits of mortgage loan operations.

Credit Report

A credit report is an evaluation of an individual’s debt repayment

Red Flags

The absence of a credit history can indicate the use of an alias
and/or multiple social security numbers.

A borrower recently paying all accounts in full can indicate an
undisclosed consolidation loan.

Indebtedness disclosed on the application differs from the credit

The length of time items are on file is inconsistent with the
buyer’s age.

The borrower claims substantial income but only has credit
experience with finance companies.

All trade lines were opened at the same time with no explanation.

A pattern of delinquencies exists that is inconsistent with the
letter of explanation.

Recent inquiries from other mortgage lenders are noted.

AKA (also known as) or DBA (doing business as) are indicated.

The borrower cannot be reached at his place of business.

FI cannot confirm the borrower’s employment.

DTI ratios are right at maximum approval limits.

Employment information/history on the loan application is not
consistent with the verification of employment form.

Credit Bureau alerts exist for Social Security number
discrepancies, address mismatches, or fraud victim alerts.

Internal Controls/Best Practices

Establish an employee training program that provides instruction
on understanding common mortgage fraud schemes, analyzing credit
reports, and recognizing red flags.

Include an analysis of the credit report in the pre-funding
quality assurance program.

Make direct inquiries to the borrower and creditors to get an
explanation of unusual or inconsistent information.

Obtain an updated credit report if the one received is older than
six months.

Independently verify employment by researching the location and
phone number of business.

Implement a post-closing review to detect any inconsistencies
within the transaction.

Establish a periodic independent audit of mortgage loan

Define DTI calculation criteria and conduct training to ensure
consistency and data integrity.

Clarify non-borrower spouse issues, such as community property
issues and the impact of bankruptcy and debts on the borrower’s
repayment capacity.

Ensure lease obligations are reflected in borrower debts and
repayment capacity.

Conduct re-verification of credit to ensure accuracy of
broker/correspondent provided credit reports.

Obtain more than one report from multiple repositories available
to corroborate the initial credit report if data appears


A closing or settlement is the act of transferring ownership of a
property from seller to buyer in accordance with the sales contract.

Escrow is an agreement between two or more parties that requires
certain instruments or property be placed with a third party for
safekeeping, pending the fulfillment or performance of a specific
act or condition.

Red Flags

Related parties are involved in the transaction.

The business entity acting as the seller may be controlled by or
is related to the borrower.

Right of assignment is included which may hide the borrower’s
actual identity.

Power of attorney is used and there is no documented explanation
about why the borrower cannot execute documents.

The buyer is required to use a specific broker or lender.

The sale is subject to the seller acquiring title.

The sales price is changed to “fit” the appraisal.

No amendments are made to escrow.

A house is purchased that is not subject to inspection.

Unusual amendments are made to the original transaction.

Cash is paid to the seller outside of an escrow arrangement.

Cash proceeds are paid to the borrower in a purchase transaction.

Zero funds are due from the buyer.

Funds are paid to undisclosed third parties indicating that there
may be potential obligations by these parties.

Odd amounts are paid as escrow deposits or down payment.

Multiple mortgages are paid off.

The terms of the closed mortgage differ from terms approved by the

Unusual credits or disbursements are shown on settlement

Discrepancies exist between the HUD-1 and escrow instructions.

A difference exists between sales price on the HUD-1 and sales

Internal Controls/Best Practices

Establish an employee training program that provides an
understanding of common mortgage fraud schemes, proper closing
procedures, and recognizing red flags.

Provide the closing agent with instructions specific to each
mortgage transaction.

Instruct the closing agent to accept certified funds only from the
FI that is the verified depository.

Require the closing agent to notify the FI if the agent has
knowledge of a previous, concurrent, or subsequent transaction
involving the borrower or the subject property.

Obtain a specific transaction closing protection letter from the
closing agent.

Implement controls to ensure loan proceeds fully discharge all
debts and prior liens as required.

Employ pre- and post-closing reviews to detect any inconsistencies
within the transaction.

Conduct periodic independent audits of mortgage loan operations.

Use IRS form 4506 on all loans to facilitate full investigation of
future fraud allegations.

Industry studies indicate that a significant portion of the loss
associated with residential RE loans can be attributed to fraud.
Industry experts estimate that up to 10% of all residential loan
applications, representing several hundred billion dollars of the
annual U.S. residential RE market, have some form of material
misrepresentation, both inadvertent and malicious.  An in-depth
review by The Prieston Group of Santa Rosa, California of early
payment defaults, an indicator of problem loans, revealed that 45-
50% of these loans have some form of misrepresentation.
Additionally, this study showed that approximately 25% of all
foreclosed loans have at least some element of misrepresentation,
and losses on floan balance.

The second motive, fraud for profit, is a major concern for the
mortgage lending industry.  It often results in larger losses per
transaction and usually involves multiple transactions.  The schemes
are frequently well planned and organized.  There may also be intent
to default on the loan when the profit from the scheme has been
realized.  Multiple loans and people may be involved and
participants, who are often paid for their involvement, do not
necessarily have knowledge of the whole scheme.

Fraud for profit can take many forms including, but not limited to:

Receipt of an undisclosed or unusually high commission or fee,

Representation of investment property as owner-occupied since
FIs usually offer more favorable terms on owner-occupied RE, •
Sale of an otherwise unsalable piece of property by concealing
undesirable traits, such as environmental contamination,
easements, building restrictions, etc.,

Attainment of a new loan to redeem a property from foreclosure
to relieve a burdensome debt,

Rapid buildup of a RE portfolio with an inflated value to
perpetrate a land flip scheme,

Mortgage of rental RE with the intention of collecting rents
and not making payments to the lender, retaining funds for
personal use,

The advance of loan approvals for customers to benefit from the
commission payments, and/or

Misrepresentation of personal identity, i.e., use of illegally
acquired social security numbers, to illegally obtain a loan,
or to sell/take cash out of equity on a property with no
intention of repaying the debt.

The third motive, which involves additional criminal purposes beyond
fraud, is becoming more of a concern for law enforcement and FIs.
This involves taking the profit motive one step further by applying
the illegally obtained funds or assets to other crimes, such as:

Money laundering through purchase of RE, most likely with cash,
at inflated prices,

Terrorist activities such as the purchase of terrorist safe
houses and,

Other illegal activities like prostitution, drug sales or use,
counterfeiting, smuggling, false document production and
resale, auto chop shops, etc.


It is important to be aware of the different participants and
transaction flows to understand the fraud schemes described in this
paper.  This section provides background information on various
participants and their roles in typical mortgage transactions.


Common participants in a mortgage transaction include, but are not
limited to:

Buyer – a person acquiring the property,

Seller – a person desiring to convert RE to cash or another
type of asset,

Real Estate Agent – an individual or firm that receives a
commission for representing the buyer or seller, •
Originator – a person or entity, such as a loan officer,
broker, or correspondent, who assists a borrower with the loan

Processor – an individual who orders and/or prepares items
which will be included in the loan package,

Appraiser – a person who prepares a written valuation of the

Underwriter – an individual who reviews the loan package and
makes the credit decision,

Warehouse Lender – a short term lender for mortgage bankers
that provides interim financing using the note as collateral
until the mortgage is sold to a permanent investor, and

Closing/Settlement Agent – a person who oversees the
consummation of a mortgage transaction at which the note and
other legal documents are signed and the loan proceeds are

Refer to Appendix A – Glossary for additional and expanded
definitions for participants and other terms used throughout this

Mortgage Loan Purchased from a Correspondent – In this transaction,
the borrower applies for and closes his loan with a correspondent of
the FI, which can be a mortgage company, small depository
institution, or finance company.  The correspondent closes the loan
with internally generated funds in its own name or with funds
borrowed from a warehouse lender.  Without the capacity or desire to
hold the loan in its own portfolio, the correspondent sells the loan
to an FI.  The purchasing FI is frequently not involved in the
origination aspects of the transaction, and relies on the
correspondent to perform these activities in compliance with the
FI’s approved underwriting, documentation, and loan delivery
standards.  The purchasing FI reviews the loan for quality prior to
purchase.  The purchasing FI must also review the appraisal or AVM
report and determine that it conforms to the appraisal regulation
and is otherwise acceptable.  The loan can be booked in the FI’s own
portfolio or sold.

In “delegated underwriting” relationships, the FI grants approval to
the correspondent to process, underwrite, and close loans according
to the FI’s processing and underwriting requirements.  The FI is
then committed to purchase those loans.  Obviously, proper due
diligence, controls, approvals, QC audits, and ongoing monitoring
are warranted for these higher risk relationships.

Financial institutions that generate mortgage loans through
correspondents should have adequate policies, procedures, and
controls to address:  initial approval and annual re-certification,
underwriting, pre-funding and QC reviews, repurchases, early
prepayments, appraisals, quality and documentation monitoring,
fraud, scorecards, timely delivery of loan packages, and utilization
of contract underwriters.  In addition, FIs should have contractual
agreements to demand and enforce repurchase proceedings and other
disciplinary actions with correspondents delivering loans outside of
product and other contractual agreements.

There are a variety of mechanisms by which third party mortgage loan
fraud can take place.  Various combinations of these mechanisms may be implemented in a single fraud.  Some of these mechanisms and
their uses are described in this section.


Collusion involves two or more individuals working in unison to
implement a fraud.  Various third parties may conspire to perpetrate
a fraud against an FI with each generally contributing to the plan.
Each person performs his respective role and receives a portion of
the illicit proceeds.  Often, but not always, third parties recruit
or bribe FI employees to take part in the scheme.  The scheme may
also include additional parties not involved in the planning or
aware of all participants, but who are still part of the plan’s

Documentation Misrepresentation

Mortgage fraud is generally achieved using fictitious, forged, or
altered documents needed to complete a transaction.  Pertinent
information may also be omitted from documents.  The following
describes some key documents and ways they can be altered to
perpetrate fraud.

Loan Application – The application captures information needed
for an FI to make a credit decision based on the borrower’s
qualifications such as financial capacity.  It may include
false information regarding the identity of the buyer or
seller, income, employment history, debts, or current occupancy
of the property.  The information on the final application may
have been altered and be materially different than that
provided on the initial application.

Appraisal – An appraisal is a written statement that should be
independently and impartially prepared by a qualified
practitioner setting forth an opinion of the market value of a
specific property as of a certain date, supported by the
presentation and analysis of relevant market information.  It
is an integral component of the collateral evaluation portion
of the credit underwriting process.

An appraisal is fraudulent if the appraiser knowingly intends
to defraud the lender and/or profits from the deception by
receiving more than a normal appraisal fee.  This includes
accepting a fee contingent on a foregone conclusion of value,
or a guarantee for future business in response to the inflated
value.  The appraiser may inflate comparable values or falsify
the true condition of the property, which can allow the
defrauder to obtain a larger loan than the property legitimately supports.  An appraisal that does not include
negative factors affecting the property value can influence the
FI to enter into a transaction that it normally would not
approve.  The defrauder may use comparables that are outdated,
fictitious, an unreasonable distance from the subject property,
or materially different from the subject property.  Photos
represented to be of the subject property may be of another
property.  Inflated appraisal values create high loss potential
and contribute to an FI’s losses at the time of foreclosure or

Credit Report – This document contains an individual’s credit
history which is used to analyze an individual’s repayment
patterns and capacity.  Credit histories can be forged or
altered through various methods to repair bad credit or create
new credit histories.  Fraudsters can also use the credit
report of an unknowing individual who has a good credit record.
Perpetrators have been known to scan and alter illegally
obtained legitimate credit reports that are then printed and
used as originals.  Copiers can be similarly used to produce
fictitious or altered credit reports.  Fraudsters have used
computers to hack into credit bureau files and have purchased
credit bureau computer access codes from persons who work for
legitimate businesses.

Alternate credit reference letters are often used for
applicants with limited or no traditional credit history.  They
are usually in the form of a letter directly from a business
such as a utility, small appliance store, etc., to which the
applicant is making regular payments.  These letters can be
easily altered or completely fabricated using the business’s
letterhead.  As lenders expand to provide loans to more diverse
income levels, alternate credit references are becoming more

Deed – A deed identifies the owner(s) of the property.  It can
be altered to disguise the true property owner or the
legitimate owner’s signature can be forged to execute a
mortgage transaction.  Alteration or forgery of this document
allows the fraudster to use a false identity to complete the

Financial Information – This includes financial statements, tax
returns, FI statements, and income information provided during
the application process.  Any of this data can be falsified to
enable the applicant to qualify for a mortgage loan.
Inadequate income and employment verification procedures may
allow mortgage loan fraudsters to deceive the FI regarding this information.  Some perpetrators have been known to set up phone
banks to receive verification calls from FIs.

HUD-1 Settlement Statement – The HUD-1 accompanies all
residential RE transactions.  This is a statement of actual
charges, adjustments, and cash due to the various parties in
connection with the settlement.  Working alone or with
accomplices this document can be altered to defraud the parties
to the transaction.  Information on the original HUD-1 may show
entities or persons not noted as lien holders but who still
receive payoffs from seller’s funds.  These individuals may be
deleted from the final HUD-1 that is available for review prior
to loan closing.  This enables individuals involved in the
fraudulent scheme to receive funds from the loan disbursement
without the FI being aware of such payments.  The document may
show a down payment when none was made.  The document may also
include the borrower’s forged signature.

Mortgage – A mortgage is a legal agreement that uses real
property as collateral to secure payment of a debt.  In some
locales a deed of trust is used instead.  A mortgage can be
altered to disguise the true property owner, the legitimate
lien holder, and/or the amount of the mortgage.  Alteration or
forgery of this document allows the fraudster to obtain loan
proceeds meant for another party or in an amount that exceeds
the legitimate value of the property.

Quitclaim Deed – This is a document used to transfer the named
party’s interest in a property.  The transferring party does
not guarantee that he has an ownership interest, only that he
is conveying the interest to which he represents he is
entitled.  Fraud perpetrators may use this document to quickly
transfer property to straw or nominee borrowers without a
proper title search.  Straw borrowers are discussed on page 17
under Third Party Mortgage Fraud Schemes.  This technique can
disguise the true property owner and allow the mortgage
transaction to be completed quickly.

Title Insurance/Opinion – Either of these documents confirms
that the stated owner of the property has title to the property
and has the right to transfer ownership of that property.  They
identify gaps in the chain of title, liens, problems with the
legal description of the property, judgments against the owner,
etc.  Title insurance schedules or opinions can be altered to
change the insured FI or omit prior liens.  This can be part of
the falsification that occurs when a perpetrator attempts to
obtain multiple loans from different FIs for one mortgage transaction.  Alteration of title insurance or opinions occurs
in other fraud scenarios, as well.

Identity Theft

Identity theft means the theft of an individual’s personal
identification and credit information, which is used to gain access
to the victim’s credit facilities and FI accounts to take over the
victim’s credit identity.  Perpetrators may commit identity theft to
execute schemes using fake documents and false information to obtain
mortgage loans.  These individuals obtain someone’s legitimate
personal information through various means, i.e., obituaries, mail
theft, pretext calling, employment or credit applications, computer
hacking, and trash retrieval.  With this information, they are able
to impersonate homebuyers and sellers using actual, verifiable
identities that give the mortgage transactions the appearance of

Mortgage Warehousing

Mortgage warehousing lines of credit are used to temporarily
“warehouse” individual mortgages until the mortgage banker, who may
be acting as a broker, can sell a group of them to an FI.  If a
dishonest mortgage banker has warehousing lines with two FIs, he can
attempt to warehouse the same mortgage loan on each line.  The
individual FIs may not be aware of the other’s line.  One FI may be
presented with the original documents, while the delivery of the
documents to the other FI is indefinitely delayed.  The second FI
may fund the line without the documents if previous dealings with
the mortgage banker have been satisfactory.  It is only after
transferring funds that the second lender realizes it has been
defrauded.  The Mortgage Electronic Registry System (MERS) can also
be used as a valuable control tool.

The mortgage warehouse lender often relies on the mortgage banker’s
internal loan data regarding FICO, loan-to-value (LTV), debt-to-
income (DTI), appraised value, credit grade and aging, making them
vulnerable to fraud if the provided data is not accurate.  The
mortgage warehouse lender should have proper procedures and controls
to provide ongoing monitoring, verification, and audits of the loans
under this line of credit.  It may also want to consider scorecards,
due diligence, and customer identification policies and procedures.


Negligence occurs when people who handle mortgage transactions are
careless or inattentive to the accuracy and details of the documents
or disregard established processing procedures.  This often happens
when an FI is experiencing fast growth and uses temporary and part-time employees to process a large volume of mortgages without proper
controls or oversight.  Inattention to detail provides perpetrators
with the opportunity to submit documents containing fraudulent
information with the probability that the fraud will not be
detected.  Fraudsters may target FIs once they identify these


The purpose of this section is to describe some of the most
prevalent types of mortgage fraud that have resulted in significant
losses to FIs.  Fraud schemes using one or more of the mechanisms
described earlier are limited only by the imagination of the
individuals who initiate them.  The following scenarios are not
intended to be an all-inclusive list.  Specific examples for most of
these schemes are detailed in Appendix C.

Appraiser Fraud

A person falsely represents himself as a State-licensed or State-
certified appraiser.  Appraiser fraud also can occur when an
appraiser falsifies information on an appraisal or falsely provides
an inaccurate valuation on the appraisal with the intent to mislead
a third party or FI.  Appraiser fraud is often an integral part of
some fraud schemes.

Double Selling

Double selling is a scheme wherein a mortgage loan broker accepts a
legitimate application, obtains legitimate documents from a buyer,
and induces two FIs to each fully fund the loan.  In this scenario,
the originator leads each FI to believe that the broker internally
funded the loan for a short period.  Since there is only one set of
documents, one of the funding FIs is led to believe that the proper
documentation will arrive any day.  Double selling is self-
perpetuating because different loans must be substituted for the
ones on which documents cannot be provided to keep the scheme going.
Essentially, the broker uses a lapping scheme to avoid detection.

Another variation of double selling entails a mortgage loan broker
accepting a legitimate application and proper documentation, who
then copies the loan file, and presents both sets of documents to
two investors for funding.  Under this scheme, the broker has to
make payments to the investor who received the copied documents or
first payment default occurs.

False Down Payment

Another third party mortgage fraud involves false down payments.  In
this scenario, a borrower colludes with a third party, such as a
broker, closing agent, etc., to reflect an artificial down payment.
When this scheme is carried out with collusion by an appraiser, the
true loan-to-value greatly exceeds 100% and has the potential to
cause substantial loss to the FI.

Fictitious Mortgage Loan

A fictitious mortgage loan scheme is perpetrated primarily by
mortgage brokers, closing agents, and/or appraisers.  In one version
of this scheme, the identity of an unsuspecting person is assumed in order to acquire property from a legitimate seller.  The broker
persuades a friend or relative to allow the broker to use the
friend’s or relative’s personal credit information to obtain a loan.
The FI is left with a property on which it must foreclose and the
third parties pocket substantial fees from both the FI and buyer.
Straw Borrower

The straw borrower scheme involves the intentional disguising of the
true beneficiary of the loan proceeds.  The “straw”, sometimes known
as a nominee, may be used to:

conceal a questionable transaction,

replace a legitimate borrower who may not qualify for the
mortgage or intend to occupy the property, or

circumvent applicable lending limit regulations by applying for
and receiving credit on behalf of a third party who may not
qualify or want to be contractually obligated for the debt.

The straw borrower scheme is accomplished by enticing an individual,
sometimes a friend or relative, to apply for credit in his own name
and immediately remit the proceeds to the true beneficiary.  The
straw borrower may feel there is nothing wrong with this and fully
believes that he is helping the third party.  He expects the
recipient of the loan proceeds to make the loan payments, either
directly or indirectly.  The recipient may be unable to or may never
intend to make the payment.  Over time, default would occur with the
FI initiating foreclosure proceedings.  This scheme can involve FI
personnel, as well as other third party participants.  The straw
borrower may or may not be paid a fee for his involvement or know
the full extent of the scheme.

In summary, millions of dollars have been lost because of the
mortgage fraud schemes described above.  These schemes produce many
indicators that are apparent to an educated observer.  The next
section identifies these red flags and provides best practices that
FIs can use to mitigate risk of loss.


Prudent risk management practices for third-party originated loans
are critical.  Strong detective and preventive controls are an
integral part of a sound oversight framework, including adequate
knowledge of the FI’s customers.  Knowledgeable, trained employees,
coupled with disciplined underwriting and proactive prevention
controls, are an FI’s best deterrent to fraud.  Implementation of
strong controls does not prevent human errors or oversight failures,
but documentary evidence of QC measures taken by the FI can be a
useful defense against a repurchase request from an investor.

As a part of the exam process, examiners should assess actions taken
by the FI to document its controls over internal fraud, relative to
safe and sound FI practices and individual agency regulatory requirements.  Examiners should also include Patriot Act and SAR
requirements in their evaluations.

The following list of red flags3, which is not intended to be all-
inclusive, may be used to identify and deter misrepresentations or
fraud.  Other automated systems for fraud detection, if used in
conjunction with this list, are dependent on the quality of the
input and analysis of the output.  The presence of any of these red
flags DOES NOT necessarily indicate that a misrepresentation or
fraud has occurred, only that further research may be necessary.


Congress enacted Title XI of the Financial Institutions, Reform,
Recovery and Enforcement Act of 1989 (FIRREA) requiring member
agencies of Federal Financial Institutions Examination Council
(FFIEC) to issue RE appraisal regulations to address problems
involving faulty and fraudulent appraisals.  One of the cornerstones
of the regulation was a requirement that a regulated financial
institution or its representative select, order, and engage
appraisers for federally related transactions to ensure
independence.  The agencies’ expectations on this subject are stated
in an interagency statement dated October 27, 2003 entitled
Interagency Appraisal and Evaluation Functions.  This statement
provides clarification of the various agencies’ appraisal and RE
lending regulations and should be reviewed in conjunction with them.

Specifically, the October 2003 statement primarily addresses the
need for appraiser independence.  A regulated institution is
expected to have board approved policies and procedures that provide
for an effective, independent RE appraisal and evaluation program.
Basic elements of independence are discussed such as separation of
the function from loan production and engagement of the appraiser by
the institution, not the borrower.  A written engagement letter is
encouraged.  An effective internal control structure is also
necessary to ensure compliance with the agencies’ regulations and
guidelines.  This includes a review process provided by qualified,
trained individuals not involved with loan production.  The depth of
review should be based on the size, complexity, and other risk
factors attributable to the transactions under review.  For the full
text of the October 27, 2003 statement please refer to Appendix G.


Gump59 – Why buy performing mortgages? If they are producing income for their owners, why wouldn’t they be held onto?

ANSWER: You’d buy a performing mortgage if you thought that you were buying it at a bargain, guaranteed with Triple AAA rating. If you buy a mortgage note that has a principal balance due of $500,000 and the stated interest rate is 6% you are expecting $30,000 in income. But if you think you are buying it for $250,000, and still getting $30,000 per year, then you are getting 12% plus a $250,000 bonus (when the note gets paid off). In the mortgage meltdown, this is what occurred. But what they were buying was one performing mortgage and 1,000 mortgages that already had the fuse lit to blow up (become non-performing). On paper it looked like 12%. In reality it was 1%, and that too vanished when the stuff hit the wall. As for the principal due on the note —- well that also vanished. The intermediaries (depository lending institutions and Wall Street investment bankers) got paid twice or three times (with Federal bailout) over, the borrower lost everything, the investor lost everything. Now the officials who gave the bailout understand that Wall Street pulled off the greatest triple fraud in history — the investors, the borrowers and the taxpayers — and in many cases because of pensions, annuities and other factors it was the same person getting pounded by the same transaction over and over again.

Neil F. Garfield, Esq.

Would You Pay $103,000 for This Arizona Fixer-Upper? — Appraisal Fraud, Predatory Loan, Securitization in its “finest” moment

Would You Pay $103,000 for This Arizona Fixer-Upper?

That Was Ms. Halterman’s Mortgage on It; ‘Unfit for Human Occupancy,’ City Says

AVONDALE, Ariz. — The little blue house rests on a few pieces of wood and concrete block. The exterior walls, ravaged by dry rot, bend to the touch. At some point, someone jabbed a kitchen knife into the siding. The condemnation notice stapled to the wall says: “Unfit for human occupancy.”

Michael Phillips/The Wall Street Journal

See photos of Ms. Halterman’s former house.

The story of the two-bedroom, one-bath shack on West Hopi Street, is the story of this year’s financial panic, told in 576 square feet. It helps explain how a series of bad decisions can add up to the worst financial crisis since the Great Depression.

Less than two years ago, Integrity Funding LLC, a local lender, gave a $103,000 mortgage to the owner, Marvene Halterman, an unemployed woman with a long list of creditors and, by her own account, a long history of drug and alcohol abuse. By the time the house went into foreclosure in August, Integrity had sold that loan to Wells Fargo & Co., which had sold it to a U.S. unit of HSBC Holdings PLC, which had packaged it with thousands of other risky mortgages and sold it in pieces to scores of investors.

Today, those investors will be lucky to get $15,000 back. That’s only because the neighbors bought the house a few days ago, just to tear it down.

At the center of the saga is the 61-year-old Ms. Halterman, who has chaotic blond-gray hair, a smoky voice and an open manner both gruff and sweet. She grew up here, working at times as a farm hand, secretary, long-haul truck driver and nurse’s aide.

In time, the container of vodka-and-grapefruit she long carried in her purse got the better of her. “Hard liquor was my downfall,” she says.

In Arizona, a $103,000 Shack


As WSJ’s Michael Phillips reports, a shack in Arizona with a $103,000 mortgage helps explain the economic mess we’re in.

Ms. Halterman says she had her last drink on Jan. 3, 1996. These days, her beverage of choice is Pepsi.

She collects junk. Her yard at the West Hopi house was waist-high in clothes, tires, laundry baskets and broken furniture. In June, the city issued a citation for what the enforcement officer described as “an exorbitant amount of rubbish/debris/trash.”

Ms. Halterman also collects people. At one time, she says, 23 people were living in the tiny house or various ramshackle outbuildings.

Her circle includes grandchildren, an old friend who lost her own home to foreclosure, a Chihuahua, and the one-year-old child of a woman Ms. Halterman’s former foster-daughter met in jail.

In the mail recently, she noticed a newsletter sent by a state agency with an article titled “Raising Children of Incarcerated Parents, Part I.”

“I need to read that one,” she said aloud to herself.

She keeps the children in line with cuddles and mock threats. “You better put that shirt on, or that cop will come and take you to jail,” she tells one. Another, whose father is in prison, was born with a heart problem related to his mother’s drug use, Ms. Halterman says. She patiently nursed him to health.

“It took me forever to get him past 15 lbs.,” she recalls.

Ms. Halterman hasn’t had a job for about 13 years, she says. She receives about $3,000 a month from welfare programs, food stamps and disability payments related to a back injury.

“I may not have everything I want, but I have everything I need,” she says.

Four decades ago, when she bought the West Hopi Street house for $3,500, Avondale was a small town built around cotton farms. From 2000 to 2005, the heart of the housing boom, it doubled in size to 70,000 residents.

Today, one in nine Avondale houses is in foreclosure or close to it.

Her lender, Integrity, was one of a flurry of small mortgage firms that sprang up nationwide during the boom, using loans from big banks to generate mortgages to resell to larger financial institutions. Whereas traditional mortgage lenders profit by collecting borrowers’ monthly payments, Integrity made its money on fees and commissions.

The company was owned by Barry Rybicki, 37, a former loan officer who started it in 2003. Of the boom years, he says: “If you had a pulse, you were getting a loan.”

[Marvene Halterman]

Marvene Halterman

When an Integrity telemarketer called Ms. Halterman in 2006, she was cash-strapped, owing $36,605 on a home-equity loan. The firm helped her get a $75,500 credit line from another lender.

Ms. Halterman used it to pay off her pickup, among other things. But soon she was struggling again.

In early 2007, she asked Integrity for help, Mr. Rybicki’s records show. This time, Integrity itself provided a $103,000, 30-year mortgage. It had an adjustable rate that started at 9.25% and was capped at 15.25%, according to loan documents.

It was one of 197 loans Integrity originated last year, totaling almost $47 million.

For a $350 fee, an appraiser hired by Integrity, Michael T. Asher, valued the house at $132,000. Mr. Asher says although he didn’t personally believe the house was worth that much, he followed standard procedures and found like-sized homes nearby that had sold in that price range in 2006.

“I can’t appraise it for the future,” Mr. Asher says. “I appraise it for that day.”

T.J. Heagy, a real-estate agent later hired to sell the property, says he can find only one comparable house that sold nearby in 2007, for $63,000.

At closing, on Feb. 26, 2007, Integrity collected $6,153 in underwriting, broker, loan-origination, document, application, processing, funding and flood-certification fees, mortgage documents show. A few days later, Integrity transferred the loan to Wells Fargo, earning $3,090 more, Mr. Rybicki says.

Kevin Waetke, of Wells Fargo Home & Consumer Finance Group, said in a written statement that “it appears that the appraisal … confirms that the property values were fully supported at the time the loan closed.”

Mr. Rybicki says neither he nor his loan officer ever saw the blue house. When shown a picture last month, he said: “Wow.”

Michael Phillips/WSJ

The rear of Ms. Halterman’s home, in a photo taken by a city code-enforcement officer around the time the eviction was served.

“When you have 50 employees, as much as you are responsible for holding their hands, you just can’t,” Mr. Rybicki says.

After the fees and her other debts were paid, Ms. Halterman walked away from closing with $11,090.33.

Ms. Halterman says she spent it on new flooring, a fence, minor repairs and food. “No steak or lobster,” she says, “hamburger and chicken.”

Soon the money was gone.

Within a few months she grew worried the rickety house wasn’t safe for children. She moved to a rental nearby. Her son Leslie Merritt took up residence at West Hopi Street and assumed responsibility for the $881 monthly payments.

When Wells Fargo sold Ms. Halterman’s loan to London-based HSBC, it got bundled with 4,050 other mortgages and used as collateral for a security issued in July 2007. More than 85% of the mortgages were, like Ms. Halterman’s, “subprime” loans to borrowers with blemished credit, according to Tom Atteberry of First Pacific Advisors LLC, a Los Angeles investment-management company.

Credit-ratings firms Standard & Poor’s and Moody’s Investors Service gave the new security their top “triple-A” ratings, which suggested investors were extremely likely to get their money back plus interest. S&P declined to explain its assessment. A Moody’s spokesman didn’t respond to requests for comment.

Thus was Ms. Halterman’s diminutive blue house tossed into the immense sea of mortgage-backed securities that would eventually imperil the U.S. financial system. Some $4.1 trillion in American mortgages were put into securities such as these between 2005 and 2006, including $1.6 trillion in subprime or other high-risk home loans, according to Inside Mortgage Finance, a trade publication.

Among other investors, the Teachers’ Retirement System of Oklahoma bought $500,000 of the new security, according to chief investment officer Bill Puckett. Also buying in was bond-giant Pacific Investment Management Co., which declined to comment.

Soon, Ms. Halterman’s son, Mr. Merritt, says he stopped paying the mortgage. He had slipped back into his methamphetamine addiction. “I lost interest in pretty much everything except my habit and the girl I was seeing,” he says. Mr. Merritt is now in prison for trafficking in stolen copper pipe.

In January, Ms. Halterman stepped back in and made the last mortgage payment. Foreclosure began in May. September brought eviction.

Ms. Halterman says she wishes she had never taken out the first home-equity loan. “I felt like I needed it,” she says. “In retrospect, I needed my a — kicked.”

Other loans backing the HSBC-issued security were souring, as well. As of November, 25% were foreclosed, in the foreclosure process or at least a month delinquent, Mr. Atteberry says.

HSBC declined to comment.

Mr. Rybicki gave up his mortgage-banking license in September. He now works for a venture-capital firm.

“The banks have part of the blame,” Mr. Rybicki says of the housing bubble. “I think we have part of the blame. We were part of the system. So does the consumer.”

Wells Fargo, which serviced the West Hopi Street loan, boarded up the house and hauled away the debris. And this past Monday, the property sold for $18,000 to Daniel and Delia Arce, who live next door in a tidy brick rambler. After expenses, investors in the mortgage-backed security will probably divide up no more than $15,000 in proceeds.

A few weeks ago, Mr. Arce asked Mike Summers, a city code-enforcement officer, whether a permit was required to raze the blue house.

“Yes,” Mr. Summers replied, “but all you need is the big, bad wolf to come out and huff and puff.”

—Liz Rappaport contributed to this article.

Write to Michael M. Phillips at


Happy New Year! We have much to talk about this year as we push forward. By all accounts, the economy, the dollar, the foreclosures, the job situation etc are all getting worse by the minute. Even if Obama is a magician it will be 2 years before there is a glimmer of hope. The homeowner aid programs are window dressing. Even the Sheila Bair one from FDIC/Indy Mac while well-intentioned does little for most homeowners. The ONLY hope for homeowners and the only hope for our economy is if we face the music and take the free market enthusiasts at their word, to wit: everyone agrees they artificially inflated real estate values and those values are still too high for the market to support. The only reason the “values” are stated so high is that the sellers are still deluding themselves in their asking prices. There is at least another 20% to go. As Brad Keiser says, we are only in about the 2nd or 3rd inning of a 9 inning game that might go into overtime.
Refi’s that leave homeowners under water simply will not work. People are not that stupid. It is easier to walk from the house and rent or buy another at real (lower) values.
Thus the Garfield Continuum plan is the only viable option — get rid of the note, obligation and mortgage altogether or at least force a modification that will bring the obligation to around 80% of true fair market value. Only a credible threat to the financial services sector pushing foreclosures will result in this relief. The threat comes from understanding and enforcing the basic law applicable to these mortgages — they screwed up and now they want borrowers to sign new paper that clears up their screw up and leaves the borrower in a horrible position.
The loss belongs where it was created — on Wall Street and Main Street Banks that rented their charter to Wall Street operatives who caused an unprecedented collapse of loan underwriting standards and crossing the line into fraud, forgery, and creation of false documentation. Companies SHOULD fail. Banks SHOULD fail. Borrowers CANNOT fail — because they are the backbone of the country and the economy. There are plenty of lenders, investment bankers and money managers who did not play the game and are perfectly healthy. Bailout money should go to the players who played by the rules and are healthy. They are the ONLY ones who can and will lend, thus freeing up, somewhat, the tightening death grip of no credit and thus no commerce.

Trustee for Investors: Powers and Limitations (with livinglies annotations)— Critical in Your Presentation in Court

The complete Trustee powers from a standard Pooling and Servicing agreement:

Section 8.01 Duties of the Trustee. The Trustee, before the occurrence of an Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform such duties and only such duties as are specifically set forth in this Agreement. In case an Event of Default has occurred and remains uncured, the Trustee shall exercise such of the rights and powers vested in it by this Agreement, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs.

The Trustee, upon receipt of all resolutions, certificates, statements, opinions, reports, documents, orders or other instruments {items for discovery} furnished to the Trustee that are specifically required to be furnished pursuant to any provision of this Agreement shall examine them to determine whether they are in the form required by this Agreement. The Trustee shall not be responsible for the accuracy or content of any resolution, certificate, statement, opinion, report, document, order, or other instrument.{Thus the Trustee cannot vouch for any allegation or fact or instruction issued with regard to delinquency, default or foreclosure}

No provision of this Agreement shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct.{This is why the Trustee can and should be named as a potential defendant in a demand letter and defendant in a lawsuit}

Unless an Event of Default known to the Trustee has occurred and is continuing:

(a) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Agreement, the Trustee shall not be liable except for the performance of the duties and obligations specifically set forth in this Agreement, no implied covenants or obligations shall be read into this Agreement against the Trustee, and the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed
therein, upon any certificates or opinions furnished to the Trustee and conforming on their face to the requirements of this Agreement
which it believed in good faith to be genuine and to have been duly executed by the proper authorities respecting any matters arising hereunder;

(b) the Trustee shall not be liable for an error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it is finally proven that the Trustee was negligent in ascertaining the pertinent facts; and

(c) the Trustee shall not be liable with respect to any action taken, suffered, or omitted to be taken by it in good faith in accordance with the direction of the Holders of Certificates evidencing not less than 25% of the
Voting Rights of Certificates relating to the time, method, and place
of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Agreement.{authority required from certificate holders — the real holders in due course}

Section 8.02 Certain Matters Affecting the Trustee and the Custodians. Except as otherwise provided in Section 8.01:

(a) the Trustee and the Custodians {note the TWO parties distinguished: Trustees and Custodians} may request and rely upon and shall be protected in acting or refraining from acting upon any resolution, Officer’s Certificate, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties {items for discovery} and neither the Trustee nor the Custodians shall have responsibility to ascertain or confirm the genuineness of any signature of any such party or parties;{this means that nobody from Trustee has authority to sign a sworn affidavit or give sworn testimony in court since they need know nothing in their own personal knowledge, can rely on the statements of others (hearsay) and are not bound by the truth or falsity of any fact.}

(b) the Trustee and the Custodians may consult with counsel, financial advisers or accountants and the advice of any such counsel, financial advisers or accountants and any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such Opinion of Counsel; {more items for discovery}

(c) neither the Trustee nor the Custodians shall be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement;{so they are admitting that if there is any break in the chain of title, any defect in the securities, negotiability of the instruments, or any payment received that occurred between any party on behalf of the borrower to any party on behalf of the investor, they will not and cannot vouch for authenticity of the alleged default, but they can “say” it. This is the difference between a letter and a sworn document or testimony}

(d) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing to do so by the Holders of Certificates evidencing not less than 25% of the Voting Rights allocated to each Class of Certificates;{Discovery item: did the Trustee make any investigation? If yes, what did they find out? If Yes, why did they do so despite the clear wording that says they didn’t have any obligation to investigate and obviously were not expected to perform one? If no, then are they not admitting they don’t know the status of the loan, ownership of the note, enforceability of the mortgage  or existence of the obligation?}

(e) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, accountants or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agents, accountants or attorneys appointed with due care by it hereunder; provided, further, the Trustee shall not be responsible for any act or omission of any Custodian;{Discovery: who were the agents, accountants or attorneys appointed? Who is responsible for the negligence, fraud or malpractice of the agents, accountants or attorneys? If there was such an appointment by this Trustee, how was it done? Where is the document that shows that? How do we know the lawyer in court is actually representing the Trustee, the Investors, the servicer or someone else?}

(f) the Trustee shall not be required to risk or expend its own funds or otherwise incur any financial liability in the performance of any of its duties or in the exercise of any of its rights or powers hereunder if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not assured to it;{so how did the Trustee get its authority to proceed? Who gave it the authroity? Who is paying the Trustee, its agents, accountants and attorneys? Where are they getting the money for these payments? Is there any undisclosed third party involved (Champerty and maintenance, — yes it still exists)}

(g) the Trustee shall not be liable for any loss on any investment of funds pursuant to this Agreement;

(h) unless a Responsible Officer of the Trustee has actual knowledge of the occurrence of an Event of Default, the Trustee shall not be deemed to have knowledge of an Event of Default, until a Responsible Officer of the Trustee shall have received written notice thereof; and

  • (i) the Trustee shall be under no obligation to exercise any of the trusts, rights or powers vested in it by this Agreement or to institute, conductor defend any litigation hereunder or in relation hereto at the request, order or direction of any of the Certificate holders, pursuant to this Agreement, unless such Certificate holders shall have offered to the Trustee reasonable security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities which may be incurred therein or thereby. {THUS since the Trustee is NEVER deemed to have actual knowledge because the Trustee is required ONLY to rely upon the representations of others without doing any investigation on its own, it may never, in its own name bring a foreclosure action or order the foreclosure sale of any property. The certificate holders, unless they have received information from a source other than the Trustee (hearsay) are getting their information from the Trustee. Thus they are in no better position than the Trustee to know anything. This brings to the forefront the most basic rule of evidence: a witness must take an oath, have perceived something by their own senses, recall what they saw, and be able to communicate it. The real parties are the investors and the borrowers. Everyone else is just a middleman and none of the middlemen are taking responsibility for knowing anything, doing anything or vouching for anything. Only a party who can offer admissible evidence may sue for any relief. In no case we have seen so far, has any party ordered a notice of sale or filed a foreclosure suit with the ability to offer admissible evidence. They are using conventional thinking to get around the rules of evidence. And they don’t want anyone in court who really knows because if they tell the truth, the testimony will be that the parties in court have all been paid in full, received fees that were never disclsoed to the borrower or the investor, and that they have no idea whether the ivnestor has been partially or completely paid through reserves, colalteralization, insurance, credit default swaps or government bailouts. }

Section 8.03 Trustee Not Liable for Certificates or Mortgage Loans.
The recitals contained herein and in the Certificates shall be taken as the statements of the Depositor and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Agreement or of the Certificates or of any Mortgage Loan or related document. The Trustee shall not be accountable for the use or application by the Depositor, the Securities Administrator or a Servicer of any funds paid to the Depositor, the Securities Administrator or a Servicer in respect of the Mortgage Loans or deposited in or withdrawn from any Collection Account or the Distribution Account by the Depositor, the Securities Administrator or a Servicer.{This is your authority for saying these people need to be brought to court to account for the money that was paid by the borrower and third parties and to account for the alleged assignemnts or negotiation of notes, whose terms were changed by the very act of pooling and then collateralizing within the Special Purpose Vehicle}

The Trustee shall have no responsibility for filing or recording any financing or continuation statement in any public office at any time or to otherwise perfect or maintain the perfection of any security interest or lien granted to it hereunder (unless the Trustee shall have become the successor servicer).{Trustee cannot even vouch that the security still exists, ever existed or whether it is still enforceable}

Section 8.04 Trustee May Own Certificates. The Trustee in its individual or any other capacity may become the owner or pledgee of Certificates with the same rights as it would have if it were not the Trustee.{Discovery item: did this happen? Where are these certificates now?}

Section 8.05 Trustee’s Fees and Expenses. As compensation for its activities under this Agreement, the Trustee shall be paid its fee by the Securities Administrator from the Securities Administrator’s own funds pursuant to a separate agreement. {Discovery Item} The Trustee and any director, officer, employee, or agent of the Trustee shall be indemnified by the Trust Fund against any loss, liability, or expense (including reasonable attorney’s fees) resulting from any error in any tax or information return prepared by any Servicer or incurred in connection with any claim or legal action relating to (a) this Agreement, (b) the Certificates or the Interest Rate Swap Agreement, or (c) the performance of any of the Trustee’s duties under this Agreement (including any unreimbursed out-of-pocket costs resulting from a servicing transfer), the Certificates or the Interest Rate Swap Agreement, other than any loss, liability, or expense (i) resulting from any breach of any Servicer’s obligations in connection with this Agreement for which the related Servicer has performed its obligation to indemnify the Trustee pursuant to Section 6.05, (ii) resulting from any breach of any Responsible Party’s obligations in connection with this Agreement for which the related Responsible Party has performed its obligations to indemnify the Trustee pursuant to Section 2.03(j) or (iii) incurred because of willful misconduct, bad faith, or negligence in the performance of any of the Trustee’s duties under this Agreement. This indemnity shall survive the termination of this Agreement or the resignation or removal of the Trustee under this Agreement. Without limiting the foregoing, except as otherwise agreed upon in writing by the Depositor and the Trustee, and except for any expense, disbursement, or advance arising from the Trustee’s negligence, bad faith, or willful misconduct, the Trust Fund shall pay or reimburse the Trustee, for all reasonable expenses, disbursements, and advances incurred or made by the Trustee in accordance with this Agreement with respect to:


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Lawyers Workshop Registration Form – November 2, 2009

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How to Save $$ while attending Garfield Event(s) Clearwater Beach FL November 1-2, 2009

* Reserve Workshop Seat prior to Oct 23, 2009 for Early Bird discount on Registration

* Mention Garfield’s Foreclosure Defense Group when reserving rooms to get special Group Rate of $99

* Check  into flying into  Tampa/St. Petersburg and other airports within a short drive multiple airports in the area 

* Consider Southwest Airlines only $200-$300 for RT


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