OK, We Fabricated and Forged the Documentation. So What?

As Bill Paatalo (who brought this to my attention) says: “You can’t make this s–t up.” Reality is much stranger than fiction. This marks the point where we have entered the Twilight Zone in law where the rule of law is just a guidepost not to be confused with the real rule of men.

Sheila Bair  was forced out of the Chairmanship of the FDIC by Geithner when it became obvious that this was a game she was unwilling to play. Even worse she was making her opposition public, essentially saying that the government was becoming complicit in a criminal conspiracy (not her exact words, publicly but evidence suggests she said exactly that to Geithner and probably Obama).

Let us help you plan your discovery requests and defense narrative: 202-838-6345. Ask for a Consult.
Purchase now Neil Garfield’s Mastering Discovery and Evidence in Foreclosure Defense webinar including 3.5 hours of lecture, questions and answers, plus course materials that include PowerPoint Presentations. Presenters: Attorney and Expert Neil Garfield, Forensic Auditor Dan Edstrom, Attorney Charles Marshall and and Private Investigator Bill Paatalo. The webinar and materials are all downloadable.
Get a Consult and TEAR (Title & Encumbrances Analysis and & Report) 202-838-6345. The TEAR replaces and greatly enhances the former COTA (Chain of Title Analysis, including a one page summary of Title History and Gaps).
https://www.vcita.com/v/lendinglies to schedule CONSULT, leave message or make payments. It’s better than calling!

seeFOIA Request Reveals Servicer’s “Justification” for Fraud In Fabricating Limited Power of Attorney from FDIC

FACTS as admitted by the Servicer: They fabricated and forged documents to create a chain of title. They justified it on grounds that it would be cost prohibitive to get a title report and then request or demand execution of affidavits and other documents that would clear up the presently fatally defective chain of title. The present title shows that they have no legal ownership or other interest in the loan. The fabrication and forgery is just an efficient way to change title, such that it reflects the self proclaimed interests of parties who wish to enter the foreclosure arena.

If you don’t see what is wrong with that, I don’t know why you are reading this article.

By the same logic Homeowners could do the same thing — fabricate and forge satisfactions of mortgage, with one minor exception, to wit: Homeowners go to jail for such activities whereas banks continue to suck the lifeblood out of the American and indeed the world economy.

And THIS is why, according to all legal doctrine until the securitization era began, no party to litigation was entitled to a legal presumption of facts when they had engaged in patterns of conduct in which they had forged, fabricated or otherwise attempted to use self-serving documents that were neither official documents nor otherwise credible. The fact that presumptions continue to be used shows just how much the courts have thrown themselves behind a political decision rather than coming to legal decisions.

Presumptions are simply procedural gimmicks to assume in evidence that which is obvious and credible. Up until now they were not used, nor was their use affirmed on appeal, when the facts assumed were not obvious and subject to doubt as to credibility.

There is no workaround on that — it is in every book, treatise, article and case decision on evidence — until now. Where there was any doubt about whether the “presumption” depended upon a self serving document prepared for trial, the simple fall back position, never reversed on appeal, was that the party seeking to apply legal presumptions in proving their case, had to prove the facts without the presumptions.

So this “explanation” of bad behavior made right might be reframed like this: “It’s not economical for us to try you for murder so we are just going to presume you did it.” There is a simple fix to this obvious breach of due process: force the state to actually prove each fact instead of relying on presumptions or assumptions. That is all we ask — make the foreclosing party prove each element and each fact of their case.

Try a due process pilot program as if due process was just a suggestion. Force the foreclosers to prove each element and each fact of their case. If any of them win based upon actual facts that prove the convergence of the money trail and the paper trail then fine, keep presuming that the foreclosers are entitled to a presumption. But if they can’t prove that the way everyone had to before the mortgage meltdown, then they should lose the right to prove liability by legal presumption and lose the right to prove damages by legal presumption.

Remember even in a default situation they still must prove actual damages. Spoiler alert, they can’t. They have no person or entity that they can point to and say “Yes, they are the obligee of the debt and we represent them.”


Definition of Obligee:

The individual to whom a particular duty or obligation is owed.

The obligation might be to pay a debt or involve the performance or nonperformance of a particular act.

The term obligee is often used synonymously with creditor.

Definition of Obligor:

The individual who owes another person a certain debt or duty.

The term obligor is often used interchangeably with debtor.

Top New York Judge Urges Greater Legal Rights for the Poor

Editor’s Note: Judge Lippman is certainly onto something here. There is no doubt that the poor get the short end of the stick when it comes to legal matters. Whether this will have any effect on foreclosures is a question that cannot be answered as yet. With more people moving into the poverty level due to declining real wages and joblessness, it would certainly be a step in the right direction to provide legal assistance to people when it comes to having a roof over their head.

With foreclosures the problem is getting an attorney who understands that most mortgages these days are securitized and that this has important ramifications for defense of foreclosures and evictions. it is entirely possible that the wrong party is acting against the tenant or owner or that the mortgage has been paid in whole or in part through various credit enhancement instruments that protect the creditor (the one who actually advanced the money) from loss.

April Charney is leading the way for Legal Aid and other organizations to provide competent help for indigent or financially challenged persons in the cross hairs of some pretender lender. There is no way for her to do it alone. Inch by inch we seem to be crawling away from this mess. But progress is slow and might be illusory. Recent events in Europe show that these manipulations of exotic financial instruments are wreaking havoc on everyone.

The real answer is to bust the Oligarchy of banking interests who have literally cornered the market on money itself. That takes a lot of will power, a lot of people demonstrating their willingness to engage the banks, and a lot of politicians who need to be coerced into blocking the financial sector from meddling in our lives.
May 3, 2010

Top New York Judge Urges Greater Legal Rights for the Poor


New York’s chief judge called on Monday for a new guarantee of a lawyer for poor people in civil cases, like suits over eviction and other disputes where basic needs are at stake, pushing the state to the forefront of a national effort to expand the right to representation for the indigent.

In a speech in Albany, the chief judge, Jonathan Lippman, said his proposal, the first such plan by a top court official in New York, reflected a commitment by the state’s courts “to bring us closer to the ideal of equal access to civil justice” that he described as one of the foundations of the legal system.

“I am not talking about a single initiative, pilot project or temporary program,” Judge Lippman said, “but what I believe must be a comprehensive, multifaceted, systemic approach to providing counsel to the indigent in civil cases.”

There was no price tag on the proposal, which could cost many millions of dollars. But Judge Lippman sought to avoid having it fall victim to the politics of the recession by announcing that he would hold hearings before pushing a detailed plan forward next year.

The government has been required to provide lawyers for people facing jail because of criminal charges since a landmark ruling by the United States Supreme Court in 1963, Gideon v. Wainwright.

But that protection has never included civil cases. Lawyers for the poor argue that it should because civil courts are where people who cannot afford lawyers often face the loss of the necessities of life in lopsided legal battles. Opponents say more government-paid lawyers for the poor will paralyze the courts with needless disputes.

Some Democratic legislators said they were interested in Judge Lippman’s idea. In a statement, Speaker Sheldon Silver said the Assembly had been a strong supporter of civil legal services for nearly 20 years.

Austin Shafran, a spokesman for the State Senate Democratic leader, John L. Sampson, said the senator had always supported programs that provided lawyers for indigent New Yorkers and was looking carefully at what Judge Lippman had put forward.

Judge Lippman, a longtime court administrator, has set an unabashedly liberal course as chief judge, a position he assumed last year after he was nominated by Gov. David A. Paterson. In addition to a seat on the highest court in New York, the chief judge also has a broad role as the top administrative official of the state’s sprawling court system.

The speech may well give Judge Lippman national prominence in efforts in recent years by lawyers for the poor, consumer advocates and some legislators around the country to expand the right to a lawyer. California passed a law in 2009 intended to expand legal counsel in civil cases.

There have been local bills elsewhere, including in New York City, and lawsuits in several states arguing that the protections of the legal system are often meaningless to people too poor to hire lawyers. In 2006, the American Bar Association said there should be a right to a lawyer in civil cases where basic human needs were at stake, like those dealing with shelter, sustenance, safety, health or child custody.

Advocates for the right to a lawyer in civil cases — some of them call it a “civil Gideon” right, referring to the 1963 ruling for criminal cases — said Monday that Judge Lippman’s speech was one of the most notable steps in their efforts.

“It is a very important statement, both in New York and nationally, about the need for access to justice. I don’t know that any stronger voice has come forward,” said Donald Saunders, a vice president of the National Legal Aid and Defender Association, the largest national group of lawyers for the poor.

In his speech, Judge Lippman said the recession had swelled the ranks of New Yorkers who could not afford lawyers facing civil legal problems to more than two million a year.

Judge Lippman said he would hold hearings beginning this fall in every part of the state to assess the extent and nature of the unmet need for civil legal representation. He said the hearings would end with recommendations to the Legislature of the kinds of civil cases in which legal representation should be required and what financing would meet those needs.

Legal Aid and other providers of civil legal representation to poor people in New York State operate on about $200 million a year, officials say, a combination of federal, state, local and privately raised money. Those organizations said that they were unable to meet the needs but that the extent of the shortfall was not known.

Steven Banks, the attorney in chief of the Legal Aid Society in the city, called it “a huge step” for the leader of the court system to endorse the idea that poor people had a right to a lawyer, whether they found themselves in criminal or civil court.

Rigging the Bids at Foreclosure Sales

From Dan Edstrom:

Department of Justice Press Release

For Immediate Release
April 16, 2010 United States Attorney’s Office
Eastern District of California
Contact: (916) 554-2700
Stockton Real Estate Executive Pleads Guilty to Bid Rigging at Auctions of Foreclosed Properties

SACRAMENTO, CA—United States Attorney Benjamin B. Wagner and Assistant Attorney General Christine Varney of the Department of Justice’s Antitrust Division announced today that Anthony B. Ghio, 43, of Stockton, pleaded guilty today before United States District Judge Edward J. Garcia to conspiring to rig bids at public real estate foreclosure auctions held in San Joaquin County.

These charges arose from an ongoing federal antitrust investigation of fraud and bidding irregularities in certain real estate auctions in San Joaquin County. The investigation is being conducted by the U.S. Attorney’s Office for the Eastern District of California, the Antitrust Division’s San Francisco Office, the Federal Bureau of Investigation, and the San Joaquin County District Attorney’s Office.

According to Assistant United States Attorneys Robin R. Taylor and Russell L. Carlberg, who are prosecuting the case with assistance from Barbara Nelson and Richard Cohen of the Antitrust Division, Ghio admitted in his guilty plea that he conspired with a group of real estate speculators who agreed not to bid against each other at certain public real estate foreclosure auctions in San Joaquin County. The primary purpose of the conspiracy was to suppress and restrain competition and obtain selected real estate offered at San Joaquin County public foreclosure auctions at noncompetitive prices.

Court documents show that after the conspirators’ designated bidder bought a property at a public auction, they would hold a second private auction. Each participating conspirator would submit bids in the private auction above the public auction price. The conspirator who bid the highest amount at the end of the private auction won the property. The difference between the noncompetitive price at the public auction and the winning bid at the second auction was the group’s illicit profit, and it was divided among the conspirators in payoffs. Ghio participated in the bid-rigging scheme from April 2009 until October 2009.

Ghio is charged with bid rigging, a violation of the Sherman Act, which carries a maximum penalty of 10 years in prison and a $1 million fine. The maximum fine may be increased to twice the gain derived from the crime or twice the loss suffered by the victim of the crime, if either of those amounts is greater than the statutory maximum fine. The actual sentence, however, will be determined at the discretion of the court after consideration of any applicable statutory sentencing factors and the Federal Sentencing Guidelines, which take into account a number of variables.

The investigation is continuing. Anyone with information concerning bid rigging or fraud related to real estate foreclosure auctions should contact the Antitrust Division’s San Francisco Office at 415-436-6660 or visit http://www.justice.gov/atr/contact/newcase.htm, or the FBI’s Sacramento Division at 916-481-9110, or the U.S. Attorneys Office for the Eastern District of California at 916-554-2900.

Media inquiries to the U.S. Attorney’s Office should be directed to Lauren Horwood at 916-554-2706. Media inquiries regarding the department’s Antitrust Division should be directed to Gina Talamona at 202-514-2007.

This law enforcement action is part of President Barack Obama’s Financial Fraud Enforcement Task Force.

President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

One component of the FFETF is the national Mortgage Fraud Working Group, co-chaired by U.S. Attorney Wagner.

Dan Edstrom

Foreclosure Prevention 1.1

Nobody ever thought that returning a lady’s purse to her after a purse snatcher ran away with it was a gift. So why is anyone contesting returning the purse to homeowners who had their lives snatched from them?

The baby steps of the Obama administration are frustrating. Larry Summers, Tim Geithner and those who walk with Wall Street are using ideology and assumptions instead of reality and facts.

First they started with the idea of modifications. That would do it. Just change the terms a little, have the homeowner release rights and defenses to what was a completely fraudulent and deceptive loan transaction (and a violation of securities regulations) and the foreclosure mess would end. No, it doesn’t work that way.

The reality is that these homeowners are being drained every day and displaced from their lives and homes by the consequences of a scheme that depended upon fooling people into signing mortgages under the false assumption that the appraisal had been verified and that the loan product was viable. All sorts of tricks were used to make borrowers think that an underwriting process was under way when in fact, it was only a checklist, they were even doing title checks (using credit reports instead), and the viability of the loan was antithetical to their goals, to wit: to have the loans fail, collect on the insurance and get the house too without ever reporting a loss.

Then it went to modification through interest rate reduction and adding the unpaid monthly payments to the end of the mortgage. Brilliant idea. The experts decided that an interest rate reduction was the equivalent of a principal reduction and that everything would even out over time.

Adding ANYTHING to principal due on the note only put these people further under water and reduced any incentive they had to maintain their payments or the property. Reducing the interest was only the equivalent of principal reduction when you looked at the monthly payments; the homeowner was still buried forever, without hope of recovery, under a mountain of debt based upon a false value associated with the property and a false rating of the loan product.

Adding insult to injury, the Obama administration gave $10 billion to servicing companies to do modifications — not even realizing that servicers have no authority to modify and might not even have the authority to service. Anyone who received such a modification (a) got a temporary modification called a “trial” (b) ended up back in foreclosure anyway (c) was used once again for unworthy unauthorized companies to collect even more illegal fees and (d) was part of a gift to servicers who were getting a house on which they had invested nothing, while the real source of funds was already paid in whole or in part by insurance, credit default swaps or federal bailout.

Now the Obama administration is “encouraging” modifications with reductions in principal of perhaps 30%. But the industry is pushing back because they don’t want to report the loss that would appear on their books now, if a modification occurred, when they could delay reporting the “loss” indefinitely by continuing the foreclosure process. The “loss” is fictitious and the push-back is an illusion. There is no loss from non-performance of these mortgages on the part of lending banks because they never lent any money other than the money of investors who purchased mortgage-backed bonds.

You want to stop the foreclosures. It really is very simple. Stop lying to the American people whether it is intentional or not. Admit that the homes they bought were not worth the amount set forth in the appraisal and not worth what the “lender” (who was no lender) “verified.” Through criminal, civil and/or administrative proceedings, get the facts and change the deals like any other fraud case. Nobody ever thought that returning a lady’s purse to her after a purse snatcher ran away with it was a gift. So why is anyone contesting returning the purse to homeowners who had their lives snatched from them?

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.

Give me a little help here: Trusts, REMICs, and the Authority of the Trustee or Trustee’s Attorney to Represent

When U.S. Bank comes in as Trustee for the the holders of series xyz etc., the use of the words Trustee and series certificates give it an air of legitimacy. But this is probably just another bluff. Reading the indenture on the bond (mortgage backed security) and the prospectus, you will see that the “Trust” may or may not be the the Special Purpose Vehicle that issued the bonds.

And of course I remind you that the “borrower” (whom I call an “issuer” for reason explained in other posts) signed a note with one set of terms and the source of funding, the investor received a bond with another set of terms (and parties) who in turn received some sort of transmittal delivery or conveyance of a pool of “assets” from a pool trustee or other third party who obtained the “assets” under an entirely different set of terms (and parties) including a buy back provision which would appear to negate the entire concept of any unconditional “assignment” (a primary condition for negotiability being the absence of conditions and the certainty that the instrument sets forth all obligations without any “off-record” activity creating a condition on payment).

In short, we have a series of independent contracts that are part of a common scheme to issue unregulated securities under false pretenses making the “borrower” and the “investor” both victims and making the “borrower” an unknowing issuer of an instrument that was intended to be used as a negotiable instrument and sold as as a security.

One of the more interesting questions raised by another reader is this issue of trusts. care to comment on the following? I’ll make it an article and post it. Send it to me at ngarfield@msn.com. Want to be a guest on the podcast show? Submit an article that gets posted.

1. What is a trust? How is it defined? How is it established for legal existence? Does it need to be registered or recorded anywhere?
2. Can a trust legally exist if it is unfunded? (If there is nothing in the trust to administer, is there a trust?)
3. What are the powers of the Trustee of an unfunded trust? Can a Trustee claim apparent or actual authority to represent the holders of bonds (mortgage backed securities) issued by a Special Purpose Vehicle — as an agent? as a trustee? Again what are the “Trustee’s” (agent?) powers?
4. Who can be a Trustee.
5. Can a financial services entity otherwise qualified to do business in the state claim to be an institutional trustee?
6. Can a financial services entity that does not qualify to do business in the state, not chartered or licensed do business as a bank? a lender? a securities issuer? a trustee? a trust company?
7. If the mortgage backed securities (bonds) are sold to investors what asset or res can be arguably in the trust?
8. If the mortgage backed securities (bonds) contain an indenture that purports to convey a pro rata share of the mortgages and notes in a pool to the owner of the certificate of mortgage backed security (bond) what asset or res can be arguably in the trust?
9. If the Special Purpose Vehicle has filed with the IRS as a REMIC conduit (see below) then how it own anything since by definition it is a conduit and must act as a conduit or else it loses tax exempt status and subjects itself to income and capital gains taxes?


Real Estate Mortgage Investment Conduits, or “REMICs,” are a type of special purpose vehicle used for the pooling of mortgage loans and issuance of mortgage-backed securities. They are defined under the United States Internal Revenue Code (Tax Reform Act of 1986), and are the typical vehicle of choice for the securitization of residential mortgages in the US.

REMIC usage

REMICs are investment vehicles that hold commercial and residential mortgages in trust and issue securities representing an undivided interest in these mortgages. A REMIC assembles mortgages into pools and issues pass-through certificates, multiclass bonds similar to a collateralized mortgage obligation (CMO), or other securities to investors in the secondary mortgage market. Mortgage-backed securities issued through a REMIC can be debt financings of the issuer or a sale of assets. Legal form is irrelevant to REMICs: trusts, corporations, and partnerships may all elect to have REMIC status, and even pools of assets that are not legal entities may qualify as REMICs.[2]

The Tax Reform Act eliminated the double taxation of income earned at the corporate level by an issuer and dividends paid to securities holders, thereby allowing a REMIC to structure a mortgage-backed securities offering as a sale of assets, effectively removing the loans from the originating lender’s balance sheet, rather than a debt financing in which the loans remain as balance sheet assets. A REMIC itself is exempt from federal taxes, although income earned by investors is fully taxable. As REMICs are typically exempt from tax at the entity level, they may invest only in qualified mortgages and permitted investments, including single family or multifamily mortgages, commercial mortgages, second mortgages, mortgage participations, and federal agency pass-through securities. Nonmortgage assets, such as credit card receivables, leases, and auto loans are ineligible investments. The Tax Reform Act made it easier for savings institutions and real estate investment trusts to hold mortgage securities as qualified portfolio investments. A savings institution, for instance, can include REMIC-issued mortgage-backed securities as qualifying assets in meeting federal requirements for treatment as a savings and loan for tax purposes.

To qualify as a REMIC, an entity or pool of assets must make a REMIC election, follow certain rules as to composition of assets (by holding qualified mortgages and permitted investments), adopt reasonable methods to prevent disqualified organizations from holding its residual interests, and structure investors’ interests as any number of classes of regular interests and one –- and only one -– class of residual interests.[3] The Internal Revenue Code does not appear to require REMICs to have a class of regular interests.[4]

Qualified mortgages

Qualified mortgages encompass several types of obligations and interests. Qualified mortgages are defined as “(1) any obligation (including any participation or certificate of beneficial ownership therein) which is principally secured by an interest in real property, and is either transferred to the REMIC on the startup day in exchange for regular or residual interests, or purchased within three months after the startup day pursuant to a fixed-price contract in effect on the startup day, (2) any regular interest in another REMIC which is transferred to the REMIC on the startup day in exchange for regular or residual interests in the REMIC, (3) any qualified replacement mortgage, or (4) certain FASIT regular interests.”[5] In (1), “obligation” is ambiguous; a broad reading would include contract claims but a narrower reading would involve only what would qualify as “debt obligations” under the Code.[6] The IRC defines “principally secured” as either having “substantially all of the proceeds of the obligation . . . used to acquire or to improve or protect an interest in real property that, at the origination date, is the only security for the obligation” or having a fair market value of the interest that secures the obligation be at least 80% of the adjusted issue price (usually the amount that is loaned to the mortgagor)[7] or be at least that amount when contributed to the REMIC.[8]

Permitted investments

Permitted investments include cash flow investments, qualified reserve assets, and foreclosure property.

Cash flow investments are temporary investments in passive assets that earn interest (as opposed to accruing dividends, for example) of the payments on qualified mortgages that occur between the time that the REMIC receives the payments and the REMIC’s distribution of that money to its holders.[9] Qualifying payments include mortgage payments of principal or interest, payments on credit enhancement contracts, profits from disposing of mortgages, funds from foreclosure properties, payments for warranty breaches on mortgages, and prepayment penalties.[10]

Qualified reserve assets are forms of intangible property other than residual interests in REMICs that are held as investments as part of a qualified reserve fund, which “is any reasonably required reserve to provide for full payment of” a REMIC’s costs or payments to interest holders due to default, unexpectedly low returns, or deficits in interest from prepayments.[11] REMICs usually opt for safe, short term investments with low yields, so it is typically desirable to minimize the reserve fund while maintaining “the desired credit quality for the REMIC interests.”[12]

Foreclosure property is real property that REMICs obtain upon defaults. After obtaining foreclosure properties, REMICs have until the end of the third year to dispose of them, although the IRS sometimes grants extensions.[13] Foreclosure property loses its status if a lease creates certain kinds of rent income, if construction activities that did not begin before the REMIC acquired the property are undertaken, or if the REMIC uses the property in a trade or business without the use of an independent contractor and over 90 days after acquiring it.[14]

Regular interests

It is useful to think of regular interests as resembling debt; they tend to have lower risk with a corresponding lower yield. Regular interests are taxed as debt.[15] A regular interest must be designated as such, be issued on the startup day, contain fixed terms, provide for interest payments and how they are payable, and unconditionally entitle the holder of the interest to receive a specific amount of the principal.[16] Profits are taxed to holders.

Residual interests

Residual interests tend to involve ownership and resemble equity more than debt. However, residual interests may be neither debt nor equity. “For example, if a REMIC is a segregated pool of assets within a legal entity, the residual interest could consist of (1) the rights of ownership of the REMIC’s assets, subject to the claims of regular interest holders, or (2) if the regular interests take the form of debt secured under an indenture, a contractual right to receive distributions released from the lien of the indenture.”[17] The risk is greater, as residual interest holders are the last to be paid, but the potential gains are greater. Residual interests must be designated as such, be issued on the startup day, and not be a regular interest (which it can effortlessly avoid by not being designated as a regular interest). If the REMIC makes a distribution to residual interest holders, it must be pro rata; the pro rata requirement simplifies matters because it usually prevents a residual class from being treated as multiple classes, which could disqualify the REMIC.[18]


A REMIC can issue mortgage securities in a wide variety of forms: securities collateralized by Government National Mortgage Association (Ginnie Mae) pass-through certificates, whole loans, single class participation certificates and multiclass mortgage-backed securities; multiple class pass-through securities and multiclass mortgage-backed securities; multiple class pass-through securities with fast-pay or slow-pay features; securities with a subordinated debt tranche that assumes most of the default risk, allowing the issuer to get a better credit rating; and Collateralized Mortgage Obligations with monthly pass-through of bond interest, eliminating reinvestment risk by giving investors call protection against early repayment.

The advantages of REMICs

REMICs abolish many of the inefficiencies of collateralized mortgage obligations (CMOs) and offer issuers more options and greater flexibility..[19] REMICs have no minimum equity requirements, so REMICs can sell all of their assets rather than retain some to meet collateralization requirements. Since regular interests automatically qualify as debt, REMICs also avoid the awkward reinvestment risk that CMO issuers bear to indicate debt. REMICs also may make monthly distributions to investors where CMOs make quarterly payments. REMIC residual interests enjoy more liquidity than owner’s trusts, which restrict equity interest and personal liability transfers. REMICs offer more flexibility than CMOs, as issuers can choose any legal entity and type of securities. The REMIC’s multiple-class capabilities also permit issuers to offer different servicing priorities along with varying maturity dates, lowering default risks and reducing the need for credit enhancement.[20] REMICs are also fairly user-friendly, as the REMIC election is not difficult, and the extensive guidance in the Code and in the regulations offers “a high degree of certainty with respect to tax treatment that may not be available for other types of MBSs.”[21]

The limitations of REMICs

Though REMICs provide relief from entity-level taxation, their allowable activities are quite limited “to holding a fixed pool of mortgages and distributing payments currently to investors.”[22] A REMIC has some freedom to substitute qualified mortgages, declare bankruptcy, deal with foreclosures and defaults, dispose of and substitute defunct mortgages, prevent defaults on regular interests, prepay regular interests when the costs exceed the value of maintaining those interests,[23] and undergo a qualified liquidation,[24] in which the REMIC has 90 days to sell its assets and distribute cash to its holders.[25] All other transactions are considered to be prohibited activities and are subject to a penalty tax of 100%,[26] as are all nonqualifying contributions.

To avoid the 100% contributions tax, contributions to REMICs must be made on the startup day. However, cash contributions avoid this tax if they are given three months after the startup day, involve a clean-up call or qualified liquidation, are made as a guarantee, or are contributed by a residual interest holder to a qualified reserve fund.[27] Additionally, states may tax REMICs under state tax laws.[28] “Many states have adopted whole or partial tax exemptions for entities that qualify as REMICs under federal law.”[29]

REMICs are subject to federal income taxes at the highest corporate rate for foreclosure income and must file returns through Form 1066.[30] The foreclosure income that is taxable is the same as that for a real estate investment trust (REIT)[31] and may include rents contingent on making a profit, rents paid by a related party, rents from property to which the REMIC offers atypical services, and income from foreclosed property when the REMIC serves as dealer.[32]

The REMIC rules in some ways exacerbate problems of phantom income for residual interest holders, which occurs when taxable gain must be realized without a corresponding economic gain with which to pay the tax.[33] Phantom income arises by virtue of the way that the tax rules are written. There are penalties for transferring income to non-taxpayers, so REMIC interest holders must pay taxes on gains that they do not yet have.

Wells Fargo Steps on A Rake (We Hope) — EGGS — a New Country

And when that rakes hits them in the head, it will hopefully start a domino effect with the rest of the pretender lenders. OH Sup Ct – Wells Fargo Appeal

WF has decided to go for the brass ring by bringing an appeal from a case they lost. What they are saying to the Ohio Supreme Court is that if the borrower doesn’t raise the issue of “who owns the loan” early enough, they have waived it. They are also saying that when they finally record the assignment documents should have no effect on who can enforce the note and mortgage. Lastly, and most importantly they are really saying “this is the way we do things now and the courts must conform to industry practice even if it leads to unjust, inequitable, foul results.”All of this would have been considered a bad joke on a law school exam deserving an “F” for failure to have absorbed even the the most basic elements of Black Letter Law or even common decency. Now it is being treated as a real issue.

TRANSLATION: WF wants the Ohio Supreme Court to rule that ANYONE in the securitization chain can enforce the note and mortgage and that the effect on the marketability of title to the property and the clouding of title should be ignored. And they are saying they can do that without notifying, serving or suing anyone else in the securitization chain — even though WF never funded the loan, doesn’t have a dime in the deal and basically is using procedural devices the steal homes from unwary homeowners who do not have the legal expertise or access to to lawyers with sufficient understanding of securitization to oppose the obviously unfair and unjust result.

When we started this blog we predicted that the entire issue, in legal circles, would come down to whether the pretender lenders were successful in getting the courts to see only the individual transactions, rather than all the transactions in the securitization chain taken as a whole. In legal theory this is known as the single transaction doctrine or the step transaction doctrine. The basic test is whether the deal would have ever happened if all the parties knew what was going on. The answer is clearly “NO!”

  • Would an investor have knowingly invested cash into a pool where the loans were based upon obviously inflated property values that could not, would not and did not withstand the test of time (even a few weeks in some cases), NINJA (no income, no job, no assets, no problem) or were subprime borrowers with credit histories that were questionable?
  • Would investors have funded $800,000 for a bond (mortgage-backed security) where the proceeds were to be used for funding a $300,000 mortgage and the rest was kept for fees and profits? Who would buy something for investment where the moment they executed the paperwork they were taking a 60% loss? Never mind the fact that on the secondary market the bonds are selling for $.01-$.03 cents on the dollar. So what does that mean? They are either worthless, unenforceable or both. The mortgage and the note have been “separated” unlike what you have always heard about mortgages following notes and vice versa….the legal consequences of securitization are this…the note is at best unsecured and worst ….for the investor unenforceable.
  • Would borrowers have signed papers and put up their home for collateral if they knew about the inflated home values when they were depending upon the appraisers who were hired by the lenders?
  • Would investors have signed papers and put up the cash for the securitization chain if they knew about inflated securities values, bogus AAA ratings and security quality when they were depending upon rating agencies that were hired by investment banks who were the issuers of the bonds and insurance policies from companies insuring the potential default of the mortgages backing the cash flows that provided the return on the securities without  insufficient assets to cover the liability to pay in the event of a claim?
  • Would borrowers have signed papers knowing that the profit being made by intermediaries was as much or more than the amount of their loan? Obviously not.
  • How many borrowers would have knowingly signed papers and moved into a house from which it was certain they would be evicted? because the “lender” knew or should have know that mortgage would default with the first adjustment in payment…
  • This all occurred because Wall Street and all the intermediaries, banks, mortgage originators, mortgage brokers etc. kept the investor and the borrower from ever meeting or even knowing they existed.

Even if this tricky theory of WF was to be accepted arguendo, in order to have a complete adjudicate of all rights and obligations and in order to clear title and present a certificate of title that was marketable (not subject to being later overturned by claims of fraud on the court) ALL parties in the securitization scheme must be given notice and an opportunity to be heard. Just how well would some hedge fund like it if they received a notice from Wells Fargo or Countrywide or Ocwen or HSBC saying that there was a foreclosure going on, that the hedge fund was named as a defendant because their interest mortgages and notes they were told they had purchased were about to be extinguished and kept by an intermediary?

WF is trying to make the Ohio Supreme Court a party to fraud. Isn’t that why Countrywide was sued by Greenwich Financial et al? The investors were saying that Countrywide had no right to agree to short sales, modifications or anything else because the Hedge fund owned the loans not the servicer. This is not theoretical… it is actual. Why did “mortgage modifications” come to a halt last fall and early this year? Despite Obama and Financial Institution rehetoric about assisting homeowners and modifyin “millions of mortgages” the Greenwich vs. Countrywide suit “froze” all modifications because the parties, from servicers to “loan mod” companies claiming to assit borrowers have NO authority to modify the mortgage and would not act for fear of similar litigation. WF admits in its brief that the issue is multiple liability for the borrower because ANYONE in the securitization chain can sue, but says that doesn’t matter. Probably true. It doesn’t matter to these interlopers but it sure matters to the “borrower” and the “investor” (both of which could simply be regarded as VICTIMS). They are the only parties that stand to lose money or assets….READ: actually be damaged.

Of course the effect on title to the property is horrific. Think about it. You have a homeowner who is on the deed and upon foreclosure a certificate of title is issued to a party that was not named in the mortgage or deed of trust. You have a bondholder who has received a bond (mortgage backed security) listing the borrower and the security interest in the property as being conveyed to the investor. And it is all in the public record and public domain. You have a mortgage or deed of trust that when all the smoke and mirrors are cleared away says “we are going to pass the title around here to whomever we want and when we are good and ready we’ll tell you who has title.” So the notice of record declares that there will off-record transactions but that nobody can know until private parties declare the effect of those transactions. What they are advocating is the judicial act of ignoring the requirements of federal law, state law and common law.

Why don’t they just come out and say it like Dick Durbin, Senior Senator from Illinois said it “When it comes to banking, they own the the government.” They certainly used the government as their private bank account (TARP, Federal Bailout, U.S. Treasury bailout and credits, etc.). Why don’t we just come right out and say it — forget the constitution, forget the declaration of independence, forget the rule of law, forget federal legislation, executive agency rules, state laws and common law, we are now the Empire of Great Goldman Sachs.

And they are saying this is “industry practice” now. True, it IS industry practice and that is why the indsutry as a whole has put itself in the position of potential civil, administrative and criminal liability and sanctions. But up until the last few years any such practice would have have been properly condemned.

Everything is relative, a new “common industry practice” over a brief 5-10 years  is not what changes Black Letter Property Law, which for 200 plus years has been belonged to the states. Just because the banking industry quit crossing their T’s and dotting their I’s and devised a scheme, using their own proprietary, member based, electronic system(MERS) to avoid the various state and local taxes and fees dues states and counties for recording an interest in real property.

In a society of laws (not men) it is government that has the power to declare true title of record. It is only in a nation where we governed by the rule of privileged men instead of laws that we grant such powers to private entities and bind public branches of government to the edict of companies like MERS (Mortgage Electronic Registration Systems). EGGS seeks to complete its bloodless coup turning a republic into an oligopoly and unfortunately the Obama administration doesn’t seem to get it even though the citizens of this once great country see it clearly. If this doesn’t turn the rule of law on its head, I don’t know what does.

We can only hope that as these cases slowly move up the appellate process that all judges come to realize this is not an ideological issue it is a moral issue and a constitutional issue. We are under attack — even the people who don’t think they under attack. The most basic rights enunciated in the United States Constitution and the Declaration of Independence are being siphoned away. This is no longer about the people who have lost their homes or the people who are in the process of losing their homes. This is about the clear and present danger that any of us could lose anything we have by edict from the rich and powerful. If the Courts go along with it, we are doomed as a nation, as a society and as hope for the world.

The genius’ on Wall Street forgot that we are dealing with REAL property here and more importantly REAL people…and families. When we talk about “Black Letter Law” we are not just talking about circa last 200 years adopted from the English Lords where the issue of “standing”  came from….Go back to your Bible and read the Old Testament Book of Ruth….even Boaz took off his shoe and had 10 elders in the town witness the legal transfer of interest in real property from Naomi’s heirs so there would be no “cloud on his title” or one might say today that he “perfected his interest” in that property.  Wells Fargo’s argument is that a group of us in the mortgage industry came up with our own set of rules a few years ago and in recent history(the last 10 years not the last 100 years) it kind of became industry practice so ….we expect the courts ….after the fact to adapt to OUR standard….yeah right. Talk about a weak argument….it would get you an “F” in Law school…consequently the American public knows it doesn’t hold water.

Judges are you listening?

Time to Write to Obama, Senators and Congressman

Many Thanks to Ron Ryan, Esq. representing the Tucson Bankruptcy Bar for the submission below:

Editor’s Note: Obama wasn’t kidding when he he said the thing that humbled or frustrated him the most was how slow Washington is to “get on board.” Dick Durbin had the class and guts to say it outright. The banks own the city — and we the taxpayers gave them the money. WHERE IS YOUR OUTRAGE AND WHY ARE YOU NOT EXPRESSING IT?

The Troubled Asset Relief Program money went to bank holding companies that were (a) not holding any troubled assets and (b) not lenders.  While we can and should cut Obama some slack because this was Bush-Paulson policy, to quote his own words back to him “We Can’t Wait!” The vote on amending the bankruptcy showed just how much of a strangleghold the banks have on Washington. The oligopoly that controls our government is driving us into another ditch, this time worse than the one we just visited at the end of the Bush term.

The code was amended by Republican majority with the aid of Democrats to basically say that you can reduce the principal on,loans on 2nd, third, fourth, fifth and sixth residences but not on your first and only residence.  So the wealthy, the speculators and other people who essentially DON’T need the relief have it while 20 million homeowners are eating crow. This crisis was spawned and promoted by appraisal fraud at both ends of the spectrum — lying to the borrower about the value of the house and lying to the investor about the value of his investment. We are helping the liars.The recipients of taxpayer lenders are neither lenders nor holders of toxic assets.

Federal Policy and Federal Money should be first aimed at stabilizing the free fall of people who have lost all their wealth in the middle and lower “classes” and second at making some sort of restitution to the investors who lost all their money. (MBS securities are said to be trading thinly at 3 cents on the dollar). Current policy and programs continue the MYTH that the intermediaries who are foreclosing, collecting, or modifying loans have any legal right to do so. They don’t. And if the reality doesn’t sink in, then  the eventual remedy is going to be that 20 million homeowners are going to be sitting in homes that have no mortgage or note and the investors are left eating crow. It is inevitable that the judicial outcome is the elimination of virtually all securitized mortgages and the reversal of virtually all foreclosures of securitized debt.

From Ron Ryan and Tucson BKR Bar:

Log on to the National Association of Consumer Bankruptcy Lawyer to read more and with one click send a letter to your Senators and the President. NACBA has been a major lobbyist in favor of this amendment for over two years. When you write Obama, you might want to add a little bit about how he needs to use his muscle and insist on the Senators passing measures he is in favor of. It doesn’t seem that he has done much arm twisting, and it will be necessary if he wants to get anything done. http://www.nacba.com/. Also, here is the mailing address and fax number for the President:

President Barack Obama
The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500
via fax 202-456-2461

Cramdown Vote: Banks Bought Senators On The Cheap

Sen. Dick Durbin (D-Ill.) introduced legislation in the Senate Thursday which would allow homeowners in bankruptcy to renegotiate — or cramdown — mortgages with banks. His corresponding amendment to the House-passed bankruptcy reform bill is scheduled to be voted on at 2:30. (Read the whole thing.)
The measure is widely expected to fail, as crucial Democratic senators, whose votes are needed to overcome a filibuster, have publicly declared their opposition.
Democratic Sens. Ben Nelson (Neb.), Mary Landrieu (La.) and Jon Tester have indicated they plan to vote against the amendment. Sen. Evan Bayh (D-Ind.), who supported the bill last time around, expressed reluctance to back it this time. The banking industry has lobbied relentlessly against the reform.
On Monday night, Durbin concluded that the banks “frankly own the place.”

The place came (relatively) cheap.

The banking and real estate industry has funneled roughly $2,000,000 into Landrieu’s campaign coffers over her 12-year career, according to data from the Center for Responsive Politics. Bayh has taken in about $3.5 million. The financial sector is Nelson’s biggest backer; he’s taken $1.4 million from banks and real estate interests and another $1.2 million from insurance firms. Tester has fielded roughly half a million in his two years in office.

That’s about nine million dollars — far, far less than one percent of the amount taxpayers have spent to bail out the financial industry.

The opponents of the bill all say that industry influence is not the reason they’ll vote against the measure. Rather, they claim genuine policy disagreements: concerns it could raise interest rates or increase defaults, for instance.
But Durbin’s amendment is very narrowly tailored and would only allow mortgages signed before Jan. 1 to be modified — meaning that interest rates on future loans should be unaffected.
We’ll be watching the roll call and will post the rest of the no votes along with their take from the financial industry.
Durbin’s office has also calculated, relying on data from the Center for Responsible Lending and Moody’s, how many homes his bill would save and how much home equity it would preserve by preventing foreclosures, which damage entire neighborhoods.
Landrieu’s Louisiana could see 12,651 homes and $500 million of equity preserved. Tester’s Montana: 2,815 and $40 million. Nelson’s Nebraska: 3,763 and $140 million. Bayh’s Indiana: 27,960 homes and $590 million.
Across the United States, the measure is estimated to prevent 1.69 million foreclosures and preserve $300 billion in home equity.
Ryan Grim is the author of the forthcoming book This Is Your Country On Drugs: The Secret History of Getting High in America
Get HuffPost Politics On Facebook and Twitter!

Cuomo Spotted Appraisal Fraud as Core Problem in 2007

WaMu faulted on home loans

Colluded to inflate property values, N.Y. attorney general says


New York’s attorney general has accused Washington Mutual Inc. of pressuring a real estate appraisal company to deliver inflated home values in order to justify making loans, a practice that some appraisers have complained of increasingly in recent years.

The suit filed Thursday in a New York court by Attorney General Andrew Cuomo doesn’t name Seattle-based WaMu as a defendant. Instead, it charges First American Corp. and its eAppraiseIT subsidiary of engaging in “deceptive, fraudulent and illegal business practices.”

But WaMu figures prominently in the complaint: EAppraiseIT “improperly allows WaMu’s loan production staff to hand-pick appraisers who bring in appraisal values high enough to permit WaMu’s loans to close, and improperly permits WaMu to pressure eAppraiseIT appraisers to change appraisal values that are too low to permit loans to close.”

Cuomo said the actions of First American and Washington Mutual are indicative of widespread problems in the home-lending and appraisal businesses, and have contributed to turmoil in the housing market.

“It’s about time,” said Richard Hagar, who owns American Home Appraisals on Mercer Island, teaches anti-fraud classes and helped write Washington’s mortgage laws. “I have been surprised that no investigations have been started earlier on something like this.”

Graham Albertini, a former WaMu appraiser who now works for Hagar and teaches appraisal classes, said the bank’s appraisal process has been increasingly problematic since 2002.

“Starting in 2002 they shifted the emphasis from quality to quantity,” he said.

Appraisers have been complaining with increasing vehemence in recent years about the kind of pressure Cuomo described, saying it has enabled buyers to overpay, leaving many with mortgages for more than their homes were worth.

The traditional role of appraisers was to provide some protection for lenders, who wanted to make sure they could recoup their money if they had to foreclose. But in recent years, appraisers have increasingly been getting their work from mortgage originators representing lenders and banks that almost immediately sell off mortgages to Wall Street investors.

Meanwhile, a hot home market caused buyers to bid prices to new heights. Now that prices have started to level off in the Seattle area and decline elsewhere, some buyers are finding they cannot sell their homes for what they owe, leaving them with few alternatives to foreclosure.

“A lot of this doesn’t get revealed until you have a downturn in the housing market,” said Scott Jarvis, director of the state Department of Financial Institutions.

Washington Mutual said in a statement it is “surprised and disappointed by the allegations. … We are suspending our relationship with eAppraiseIT until we can further investigate the situation. We have absolutely no incentive to have appraisers inflate home values. In fact, inflated appraisals are contrary to our interests. We use third-party appraisal companies to make sure that appraisals are objective and accurate.”

“We vehemently disagree with (Cuomo’s) characterization of the facts,” Kenneth DeGiorgio, First American’s general counsel, said in a call with analysts, according to Bloomberg News. “We’re confident that once we’ve had the opportunity to set forth our response before an impartial arbiter, our activities will be found to be appropriate.”

Hagar said Washington Mutual never pressured him on an appraisal.

“That changed about five-ish years ago,” he said. “We started getting some pressure and they started looking for lesser appraisers — not the best qualified, but anyone who could get it done fast and cheap.”

But Hagar also said appraiser pressure is an industrywide problem, and acknowledged that WaMu has a better reputation than many lenders.

Albertini said WaMu had great standards for appraisals until 2002, when the company started automating much of its appraisal review work.

WaMu took no action in cases where reviews of homes that ended up in foreclosure found the original appraisal had been bad, Albertini said. “They would still hire that appraiser and they would never do anything to get that appraiser in trouble.”

In 2005, the company created a separate group of appraisers to quickly look over appraisals without doing a full review, and paid incentives based on how many they OK’d, Albertini said.

One 2006 appraisal pegged a West Seattle house at $2.5 million above its true value by comparing it with homes in Medina, but WaMu went ahead with the refinance loan, Albertini said. “They would pretty much just disregard what I did and then loan on the original appraisal.”

Albertini said he never received any pressure from WaMu managers to do anything wrong.

The lawsuit cites numerous e-mails that Cuomo says indicate the pressure Washington Mutual put on appraisers to be compliant, flexible and bank-friendly by delivering an appraisal price that met or exceeded the sales price. In one e-mail, a First American executive says the company could receive additional business from WaMu if disputes over appraisals are resolved.

In another e-mail, eAppraiseIT’s president signaled the company’s acquiescence to WaMu’s insistence that business be steered to “proven appraisers”: “We have agreed to roll over and just do it.”

Those e-mails “were not the idle chatter of disgruntled, low-level employees,” said Eric Corngold, executive deputy attorney general for economic justice.

EAppraiseIt executives on several occasions expressed uneasiness over the arrangement with WaMu and even concern that it might be illegal, e-mails cited in the suit indicate.

While investigators have pursued high-profile fraud cases in recent years, day-to-day pressure to meet inflated values has not been a priority, Hagar said. Washington regulators acknowledged this earlier this year, saying they have small staffs, few appraisers file formal complaints and pressure cases were often hard to pursue.

Hagar has been looking for action from federal regulators, given the size of banks such as WaMu. “It’s very, very difficult for any single state agency to go out after them,” he said. “Bravo that the attorney general from New York has the resources to go after them.”

Albertini noted that few appraisers ever get in trouble for bad appraisals, and penalties tend to be small.

“I think all it would take for appraisers to wise up and change is hearing about a few of them getting in trouble,” Albertini said. “There’s been nobody going after the bad appraisers.”

Washington Mutual wasn’t named as a defendant, Cuomo said, because state attorneys general are pre-empted from filing legal actions against financial institutions such as WaMu that are federally chartered.

Cuomo said his office will notify federal regulators of his office’s findings, adding that “the federal government is asleep at the switch once again.” Cuomo, who served as secretary of Housing and Urban Development in the Clinton administration, said the issue of appraisal fraud isn’t new. “We learned these lessons over 20 years ago” in the wake of the savings and loan crisis.

A spokesman for the federal Office of Thrift Supervision, which regulates WaMu, said it had just become aware of the suit and wasn’t able to comment.

The news delivered another hit to WaMu’s stock, already reeling from the hit to its earnings from housing-market turmoil. WaMu stock closed at $25.75, down $2.13 per share. Since trading at more than $45 this year, Washington Mutual has slid to its lowest closing price since October 2000.


New York Attorney General Andrew Cuomo is using e-mails as the basis for much of his case against a major real estate appraiser he accuses of “caving” in to pressure from a lender to inflate property values. Cuomo says the internal e-mails are also evidence of collusion between eAppraiseIT, a subsidiary of First American Corp., and Washington Mutual Inc. Excerpts:

  • Sept. 27, 2006: First American’s vice chairman said a Washington Mutual executive told him that cooperating could lead to more business: “If the appraisal issues are resolved and things are working well he would welcome conversations about expanding our relationship.”
  • Feb. 22, 2007: eAppraiseIT’s president told senior executives at First American: “We have agreed to roll over and just do it …”
  • April 4, 2007: eAppraiseIT’s executive vice president warned First American: “We as an AMC (Appraisal Management Co.) need to retain our independence from the lender or it will look like collusion … eAppraiseIT is clearly being directed who to select. The reasoning … is bogus for many reasons including the most obvious — the proven appraisers bring in the values.”SOURCE: New York State Office of the Attorney General/The Associated Press
  • P-I reporter Bill Virgin can be reached at 206-448-8319 or billvirgin@seattlepi.com.

    Appraisal Fraud: Rules set to cut off mortgage originators from appraisers this week

    Thank you Alan Baron for submitting the article.

    Editor’s Note: Maybe too little too late but a good start nonetheless. This issue is very simple. In the law it is called “fraud on the market.” Wall Street targeted specific swaths of geography and made it look like the entire market was going wild in that area. It wasn’t. It was all a big lie. They did it by inflating ALL appraisals in the area. This gave them the cover of  plausible deniability. In the end, the “appraisals” were improperly rendered and could not withstand the test of time or any other scrutiny. They used developer’s asking prices as comparables instead of sales. They used anything they could get their hands on to inflate the appraisals because Wall Street had already sold MBS securities and needed a place to put the money. They were running out of houses and borrowers so they did the next “best” thing: they artificially inflated the value of the houses.

    Any appraisal company that refused to “play the game” didn’t get any business. Any appraiser who did play according to the new rules was given lots of business and lavishly awarded excess fees, some of which were siphoned off as kickbacks to developers or other sellers or intermediaries.

    Bottom Line: Homeowners got the shaft. And the TARP money went to Bank Holding Companies that don’t lend money by definition. My solution is the same as it was in October, 2007: push the reset button — put everyone back into heir homes, get rid of these toxic unenforceable mortgages, restore wealth to the middle class, and strengthen the vast community banking system and credit unions (7,000 out of the total of 8,000 financial institutions in the U.S. alone). It’s not just good sense. It is reality. Without reality we have no credibility. Without credibility we can have no confidence.
    Rules set to cut off mortgage originators from appraisers this week


    Most people who buy a home know they pay to have it appraised but don’t know why and never see the resulting appraisal report.

    But bad appraisals played a big part in adding air to the recent real-estate bubble, which is why the appraisal world officially will be remade on May 1. Some professionals, however, say the changes will cause more problems than they fix, while even supporters say implementation is problematic.

    A quick history lesson. Appraisals historically protected lenders, ensuring the homes their customers wanted to buy were worth what customers wanted to pay (or at least as much as the mortgage). But the incentive for good appraisals faded in recent years with the rise of mortgage brokers who were paid per closed loan and of lenders who almost immediately resold mortgages on the secondary market.

    That’s why appraisers have been complaining loudly in recent years about brokers, loan officers and bank supervisors pressuring them to hit the value in the sales contract, regardless of a home’s condition.

    Enter New York Attorney General Andew Cuomo, who filed a lawsuit in late 2007 accusing First American Corp. and its eAppraiseIT subsidiary of improperly allowing Washington Mutual’s loan-production staff to hand-pick appraisers who brought in desired values and pressure appraisers to change values.

    Cuomo then subpoenaed to government-sponsored mortgage buyers Fannie Mae and Freddie Mac, which own or back most U.S. house mortgages. Cuomo wanted to know about loans Fannie and Freddie bought from banks, including Washington Mutual, and how they handled appraisals.

    Cuomo eventually got Fannie and Freddie to agree to a new Home Valuation Code of Conduct, which is what takes effect May 1. The importance of Fannie and Freddie to the mortgage industry, particularly now that many investors have fled the market, means pretty much every loan under their size limits will have to comply with the code.

    Last week, National Association of Realtors President Charles McMillan sent letters Fannie and Freddie, with copies to Cuomo and the Federal Housing Finance Agency (which oversees Fannie and Freddie), asking them to delay implementation of the code for a year so people would have more time to prepare.

    “Everybody’s going to get sucked into this eventually,” said Richard Hagar, a Mercer Island appraiser, said during a class he taught on the code earlier this month.

    So what does the code say? Basically, it’s that the people responsible for originating mortgages can have nothing to do with the appraisal process.

    The code also, among other things:

    * Prohibits lenders and third parties from influencing or attempting to influence appraisals.
    * Requires lenders to ensure that borrowers get a free copy of appraisal reports at least three business days before closing.
    * Allows lenders to have in-house appraisers, so long as they’re completely independent of sales staff and their compensation does not depend on their estimates or on loan closings.
    * Requires lenders to test a randomly selected 10 percent (or other statistically significant percentage) of appraisals and report any problems to Fannie Mae or Freddie Mac, which may force lenders to buy loans back from them.
    * Requires lenders to report appraisal misconduct to applicable state agencies.

    The code does not apply to Federal Housing Administration and Veterans Administration insured loans.

    Many of the rules mirror federal regulations, Hagar said. “They didn’t create a lot of new rules. They just pulled up older federal rules that people had forgotten.”

    Appraisers should get themselves on lenders’ lists of approved appraisers, Hagar said. “If you’re simply a form filler and your business is based upon mortgage brokers, you’re hosed.”

    The requirement to provide copies of appraisals to buyers before closing means buyers will be able to claim they relied on the reports in deciding to go through with a purchase, Hagar said. “I will tell you there are going to be a lot of successful lawsuits.”

    The code also calls for creation of an Independent Valuation Protection Institute that would run a telephone line and e-mail address to receive complaints about code violations and publish and promote best practices for independent valuation.

    “Everybody now has a place to squeal,” Hagar said.

    So what’s wrong with all this? Plenty, according to some appraisers and mortgage brokers.

    “I think this going to be incredibly bad for everyone involved,” said Jason Bloom, chairman of Elliott Bay Mortgage in Bellevue, president of the Washington Association of Mortgage Professionals and chairman of the state Mortgage Broker Commission.

    Bloom said his company is setting up a firewalled appraisal operation, but many small lenders and mortgage brokers are turning to appraisal-management companies. These companies provide a buffer, but also keep a large chunk of appraisal fees, forcing appraisers to make up lost revenue by doing more and faster reviews, he said.

    They also often assign appraisers unfamiliar with a particular area, Bloom said. “Neighborhood to neighborhood, mile to mile, the housing markets in a volatile environmental like this are different.”

    A year ago, Washington Real Estate Appraiser Commission Chairwoman Cheryl Kelley Farivar and Ralph Birkdahl, manager of the state Department of Licensing’s Appraiser Program, sent state Attorney General Rob McKenna a letter urging him to reject the code of conduct.

    Farival hasn’t grown any fonder of the code since then.

    “It doesn’t reach the intended goal of accuracy in appraisal,” she said earlier this month, asserting that most brokers have signed on with appraisal management companies.

    “We end up getting appraisal by the lowest bidder,” she said. “They’re looking for the cheapest appraiser and the fastest appraiser, and good appraisers are not cheap and they’re not generally fast.”

    Kevin Malesis, owner of Westside Appraisal, in Auburn, said appraisal-management companies generally keep 30 to 50 percent of the appraisal fee, which typically is around $500.

    Malesis said some of his best clients are moving to appraisal-management companies, but he generally declines appraisal-management company assignments unless they pay him his normal fee, which they rarely do.

    “You get only the least-experienced and the least-qualified appraisers, who are willing to take a huge pay cut to work,” he said. “I’m hoping it gets to a point where they realize their business model’s wrong.”

    Two of the nation’s largest home lenders, Countrywide (now owned by Bank of America) and Wells Fargo, have their own subsidiary appraisal-management companies, LandSafe and Rels Valuation.

    Seattle-based law firm Hagens Berman Sobol Shapiro has filed lawsuits against Countrywide/LandSafe and Wells Fargo/Rels, accusing each of improperly pressuring appraisers.

    Responding to questions about complaints against Rels, Wells Fargo spokeswoman Lara Underhill said the company is responsible for ensuring appraisers meet legal requirements and provide fair and accurate reports that meet legal standards.

    “While there are some administrative costs associated with these quality control measures, they act as important safeguards to protect both the borrower and the bank from appraisals done by unqualified and unlicensed individuals,” she said. “When Wells Fargo customers pay for the appraisal, those charges reflect the actual cost of providing the appraisal and Rels’ administrative costs.”

    Bank of America spokesman Terry Francisco said LandSafe follows federal regulatory guidance in “charging a reasonable fee to recapture the operating costs.”

    Also, he said: “LandSafe has the controls in place to ensure that appraisals are independent from the influence of persons who may financially benefit from the funding of a loan. No persons involved in the origination of a loan is ever in contact with an appraiser.”

    LandSafe has quality-control measures that screen some appraisals, particularly in areas where home values have fallen faster than the national average, has a confidential hotline that appraisers can call to report unethical behavior and puts the toll-free hotline number on every appraisal request, Francisco said.

    Farival noted that the Independent Valuation Protection Institute doesn’t exist yet. A Freddie Mac information sheet on the code says: “The Institute has not yet been established, and therefore, the provisions regarding the Institute are not effective.”

    In February, the National Association of Mortgage Brokers filed a lawsuit seeking to block the code, saying it amounted to rule-making without following federal requirements and arguing it would inhibit competition among mortgage originators and increase the cost of mortgages to consumers.

    On April 2, the association withdrew the lawsuit as a “strategic maneuver” to assess how it could refute the Federal Housing Finance Agency’s claim that courts cannot review their decisions while Fannie and Freddie are in federal conservatorship.

    “There were a lot of banks that held back a little bit on implementing this sooner, thinking (the National Association of Mortgage Brokers) would win or at least get a stay,” Bloom said. “I think the industry as a whole is surprised that its here and that it’s happening.”

    In his letter, McMillan said, among other things, that Fannie and Freddie only recently had provided substantial guidance on code implementation, states were just starting to enact laws to regulate appraisal management companies, and many lenders were not ready to implement the code.

    So what should happen?

    “I honestly think that this was one of the problems that sort of solved itself due to what has happened to the economy,” Farival said. “Since the mortgage crisis, lenders are doing what they should have always done, which is reviewing all the appraisals they receive.”

    Another important step is licensing mortgage brokers and the loan originators who work under them, Farival said. Washington now does this, but many other states don’t.

    Hagar also sees appraisal-management companies as an “extremely flawed” solution, at least in their current form.

    “There’s going to be a lot of users of these appraisal management company systems, and there’s going to still be a lot of problems,” he said. “But now it’s going to be more focused to a small group of people, and they can be regulated quicker, faster.”

    Regulators “are hiring lots and lots of auditors,” Hagar said. And, he added: “There’s a lot of a guys just looking to sue more people for not doing their job right.”

    Aubrey Cohen can be reached at 206-448-8362 or aubreycohen@seattlepi.com.

    The Big Takeover The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution

    The Big Takeover The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution MATT TAIBBI Posted Mar 19, 2009 12:49 PM ADVERTISEMENT It’s over — we’re officially, royally fucked. no empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country’s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire. The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That’s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no=2 0avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses). So it’s time to admit it: We’re fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we’re still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck — bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company’s CEO, actually compared it to catching a cold: “The marketplace is a pretty crummy place to be right now,” he said. “When the world catches pneumonia, we get it too.” In a pathetic attempt at name-dropping, he even whined that AIG was being “consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet’s investment portfolio down.” ADVERTISEMENT Liddy made AIG sound like an orphan begging in a soup line, hungry and sick from being left out in someone else’s financial weather. He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its “pneumonia” was making colossal, world-sinking $500 billion bets with money it didn’t have, in a toxic and completely unregulated derivatives market. Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires. People are pissed off about this financial crisis, and20about this bailout, but they’re not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

    The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — “our partners in the government,” as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout. The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at20the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers. I.

    PATIENT ZERO The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people’s money would make his dick bigger. That guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington’s deregulation of the Wall Street casino. “It’s all about the regulatory environment,” says a government source involved with the AIG bailout. “These guys look for holes in the system, for ways they can do trades without government interference.

    Whatever is unregulated, all the action is going to pile into that.” The mess Cassano created had its roots in an investment boom fueled in part by a relatively new type of financial instrument called a collateralized-debt obligation. A CDO is like a box full of diced-up assets. They can be anything: mortgages, corporate loans, aircraft loans, credit-card loans, even other CDOs. So as X mortgage holder pays his bill, and Y corporate debtor pays his bill, and Z credit-card debtor payshis bill, money flows into the box. The key idea behind a CDO is that there will always be at least some money in the box, regardless of how dicey the individual assets inside it are .. No matter how you look at a single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably sure that somebody is going to pay up. Say $100 is supposed to come into the box every month. Even in an apocalypse, when $90 in payments might default, you’ll still get $10. What the inventors of the CDO did is divide up the box into groups of investors and put that $10 into its own level, or “tranche.” They then convinced ratings agencies like Moody’s and S&P to give that top tranche the highest AAA rating — meaning it has close to zero credit risk. Suddenly, thanks to this financial seal of approval, banks had a way to turn their shittiest mortgages and other financial waste into investment-grade paper and sell them to institutional investors like pensions and insurance companies, which were forced by regulators to keep their portfolios as safe as possible.

    Because CDOs offered higher rates of return than truly safe products like Treasury bills, it was a win-win: Banks made a fortune selling CDOs, and big investors made much more holding them. The problem was, none of this was based on reality. “The banks knew they were selling crap,” says a London-based trader from one of the bailed-out companies. To get AAA ratings, the CDOs relied not on their actual underlying assets but on cra zy mathematical formulas that the banks cooked up to make the investments look safer than they really were. “They had some back room somewhere where a bunch of Indian guys who’d been doing nothing but math for God knows how many years would come up with some kind of model saying that this or that combination of debtors would only default once every 10,000 years,” says one young trader who sold CDOs for a major investment bank. “It was nuts.” Now that even the crappiest mortgages could be sold to conservative investors, the CDOs spurred a massive explosion of irresponsible and predatory lending. In fact, there was such a crush to underwrite CDOs that it became hard to find enough subprime mortgages — read: enough unemployed meth dealers willing to buy million-dollar homes for no money down — to fill them all.

    As banks and investors of all kinds took on more and more in CDOs and similar instruments, they needed some way to hedge their massive bets — some kind of insurance policy, in case the housing bubble burst and all that debt went south at the same time. This was particularly true for investment banks, many of which got stuck holding or “warehousing” CDOs when they wrote more than they could sell. And that’s were Joe Cassano came in. Known for his boldness and arrogance, Cassano took over as chief of AIGFP in 2001. He was the favorite of Maurice “Hank” Greenberg, the head of AIG, who admired the younger man’s hard-driving ways, even if neither he nor20his successors fully understood exactly what it was that Cassano did. According to a source familiar with AIG’s internal operations, Cassano basically told senior management, “You know insurance, I know investments, so you do what you do, and I’ll do what I do — leave me alone.” Given a free hand within the company, Cassano set out from his offices in London to sell a lucrative form of “insurance” to all those investors holding lots of CDOs. His tool of choice was another new financial instrument known as a credit-default swap, or CDS. The CDS was popularized by J.P. Morgan, in particular by a group of young, creative bankers who would later become known as the “Morgan Mafia,” as many of them would go on to assume influential positions in the finance world. In 1994, in between booze and games of tennis at a resort in Boca Raton, Florida, the Morgan gang plotted a way to help boost the bank’s returns. One of their goals was to find a way to lend more money, while working around regulations that required them to keep a set amount of cash in reserve to back those loans. What they came up with was an early version of the credit-default swap. In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can’t make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope’s mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job.

    When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators — from the Federal Reserve to the Office of the Comptroller of the Currency — accepted the argument, and Morgan was allowed to put more money on the street. What Cassano did was to transform the credit swaps that Morgan popularized into the world’s largest bet on the housing boom. In theory, at least, there’s nothing wrong with buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. First, the party selling CDS protection didn’t have to post any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don’t have to show a dime. So Cassano could sell=2 0investment banks billions in guarantees without having any single asset to back it up. Secondly, Cassano was selling so-called “naked” CDS deals. In a “naked” CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A’s mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet thatsomeone else’s house would burn down, or take out a term life policy on the guy with AIDS down the street.

    It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn’t have the cash to pay off if the kick went wide. ADVERTISEMENT In a span of only seven years, Cassano sold some $500 billion worth of CDS protection, with at least $64 billion of that tied to the subprime mortgage market. AIG didn’t have even a fraction of that amount of cash on hand to cover its bets, but neither did it expect it would ever need any reserves. So long as defaults on the underlying securities remained a highly unlikely proposition, AIG was essentially collecting huge and steadily climbing premiums by selling insurance for the disaster it thought would never come. Initially, at least, the revenues were enormous: AIGFP’s returns went from $737 million in 1999 to $3.2 billion in 2005. Over the past seven years, the subsidiary’s 400 employees were paid a total of $3.5 billion; Cassano himself pocketed at least $280 million in compensation. Everyone made their money — and then it all went to shit. II. THE REGULATORS Cassano’s outrageous gamble wouldn’t have been possible had he not had the good fortune to take over AIGFP just as Sen. Phil Gramm — a grinning, laissez-faire ideologue from Texas — had finished engineering the most dramatic deregulation of the financial industry since Emperor Hien Tsung invented paper money in 806 A.D. For years, Washington had kept a watchful eye on the nation’s banks. Ever since the Great Depression, commercial banks — those that kept mone y on deposit for individuals and businesses — had not been allowed to double as investment banks, which raise money by issuing and selling securities. The Glass-Steagall Act, passed during the Depression, also prevented banks of any kind from getting into the insurance business. But in the late Nineties, a few years before Cassano took over AIGFP, all that changed. The Democrats, tired of getting slaughtered in the fundraising arena by Republicans, decided to throw off their old reliance on unions and interest groups and become more “business-friendly.” Wall Street responded by flooding Washington with money, buying allies in both parties. In the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn’t going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?

    The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernizati on Act that made it impossible to regulate credit swaps as either gambling or securities. Commercial banks — which, thanks to Gramm, were now competing directly with investment banks for customers — were driven to buy credit swaps to loosen capital in search of higher yields. “By ruling that credit-default swaps were not gaming and not a security, the way was cleared for the growth of the market,” said Eric Dinallo, head of the New York State Insurance Department. The blanket exemption meant that Joe Cassano could now sell as many CDS contracts as he wanted, building up as huge a position as he wanted, without anyone in government saying a word. “You have to remember, investment banks aren’t in the business of making huge directional bets,” says the government source involved in the AIG bailout. When investment banks write CDS deals, they hedge them. But insurance companies don’t have to hedge. And that’s what AIG did. “They just bet massively long on the housing market,” says the source. “Billions and billions.” In the biggest joke of all, Cassano’s wheeling and dealing was regulated by the Office of Thrift Supervision, an agency that would prove to be defiantly uninterested in keeping watch over his operations. How a behemoth like AIG came to be regulated by the little-known and relatively small OTS is yet another triumph of the deregulatory instinct. Under another law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts (better known as savings-and-loans). Because the OTS was viewed as more compliant than the Fed or the Securities and Exchange Commission, companies rushed to reclassify themselves as thrifts. In 1999, AIG purchased a thrift in Delaware and managed to get approval for OTS regulation of its entire operation. Making matters even more hilarious, AIGFP — a London-based subsidiary of an American insurance company — ought to have been regulated by one of Europe’s more stringent regulators, like Britain’s Financial Services Authority. But the OTS managed to convince the Europeans that it had the muscle to regulate these giant companies. By 2007, the EU had conferred legitimacy to OTS supervision of three mammoth firms — GE, AIG and Ameriprise. That same year, as the subprime crisis was exploding, the Government Accountability Office criticized the OTS, noting a “disparity between the size of the agency and the diverse firms it oversees.”

    Among other things, the GAO report noted that the entire OTS had only one insurance specialist on staff — and this despite the fact that it was the primary regulator for the world’s largest insurer! “There’s this notion that the regulators couldn’t do anything to stop AIG,” says a government official who was present during the bailout. “That’s bullshit. What you have to understand is that these regulators have ultimate power. They can send you a letter and say, ‘You don’t exist anymore,’ and that’s basically that. They=2 0don’t even really need due process. The OTS could have said, ‘We’re going to pull your charter; we’re going to pull your license; we’re going to sue you.’ And getting sued by your primary regulator is the kiss of death.” When AIG finally blew up, the OTS regulator ostensibly in charge of overseeing the insurance giant — a guy named C.K. Lee — basically admitted that he had blown it. His mistake, Lee said, was that he believed all those credit swaps in Cassano’s portfolio were “fairly benign products.” Why? Because the company told him so. “The judgment the company was making was that there was no big credit risk,” he explained. (Lee now works as Midwest region director of the OTS; the agency declined to make him available for an interview.) In early March, after the latest bailout of AIG, Treasury Secretary Timothy Geithner took what seemed to be a thinly veiled shot at the OTS, calling AIG a “huge, complex global insurance company attached to a very complicated investment bank/hedge fund that was allowed to build up without any adult supervision.” But even without that “adult supervision,” AIG might have been OK had it not been for a complete lack of internal controls. For six months before its meltdown, according to insiders, the company had been searching for a full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either.

    That meant that the 18th-largest company in the world had no one checking to make sure its balance20sheet was safe and no one keeping track of how much cash and assets the firm had on hand. The situation was so bad that when outside consultants were called in a few weeks before the bailout, senior executives were unable to answer even the most basic questions about their company — like, for instance, how much exposure the firm had to the residential-mortgage market. III. THE CRASH Ironically, when reality finally caught up to Cassano, it wasn’t because the housing market crapped but because of AIG itself. Before 2005, the company’s debt was rated triple-A, meaning he didn’t need to post much cash to sell CDS protection: The solid creditworthiness of AIG’s name was guarantee enough. But the company’s crummy accounting practices eventually caused its credit rating to be downgraded, triggering clauses in the CDS contracts that forced Cassano to post substantially more collateral to back his deals. ADVERTISEMENT By the fall of 2007, it was evident that AIGFP’s portfolio had turned poisonous, but like every good Wall Street huckster, Cassano schemed to keep his insane, Earth-swallowing gamble hidden from public view. That August, balls bulging, he announced to investors on a conference call that “it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions.” As he spoke, his CDS portfolio was racking up $352 million in losses. When the growing credit crunch prompted senior AIG executives to re-examine its liabilities, a company accountant named Joseph St. Denis became “gravely concerned” about the CDS deals and their potential for mass destruction. Cassano responded by personally forcing the poor sap out of the firm, telling him he was “deliberately excluded” from the financial review for fear that he might “pollute the process.” The following February, when AIG posted $11.5 billion in annual losses, it announced the resignation of Cassano as head of AIGFP, saying an auditor had found a “material weakness” in the CDS portfolio. But amazingly, the company not only allowed Cassano to keep $34 million in bonuses, it kept him on as a consultant for $1 million a month. In fact, Cassano remained on the payroll and kept collecting his monthly million through the end of September 2008, even after taxpayers had been forced to hand AIG $85 bil lion to patch up his fuck-ups.

    When asked in October why the company still retained Cassano at his $1 million-a-month rate despite his role in the probable downfall of Western civilization, CEO Martin Sullivan told Congress with a straight face that AIG wanted to “retain the 20-year knowledge that Mr. Cassano had.” (Cassano, who is apparently hiding out in his lavish town house near Harrods in London, could not be reached for comment.) What sank AIG in the end was another credit downgrade. Cassano had written so many CDS deals that when the company was facing another downgrade to its credit rating last September, from AA to A, it needed to post billions in collateral — not only more cash than it had on its balance sheet but more cash than it could raise even if it sold off every single one of its liquid assets. Even so, management dithered for days, not believing the company was in serious trouble. AIG was a dried-up prune, sapped of any real value, and its top executives didn’t even know it. On the weekend of September 13th, AIG’s senior leaders were summoned to the offices of the New York Federal Reserve. Regulators from Dinallo’s insurance office were there, as was Geithner, then chief of the New York Fed. Treasury Secretary Hank Paulson, who spent most of the weekend preoccupied with the collapse of Lehman Brothers, came in and out. Also present, for reasons that would emerge later, was Lloyd Blankfein, CEO of Goldman Sachs. The only relevant government office that was n’t represented was the regulator that should have been there all along: the OTS. “We sat down with Paulson, Geithner and Dinallo,” says a person present at the negotiations. “I didn’t see the OTS even once.”

    On September 14th, according to another person present, Treasury officials presented Blankfein and other bankers in attendance with an absurd proposal: “They basically asked them to spend a day and check to see if they could raise the money privately.” The laughably short time span to complete the mammoth task made the answer a foregone conclusion. At the end of the day, the bankers came back and told the government officials, gee, we checked, but we can’t raise that much. And the bailout was on. A short time later, it came out that AIG was planning to pay some $90 million in deferred compensation to former executives, and to accelerate the payout of $277 million in bonuses to others — a move the company insisted was necessary to “retain key employees.” When Congress balked, AIG canceled the $90 million in payments. Then, in January 2009, the company did it again. After all those years letting Cassano run wild, and after already getting caught paying out insane bonuses while on the public till, AIG decided to pay out another $450 million in bonuses. And to whom? To the 400 or so employees in Cassano’s old unit, AIGFP, which is due to go out of business shortly! Yes, that’s right, an average of $1.1 million in taxpayer-backed money apiece, to the20very people who spent the past decade or so punching a hole in the fabric of the universe! “We, uh, needed to keep these highly expert people in their seats,” AIG spokeswoman Christina Pretto says to me in early February. “But didn’t these ‘highly expert people’ basically destroy your company?” I ask. Pretto protests, says this isn’t fair. The employees at AIGFP have already taken pay cuts, she says. Not retaining them would dilute the value of the company even further, make it harder to wrap up the unit’s operations in an orderly fashion.

    The bonuses are a nice comic touch highlighting one of the more outrageous tangents of the bailout age, namely the fact that, even with the planet in flames, some members of the Wall Street class can’t even get used to the tragedy of having to fly coach. “These people need their trips to Baja, their spa treatments, their hand jobs,” says an official involved in the AIG bailout, a serious look on his face, apparently not even half-kidding. “They don’t function well without them.” IV. THE POWER GRAB So that’s the first step in wall street’s power grab: making up things like credit-default swaps and collateralized-debt obligations, financial products so complex and inscrutable that ordinary American dumb people — to say nothing of federal regulators and even the CEOs of major corporations like AIG — are too intimidated to even try to understand them. That, comb ined with wise political investments, enabled the nation’s top bankers to effectively scrap any meaningful oversight of the financial industry. In 1997 and 1998, the years leading up to the passage of Phil Gramm’s fateful act that gutted Glass-Steagall, the banking, brokerage and insurance industries spent $350 million on political contributions and lobbying. Gramm alone — then the chairman of the Senate Banking Committee — collected $2.6 million in only five years. The law passed 90-8 in the Senate, with the support of 38 Democrats, including some names that might surprise you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John Edwards. The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America — and in turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms with even more money and power to lobby for further deregulatory measures. “We’re moving to an oligopolistic situation,” Kenneth Guenther, a top executive with the Independent Community Bankers of America, lamented after the Gramm measure was passed.

    The situation worsened in 2004, in an extraordinary move toward deregulation that never even got to a vote. At the time, the European Union was threatening to more strictly regulate the foreign operations of America’s big investment banks if the U.S. didn’t strengthen its own oversight. So the top five investment banks got together on April 28th of that year and — with the helpful assistance of then-Goldman Sachs chief and future Treasury Secretary Hank Paulson — made a pitch to George Bush’s SEC chief at the time, William Donaldson, himself a former investment banker. The banks generously volunteered to submit to new rules restricting them from engaging in excessively risky activity. In exchange, they asked to be released from any lending restrictions. The discussion about the new rules lasted just 55 minutes, and there was not a single representative of a major media outlet there to record the fateful decision. Donaldson OK’d the proposal, and the new rules were enough to get the EU to drop its threat to regulate the five firms. The only catch was, neither Donaldson nor his successor, Christopher Cox, actually did any regulating of the banks. They named a commission of seven people to oversee the five companies, whose combined assets came to total more than $4 trillion. But in the last year and a half of Cox’s tenure, the group had no director and did not complete a single inspection. Great deal for the banks, which originally complained about being regulated by both Europe and the SEC, and ended up being regulated by no one.

    Once the capital requirements were gone, those top five banks went hog-wild, jumping ass-first into the then-raging housing bubble. One of those was Bear Stearns, which used its freedom to drown itself in bad mortgage loans. In the short period between the 2004 change and Bear’s collapse, the firm’s debt-to-equity ratio soared from 12-1 to an insane 33-1. Another culprit was Goldman Sachs, which also had the good fortune, around then, to see its CEO, a bald-headed Frankensteinian goon named Hank Paulson (who received an estimated $200 million tax deferral by joining the government), ascend to Treasury secretary. Freed from all capital restraints, sitting pretty with its man running the Treasury, Goldman jumped into the housing craze just like everyone else on Wall Street. Although it famously scored an $11 billion coup in 2007 when one of its trading units smartly shorted the housing market, the move didn’t tell the whole story. In truth, Goldman still had a huge exposure come that fateful summer of 2008 — to none other than Joe Cassano. Goldman Sachs, it turns out, was Cassano’s biggest customer, with $20 billion of exposure in Cassano’s CDS book. Which might explain why Goldman chief Lloyd Bl ankfein was in the room with ex-Goldmanite Hank Paulson that weekend of September 13th, when the federal government was supposedly bailing out AIG. When asked why Blankfein was there, one of the government officials who was in the meeting shrugs. “One might say that it’s because Goldman had so much exposure to AIGFP’s portfolio,” he says. “You’ll never prove that, but one might suppose.” Market analyst Eric Salzman is more blunt. “If AIG went down,” he says, “there was a good chance Goldman would not be able to collect.” The AIG bailout, in effect, was Goldman bailing out Goldman. Eventually, Paulson went a step further, elevating another ex-Goldmanite named Edward Liddy to run AIG — a company whose bailout money would be coming, in part, from the newly created TARP program, administered by another Goldman banker named Neel Kashkari. V. REPO MEN There are plenty of people who have noticed, in recent years, that when they lost their homes to foreclosure or were forced into bankruptcy because of crippling credit-card debt, no one in the government was there to rescue them. But when Goldman Sachs — a company whose average employee still made more than $350,000 last year, even in the midst of a depression — was suddenly faced with the possibility of losing money on the unregulated insurance deals it bought for its insane housing bets, the government was there in an instant to patch the hole.

    That’s the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers’ credit card. The people who have spent their lives cloistered in this Wall Street community aren’t much for sharing information with the great unwashed. Because all of this shit is complicated, because most of us mortals don’t know what the hell LIBOR is or how a REIT works or how to use the word “zero coupon bond” in a sentence without sounding stupid — well, then, the people who do speak this idiotic language cannot under any circumstances be bothered to explain it to us and instead spend a lot of time rolling their eyes and asking us to trust them. That roll of the eyes is a key part of the psychology of Paulsonism. The state is now being asked not just to call off its regulators or give tax breaks or funnel a few contracts to connected companies; it is intervening directly in the economy, for the sole purpose of preserving the influence of the megafirms. In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one that would socialize “toxic” risks but keep both the profits and the management of the bailed-out firms in private hands. Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such financial losers. Some aspects of the bailout were secretive to the point of absurdity. In fact, if=2 0you look closely at just a few lines in the Federal Reserve’s weekly public disclosures, you can literally see the moment where a big chunk of your money disappeared for good. The H4 report (called “Factors Affecting Reserve Balances”) summarizes the activities of the Fed each week. You can find it online, and it’s pretty much the only thing the Fed ever tells the world about what it does. For the week ending February 18th, the number under the heading “Repurchase Agreements” on the table is zero. It’s a significant number. Why? In the pre-crisis days, the Fed used to manage the money supply by periodically buying and selling securities on the open market through so-called Repurchase Agreements, or Repos. The Fed would typically dump $25 billion or so in cash onto the market every week, buying up Treasury bills, U.S. securities and even mortgage-backed securities from institutions like Goldman Sachs and J.P. Morgan, who would then “repurchase” them in a short period of time, usually one to seven days. This was the Fed’s primary mechanism for controlling interest rates: Buying up securities gives banks more money to lend, which makes interest rates go down. Selling the securities back to the banks reduces the money available for lending, which makes interest rates go up.

    If you look at the weekly H4 reports going back to the summer of 2007, you start to notice something alarming. At the start of the credit crunch, around August of that year, you see the Fed buying a few more Repos than usual — $33 billion or so. By November, as private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting even more cash than usual into the economy: $48 billion. By late December, the number was up to $58 billion; by the following March, around the time of the Bear Stearns rescue, the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number was $115 billion — “out of control now,” according to one congressional aide. For the rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as much as $125 billion of these short-term loans into the economy — until suddenly, at the start of this year, the number drops to nothing. Zero. The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to p ump its money into the hands of private companies. By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you’ve never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there’s also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and AIG. While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments). Although this technically isn’t taxpayer money, it still affects taxpayers directly, because the activities of the Fed impact the economy as a whole. And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy.

    No one knows who’s getting that money or exactly how much of it is disappearing through these new holes in the hu ll of America’s credit rating. Moreover, no one can really be sure if these new institutions are even temporary at all — or whether they are being set up as permanent, state-aided crutches to Wall Street, designed to systematically suck bad investments off the ledgers of irresponsible lenders. “They’re supposed to be temporary,” says Paul-Martin Foss, an aide to Rep. Ron Paul. “But we keep getting notices every six months or so that they’re being renewed. They just sort of quietly announce it.” None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn’t like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include “deliberations, decisions and actions on monetary policy matters.” The exemption, as Foss notes, “basically includes everything.” According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter. VI. WINNERS AND LOSERS Stevens isn’t the only person in Congress to be given the finger by the Fed. In January, when Rep.=2 0Alan Grayson of Florida asked Federal Reserve vice chairman Donald Kohn where all the money went — only $1.2 trillion had vanished by then — Kohn gave Grayson a classic eye roll, saying he would be “very hesitant” to name names because it might discourage banks from taking the money. “Has that ever happened?” Grayson asked. “Have people ever said, ‘We will not take your $100 billion because people will find out about it?'” “Well, we said we would not publish the names of the borrowers, so we have no test of that,” Kohn answered, visibly annoyed with Grayson’s meddling. Grayson pressed on, demanding to know on what terms the Fed was lending the money. Presumably it was buying assets and making loans, but no one knew how it was pricing those assets — in other words, no one knew what kind of deal it was striking on behalf of taxpayers. So when Grayson asked if the purchased assets were “marked to market” — a methodology that assigns a concrete value to assets, based on the market rate on the day they are traded — Kohn answered, mysteriously, “The ones that have market values are marked to market.” The implication was that the Fed was purchasing derivatives like credit swaps or other instruments that were basically impossible to value objectively — paying real money for God knows what. “Well, how much of them don’t have market values?” asked Grayson. “How much of them are worthless?” “None are worthless,” Kohn snapped. “Then why don’t you mark them to market?” Grayson demanded. “Well,” Kohn sighed, “we are marking the ones to market that have market values.” In essence, the Fed was telling Congress to lay off and let the experts handle things. “It’s like buying a car in a used-car lot without opening the hood, and saying, ‘I think it’s fine,'” says Dan Fuss, an analyst with the investment firm Loomis Sayles. “The salesman says, ‘Don’t worry about it. Trust me.’ It’ll probably get us out of the lot, but how much farther? None of us knows.”

    When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriations process, what’s happening in the Fed amounts to something truly revolutionary — a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke. “We spend hours and hours and hours arguing over $10 million amendments on the floor of the Senate, but there has been no discussion about who has been receiving this $3 trillion,” says Sen. Bernie Sanders. “It is beyond comprehension.” Count Sanders among those who don’t buy the argument that Wall Street firms shouldn’t have to face being outed as recipients of public funds, that making this information public might cause investors to panic and dump their holdings in these firms. “I guess if we made that public , they’d go on strike or something,” he muses. And the Fed isn’t the only arm of the bailout that has closed ranks. The Treasury, too, has maintained incredible secrecy surrounding its implementation even of the TARP program, which was mandated by Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine which banks received bailout funds and which didn’t — particularly the first $350 billion given out under Bush appointee Hank Paulson. The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded — and this isn’t a joke — by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless by the response. “Do you believe that?” she says incredulously. “That’s not what we had in mind.” Another member of Congress, who asked not to be named, offers his own theory about the TARP process. “I think basically if you knew Hank Paulson, you got the money,” he says.

    This cozy arrangement created yet another opportunity for big banks to devour market share at the expense of smaller regional lenders. While all the bigwigs at Citi and Goldman and Bank of America who had Paulson on speed-dial got bailed out right away — remember=2 0that TARP was originally passed because money had to be lent right now, that day, that minute, to stave off emergency — many small banks are still waiting for help. Five months into the TARP program, some not only haven’t received any funds, they haven’t even gotten a call back about their applications. “There’s definitely a feeling among community bankers that no one up there cares much if they make it or not,” says Tanya Wheeless, president of the Arizona Bankers Association. Which, of course, is exactly the opposite of what should be happening, since small, regional banks are far less guilty of the kinds of predatory lending that sank the economy. “They’re not giving out subprime loans or easy credit,” says Wheeless. “At the community level, it’s much more bread-and-butter banking.” Nonetheless, the lion’s share of the bailout money has gone to the larger, so-called “systemically important” banks. “It’s like Treasury is picking winners and losers,” says one state banking official who asked not to be identified. This itself is a hugely important political development. In essence, the bailout accelerated the decline of regional community lenders by boosting the political power of their giant national competitors.

    Which, when you think about it, is insane: What had brought us to the brink of collapse in the first place was this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to gradually feed all the little fish in the sea t o an ever-shrinking pool of Bigger Fish. To fix this problem, the government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost completely secret bailout process to double down on the same faulty, merger-happy thinking that got us here in the first place, creating a constellation of megafirms under government control that are even bigger, more unwieldy and more crammed to the gills with systemic risk. ADVERTISEMENT In essence, Paulson and his cronies turned the federal government into one gigantic, half-opaque holding company, one whose balance sheet includes the world’s most appallingly large and risky hedge fund, a controlling stake in a dying insurance giant, huge investments in a group of teetering megabanks, and shares here and there in various auto-finance companies, student loans, and other failing businesses. Like AIG, this new federal holding company is a firm that has no mechanism for auditing itself and is run by leaders who have very little grasp of the daily operations of its disparate subsidiary operations. In other words, it’s AIG’s rip-roaringly shitty business model writ almost inconceivably massive — to echo Geithner, a huge, complex global company attached to a very complicated investment bank/hedge fund that’s been allowed to build up without adult supervision. How much of what kinds of crap is actually on our balance sheet, and what did we pay for it? When exactly will the rent come due, when will the money run out? Does anyone know what the hell is going on? And on the linear spectrum of capitalism to socialism, where exactly are we now? Is there a dictionary word that even describes what we are now? It would be funny, if it weren’t such a nightmare.

    VII. YOU DON’T GET IT The real question from here is whether the Obama administration is going to move to bring the financial system back to a place where sanity is restored and the general public can have a say in things or whether the new financial bureaucracy will remain obscure, secretive and hopelessly complex. It might not bode well that Geithner, Obama’s Treasury secretary, is one of the architects of the Paulson bailouts; as chief of the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the secretive=2 0Maiden Lane facilities used to funnel funds to the dying company. Neither did it look good when Geithner — himself a protégé of notorious Goldman alum John Thain, the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing out his firm — picked a former Goldman lobbyist named Mark Patterson to be his top aide. In fact, most of Geithner’s early moves reek strongly of Paulsonism. He has continually talked about partnering with private investors to create a so-called “bad bank” that would systemically relieve private lenders of bad assets — the kind of massive, opaque, quasi-private bureaucratic nightmare that Paulson specialized in. Geithner even refloated a Paulson proposal to use TALF, one of the Fed’s new facilities, to essentially lend cheap money to hedge funds to invest in troubled banks while practically guaranteeing them enormous profits. God knows exactly what this does for the taxpayer, but hedge-fund managers sure love the idea. “This is exactly what the financial system needs,” said Andrew Feldstein, CEO of Blue Mountain Capital and one of the Morgan Mafia. Strangely, there aren’t many people who don’t run hedge funds who have expressed anything like that kind of enthusiasm for Geithner’s ideas. As complex as all the finances are, the politics aren’t hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd=2 0has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below. The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of.

    When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40. “But wait a minute,” you say to them. “No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what’s left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?” But before you even finish saying that, they’re rolling their eyes, becau se You Don’t Get It. These people were never about anything except turning money into money, in order to get more money; valueswise they’re on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests. Good luck with that, America. And enjoy tax season. [From Issue 1075 — April 2, 2009]

    Motion for Consolidation is sometimes enough

    From an attorney involved in foreclosure defense.
    I hope you are well.  I have been reading through your manual daily to absorb the breadth and depth and width of this mortgage meltdown…  I am so glad I was able to come to the workshop in Napa and meet you.  I’m sorry I missed your teleconference today… There will be more
    Just wanted to let you know the progress that’s been made to date:
    notwithstanding two failed attempts at TRO, I filed a Motion to Consolidate (Great idea) the underlying action against the lender which I filed with the subsequent lender’s UD action against me and prior to the hearing date the lender DISMISSED THE UD! Now you are cooking. This is what we are seeing repeatedly. They fight and then they disappear. Because they are committing fraud on the court and fraud on you. Once they file the UD they ARE using state action and THEN it is time for due process arguments. When they or the Judge says the case is over, the certificate of title has been issued, your answer, “Your Honor, all that was done by self help under private contract that was breached. THIS is the first time this matter has come before a court. They have made this a judicial procedure by filing the Unlawful Detainer action. Now they have to prove their case — not merely that they acted, but that they acted with proper authority and in good faith. Now I just have to respond to the mortgage broker’s demurrer to the complaint.  So we are headed down the track with discovery etc.
    Thanks so much for your input.
    Of course I have some questions for you:

    1                How do I handle the non existence of the original lender (New Century was among the first to dissolve) and is sufficiently dissolved now that they cannot be found to be served? Ie – discovery, information as to securitization, excuse as to loss of original note… do I dismiss them as a party?  Absolutely not. Pull up your title record and if they were the only “lender” on record, you send in copies of your notice of rescission, QWR etc. with your complaint to quiet title and simply say they are the only people on record, the title is only subject to their claim and they are not around to make it.  Make sure they are properly served by publication and then take a default.

    2 How do I respond to the foreclosing servicers response of “non monetary interest and appearance” instead of answering the complaint? Not sure what that means.

    3 How do I capitalize on the “King County effect” where the attorney (Pite, Duncan, LLP in San Diego) is representing Saxon, MERS and Deutsche in this matter and the verification that has come back is from the same VP who has the same exact address for all three parties? Very simple: First a motion to strike because the documents are invalid on their face. Second, file a motion for the attorney to produce authority or file an affidavit proving authority to represent. That could be enough for him to exit the case. It has before.

    WSJournal – “Servicers are limited in their ability to modify mortgages”

    Key points
    -“servicers are limited in their ability to modify mortgages”

    READ: they have no authority to modify nor authority to foreclose
    This is why so many are “strung along” thinking they are waiting to be approved for a loan modification and at the eleventh hour are told they “weren’t approved” and then the following week get a foreclosure notice. Get these “promises” communicated in WRITING or record them.

    -“40% of borrowers were 60 days past due within 8 months after their loan was modified”

    What it doesn’t say is that in modifying their loan they verified or affirmed a non-existent obligation AND likely agreed to “waive all claims” against everyone…

    -“loan modifications that include a principal reduction are less likely to re-default”

    If you are not getting a principal reduction that considers “affordability” AND the current value of the property today you are wasting your time or probably prolonging the inevitable. In order to get principal reductions you need some leverage, affirmative defenses, counterclaims.

    MOST OF ALL – DON’T WAIT until a week before a Summary Judgment hearing or Trustee Sale to try to act….you must be PROACTIVE and get your ammo ready before the enemy is at your door. THIS IS WAR PEOPLE – THE HOMEOWNERS WAR right here on our soil and its your home they want.

    Wall Street Journal   FEBRUARY 11, 2009


    The Obama administration provided few details about its plans to address the foreclosure crisis when laying out its economic-recovery program Tuesday, highlighting the challenges of creating a program that is fair and effective.
    The administration’s efforts are being complicated by a weakening economy. Nearly five million families could lose their homes between 2009 and 2011, according to Moody’s Economy.com. “The ground is shifting,” said Tom Deutsch, deputy executive director of the American Securitization Forum, an industry group. “We have a lot more job loss and a lot more pessimistic expectations on home prices.”
    Housing and Urban Development Secretary Shaun Donovan and Treasury Secretary Timothy Geithner will be meeting Wednesday to discuss possible approaches to the foreclosure crisis.
    One question facing the administration is how to win investor support for modification efforts while providing meaningful relief to borrowers. At a town-hall meeting Tuesday in Fort Myers, Fla., President Barack Obama suggested that he would propose legislation to make it easier for loan-servicing companies to ease up on troubled borrowers while taking steps that might win investors’ support. Right now, he said, servicers are limited in their ability to modify mortgages that have been packaged into securities and sold to multiple investors. In addition, “the borrower is going to have to probably — if they get some assistance — agree to give up some equity once housing prices recover,” the president said.
    Another challenge is determining who should get help. In Fort Myers, those facing foreclosure aren’t just local residents hurt by job losses, but also real-estate speculators. Another worry is moral hazard, or how to help those truly in need without encouraging others to fall behind on their payments.
    Government officials are also expected to create national standards for loan modifications that would be adopted by Fannie Mae and Freddie Mac. But there is little data on what types of workouts are most cost-effective. Data released in December by federal banking regulators show that more than 40% of borrowers were at least 60 days past due eight months after their loan was modified. Critics say redefaults are so high because mortgage companies aren’t doing enough to make payments more affordable.
    Forty-seven percent of loan modifications completed in November resulted in higher payments for borrowers, typically because unpaid interest and fees were added to the loan balance, according to a study by Alan M. White, a professor at Valparaiso University Law School in Indiana.
    Coming up with an effective modification is complicated by the fact that many troubled borrowers also have home-equity loans or credit-card debt, auto loans or other obligations that can make it difficult to afford even a lower mortgage payment. Other borrowers may be able to afford a modified payment, but lack the reserves to deal with unexpected bills.
    “You don’t want to modify a loan that you think will eventually redefault,” said Thomas Lawler, an independent housing economist. “All that will do is delay the process and increase the cost.”
    With home prices tumbling, some analysts have been pushing for mortgage companies to reduce loan balances. Borrowers whose loan modifications include a principal reduction are less likely to redefault, according to an analysis by Credit Suisse, but mortgage companies have thus far been reluctant to write down loan balances.
    A focus for the government has been on how to determine the “net present value” of homes. Government officials think that if they can agree on a common metric for determining a home’s value, they can expedite how the loan is modified.
    —Michael M. Phillips and Damian Paletta contributed to this article.
    Write to Ruth Simon at ruth.simon@wsj.com

    Problems with a Loan Modification: 10 POINTS TO CONSIDER


    Problems with a Loan Modification:

    1. The borrowers will think they are modifying their current loan when in fact they are starting all over again.
    2. The Foreclosing entity which lacks standing to bring lawsuit, is not authorized to modify anything since they are not the owner of the loan in question.
    3. Since the real parties in interest are no where to be found, they are taking it upon themselves with the help of their lawyers to steal your property.
    4. The borrower is actually getting a new loan which may enjoin borrower from rescinding new transaction.
    5. The foreclosing entity is STILL not using their own funds to modify (new loan) loan. They are getting funds to lend borrowers through Federal bail outs, insurance proceeds and believe it or not Investors. [same process]
    6. Their lawyers are not acting in a lawyer’s capacity but as BROKERS; [middlemen] they are getting paid commission on every new loan they help brokered.
    7. What Does Loan Modification Mean?
      A modification to an existing loan made by a lender in response to a borrower’s long-term inability to repay the loan. Loan modifications typically involve a reduction in the interest rate on the loan, an extension of the length of the term of the loan, a different type of loan or any combination of the three. A lender might be open to modifying a loan because the cost of doing so i
      s less than the cost of default.
    8. Why would they need to re-qualify if they claim they would make the borrowers payments and rates to be less?
    9. The borrower took the loan out with lender “A” but an unknown lender “B” is trying to modify it.
    10. When the modification is said and done, the borrower will have lender “B” as the lender. What happened to lender “A”???

    Livinglies site is not only for the skeptics enjoyment and those seeking sources of underground legal entertainment. Damn it people it works.

    By Maher Soliman 
    Living lies recently posted an outstanding (according to our counsel) well prepared Motion to set aside judgment which we used to file after entry of judgment for a UD hearing that did not end up favorable. We filed six motions total to date and we are five for six when filed.
    The most recent effort to bring life back into a wrongful foreclosure was a late filing on Friday January 31th 2009. The trustor now holdover was prepared to meet her fate on the following Monday as the sheriffs order to vacate the subject dwelling was scheduled and likely to occour early in the am.  We typically come back to court now no later than one month subsequent to the last court date with the motion. I understand in some circumstances you can file it years after the case has been closed by the courts. 
    We filed this one after two weeks subsequent to the courts ruling against. 
    The documents were filed with a half hour to go before the court closed. The trustor called to tell us she got the documents filed as were prepared and signed off by counsel last minute.
    While driving home the party was calling to inform us of her apprehensions of moving and concerns for coming to grips the party was over. Brenda Michelson from our office  took the livinglies opportunity and chance to the client and was on the phone with the party as she pulled up to the home to find the order to stay the matter was already posted to her door. IT HIT! Needless to say we are going back to court in a few weeks’ and the order to stay is good through February. 
    Livinglies site is not only for the skeptics enjoyment and those seeking sources of underground legal entertainment. 
    Damn it people it works. 
    Respect the courts as lay persons and follow procedures. If this is all new to you get an attorney to just over see you and one like Susan Rabin Esq who is willing to cooperate. That’s all and the rest should fall into place. 
    Maher Soliman

    NY TIMES: What do the market traders know that the rest of the world does not?

    NY Times second lead article is how are these “Troubled Assets” going to be valued? 97 cents on the dollar (management), 87 cents (S&P at current default rates), 53 cents under “bleaker” (undefined conditions), 38 cents where the trading markets value them, or 0 cents on the “Garfield Continuum Index.” ?

    why the disparity? What do the market traders know that the rest of the world does not? ANSWER: The paper is ALL worthless. The gamble is that the government will somehow add value to the mix. The  markets are saying there is one chance in 3 that the government will be successful.
    The Fed and US Treasury bought preferred stock so they wouldn’t be exposed to a fraudulent list of mortgages and notes, asset backed securities and pools. Assets that either don’t exist and never existed or never existed in the way they were described to investors. None of the foreclosures are being brought by people who actually own the note.
    Why would anyone value them under the current default rate? The answer is really because NONE of the investors are getting paid regardless of the outcome of the foreclosures. ALL of the foreclosing parties are people who never lost a dime and to add insult to injury they are taking the property too. ALL of them made money hand over fist and the game is still going on. Meanwhile the investors continue to get screwed which is why nobody trusts the credit markets (who would?) and the borrowers are getting screwed out of their homes because they believe the system is working properly when it isn’t.
    Note CNN piece on Marcy Kaptur, Toledo congresswoman who says stay even if you have been foreclosed. They don’t have the note. The reasons why nobody who actually has authority over the note is involved is if they step forward, under the Uniform Commercial Code, TILA and other laws they are stepping into the shoes of the originating lenders, poolers and securitizers who committed all these criminal and civil frauds.
    February 2, 2009

    Big Risks for U.S. in Trying to Value Bad Bank Assets

    As the Obama administration prepares its strategy to rescue the nation’s banks by buying or guaranteeing troubled assets on their books, it confronts one central problem: How should they be valued?

    Not just billions, but hundreds of billions of taxpayer dollars are at stake.

    The Treasury secretary, Timothy F. Geithner, is expected to announce details of the new plan within weeks. Administration and Congressional officials say it will give the government flexibility to buy some bad assets and guarantee others in an effort to have a broad impact but still tailor the aid for different institutions.

    But getting this right will not be easy. The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.

    The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

    The bond analyzed by S.& P. is just one of thousands that the government might buy or guarantee should it go forward with setting up a “bad bank” that would acquire $1 trillion or more of toxic assets from banks.

    The idea is that, free from the burden of carrying these bad assets, banks would start lending again and bolster the faltering economy. The bad bank set up by the government would, over time, sell the assets and recover some or most of what it had paid.

    While the government is considering several approaches to helping the banks, including more capital injections, buying or insuring toxic assets is likely to be a centerpiece. Determining the right price for these assets is crucial to success. Placing too low a value would force institutions selling and others holding similar investments to register crushing losses that could deplete their capital and make it harder for them to increase lending.

    But inflated values would bail out the companies, their shareholders and executives at the expense of taxpayers, who would swallow the losses if the government could not recoup what it had paid.

    Some critics of the plan warn that the government should not buy the assets, because banks will try to get too high a price and leave taxpayers holding the bag.

    “To date, the banks have stuck their heads in the sand,” said Lynn E. Turner, a former chief accountant for the Securities and Exchange Commission, “and demanded that they be paid the price of good apples for bad apples.”

    But many believe that, given the depth of the problem and the fact that it keeps getting worse, the government has little choice.

    Finance experts from Wall Street and academia are advising the administration on other options. To sidestep the thorny valuation problem, some have suggested that the bad bank acquire only assets that have already been marked down significantly and guarantee other assets, but officials would have just as difficult a task in determining how much to charge for insuring risky assets.

    Economists predict that the cost of the program will most likely exceed the $350 billion remaining in the $700 billion Troubled Assets Relief Program that Congress approved in October.

    They say the Obama administration may need upwards of $1 trillion in additional aid for banks — on top of the more than $800 billion the administration is seeking in an economic stimulus measure moving through Congress.

    Many in Washington question whether the rescue has achieved its goal of stabilizing the financial markets. A report by the General Accountability Office on Friday concluded that whether the bailout program had been effective might never be known.

    “While the package helped avoid a financial collapse, many are frustrated by the results — and rightfully so,” President Obama said in his weekly address on Saturday. “Too often taxpayer dollars have been spent without transparency or accountability. Banks have been extended a hand, but homeowners, students, and small businesses that need loans have been left to fend on their own.”

    Mr. Obama and many lawmakers have expressed anger that banks that received the first batch of aid money do not appear to have increased their lending significantly, even as some firms have spent billions on bonuses, corporate jets and other perks. In two weeks the House will hold a hearing to ask chief executives of the eight largest banks about their spending controls.

    As early as this week, the Treasury Department may impose new limits on the executive pay of companies receiving financial assistance. The Oversight Panel created by Congress to monitor the program is also expected to publish a report this week looking at whether the government paid too much to the large banks that they have provided with assistance.

    A frequent refrain in Washington and on Wall Street is that there are no current market prices for toxic securities. But people who buy and sell these investments say that is a simplistic reading of the problem. They say most kinds of securities can be valued and are being traded, but trading has slowed as sellers and buyers disagree about what that the price should be.

    The value of these securities is based on the future cash flow they provide to investors. To determine that, traders have to make assumptions about the housing market and the economy: How high will the unemployment rate go in the coming years? How many borrowers will default? What will homes be worth?

    The Standard & Poor’s group, Market, Credit and Risk Strategies, which operates independently from the company’s credit ratings business, has been studying troubled securities for investors and banks. The bond that is trading at 38 cents provides a vivid illustration of the dilemma in valuing these assets.

    The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.

    Michael G. Thompson, a managing director at the S.& P. group, says his computer models can easily calculate what the bond is worth under different situations. “This is not rocket science, this is straight bond math,” he said. But determining what the future holds is much harder. “We are not masters of the universe who can predict the macroeconomic environment,” he added

    Some would-be buyers of these assets fear that a deep recession could drive up default rates and push down home prices much further. They also worry that a cataclysm like the failure of a big bank could send prices tumbling again, just as the collapse of Lehman Brothers did in September. Others see no reason to bid up prices because those who need to sell are desperate.

    Big banks and other owners of mortgage investments have argued that the low market prices reflect fire sales. Many have classified such securities as level-three assets, for which accounting rules allow them to determine values using computer models rather than the marketplace. Mr. Thompson estimates that at the end of September financial firms had $600 billion in such hard-to-value assets.

    But critics like Mr. Turner say that the banks’ accounting for these assets cannot be trusted because they have an incentive to use optimistic assumptions.

    In some instances, the government has guaranteed losses on certain assets for big, systemically important companies like Citigroup and Bank of America.

    Policy makers have found such arrangements appealing because they do not require upfront payments and they can be customized for each bank, Douglas J. Elliott, a fellow at the Brookings Institution, wrote in a recent paper.

    Still, government guarantees need to be based on sound valuations, Mr. Elliott and others say. If the government underestimates the risks of default, taxpayers could eventually lose tens of billions of dollars. The cost of insuring such assets in the private market is often several times greater than the price the government is charging banks.

    Whatever approach the Obama administration takes, investors and policy makers say it should provide more and clearer information about the health of banks and the risks that the government is taking.

    Many analysts do not trust what they are told about the quality of the securities and loans held by banks and other financial firms. Most banks provide only a very general description of their holdings, because they consider the information privileged.

    But the government, using its power as a big investor, could compel the banks to divulge more specific data, without giving away the names of individual bonds or loans, analysts said. The market could then do its own analysis on what the assets are worth.

    “At least it would give the government one objective measure of the value of these assets,” said Anthony Lembke, co-head of investments at MKP Capital Management, a hedge fund firm that is a big investor in mortgages. “In the absence of transparency and clarity, investors are going to assume a value that will be conservative and then add a risk premium.”

    Those $18 billion in bonuses were earned from hidden profits: The Joke is on Us

    Obama is of course correct in his outrage. Taking hundreds of billions of dollars from the taxpayers to cover the appearances of catastrophic losses and then paying bonuses for good management is over the top by any standards. But neither he nor the media is correct in assuming that that the bonuses were not in fact earned by the people who defrauded us in the first place with the mortgage meltdown. Those bonuses were paid BECAUSE PROFIT WAS GENERATED even if it wasn’t completely reported. Nobody seems to get it — the key acronym is OPM (other people’s money). Wall Street did not lose any money, they made record profits, kept it, took taxpayer money too and now they are in the process of also taking the properties of unsuspecting homeowners who still don’t understand what hit them and how it was done.

    At no time did the investment bankers have their own capital at risk during the selling of the mortgage backed securities. They were ALWAYS using the money of other people (investors). Every time money moves, financial insitutions make money. In this case both their existence and their profits and fees were and remain largely undisclosed. Starting with the “forward sale” (i.e., selling what you don’t have “yet”) of certificates of mortgage backed securities at a nominal rate of interest that could never be paid and filling in the void with either non-existent mortgage obligations or deals in which the actual expected life of the “loan” was as little as a month and at most five years, investment bankers made astonishing profits PLUS fees. Selling a note with a nominal interest rate of 18% to an investor looking for a 6% return enabled investment bankers to receive $900,000 on a “loan” that was funded for $300,000. You don’t really think they went wild selling these things because they were making money on volume with basis points as fees do you?

    And at the “pretender lender” level where a financial institution pretended to be the underwriter of a home loan and where the committees to verify viability, value and income were disbanded, they put on a good face because they were being paid for the renting of their charter to people and companies who were operating as bankers without even being seen, much less regulated. So the “pretender lender” would charge all the “normal” fees for a sub-sub prime loan into which the borrower was steered when they qualified for a conventional loan, PLUS an undisclosed 2.5% fee for renting their charter out to an undisclosed third party. Now Countrywide and others are telling borrowers that they won’t reveal the true name of the lender because the information is confidential. Why? Because when the borrower and investor get together they will have proof positive of  identical fraud on both ends of this game. You didn’t think that these lenders were advertising for borrowers because they were making a few hundred dollars on each loan plus interest, did you? NO, they were never at risk because they were using OPM and they got paid $30,000 on that $300,000 loan funding.

    Did you think home prices went up because of increased demand for housing? Take a look around you. We have enough inventory to satisfy demand for the next three or four years without another stick being nailed. Home prices went up because Wall Street needed to move money — lots of it — $13 trillion to be exact. And they had a problem. They had run out of borrowers, buyers, and homeowners seeking refinancing. So they invented them and inflated the “price” or “value” of the house to satisfy the demand from Wall Street for $100 billion per month in paper.

    It isn’t that the bonuses were unearned or that actual losses were incurred. The story here is that they didn’t lose money and did earn the bonuses. It was everyone else who lost money. And yet we continue to throw money at the “infrastructure” (translation: big institutions) for the same stupid WMD reasons that got us into Iraq. There are 6,000 depository bank institutions in this country alone, most of whom are NOT in trouble. Most community bankers and loan managers at credit unions didn’t play the mortgage meltdown game. Without a penny of “bailout” they could have filled the void created by these giant thieves and credit would be flowing. There is nothing new in that model. Every time a financial institution buckles, the FDIC, OCC, FED or OTS steps in, breaks them up and distributes the assets with value to healthy institutions. The only reason that didn’t happen  this time is that government was in bed with the regulators.

    Credit will flow when the world has confidence in the United States economy and financial system. A fraud has occurred under our watch (all of us). The system can’t correct until the fraud is corrected, the damages are measured and a plan is in place that will actually (not cosmetically) put people back in the position they were in before the fraud occurred. That means the mortgages must fall, the notes must be reduced (or eliminated) and the investors must have a GOOD bank representing them that will participate in equity appreciation in the homes, not a BAD bank that will apply lipstick to a pig. Right now it is the mortgage servicers and other middlemen who never put up a dime who are getting and keeping the houses and proceeds of foreclosure sales. They are laughing all the way to their own bank.

    Putting homeowners back in the black will provide a greater stimulus than any plans being offered today, although the current stimulus packages are badly needed for us to compete globally. Putting investors in a position where they can recover some or all of their investment will inject confidence into limping marketplace. And putting the thieves in jail will tell the world, we recognize and correct our mistakes — giving us a chance to regain or re-earn some moral high ground.

    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 michael.phillips@wsj.com


    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.