Securitization for Lawyers: How it was Written by Wall Street Banks

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Continuing with my article THE CONCEPT OF SECURITIZATION from yesterday, we have been looking at the CONCEPT of Securitization and determined there is nothing theoretically wrong with it. That alone accounts for tens of thousands of defenses” raised in foreclosure actions across the country where borrowers raised the “defense” securitization. No such thing exists. Foreclosure defense is contract defense — i.e., you need to prove that in your case the elements of contract are absent and THAT is why the note or the mortgage cannot be enforced. Keep in mind that it is entirely possible to prove that the mortgage is unenforceable even if the note remains enforceable. But as we have said in a hundred different ways, it does not appear to me that in most cases, the loan contract ever existed, or that the acquisition contract in which the loan was being “purchased” ever occurred. But much of THAT argument is left for tomorrow’s article on Securitization as it was practiced by Wall Street banks.

So we know that the concept of securitization is almost as old as commerce itself. The idea of reducing risk and increasing the opportunity for profits is an essential element of commerce and capitalism. Selling off pieces of a venture to accomplish a reduction of risk on one ship or one oil well or one loan has existed legally and properly for a long time without much problem except when a criminal used the system against us — like Ponzi, Madoff or Drier or others. And broadening the venture to include many ships, oil wells or loans makes sense to further reduce risk and increase the likelihood of a healthy profit through volume.

Syndication of loans has been around as long as banking has existed. Thus agreements to share risk and profit or actually selling “shares” of loans have been around, enabling banks to offer loans to governments, big corporations or even little ones. In the case of residential loans, few syndications are known to have been used. In 1983, syndications called securitizations appeared in residential loans, credit cards, student loans, auto loans and all types of other consumer loans where the issuance of IPO securities representing shares of bundles of debt.

For logistical and legal reasons these securitizations had to be structured to enable the flow of loans into “special purpose vehicles” (SPV) which were simply corporations, partnerships or Trusts that were formed for the sole purpose of taking ownership of loans that were originated or acquired with the money the SPV acquired from an offering of “bonds” or other “shares” representing an undivided fractional share of the entire portfolio of that particular SPV.

The structural documents presented to investors included the Prospectus, Subscription Agreement, and Pooling and Servicing Agreement (PSA). The prospectus is supposed to disclose the use of proceeds and the terms of the payback. Since the offering is in the form of a bond, it is actually a loan from the investor to the Trust, coupled with a fractional ownership interest in the alleged “pool of assets” that is going into the Trust by virtue of the Trustee’s acceptance of the assets. That acceptance executed by the Trustee is in the Pooling and Servicing Agreement, which is an exhibit to the Prospectus. In theory that is proper. The problem is that the assets don’t exist, can’t be put in the trust and the proceeds of sale of the Trust mortgage-backed bonds doesn’t go into the Trust or any account that is under the authority of the Trustee.

The writing of the securitization documents was done by a handful of law firms under the direction of a few individual lawyers, most of whom I have not been able to identify. One of them is located in Chicago. There are some reports that 9 lawyers from a New Jersey law firm resigned rather than participate in the drafting of the documents. The reports include emails from the 9 lawyers saying that they refused to be involved in the writing of a “criminal enterprise.”

I believe the report is true, after reading so many documents that purport to create a securitization scheme. The documents themselves start off with what one would and should expect in the terms and provisions of a Prospectus, Pooling and Servicing Agreement etc. But as you read through them, you see the initial terms and provisions eroded to the point of extinction. What is left is an amalgam of options for the broker dealers selling the mortgage backed bonds.

The options all lead down roads that are absolutely opposite to what any real party in interest would allow or give their consent or agreement. The lenders (investors) would never have agreed to what was allowed in the documents. The rating agencies and insurers and guarantors would never have gone along with the scheme if they had truly understood what was intended. And of course the “borrowers” (homeowners) had no idea that claims of securitization existed as to the origination or intended acquisition their loans. Allan Greenspan, former Federal Reserve Chairman, said he read the documents and couldn’t understand them. He also said that he had more than 100 PhD’s and lawyers who read them and couldn’t understand them either.

Greenspan believed that “market forces” would correct the ambiguities. That means he believed that people who were actually dealing with these securities as buyers, sellers, rating agencies, insurers and guarantors would reject them if the appropriate safety measures were not adopted. After he left the Federal Reserve he admitted he was wrong. Market forces did not and could not correct the deficiencies and defects in the entire process.

The REAL document is the Assignment and Assumption Agreement that is NOT usually disclosed or attached as an exhibit to the Prospectus. THAT is the agreement that controls everything that happens with the borrower at the time of the alleged “closing.” See me on YouTube to explain the Assignment and Assumption Agreement. Suffice it to say that contrary to the representations made in the sale of the bonds by the broker to the investor, the money from the investor goes into the control of the broker dealer and NOT the REMIC Trust. The Broker Dealer filters some of the money down to closings in the name of “originators” ranging from large (Wells Fargo, Countrywide) to small (First Magnus et al). I’ll tell you why tomorrow or the next day. The originators are essentially renting their names the same as the Trustees of the REMIC Trusts. It looks right but isn’t what it appears. Done properly, the lender on the note and mortgage would be the REMIC Trust or a common aggregator. But if the Banks did it properly they wouldn’t have had such a joyful time in the moral hazard zone.

The PSA turned out to be the primary document creating the Trusts that were creating primarily under the laws of the State of New York because New York and a few other states had a statute that said that any variance from the express terms of the Trust was VOID, not voidable. This gave an added measure of protection to the investors that the SPV would not be used for any purpose other than what was described, and eliminated the need for them to sue the Trustee or the Trust for misuse of their funds. What the investors did not understand was that there were provisions in the enabling documents that allowed the brokers and other intermediaries to ignore the Trust altogether, assert ownership in the name of a broker or broker-controlled entity and trade on both the loans and the bonds.

The Prospectus SHOULD have contained the full list of all loans that were being aggregated into the SPV or Trust. And the Trust instrument (PSA) should have shown that the investors were receiving not only a promise to repay them but also a share ownership in the pool of loans. One of the first signals that Wall Street was running an illegal scheme was that most prospectuses stated that the pool assets were disclosed in an attached spreadsheet, which contained the description of loans that were already in existence and were then accepted by the Trustee of the SPV (REMIC Trust) in the Pooling and Servicing Agreement. The problem was that the vast majority of Prospectuses and Pooling and Servicing agreements either omitted the exhibit showing the list of loans or stated outright that the attached list was not the real list and that the loans on the spreadsheet were by example only and not the real loans.

Most of the investors were “stable managed funds.” This is a term of art that applied to retirement, pension and similar type of managed funds that were under strict restrictions about the risk they could take, which is to say, the risk had to be as close to zero as possible. So in order to present a pool that the fund manager of a stable managed fund could invest fund assets the investment had to qualify under the rules and regulations restricting the activities of stable managed funds. The presence of stable managed funds buying the bonds or shares of the Trust also encouraged other types of investors to buy the bonds or shares.

But the number of loans (which were in the thousands) in each bundle made it impractical for the fund managers of stable managed funds to examine the portfolio. For the most part, if they done so they would not found one loan that was actually in existence and obviously would not have done the deal. But they didn’t do it. They left it on trust for the broker dealers to prove the quality of the investment in bonds or shares of the SPV or Trust.

So the broker dealers who were creating the SPVs (Trusts) and selling the bonds or shares, went to the rating agencies which are quasi governmental units that give a score not unlike the credit score given to individuals. Under pressure from the broker dealers, the rating agencies went from quality culture to a profit culture. The broker dealers were offering fees and even premium on fees for evaluation and rating of the bonds or shares they were offering. They HAD to have a rating that the bonds or shares were “investment grade,” which would enable the stable managed funds to buy the bonds or shares. The rating agencies were used because they had been independent sources of evaluation of risk and viability of an investment, especially bonds — even if the bonds were not treated as securities under a 1998 law signed into law by President Clinton at the behest of both republicans and Democrats.

Dozens of people in the rating agencies set off warning bells and red flags stating that these were not investment grade securities and that the entire SPV or Trust would fail because it had to fail.  The broker dealers who were the underwriters on nearly all the business done by the rating agencies used threats, intimidation and the carrot of greater profits to get the ratings they wanted. and responded to threats that the broker would get the rating they wanted from another rating agency and that they would not ever do business with the reluctant rating agency ever again — threatening to effectively put the rating agency out of business. At the rating agencies, the “objectors” were either terminated or reassigned. Reports in the Wal Street Journal show that it was custom and practice for the rating officers to be taken on fishing trips or other perks in order to get the required the ratings that made Wall Street scheme of “securitization” possible.

This threat was also used against real estate appraisers prompting them in 2005 to send a petition to Congress signed by 8,000 appraisers, in which they said that the instructions for appraisal had been changed from a fair market value appraisal to an appraisal that would make each deal work. the appraisers were told that if they didn’t “play ball” they would never be hired again to do another appraisal. Many left the industry, but the remaining ones, succumbed to the pressure and, like the rating agencies, they gave the broker dealers what they wanted. And insurers of the bonds or shares freely issued policies based upon the same premise — the rating from the respected rating agencies. And ultimate this also effected both guarantors of the loans and “guarantors” of the bonds or shares in the Trusts.

So the investors were now presented with an insured investment grade rating from a respected and trusted source. The interest rate return was attractive — i.e., the expected return was higher than any of the current alternatives that were available. Some fund managers still refused to participate and they are the only ones that didn’t lose money in the crisis caused by Wall Street — except for a period of time through the negative impact on the stock market and bond market when all securities became suspect.

In order for there to be a “bundle” of loans that would go into a pool owned by the Trust there had to be an aggregator. The aggregator was typically the CDO Manager (CDO= Collateralized Debt Obligation) or some entity controlled by the broker dealer who was selling the bonds or shares of the SPV or Trust. So regardless of whether the loan was originated with funds from the SPV or was originated by an actual lender who sold the loan to the trust, the debts had to be processed by the aggregator to decide who would own them.

In order to protect the Trust and the investors who became Trust beneficiaries, there was a structure created that made it look like everything was under control for their benefit. The Trust was purchasing the pool within the time period prescribed by the Internal Revenue Code. The IRC allowed the creation of entities that were essentially conduits in real estate mortgages — called Real Estate Mortgage Investment Conduits (REMICs). It allows for the conduit to be set up and to “do business” for 90 days during which it must acquire whatever assets are being acquired. The REMIC Trust then distributes the profits to the investors. In reality, the investors were getting worthless bonds issued by unfunded trusts for the acquisition of assets that were never purchased (because the trusts didn’t have the money to buy them).

The TRUSTEE of the REMIC Trust would be called a Trustee and should have had the powers and duties of a Trustee. But instead the written provisions not only narrowed the duties and obligations of the Trustee but actual prevented both the Trustee and the beneficiaries from even inquiring about the actual portfolio or the status of any loan or group of loans. The way it was written, the Trustee of the REMIC Trust was in actuality renting its name to appear as Trustee in order to give credence to the offering to investors.

There was also a Depositor whose purpose was to receive, process and store documents from the loan closings — except for the provisions that said, no, the custodian, would store the records. In either case it doesn’t appear that either the Depositor nor the “custodian” ever received the documents. In fact, it appears as though the documents were mostly purposely lost and destroyed, as per the Iowa University study conducted by Katherine Ann Porter in 2007. Like the others, the Depositor was renting its name as though ti was doing something when it was doing nothing.

And there was a servicer described as a Master Servicer who could delegate certain functions to subservicers. And buried in the maze of documents containing hundreds of pages of mind-numbing descriptions and representations, there was a provision that stated the servicer would pay the monthly payment to the investor regardless of whether the borrower made any payment or not. The servicer could stop making those payments if it determined, in its sole discretion, that it was not “recoverable.”

This was the hidden part of the scheme that might be a simple PONZI scheme. The servicers obviously could have no interest in making payments they were not receiving from borrowers. But they did have an interest in continuing payments as long as investors were buying bonds. THAT is because the Master Servicers were the broker dealers, who were selling the bonds or shares. Those same broker dealers designated their own departments as the “underwriter.” So the underwriters wrote into the prospectus the presence of a “reserve” account, the source of funding for which was never made clear. That was intentionally vague because while some of the “servicer advance” money might have come from the investors themselves, most of it came from external “profits” claimed by the broker dealers.

The presence of  servicer advances is problematic for those who are pursuing foreclosures. Besides the fact that they could not possibly own the loan, and that they couldn’t possibly be a proper representative of an owner of the loan or Holder in Due Course, the actual creditor (the group of investors or theoretically the REMIC Trust) never shows a default of any kind even when the servicers or sub-servicers declare a default, send a notice of default, send a notice of acceleration etc. What they are doing is escalating their volunteer payments to the creditor — made for their own reasons — to the status of a holder or even a holder in due course — despite the fact that they never acquired the loan, the debt, the note or the mortgage.

The essential fact here is that the only paperwork that shows actual transfer of money is that which contains a check or wire transfer from investor to the broker dealer — and then from the broker dealer to various entities including the CLOSING AGENT (not the originator) who applied the funds to a closing in which the originator was named as the Lender when they had never advanced any funds, were being paid as a vendor, and would sign anything, just to get another fee. The money received by the borrower or paid on behalf of the borrower was money from the investors, not the Trust.

So the note should have named the investors, not the Trust nor the originator. And the mortgage should have made the investors the mortgagee, not the Trust nor the originator. The actual note and mortgage signed in favor of the originator were both void documents because they failed to identify the parties to the loan contract. Another way of looking at the same thing is to say there was no loan contract because neither the investors nor the borrowers knew or understood what was happening at the closing, neither had an opportunity to accept or reject the loan, and neither got title to the loan nor clear title after the loan. The investors were left with a debt that could be recovered probably as a demand loan, but which was unsecured by any mortgage or security agreement.

To counter that argument these intermediaries are claiming possession of the note and mortgage (a dubious proposal considering the Porter study) and therefore successfully claiming, incorrectly, that the facts don’t matter, and they have the absolute right to prevail in a foreclosure on a home secured by a mortgage that names a non-creditor as mortgagee without disclosure of the true source of funds. By claiming legal presumptions, the foreclosers are in actuality claiming that form should prevail over substance.

Thus the broker-dealers created written instruments that are the opposite of the Concept of Securitization, turning complete transparency into a brick wall. Investor should have been receiving verifiable reports and access into the portfolio of assets, none of which in actuality were ever purchased by the Trust, because the pooling and servicing agreement is devoid of any representation that the loans have been purchased by the Trust or that the Trust paid for the pool of loans. Most of the actual transfers occurred after the cutoff date for REMIC status under the IRC, violating the provisions of the PSA/Trust document that states the transfer must be complete within the 90 day cutoff period. And it appears as though the only documents even attempted to be transferred into the pool are those that are in default or in foreclosure. The vast majority of the other loans are floating in cyberspace where anyone can grab them if they know where to look.

Kickbacks at Fannie, Freddie Explain a Lot

13 Questions Before You Can Foreclose

foreclosure_standards_42013 — this one works for sure

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The selection of an attorney is an important decision  and should only be made after you have interviewed licensed attorneys familiar with investment banking, securities, property law, consumer law, mortgages, foreclosures, and collection procedures. This site is dedicated to providing those services directly or indirectly through attorneys seeking guidance or assistance in representing consumers and homeowners. We are available to any lawyer seeking assistance anywhere in the country, U.S. possessions and territories. Neil Garfield is a licensed member of the Florida Bar and is qualified to appear as an expert witness or litigator in in several states including the district of Columbia. The information on this blog is general information and should NEVER be considered to be advice on one specific case. Consultation with a licensed attorney is required in this highly complex field.

EDITOR’S COMMENT AND ANALYSIS:  The criminality of the Wall Street banks for the last 15 years has been so widespread and pervasive that it is difficult to imagine a scenario under which such behavior could have gone undetected.  The questions are unending. One particular answer to those questions stands out far above all the other possible answers, to wit: the actions of Wall Street did not go undetected.

The banks and Wall Street in general practically invented the process of due diligence, which is an examination of a proposed deal to determine whether the representations of each side are true, exaggerated or just plain false.

The government-sponsored entities of Fannie and Freddie clearly had the resources to perform extensive due diligence before they put their stamp of approval and guarantee on loans and investments that were clearly not originated or issued in accordance with government guidelines or industry standards.

The same thing may be said for the rating agencies that “got it wrong” or the insurers who presumably evaluated the risk that they were undertaking, and of course the counterparties to the hedge products including but not limited to credit default swaps.

The Wall Street Journal published a number of articles about the close relationship and economic pressure existing between the banks that were underwriting the bogus mortgage bonds and the rating agencies, insurance companies, and counterparties to credit default swaps.  these articles in the Wall Street Journal and other periodicals in mainstream media started back in 2007.

Similar articles appeared in the blogosphere  before that time warning of the coming catastrophe. Anyone with a background similar to mine on Wall Street could easily see that the underwriting of loans to consumers (especially mortgage loans) did not and could not conform to any known standards for risk assessment.

Why would a bank loan money in the knowledge (and indeed the hope) that the money would never be repaid? Why did government-sponsored entities, insurance companies, rating agencies, securities regulators, and counterparties to exotic hedge instruments turn their heads the other way, with full knowledge of the impending disaster? The answer is as old and simple as the history of commerce —  kickbacks, payoffs, bribes and promises of lucrative employment.

The Wall Street Journal told the stories where individuals working for rating agencies and insurance companies were taken on fishing trips and other junkets following which they received threats from the Wall Street banks that if the rating and insurance contracts were not to the liking of the Wall Street banks, the banks would go elsewhere.

Considering the creation of such entities as mortgage electronic registration systems (MERS)  and the financial strength of the banks, it was easy to see that if the banks didn’t get what they want from existing rating agencies and insurance companies they would create their own. Thus in addition to direct payoffs to individuals the management of old established institutions was put under pressure to play ball with Wall Street or go out of business.

The same playbook was used with appraisers who were promised higher fees if they continue to raise the stated value of the real property as they were instructed to do. In 2005 8000 appraisers warned Congress that this would happen. They were ignored. All the information that was needed for due diligence was easily accessible to the institutions that ignored red flags and eventually became part of the largest case of criminal fraud in human history.

If you look at the history of organized crime in this country you will see substantial similarities between the crime syndicates and the behavior of Wall Street. Payoffs and kickbacks to law enforcement, agencies, government officials, and legislators in the governing body of states and Congress became the ultimate protection and immunity from prosecution regardless of the severity of the crime or the damage caused to society.

While it is true that most such syndicates and eventually fail we cannot wait for time to run its course. That is why the demonstrations by occupy Wall Street and others are so important to bring pressure on those who are protecting multinational banks and the people who run them. It is not going to be easy because the amount of money is staggering. Trillions of dollars have been siphoned out of our own economy and the economy of dozens of other countries. With that kind of money you can pay off a lot of people with more money than they ever dreamed of having.

So it should come as no surprise that a “foreclosure specialist” at Fannie Mae was caught picking up $11,200 in cash in a sting operation. The problem here is that we are catching the smallest fish in the pond instead of removing those who control the action. It is interesting that the case reported below involved steering foreclosure listings to particular brokers. By focusing attention on activities far from the core of evil emanating from Wall Street many of us are distracted from looking at the real cause and the real problem not only still exists, but is being renewed as we speak in new schemes not very different from the old schemes.

The arrogance of Wall Street is either well-founded or stupid. At the present time it appears to be well founded. It remains to be seen whether we the people force our representatives, regulators and law enforcement to reject the carrot and stick from Wall Street and return to a nation of laws.

Kickbacks as ‘a natural part of business’ at Fannie Mae alleged,0,6280041.story



COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary GET COMBO TITLE AND SECURITIZATION ANALYSIS – CLICK HERE

EDITOR’S NOTE: There might be some discoverable information in the records of GSE’s like Fannie and Freddie. I note in particular that there are specific requirements for appraisals. I’d like to see whether the fraudulent appraisals differed in any respect from the fraudulent appraisal used to convince the buyer/borrower that he was buying into a good deal with the loan originator.

Submitted BY COCHRANE on 2011/08/12 at 10:47 am

FIS – ORIGINATION – GSE Vendor approved Freddie & Fannie

Loan Syndication and Trading – integrated functional modules that support the lending process from deal building through servicing and trading

FIS is one of the world’s top-ranked technology providers to the banking industry. With more than 30,000 experts in 100 countries, FIS delivers the most comprehensive range of solutions for the broadest range of financial markets, all with a singular focus: helping you succeed. Every FIS solution has the strength you need for profitability today, and the power to help you manage whatever comes next.

FIS is part of the S&P 500. FIS has also been named the number one overall financial technology provider in the world by American Banker and Financial Insights (FinTech 100).

FIS ‘PREFERRED AND ONLY ORIGINATOR’ LISTED AS APPROVED VENDOR OF NEW PROGRAMS. VENDOR LIST BELOW incorporates all of its global subscribers related to real estate industry. ‘EXCLUDES’ Small …’

Midtier and Large Banking – flexible channel, integration and core solutions to meet every banking need from originations to servicing.

Uniform Collateral Data Portal (UCDP)
Solution Providers as of (Vendor/AMC List) July 19, 2011

-ACI – appraisal . com
-a la mode, inc. Mercury Network
-Avista Solutions, inc. – Avista Agile(tm) Loan Origination System (LOS)
-Bradford Technologies, inc. – Appraisal/World Connection
-Calyx Software – Point(r) PointCentral(r)
-Fisserv – EasyAccess & Unlflo Pro Mortgage
-FNC, Inc. – Collateral Management System (r) (CMS) & Collateral -Headquarters ™ (CHQA)
-Global DMS, LLC – OASIS Valuation Management Platform & ——–Global Klnex WebServices
-IBM – Impact Loan Origination System
-InHouse, Inc – Connexions (AssS&Appraisal Management Services)
ISGN – Appraisal Services
-Kirchmeyer & Associates, Inc – Kichmeyer Order Management System
-RealEC Technologies – RealEC Collaborative Partner Network
-LenderVend LLC – Appraisal Fufilment Services
-MortgageFlex System – The Residential Lending System
-Prime Alliance Solutions – Lending Suite
-ServiceLink Valuation Solutions, LLC – Vision Integrations, Valuation Products
-Solidifil – Solidifil Values ™
-Veros Real Estate Solution – VeroSELECT & Valuation Risk –Management System (VRM) Sapphire (backoffice UCDP)
-ValuAmerica – ValuNet

https : // www . efanniemae . com/sf/technology / commitloandel / ucdp / pdf / ucdpvendorlist . pdf

Data and open system platform changed economic landscape and intent of INVESTORS’s TRUSTEE taking possession of property in deceptive perhaps larcenous manner.

Data portals of ‘Servicer’ advancing funding on an individual debt that is ‘collateral’ with legal claim is related to the OWNER of the BOND (Purchaser) of the Collateral placed inside the ‘BOND’, and the ‘promissory note’ separated from the Deed of Trust during Origination. How? Look at current members who are ready for FREDDIE and FANNIE’s new open system platform ‘FIS’ Originator controls the nationwide network of bank attorney’s, lawyers, title & settlement agents, agencies, insurance companies, who are ‘authorized’ integrators on the ‘Cloud.’


(CLOUD) Approved Vendor List 7/19/2011

Definition of a UDC
Document File ID ’1100000A2D’
File Identifer listed inside of CTS-Link Remitter & Collateral Files links Appraisal submissions of Appraiser, Lender, Seller, Purchaster to INVESTOR including both (GSEs) INVESTOR & LENDER & SELLER Loan# documented inside of UDC documents processed via portal by Lender Admistrator and

eFannieMae . com
Uniform Collateral Data Portal (UCDP)
September 1, 2011 effective date for use of Uniform Appraisal Data set (UAD)-compliant forms quickly approaching.

Appraisal report forms for all conventional mortgage loans delivered to Fannie Mae on or after March 19, 2010 must be submitted to UCDP if:
– The loan application is dated on or after December 1, 2011, and
– An appraisal report is required.

INFORMATION TECHNOLOGISTS UNDERSTAND ‘data’ bases must be updated, tested, for new open system platform development, systems wil run parallel. Major changes underway include dissolution of MERS entity and the National Registry status? of MIN Identifer 18 digits (7 Member ID) 10 Agreement Numeric Identifer -1 Control Prefix insuring unique number.

UCDP General User Guide discusses new 15 digit numeric placeholder. New number? Unique to FREDDIE/FANNIE/LENDERS/SELLERS?

Vendor-provided solutions that offer an integrated system interface to UCDP. A list of technology vendors that plan to provide a vendor solution with an integrated system interface to UCDP is provided below. The list will be updated frequently over the next several months as vendors are added.

Attorney’s and client’s of Origination transaction documents, servicing transactions documents, and BATES ‘discovery’ documents, may not realize data identifiers in report reveal the system,, gateways, portals, requests for documents passed through will have detailed data records defineding Investor, Lender, Seller, Appraiser, Underwriter, …

Accurate business documents exist stored in specified locations of ‘originator’ or eValut provider identified in MERS data records, an example.

Transactions via CLOUD may affix in image “TD” a data identifier document report to/from TD Escrow Services.

ORIGINATOR Fidelity Information Services, MERS, eLynx, Services-Link, LPS/DOCX,
including FREDDIE MAC UMD ID: 1100000A2D’ 10 digit document file identification.

FREDDIE MAC ‘website: ‘search’ collateral
June 2011
Uniform Collateral Data Portal ‘UCDP’

Users CREATED in UDCP “Lender Administrator’
Users INVITED INto UCDP ‘Invited General User’

Lender Administrator (Organizational setup) or Lender Admin is a UCDP user who has the authority to set up and manage your company’s business structure within the portal, including the access privileges of other users, at the business unit or enterprise level.

The Lender Admin can either “create” a general user in UCDP (created users) or “invite” a general user to register for UCDP (invited user).

General users have access to all of the functions described herein (except the ability to change passwords and to invite and/or create users, which is reserved for the Lender Admin). Read-only users can only read information on the screen and do not have a Submit Appraisal option on their Home page

GSE Sellers acess to ‘joint’ GSE website. UCDP user agreement does not amend or supplement Agreemnt between you and either GSE.




Who should read this manual?
This User Guide is intended for loan officers, underwriters, appraisal management companies, and others who use UCDP to submit appraisal data files to the GSEs, resolve problems with the appraisal data file submissions, and generate reports from UCDP

The Uniform Collateral Data PortalSM (UCDPSM) is the Web-based portal lenders and their designated agents use to electronically submit appraisal data files prior to loan delivery to Fannie Mae and/or Freddie Mac (Government Sponsored Enterprises or GSEs). Through UCDP, you can submit up to 10 appraisal data files at a time, search for previously submitted appraisal data files, clear exceptions, and view reports. NOTE: The use of UCDP does not relieve lenders of any obligations under the Fannie Mae or Freddie Mac Guides, as applicable, including the representations and warranties they are required to make about the accuracy and sufficiency of appraisals relating to mortgages that are sold to either Freddie Mac or Fannie Mae, including adherence to the Uniform Appraisal Dataset (UAD) standards

FannieMae & FreddieMac
Uniform Collateral Data Portal (UCDP) General User Guide
[PDF 4.7M] New
Uniform Collateral Data Portal (UCDP) Lender Agent Admin User Guide [PDF 2.8M] New
Uniform Collateral Data Portal (UCDP) Reference Series for the Lender Admin [PDF] New


SUBMIT APPRAISAL ‘Electronic Appraisal data file (XML with embedded PDF) FOR A LOAN.



BUSINESS UNIT – UCDP assigned business units
NON S/SN ID (Select the Seller Servicer Number (S/SN) or
Non-Seller Service Number (Non S/SN
FREDDIE MAC S/SN OR TPO# – Select Seller/Servicer Number (S/SN or Third Party Originator Number (TPO) from dropdown
FILE NAME LOCATION: Uploan appraisal data file ‘Appraisal 1′…


Inside SEC Documents, information captured in ‘FWP’ Free Writing Prospectus, Lender Loan Number, Zip Code, Appraisal Value
source data from ‘appraisal documentation’ reviewed by GSE via UCDP

‘Consumer name and physical address as borrower omitted inside FWP. Deal between FREDDIE MAC ‘Investor’ and LENDERS Loan# and info inside UCDP includes borrower’s name and physical address, and appraisal, and Loan Information for approval.



Doc File ID
Date Submitted
Last Update
Business Unit
FNM Status
FRE Status

UCDP ‘User’ submits changes.






Appraisal freport forms for all conventional mortgage loans delivered to Fannie Mae on or after March 19, 2010 must be submitted to UCDP if:
– The loan application is dated on or after December 1, 2011, and
– An appraisal report is required.

eFanniemae approved vendor of ‘Origination’

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EDITOR’S NOTE: Now the FDIC gets it too. THE WORSE THE LOAN THE MORE MONEY THEY MADE. In the convoluted logic of the mortgage mess the investment banks profits skyrocketed as they increased the likelihood that the the loan would fail. Going into the subprime market was only one way it was done. The same facts apply across the board. A loan destined to fail was far more likely to carry an inflated nominal rate of interest, albeit knowing that the payments would not be made at earliest time possible. Since these loans could not be closed with borrowers unless the initial payment (teaser etc.) was low enough that the borrower could be convinced they could afford it, and the borrowers were relying on the mortgage broker and the fact that a lender would not take the risk unless there was merit to the deal, they relied upon the lender’s appraisal and apparent confirmation of appraisal of the property. By increasing the “value”of the property they were able to close larger loans. By closing larger loans, they were able to move more money faster.

The higher nominal rate of interest was something everyone except the borrower and investor knew would never be paid. The principal was also skewed based upon a higher rate of principal payments based upon an unsustainable appraisal (which of course also increased the size of the loan and therefore the principal and interest payments). The life of the loan and the effect on the actual rate of interest moved many loans into usury territory. And before you tell me that banks are exempt in many states from usury laws, let me say that in many states they are not and even if they banks ARE exempt the originators of nearly all securitized loans either were not banks at all or were banks acting as mortgage brokers — i.e., not actually underwriting the loan nor funding it.

The net effect of this, from a TILA standpoint, is that the APR was misstated in the Good Faith Estimate (GFE) given to each borrower which did not reflect the reality of the actual loan life (obviously ending when the payments reset to a level that exceeded the borrower’s income), the inflated appraisal and the actual terms of compensation being received by intermediaries who were not disclosed to the borrower or the investors. RESCISSION is therefore most probably an available remedy even in old loans as a result of this. ANd the amount that would be required for tender back to the “Lender” (originator) would be reduced by the amount of the appraisal fraud and other causes of action attendant to this fraud.

The plot thickens: by using crappy loans and getting what on paper looked like high interest rates (nominal rates), the banks were able to create the illusion that the DOLLAR amount of return that the investor was expecting was satisfied by the loans “in the portfolio” which we now know never made into the “portfolio” or “pool.” Thus by jacking up at least part of the portfolio nominal rates the banks were able to REDUCE THE PRINCIPAL of the so-called “loan,” which we now know was a sham. This reduction in the amount of principal actually funded produced a spread between the amount of money advanced by the investors and the amount of money actually funded, which the investors knew nothing about.

This spread was caused by the difference between the rates that the investors were expecting (yield) and the rates that the borrowers were supposed to pay (yield), which is why I identified a second yield spread premium (YSP2) years ago. This premium taken by the banks was in the form of profit on sale of loans that were neither sold nor even transferred but nobody knew that back then, although I suspected it based upon the inability of the banks to produce documentation on any performing loan. The only time they came up with documentation was when the loan was in foreclosure and it was in litigation and it was close a hearing in which they had to either putup or shut up. Many simply shut up and moved on to more low hanging fruit. 

FDIC Sues LPS and CoreLogic Over Appraisal Fraud; Shows Investors Leaving Money on the Table

Posted By igradman On May 30, 2011 (10:43 pm)

In another sign that the Federal Government is turning its focus towards prosecuting the securitization players who may have contributed to the Mortgage Crisis, the FDIC filed separate lawsuits against LSI Appraisal (available here) and CoreLogic (available here) earlier this month.  In the suits, both filed in the Central District of California, the FDIC, as Receiver for Washington Mutual Bank (“WAMU”), accuses vendors with whom WAMU contracted to provide appraisal services with gross negligence, breach of reps and warranties, and other breaches of contract for providing defective and/or inflated appraisals.  The FDIC seeks at least $154 million from LSI (and its parent companies, including Lender Processing Services and Fidelity, based on alter ego liability) and at least $129 million from CoreLogic (and its parent companies, including First American Financial, based on alter ego liability).

As we’ve been discussing on The Subprime Shakeout this past month, the U.S. Government has stepped up its efforts to pursue claims against originators, underwriters and other participants in mortgage securitization over irresponsible lending and underwriting practices that led to the largest financial crisis since the Great Depression.  This has included the DOJ suing Deutsche Bank over reckless lending and submitting improper loans to the FHA and the SEC subpoenaing records from Credit Suisse and JPMorgan Chase over so-called “double dipping” schemes.  The FDIC’s lawsuit is just the latest sign that much more litigation is on the horizon, as it focuses on yet another aspect of the Crisis that is ripe for investigation–appraisal fraud.

Granted, those familiar with the loan repurchase or putback process have long recognized that inflated or otherwise improper appraisals are a major category of rep and warranty violations that are found in subprime and Alt-A loans originated between 2005 and 2007.  In fact, David Grais, in his lawsuits on behalf of the Federal Home Loan Banks of San Francisco and Seattle, focused the majority of his allegations against mortgage securitizers on inflated appraisals (ironically, the data Grais used in his complaints was compiled by CoreLogic, which is now one of the subjects of the FDIC’s suits).

Grais likely zeroed in on appraisals in those cases because he was able to evaluate their propriety after the fact using publicly available data, as he had not yet acquired access to the underlying loan files that would have provided more concrete evidence of underwriting deficiences.  But, appraisals have been historically a bit squishy and subjective–even using retroactive appraisal tools–and absent evidence of a scheme to inflate a series of comparable properties, it can be difficult to convince a judge or jury that an appraisal that’s, say, 10% higher than you would expect was actually a negligent or defective assessment of value.

The reason that the FDIC/WAMU is likely focusing on this aspect of the underwriting process is because it’s one of the few avenues available to WAMU to recover its losses.  Namely, the FDIC is suing over losses associated with loans that it holds on its books, not loans that it sold into securitization.  Though the latter would be a much larger set of loans, WAMU no longer holds any ownership interest in those loans, and would not suffer losses on that pool unless and until it (or its new owner, JPMorgan) were forced to repurchase a significant portion of those loans (read: a basis for more lawsuits down the road).

Which brings me to the most interesting aspect of these cases.  As I mentioned, the FDIC is only suing these appraisal vendors over the limited number of loans that WAMU still holds on its books.  In the case against LSI, the FDIC only reviewed 292 appraisals and is seeking damages with respect to 220 of those (75.3%), for which it claims it found “multiple egregious violations of USPAP and applicable industry standards” (LSI Complaint p. 12).   Only 10 out of 292 (3.4%) were found to be fully compliant.  Yet, the FDIC notes earlier in that complaint that LSI “provided or approved more than 386,000 appraisals for residential loans that WaMu originated or purchased” (LSI Complaint p. 11).

In the case against CoreLogic, the FDIC says that it reviewed 259 appraisals out of the more than 260,000 that had been provided (CoreLogic Complaint pp. 11-12).  Out of those, it found only seven that were fully compliant (2.7%), while 194 (74.9%) contained multiple egregious violations (CoreLogic Complaint p. 12).  And it was the 194 egregiously defective appraisals that the FDIC alleges caused over $129 million in damages.

Can you see where I’m going with this?  If you assume that the rest of the appraisals looked very similar to those sampled by the FDIC, there’s a ton of potential liability left on the table.

Just for fun, let’s just do some rough, back-of-the-envelope calculations to provide a framework for estimating that potential liability.  I will warn you that these numbers are going to be eye-popping, but before you get too excited or jump down my throat, please recognize that, as statisticians will no doubt tell you, there are many reasons why the samples cited in the FDIC’s complaints may not be representative of the overall population.  For example, the FDIC may have taken an adverse sample or the average size of the loans WAMU held on its balance sheet may have been significantly greater than the average size of the loans WAMU securitized, meaning they produced higher than average loss severities (and were also more prone to material appraisal inflation). Thus, do not take these numbers as gospel, but merely as an indication of the ballpark size of this potential problem.

With that proviso, let’s project out some of the numbers in the complaints.  In the LSI/LPS case, the FDIC alleges that 75% of the appraisals it sampled contained multiple egregious violations of appraisal standards.  If we project that number to the total population of 386,000 loans for which LSI/LPS provided appraisal services, that’s 289,500 faulty appraisals.  The FDIC also claims it suffered $154 million in losses on the 220 loans with egregiously deficient appraisals, for an average loss severity of $700,000.  Multiply 289,500 faulty appraisals by $700,000 in losses per loan and you get a potential liability to LSI/LPS (on just the loans it handled for WAMU) of $202 billion.  Even if we cut the percentage of deficient appraisals in half to account for the FDIC’s potential adverse sampling and cut the loss severity in half to account for the fact that the average loss severity was likely much smaller (WAMU may have retained the biggest loans that it could not sell into securitizations), that’s still an outstanding liability of over $50 billion for LSI/LPS.

Do the same math for the CoreLogic case and you get similar results.  The FDIC found 74.9% of the loans sampled had egregious appraisal violations, meaning that at least 194,740 of the loans that CoreLogic handled for WAMU may contain similar violations.  Since the 194 egregious loans accounted for $129 million in losses according to the Complaint, that’s an average loss severity of $664,948.  Using these numbers, CoreLogic thus faces potential liabilities of $129 billion.  Even using our very conservative discounting methodology, that’s still over $32 billion in potential liability.

This means that somewhere out there, there are pension funds, mutual funds, insurance funds and other institutional investors who collectively have claims of anywhere from $82 billion to $331 billion against these two vendors of appraisal services with respect to WAMU-originated or securitized loans.  For how many other banks did LSI and CoreLogic provide similar services?  And how many other appraisal service vendors provided similar services during this time and likely conformed to what appear to have been industry practices of inflating appraisals?  The potential liability floating out there on just this appraisal issue alone is astounding, if the FDIC’s numbers are to be believed.

The point of this exercise is not to say that the FDIC necessarily got its numbers right, or even to say that WAMU wasn’t complicit in the industry practice of inflating appraisals.  My point is that these suits reveal additional evidence that investors are sitting on massive amounts of potential claims, about which they’re doing next to nothing.  Where are the men and women of action amongst institutional money managers (and for that matter, who is John Galt?)?  Are they simply passive by nature, and too afraid of getting sued to even peek out from behind the rock? Maybe this is why investors don’t want to reveal their holdings in MBS – they’re afraid that if unions or other organized groups of pensioners realized that their institutional money managers held WAMU MBS and were doing nothing about it, they would sue these managers and/or never run their money through them again.

The better choice, of course, would be to join the Investor Syndicate or one of the other bondholder groups that are primed for action, and then actually support their efforts to go after the participants in the largest Ponzi scheme in history (an upcoming article on TSS will focus on the challenges that these groups have faced in getting their members actually motivated to do something).  It seems that these managers should be focused on trying to recover the funds their investments lost for their constituents, rather than just acting to protect their own anonymity and their jobs.  If suits like those brought by the FDIC don’t cause institutional money managers to sit up and take notice, we have no other choice but to believe these individuals are highly conflicted and incapable of acting as the fiduciaries they’re supposed to be.  Of all the conflicts of interest that have been revealed in the fallout of the Mortgage Crisis, this last conflict would be the most devastating, because it would mean that the securitization participants who were instrumental in causing this crisis, and who were themselves wildly conflicted, will largely be let off the hook by those they harmed the most.

Article taken from The Subprime Shakeout –
URL to article:

Jake Naumer
Resolution Advisors
3187 Morgan Ford
St Louis Missouri 63116
314 961 7600
Fax Voice Mail 314 754 9086


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EDITOR’S NOTE: In 1983 the nominal value of credit derivatives was zero. Today it is over $600 TRILLION. None of this would have been possible without the active complicity of credit rating companies who as quasi public agencies “assured” the quality of securities sold to both sophisticated and unsophisticated investors. People forget that in most cases behind every “sophisticated” investor are millions of unsophisticated investors who entrusted their money to these venerable institutions to manage their savings and pensions.

A full 1/4 of the $600 TRILLION in derivatives is related in some exotic way to the housing market. When appraisal companies put profit before their reputations, you would have thought that the world would have come crashing down around them. When appraisers of real property were given instructions on what value they had to come back with to make the deal work (or else they would never be hired again), you would have thought that licensing boards would have revoked their licenses and criminal investigations would have led to prosecutions.

The whole grand hallucination referred to as securitization of debt instruments, was achieved by deceit, cheating and outright theft. But the guards at the gate not only let the barbarians in, they are letting them out too. I’m probably too old to see the eventual outcome of having a country governed by banks. But our children and grandchildren will see it in living color, and as food prices and other commodities start to rise and as the value of money falls, they will feel the pain of our folly and our failure to correct a situation that still is correctable. The founding fathers of our country gave us the right the and the means to do it.

If you like what you see, and you think that things are all going in the right direction, then you don’t need to do anything. You are probably a banker or financier with tens of millions of even tens of billions of wealth stashed away, with provisions for every eventuality. The rest of us don’t have that luxury. We were steered into an economy of excess by people who made sure that we had the money in our hands to spend — but only if we spent it, leaving ourselves and our economy and our future in tatters. If you don’t like that picture and the picture painted by hundreds of economists around the world, with our noble experiment becoming a banana republic, then maybe you should do something about it.

Innovation has been the hallmark of American success. Innovation is what it will take to bring about the changes that are necessary to have a country that is governed, with consent of the governed, by people who value human rights for all more than intense concentrations of wealth for a few. Millions of Americans have fought and died and been injured or maimed fighting for our rights as set forth in the constitutions. We treat our returning vets as expendable, and we treat their predecessors as part of some dry historical landscape without meaning.  If we are truly patriotic, then we will end the tyranny of wealth, and return to a society where wealth is possible, where hope springs eternal and where our expectations are virtually guaranteed, that our children will live better than we did.

Think back and remember. IF you can’t remember then research. We did it before. Let’s do it again.

Hey, S.E.C., That Escape Hatch Is Still Open


IT’S hard to say what’s more exasperating: the woeful performance of the credit ratings agencies during the recent mortgage securities boom or the failure to hold them accountable in the bust that followed.

Not that Congress hasn’t tried, mind you. The Dodd-Frank financial reform law, enacted last year, imposed the same legal liabilities on Moody’s, Standard & Poor’s and other credit raters that have long applied to legal and accounting firms that attest to statements made in securities prospectuses. Investors cheered the legislation, which subjected the ratings agencies to what is known as expert liability under the securities laws.

But since Dodd-Frank passed, Congress’s noble attempt to protect investors from misconduct by ratings agencies has been thwarted by, of all things, the Securities & Exchange Commission. The S.E.C., which calls itself “the investor’s advocate,” is quietly allowing the raters to escape this accountability.

When Dodd-Frank became law last July, it required that ratings agencies assigning grades to asset-backed securities be subject to expert liability from that moment on. This opened the agencies to lawsuits from investors, a policing mechanism that law firms and accountants have contended with for years. The agencies responded by refusing to allow their ratings to be disclosed in asset-backed securities deals. As a result, the market for these instruments froze on July 22.

The S.E.C. quickly issued a “no action” letter, indicating that it would not bring enforcement actions against issuers that did not disclose ratings in prospectuses. This removed the expert-liability threat for the ratings agencies, and the market began operating again.

At the time, the S.E.C. said its action was intended to give issuers time to adapt to the Dodd-Frank rules and would stay in place for only six months. But on Jan. 24, the S.E.C. extended its nonenforcement stance indefinitely. Issuers are selling asset-backed securities without the ratings disclosures required under S.E.C. rules, and rating agencies are not subject to expert liability.

MARTHA COAKLEY, the attorney general of Massachusetts, has brought significant mortgage securities cases against Wall Street firms — and she is disturbed by the S.E.C.’s position. Last week, she sent a letter to Mary Schapiro, the chairwoman of the S.E.C., asking why the commission was refusing to enforce its rules and was thereby defeating Congressional intent where ratings agencies’ liability is concerned.

“We wanted to make clear that we see this as a problem and important enough that we would like an answer,” Ms. Coakley said in an interview last week. “They are either going to enforce this or say why they are not. As a state regulator, we don’t enforce Dodd-Frank, but we certainly deal with the fallout when it is not enforced.”

An S.E.C. spokesman, John Nester, said that the agency would respond to Ms. Coakley.

Meredith Cross, director of the S.E.C.’s division of corporation finance, explained the agency’s decision to stand down on the issue: “If we didn’t provide the no-action relief to issuers, then they would do their transactions in the unregistered market,” she said. “You would impede investor protection. We thought, notwithstanding the grief we would take, that it would be better to have these securities done in the registered market.”

Unfortunately, the S.E.C.’s actions appear to continue the decades of special treatment bestowed upon the credit raters. Among the perquisites enjoyed by established credit raters is protection from competition, since regulators were required to approve new entrants to the business. Regulators have also sanctioned the agencies’ ratings by embedding them into the investment process: financial institutions post less capital against securities rated at or above a certain level, for example, and investment managers at insurance companies and mutual funds are allowed to buy only securities receiving certain grades.

This is a recipe for disaster. Given that ratings were required and the firms had limited competition, they had little incentive to assess securities aggressively or properly. Their assessments of mortgage securities were singularly off-base, causing hundreds of billions in losses among investors who had relied on ratings.

That the S.E.C.’s move strengthens the ratings agencies’ protection from investor lawsuits, which runs counter to the intention of Dodd-Frank, is also disturbing. Moody’s and Standard & Poor’s have argued successfully for years that their grades are opinions and subject to the same First Amendment protections that journalists receive. This position has made lawsuits against the raters exceedingly difficult to mount, a problem that Dodd-Frank was supposed to fix.

I asked Representative Barney Frank, the Massachusetts Democrat whose name is on the 2010 financial reform legislation, if he was concerned that the S.E.C.’s inaction was enabling ratings agencies to evade liability.

Mr. Frank said he believed the S.E.C.’s move was part of a longer-term strategy to eliminate investor reliance on ratings and remove, at long last, all references to credit ratings agencies in government statutes. Indeed, the S.E.C. proposed a new rule last week that would eliminate the requirement that money market funds buy only securities with high credit ratings. If the rule goes through, fund boards would have to make their own determinations that the instruments they buy are of superior credit quality.

Still, Mr. Frank said, the commission could do a better job of explaining that its nonenforcement stance is part of an effort to reduce reliance on ratings. “The message should not be lax enforcement by the S.E.C.; it should be a lack of confidence in the ratings,” he said.

The problem is that it could take years to rid the investment arena of all references to ratings. In the meantime, the S.E.C. is letting the ratings agencies escape accountability once again.

Moreover, investors are right to fear that the S.E.C. may be capitulating to threats by the ratings agencies to boycott the securitization market as long as they are subject to expert liability. After all, Moody’s and S.& P. have succeeded before in derailing attempts by legislators to bring accountability to asset-backed securities.

Back in 2003, for example, Georgia’s legislature enacted one of the toughest predatory-lending laws in the nation. Part of the law allowed issuers of and investors in mortgage pools to be held liable if the loans were found to be abusive. Shortly after that law went into effect, the ratings agencies refused to rate mortgage securities containing Georgia loans because of this potential liability. The law was soon rewritten to eliminate the liability, allowing predatory lending to flourish.

IT is certainly important that the S.E.C. work to eliminate references to ratings in the investment arena, and to reduce investor reliance on them. But Congress couldn’t have been clearer in its intent of holding the agencies accountable. That the S.E.C. is undermining that goal is absurd in the extreme.

A Sleuth Targets Credit Ratings: Why Not Appraisals?

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EDITOR’S NOTE: Since the ratings were a symbolic flag to be recognized internationally as “inspected for safety” it hardly seems that the basic mortgage transaction would not be examined as part of the fraudulent ratings of bogus mortgage backed securities. If there was no valid mortgage, note or obligation or if the property was intentionally overvalued that was to serve as security to provide the  “mortgage-backing” of the bogus mortgage backed bond, you would think that investigative reporters and law enforcement would be all over that.

But they are not. Start with the easy part, if the appraisal was inflated and known to be inflated and the appraisal was intentionally stated to be higher than the loan amount when in fact the loan amount vastly exceeded the value of the property, then the rating on the mortgage-backed security was wrong if it rated the bond as AAA.  For reasons that defy explanation, the ratings are the subject to investigation but he underlying appraisals, easy to prove, are hardly getting a glance. In fact, the appraisal is virtually the same as the rating — each apprising the safety and value of an investment. As it turns out they interpret and rate or appraise the SAME investment, so why are they ignoring appraisal fraud?

Of course the deeper question is why nobody is looking as deep as we are at the actual “mortgage transaction.” You have a transaction between the investor as lender and the homeowner and borrower that neither one of them actually knows about, much less has signed. Then you have a bunch of paperwork describing a cash transaction between the identified lender and the same borrower which transaction never occurred. The oddity here is that the “securitization” of the loan was done in reference to the documents for the transaction that never happened.

Perhaps Kroll will peek under those covers as well.

February 26, 2011 NY Times

A Corporate Sleuth Tries the Credit Rating Field

MBS Sell Out by Big Rating Firms Creates New Entrants Into Ratings Field


FEW people ever penetrate the dark side of money, but Jules Kroll is one of them.

Fortunes plundered, ransoms paid, deals cut — the uncovering of such secrets, and the million smaller confidences that are his history, have made Mr. Kroll a rich man.

It was nearly 40 years ago, when he practically invented the business known as corporate intelligence, that he first came to the attention of crafty boardrooms. At a time when “private eye” still conjured images of cheating spouses and seedy hotels, Mr. Kroll built a sort of private C.I.A. and went corporate. If a Fortune 500 company or an A-list investment house wanted the dirt, it hired Kroll Inc. to dig it up.

Which is why his latest venture seems at once so unusual and yet so very Kroll. At 69, an age when other multimillionaires are working on their backswings, he is getting into — of all things — the credit ratings business.

Yes, credit ratings: gilt-edged triple-A’s, middling double-B’s, ignominious D’s. You might wonder why anyone pays attention to them anymore. After all, the financial crisis of 2008 and 2009 laid bare the conflicts at the heart of the ratings game. The world learned that the three dominant services — Moody’s, Standard & Poor’s and Fitch — had stamped sterling ratings on mortgage investments that turned out to be nearly worthless. It was a lesson that nearly brought down the financial system.

Ratings agencies, to many, seem like Wall Street’s enablers. What is Jules Kroll thinking? This is the man the Haitian government hired to track down financial assets linked to Jean-Claude Duvalier. The man Kuwait hired to ferret out the oil wealth of Saddam Hussein. One of Mr. Kroll’s cases, involving kidnapping, inspired the movie “Proof of Life,” and plans are in the works for HBO and Scott Rudin, the producer of “The Social Network,” to make a pilot for a television series loosely based on his exploits.

Mr. Kroll says that if he can do all of that, why, he can get to the bottom of an investment security, too. He and his son Jeremy, 39, are staking the family name on a venture called Kroll Bond Ratings. They say the business will marry hard-nosed credit analysis with their trademark corporate sleuthing. Maybe the leading ratings agencies — a triumvirate some liken to an oligopoly — can learn a thing or two from the gumshoes of Wall Street.

“They never really looked under the covers, which is what I have done all my life,” Mr. Kroll says. “If they were in any other business, they would be out of business.”

THE pertinent question for Mr. Kroll is why anyone should listen to him on the subject. The fundamental problem with the dominant agencies, their critics say, is that they are paid by the companies whose securities they evaluate, under the so-called issuer-pay model.

Some small ratings services have challenged the establishment by having investors — that is, the people who actually buy securities — pay for ratings. But for all his talk about shaking up this industry, Mr. Kroll is hewing to the status quo. Like Moody’s, S.& P. and Fitch, Kroll Bond Ratings will be paid by the issuers, just as the big three are.

Wall Street types tend to look askance at credit ratings no matter who is providing them. Not even Warren E. Buffett, whose Berkshire Hathaway owns about 12 percent of Moody’s, says he depends on ratings in making investment decisions. Mr. Buffett prefers to make his own judgments on companies, he said last year while appearing before the Financial Crisis Inquiry Commission.

But ratings services, despite their apparent failures, still play a crucial role in the capital markets. Virtually every investor, big or small, is affected by what they do. And even the pros have to pay attention, because ratings often figure into the investment guidelines of big money management firms, banks and insurance companies.

Some wonder if Mr. Kroll is out of his depth this time.

“What does he know about giving me a rating on a security?” asks Richard X. Bove, an analyst at Rochdale Securities.

Others aren’t so quick to write off Mr. Kroll. Michael F. Price, the prominent value investor, is bankrolling Kroll Bond Ratings. So is Frederick R. Adler, one of New York’s most successful venture capitalists. And William L. Mack, the big real estate investor. The venture capital firms Bessemer Venture Partners, RRE Ventures and NewMarket Capital Partners have invested a combined $24 million in it. And Mr. Kroll has personally staked $5 million.

That is pocket change by Wall Street standards. But Rob Stavis, a partner at Bessemer, says Kroll Bond Ratings could well pay off. “We often go after industries where there are significant incumbents when we believe they’re ripe for disruption,” he says. His firm was an early investor in Skype.

Mr. Kroll, for his part, is thinking big — as he always has. He wants to grab 10 percent of this $4 billion-a-year industry within five years.

But even that seemingly modest goal may be a reach. Moody’s and S.& P. each have about 40 percent of the ratings market. The remainder is spread among Fitch and several lesser-known agencies.

“I think it’s a tough industry to break into, but if anyone can do it, it’s Jules Kroll,” says Michael Charkasky, the chief executive of Altegrity, which acquired Kroll Inc. last year. (Mr. Charkasky had worked for Kroll for more than a decade.)

IN the aftermath of the Panic of 1907, a self-taught financial analyst named John Moody pioneered the idea of assigning ratings to public securities. For much of its history, the industry he founded was a relative backwater — a steady if unglamorous moneymaker that tended to attract wonks or analysts who might not land jobs at a Goldman or a Morgan.

Then, in 1975, the Securities and Exchange Commission promulgated rules that anointed a handful of Nationally Recognized Statistical Ratings Organizations. The S.E.C. argued that assessing the safety of investments was so important to the soundness of the nation’s banks and brokerage firms that only respected ratings agencies should be allowed to do the job. In the early 1980s, there were seven of these organizations. By the mid-1990s, mergers had reduced that number to three. The S.E.C. has since added seven, bringing the total to 10.

Kroll Bond Ratings is one of them.

It is certainly an uncomfortable time for ratings agencies, big or small. A report by the Congressional panel that chronicled the financial crisis called the big three services “essential cogs in the wheel of financial destruction.”

But the S.E.C. wants to wean the financial industry from its dependence on all ratings. In February, the commission unveiled a plan to strip references to ratings from rules that govern securities offerings, the first of several such moves the S.E.C. must make under the Dodd-Frank Act. The commission is also supposed to create its own Office of Credit Ratings to police the agencies, although the S.E.C. has delayed that move because of a tight budget.

”It’s a bit daunting, but I’ve always enjoyed a challenge,” Mr. Kroll says of his venture.

JULES KROLL loves a good story. The bookshelf in his 12th-floor office in Midtown Manhattan is stocked with titles that speak to a life spent weighing risks — books like “The Threat Closer to Home: Hugo Chávez and the War Against America” and “Surviving and Thriving in Uncertainty: Creating the Risk Intelligent Enterprise.”

But Mr. Kroll has plenty of his own stories to tell. Like the time in 2003 when Edward S. Lampert, the billionaire hedge fund manager who controls Sears, was kidnapped on the Connecticut Gold Coast. Mr. Kroll was brought in to help the F.B.I. and pointed out that someone — it turned out one of the kidnappers — was using Mr. Lampert’s credit card to buy pizza.

“These guys were real geniuses,” Mr. Kroll says dryly. Mr. Lampert was later released unharmed.

Over the years, Mr. Kroll has helped to secure the release of about 185 other kidnap victims, mostly overseas.

He clearly relishes his cloak-and-dagger image. In 2005, for instance, he paid $27,000 at a charity auction for a walk-on part on “CSI: New York.” He gave away the role so a friend could raise more money for another charity.

But Mr. Kroll has never quite fit the corporate mold. He sold Kroll Inc. in 2004 to Marsh & McLennan, the giant insurance brokerage firm, for $1.9 billion in cash and pocketed about $117 million.

In 2008, Mr. Kroll resigned as chairman and made an unsuccessful bid to buy his old company back. When that failed, he and Jeremy struck out on their own and opened K2 Global Consulting, whose name refers to the two Krolls. K2 provides anticorruption, due diligence and forensic accounting services that compete with the old Kroll. It will do much of the due diligence for Kroll Bond Ratings. (Marsh & McLennan sold his old company to Altegrity in 2010.)

Jeremy Kroll is being groomed for the family business, but his father says he never pressured his children to follow in his footsteps.

“I’ve seen too many situations where families and business split families apart,” Jules Kroll says. (Mr. Kroll’s daughters, Dana and Vanessa, have worked off and on for Kroll. His son Nick is an actor and comedian who recently appeared on Comedy Central.)

Jeremy Kroll, who studied languages and fine arts at Georgetown, took a series of odd jobs after college. He went to Italy to paint for a year. Later, he scouted film locations and cleaned toilets for a film company before joining his father’s company in 1996.

At Kroll, he handled things as diverse as missing-person cases and corporate litigation. And he quickly picked up his father’s work ethic: in 2001, he insisted on leading a team into Bosnia to complete a United Nations case that involved finding stolen money in the Bosnian banking system, even though, several weeks earlier, Kroll auditors had been beaten and taken hostage by Croats. “I couldn’t ask people on my team to go there if I wasn’t willing to go there myself,” Jeremy Kroll says.

One of his paintings hangs at K2’s headquarters. It is a gloomy, abstract self-portrait that he painted in Florence. In the painting, one eye is muddled over. Jeremy says it represents people who see only one side of things. “There’s always more to the story,” he says.

Kroll Bond Ratings hopes to pick apart some of the trickiest investments ever devised. Those include securities backed by residential mortgages as well as other “structured” products. Such investments, many of them linked to risky home loans, were at the heart of the financial crisis.

When they rated those securities, the dominant agencies often relied heavily on the banks that underwrote them. Indeed, the two camps often worked hand-in-glove.

Mr. Kroll vows that his venture will dig deeper, all the way down to the individual mortgages behind such investments. That would be a daunting task, given that thousands of individual home loans often back a single mortgage security.

“I wouldn’t do a rating unless that information was available — otherwise, how the hell are you going to make a judgment?” Mr. Kroll asks.

But already, his ratings venture has had some embarrassments of its own. Last year Mr. Kroll bought Lace Financial, a boutique credit rating service, to kick-start his firm. No sooner was that deal made than the S.E.C. fined Lace $20,000 for playing down a potential conflict of interest and failing to disclose steps that led to rating upgrades favorable for a big client.

Mr. Kroll dismisses the episode. “This was all just procedural stuff,” he says. Lace’s old management has since been replaced. Mr. Kroll has also recruited some heavy hitters from established agencies — that is, from the same agencies that have come under so much criticism. Among his hires are Jim Nadler, who headed the structured finance group at Fitch, and Kim Diamond, a former managing director at S.& P. For K2, Mr. Kroll has hired former C.I.A. agents, forensic accountants, academics, litigators and investigative journalists.

But breaking the grip of the big three won’t be easy. “It’s tough to break into any industry where the three incumbents have 97 percent of all ratings,” says Brett R. Gordon, an assistant professor of business at Columbia Business School.

Spokesmen for Moody’s, S.& P. and Fitch say their companies welcome competition. But Daniel Noonan, a managing director at Fitch, points out that his agency has 50 offices in 36 countries. Moody’s and S.& P. are even bigger. Start-up companies lack the geographical reach and industry expertise of the established players, Mr. Noonan says.

Kroll also faces competition from new entrants like Meredith Whitney, a banking analyst who is getting into the ratings business, and Morningstar, of mutual fund fame, which recently acquired an agency called Realpoint.

Sean Egan, the president of another small ratings service, Egan-Jones Ratings, says Mr. Kroll is playing by the old, discredited rules. The issuer-pay model lets companies shop around for the best ratings, putting pressure on the agencies to inflate their grades, Mr. Egan says.

“If a firm is being paid primarily by one side, it’s very difficult to argue that they can adequately represent the other side,” says Mr. Egan, whose firm has investors subscribe to its service. “One cannot serve two masters.”

Mr. Bove, the analyst at Rochdale, says of Mr. Kroll: “If he thinks he’s going to make his name by knocking down the ratings of one security after another, who’s going to pay him?”

BUT if Jules Kroll can deliver accurate credit ratings, he just might have a shot. Michael Millette, the head of structured finance at Goldman Sachs, says he would consider turning to Kroll. In the old days, if a security wasn’t rated by the big three, investors wondered why. To many, such securities seemed a bit dodgy. Now, in the post-crisis world, “that’s all changed,” Mr. Millette says.

Mr. Kroll is, naturally, undaunted. “I would be foolish not to tell you there is a hill to climb here,” he says, “but we’re not climbing a cliff.” He says that the big three agencies lost considerable investor confidence during the financial crisis, and that the sector is ripe for new blood. And, anyway, he says, he would rather be right than popular. “Our name is on the line,” he says.




Bank of America Corp’s

Countrywide mortgage unit is being sued for Fraud!

Investors claiming they were victimized by Bank of America’s Countrywide in a “massive fraud” when they bought mortgage-backed securities.

“Investors now seem to be conforming their allegations to those set forth on my blog 3 years ago — that they were not just sold an empty bag — it was more like they were sold a holographic image of an empty bag. The obvious fraud here extends much further than investors who purchased bogus mortgage backed securities. In order to complete the scheme they were required to lie not only to the investors who supplied the money, but the borrowers as well who were taking it. The common denominator is the use of a third party rating or appraisal upon which everyone hung their hat for “plausible deniability.” Now the deniability is not so plausible. The rating of the bogus securities and the appraisal of the property did not make the securities or property value any more real than it would have been without the made-as -instructed rating or appraisal.

They now seek to again make real what is unreal — the chain of title. This cannot be done without putting ALL TITLE to ALL PROPERTY under a cloud. The substance of the transaction was that investors advanced money to investment bankers and homeowners in the expectation of getting it back along with a return. The terms of that transaction were neither disclosed to the investor, disclosed to the borrower nor described in the promissory note executed by the homeowner. Thus the actual transaction is undocumented and hence unsecured, and the transaction described in the note and mortgage does not exist.

An examination of title immediately following any auction sale corroborates the fact that the investors and the homeowners are kept in the dark through the bitter end, at which point they are both told they have a loss and they must live with it.”

— Neil F Garfield, 1-28-11

REUTERS: 12 companies in New York, including New York Life Insurance Co and Dexia Holdings Inc, filed a lawsuit on Monday, January 23, against Bank of America and Countrywide for fraud (The case is Dexia Holdings Inc et al v. Countrywide Financial Corp et al, New York State Supreme Court, New York County, No. 650185/2011.)  The plaintiffs are claiming that the millions of dollars that they had invested in what they were told was safe and performing investments were actually junk.  To make matters worse, the lawsuit alleges that Countrywide devalued the investment even more by failing to follow its own underwriting rules.

Reuters reports that “According to the complaint, the investors bought hundreds of millions of dollars of Countrywide securities from 2005 to 2007 that they thought were “conservative, low-risk investments.” However, most of the securities now carry “junk” credit ratings rather than the “triple-A” ratings they once had, resulting in “significant losses.”

As a result, the plaintiffs want compensatory and punitive damages. The lawsuit alleges Countrywide “was an enterprise driven by only one purpose – to originate and securitize as many mortgage loans as possible into (mortgage-backed securities) to generate profits for the Countrywide defendants, without regard to the investors that relied on the critical, false information provided to them.”

This claim of fraud is not new to Countrywide.  Countrywide’s Chief Executive Angelo Mozilo’s attorney, David Siegel, said the lawsuit has no basis in law or fact.  Of course, with Countrywide’s recent losses in the courtroom lately, the investors may have a case.  Remember, in October, Mozilo and Countrywide agreed to a $67.5 million settlement of a U.S. Securities and Exchange Commission civil fraud lawsuit accusing him of misleading investors.

Also, the insurer Allstate Corp sued Bank of America last month over the alleged misrepresentation of risks on more than $700 million of mortgage debt it bought from Countrywide.

Coupled with the recent announcement that Bank of America lost $1.6 billion in the 4th quarter of 2010, this has definitely been a bad week for the mortgage giant, and doesn’t look to get any better anytime soon.

Harrington: eloquent account of the law of unintended consequences of APPRAISAL FRAUD

SEE ALSO securitization-understanding-the-risks-and-rewards?page=1

Subprime debacle – the truth emerges: Part 2

Subprime mortgage crisis | Subprime debacle – the truth emerges: Part 2 Anthony Harrington

Amongst the real horrors perpetrated during the subprime disaster, such as the many outright frauds practised on US homebuyers who should never have been re-mortgaging their homes in the first place, the testimony of real estate appraiser Karen Mann to the Financial Crisis Inquiry Commission (FCIC) sounds a barely heard note but it is an eloquent account of the law of unintended consequences in full cry.

The background is simple. For decades US mortgage lenders used professionally qualified appraisers to check the value of the “collateral”, namely the home that was the subject of the mortgage. This was the equivalent of the UK surveyor’s valuation report and was required by the Federal National Mortgage Association (FNMA), aka Fannie Mae, and by Freddie Mac, both of which carry out the securitization of mortgage assets.

However, by 1994 a political view developed that the expense of having proper valuations (appraisals) was deterring poorer folk from buying homes. Accordingly, bending with the times, and with the prevailing view in the US Congress, US regulators, including the FDIC (Federal Deposit Insurance Corporation) decided that it was no longer necessary to have homes over $100,000 subject to an appraisal. They moved the bar up to $250,000 in the interests of “improving credit availability… without threatening the safety and soundness of financial institutions”. With the benefit of hindsight, sentences like that make one’s eyes water. For loans under $250,000 what would be important henceforth was more the borrower’s creditworthiness than the collateral value of the house, according to Mann.

Instead of formal appraisals by professional appraisers, lenders could rely on statistical services which provided views on the value of homes in particular areas, or on “evaluations”. These were different from “appraisals” in that they could be done by anyone who fancied being an “evaluator” and who felt that they could stick a finger in the wind and come up with a price for a property. No training required. The benefit to the lending organisation was that it could pay peanuts, $40 dollars for an evaluation, in Mann’s testimony, versus $430 for an appraisal.

The short sightedness of this policy, from the lender’s perspective, is obvious. If the loan goes bad and the lender forecloses, the value remaining in the property is the only thing that stops the lender from taking a total write off. If the valuation is a massive overstatement, the lender takes a bath.

Even worse, Mann points out that since between 1994 and 2003 Bank Regulators left the oversight of real estate appraisal to state regulatory agencies, and since there are states with no oversight appraisal boards, many people were licensed as real estate appraisers who had no proper training or mentoring at all. As Mann diplomatically puts it, “We had a vast increase of licensed appraisers in the State of California (which does not have an oversight appraisal board) despite the lack of qualified/experienced trainers.” In other words, the distinction between professional appraisers and “evaluators” was itself being heavily diluted. Mann told the FCIC: “It would be curious” – an understatement if ever there was one – “to know the percentage of subprime loans which were Evaluations versus Appraisal Reports…”

Mann then told the FCIC of the difficulties that appraisers encountered when the housing bubble began to show signs of strain in late 2005 and 2006. Through 2003 to 2005 house prices had been going up by 30% year on year as the housing bubble peaked under the influence of cheap money and lax mortgage underwriting policies. However, by 2006, Mann says, she and her colleagues were starting to register a downturn in housing prices and were disappointing sellers by coming up with appraisals that were well under the seller’s expectations. For example, a $500,000 dollar house in 2005 had slipped back to just over $300,000 by 2008, and under that by 2009. The median price for a property in West Sacramento, California, leapt from $90,000 in 2000, to $478,000 in January 2006 and has since wandered down to just over $200,000. This is for all housing, not just subprime.

For Mann, what happened through to 2007 was that market commentators, including noted economists, generally became extremely lax in observing market signs which many appraisers were picking up on. This created a false confidence and fed the myth that real estate would henceforth never go down in value.

Absolutely basic underwriting practices went out the window. For example, although most mortgages sold were adjustable rate mortgages, Mann points out that lenders and underwriters were qualifying borrowers only at the introductory rate of the loan (often set artificially low to lure in the unwary) and not at the maximum rate that the loan could be adjusted to. This did the consumer a very poor service and stored up huge problems for the securitized mortgage industry, as we all now know.

Mann’s testimony is about regulatory muddle and the makings of the mess that allowed a sub prime bubble to grow to such toxic proportions. It is not as dramatic as some of the testimony before the FCIC, but it should be mandatory reading for regulators everywhere….

Ratings, Appraisal Fraud Unraveling: Testimony Reveals Cover-up


“According to testimony last week, from January 2006 to June 2007, Clayton reviewed 911,000 loans for 23 investment or commercial banks, including Citigroup, Deutsche Bank, Goldman Sachs, UBS, Merrill Lynch, Bear Stearns and Morgan Stanley.”

It’s like slapping some paint on a 30 year old Chevy and selling it as a Rolls Royce. As long as the buyer never sees the car, you can get away with it. Well now they are seeing it and not liking it. Investor lawsuits are piling in. Government agencies are “discovering” what borrowers, honest appraisers and economists have been telling them for years. This was gross negligence and probably outright fraud. The rating agencies knew the loans were not meeting industry standards and ignored the information. Why? Because it was not in their economic interest to do their job. In other words, they were being paid to look the other way.

If rating agencies on Wall Street were familiar enough with underwriting standards and the thus the standards set forth in the securitization documents for the loans that would be funded with the lender’s (investor’s) money, then just how likely is it, do you think, that the actually industry that has been doing underwriting of loans, appraisal of property and assessing the viability of loan repayment did NOT know what the people on Wall Street DID know.

I remind again that the ultimate responsibility for the appraisal and the viability of the loan and the borrower’s ability to pay it back is on the lender, as per Federal Law — see the Truth in Lending Act. The statement that it was the borrower’s responsibility is a nice theory if you are into the whole “personal responsibility” thing, but it isn’t the law. So either you are are for law and order or you are for ignoring the law and allowing disorder and chaos to rule the markets and the courts.

The bottom line, whether you feel it just or unjust, is that under the law these loans are unsecured and largely (if not totally) offset by affirmative defenses of third party payments, damages for fraud, and damages for payments they DID make. Why should big business be the only ones that get to feed at the trough?

The only way to get the trillions of dollars back into the marketplace that was stolen and diverted by the intermediary parties in the securitization infrastructure is to give back the wealth that was illicitly obtained. The laws and rules requiring that have been in place for decades, even centuries if you look to the common law. It’s time for the legal profession to rise to the occasion, force the pretender lenders to their knees and make them pay for what they have done. And by the way, lawyers, there are tens of millions to be made for any enterprising lawyer who gets involved — just look at the private jets and $60 millions dollar off-shore deals that the foreclosure mills got when they were on the winning side. Now it’s YOUR turn.

September 26, 2010

Raters Ignored Proof of Unsafe Loans, Panel Is Told


As the mortgage market grew frothy in 2006 — leading to a housing bubble that nearly brought down the banking system two years later — ratings agencies charged with assessing risk in mortgage pools dismissed conclusive evidence that many of the loans were dubious, according to testimony given last week to the Financial Crisis Inquiry Commission.

The commission, a bipartisan Congressional panel, has been holding hearings on the origins of the financial crisis. D. Keith Johnson, a former president of Clayton Holdings, a company that analyzed mortgage pools for the Wall Street firms that sold them, told the commission on Thursday that almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors.

Yet, Clayton found, Wall Street was placing many of the troubled loans into bundles known as mortgage securities.

Mr. Johnson said he took this data to officials at Standard & Poor’s, Fitch Ratings and to the executive team at Moody’s Investors Service.

“We went to the ratings agencies and said, ‘Wouldn’t this information be great for you to have as you assign tranche levels of risk?’ ” Mr. Johnson testified last week. But none of the agencies took him up on his offer, he said, indicating that it was against their business interests to be too critical of Wall Street.

“If any one of them would have adopted it,” he testified, “they would have lost market share.”

In the aftermath of the financial crisis, which has required billions of dollars in taxpayer money to bail out Wall Street, ratings agencies have been sharply criticized for failing to properly assess the securities they were reviewing, and federal regulators are investigating the agencies for the role they played in the credit crisis.

The agencies have said that they had closely watched the mortgage market but had not anticipated how quickly it would deteriorate.

Moody’s aggressively monitored market conditions as the crisis continued to unfold to assess the impact of how the various market participants — including the borrowers, the mortgage servicers, the mortgage originators and the federal government — might respond to the extremely fast-changing conditions,” Raymond W. McDaniel, the chief executive of Moody’s, said in Congressional testimony in April.

Mr. Johnson’s testimony last week, however, cast a new light on that assertion.

Asked about the testimony, officials at Standard & Poor’s and Moody’s said they had worked hard to assess an array of data on the mortgage market in 2006 and 2007. Michael Adler, a spokesman for Moody’s, said the company “considers a range of information from various market participants about factors that could affect the credit quality of the transactions we rate.”

“During this period, Moody’s did in fact observe the trend of loosening underwriting standards, reported on it repeatedly in our research and commentary, and incorporated it into our credit analysis,” Mr. Adler said.

Fitch said it was not aware of a meeting with Clayton.

It has been more than four years since Mr. Johnson and his colleagues at Clayton Holdings started noting that disturbing numbers of mortgages did not meet the lending criteria promised to investors in prospectuses used to market the securities.

Details of what Wall Street firms knew about the loans they were selling to investors, and when they knew it, are still trickling out in regulatory actions and private lawsuits.

The Massachusetts attorney general recently accused Morgan Stanley of deceptive practices in its financing of mortgage lenders during this period, saying that the firm had knowingly placed dubious mortgages into securitized pools. Morgan Stanley settled with the attorney general in June and paid $102 million. The facts in that case relied on Clayton reports of loan quality commissioned by Morgan Stanley.

But until Mr. Johnson’s testimony last week, it was largely unknown that the ratings agencies had been told that vast numbers of loans were being packaged as securities even though they failed to meet underwriting standards.

Before assembling mortgage pools, brokerage firms hired independent analytical companies like Clayton to sample loans and flag any that were problematic. Clayton was one of two large due diligence companies that watched for loans that did not meet specifications like geographic diversity and the loan-to-value ratios between a mortgage and the home that secured it, as well as the credit scores and incomes of borrowers.

It was a trust-but-verify approach to a lucrative business, a way for Wall Street to look over the shoulders of lenders whose operations they did not control but whose mortgages they were buying nonetheless.

According to testimony last week, from January 2006 to June 2007, Clayton reviewed 911,000 loans for 23 investment or commercial banks, including Citigroup, Deutsche Bank, Goldman Sachs, UBS, Merrill Lynch, Bear Stearns and Morgan Stanley.

The statistics provided by these samples, according to Mr. Johnson and Vicki Beal, a senior vice president at Clayton who also testified before the inquiry commission, indicated that only 54 percent of the loans met the lenders’ underwriting standards, regardless of how stringent or weak they were.

Some 28 percent of the loans sampled over the period were outright failures — that is, they were unable to meet numerous underwriting standards and did not have positive factors that compensated for their failings. And yet, 39 percent of these troubled loans still went into mortgage pools sold to investors during the period, Clayton’s figures showed.

The results varied from firm to firm. At Citigroup, for example, 29 percent of the sample failed to meet underwriting standards over the period, but almost a third of those substandard loans made it into securities pools.

At Goldman Sachs, 19 percent of loans failed to make the grade in the final quarter of 2006 and the first half of 2007, but 34 percent of those loans were still sold by the firm. Throughout this period, Goldman Sachs was also betting against the mortgage market for its own account, according to documents provided to government investigators.

About 17 percent of the loans financed by Deutsche Bank did not make the grade, but the firm still put 50 percent of them into the securities sold to investors, the Clayton report showed.

Deutsche Bank and Citigroup declined to comment.

A Goldman Sachs spokesman said the percentage of deficient loans that went into its pools was smaller than Clayton’s average, indicating that the firm had done a better job than its peers.

Because these loan samples were provided to the Wall Street investment banks that commissioned them, they could see throughout 2006 and into 2007 that the mortgages they were financing and selling to investors were becoming increasingly sketchy.

The results of the Clayton analyses were not disclosed to investors buying the loan pools. Instead, Wall Street firms used the information to pressure the lenders issuing the most troubled loans to accept a lower price for them, according to prosecutors who have investigated these cases.

A more proper procedure, analysts said, would have been for lenders like these — New Century Financial and Fremont Investment and Loan among them — to buy back the problem loans and replace them with higher-quality mortgages. But because these companies did not have enough capital to do that, they were happy to sell the troubled mortgages cheaply to the brokerage firms.

Since Wall Street firms were paying lower prices for the troubled loans, they could have passed along those discounts to customers, reducing investor risk. But Wall Street charged investors the same high prices associated with better-quality loans, thereby increasing their own profits on the problematic securities, according to a law enforcement official and executives with Wall Street companies. To be sure, the prospectuses detailing the types of loans in these pools contained brief warnings that some of the mortgages might not meet stated underwriting standards. But few investors probably realized that huge portions of the pools had failed to meet the benchmarks.

The Clayton figures took into account only small samples of the loan pools that were sold to investors. The 911,000 loans Clayton analyzed over the 18-month period were roughly 10 percent of the total number of mortgages in the securities it was contracted to review.

As a result, it is very likely that many of the loans that were not sampled also failed to meet underwriting standards but were packaged into the securities anyway.



EDITOR’S NOTE: It is ironic how reality eventually catches up with illusion. While we have been pounding on the issue of principal reduction as the only realistic way out of the recession, and while the financial industry has been busy convincing people that principal reduction is somehow immoral, the contraction of home prices back to reality is having its own consequences.

In the article below the art and necessity of strategic default is revealed as mainstream in the current housing market. In the case of home equity loans or home equity lines of credit the bloating of appraisals at the time of the transactions has blown up in the face of the financial industry. Many of those home equity loans were in reality part of the initial transaction without which the buyer would have been unable to purchase the home. The transaction would have been valid if the appraisal had been valid. It wasn’t.

A simple analysis of basic fundamental figures published monthly over the last 120 years easily demonstrates that the appraised values that were unverified by the alleged “lender” as part of a nonexistent “underwriting process” could not sustain the test of time or circumstance.

In point of fact most new homeowners quickly found out within weeks or months of the initial transaction that their property was worth far less than the representations made to them at the time of closing. The true value was so far below the so-called appraised value that it didn’t cover the home equity part of the transaction even at the time that the transaction was closed.

The reaction of homeowners to the disappearance of the illusion of wealth has been entirely predictable. For the present the number of home equity loans which are going unpaid is soaring both in numbers and percentages, regardless of the borrower’s ability to pay. Any party that wishes to assert itself as the “owner” of the loan is stuck in the position of holding a predatory loan subject to numerous defenses that is completely unsecured by any equity in the home. According to this article there is at least one debt collector that won’t pay more than $500 per loan regardless of the principal amount due.

The rising number of strategic defaults on primary loans is also rising, also predictable and also inevitable. This is the obvious reaction of a marketplace seeking equilibrium and dependable valuations. Until policy makers accept the reality that the wealth of our economy is largely buried under the illusion of debt that is neither secure nor perfected arising from transactions that were illegal, predatory and fraudulent, there is no way out.

Restoring consumers to the position they were in before they were defrauded is the only way to restore confidence in our society that has permitted the privatization of the issuance of money. Financial reform without providing an easy path to restoration of wealth in the middle-class is meaningless.

August 11, 2010

Debts Rise, and Go Unpaid, as Bust Erodes Home Equity


PHOENIX — During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.

“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”

But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”

Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”

Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”

Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.

“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”

The delinquency rate on home equity loans was 4.12 percent in the first quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping. Borrowers who default can expect damage to their creditworthiness and in some cases tax consequences.

Nevertheless, Mr. Leggett said, “more than a sliver” of the debt will never be repaid.

Eric Hairston plans to be among this group. During the boom, he bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.

Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.

The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.

Mr. Hairston, who now works for the pizza company, has not heard again from his lender.

Since the lender made a bad loan, Mr. Hairston argues, a 10 percent settlement would be reasonable. “It’s not the homeowner’s fault that the value of the collateral drops,” he said.

Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.

Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.

The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.

“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”

Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.

“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”

John Collins Rudolf contributed reporting.


Well you have to give credit to Sheila Baer> She gets it. Here she is going after the IndyMac executives for making loans to developers that they knew would not be repaid. It is the first time that an important agency has recognized the link between the malfeasance of the originating lenders, the securitization intermediaries and the developers.

It is central to the issue of appraisal fraud. Anyone who moved into a new development knows that the developer was raising prices like crazy to create a a sense of urgency on the part of borrowers. Those prices from the developers were used an excuse to inflate the appraisals ona continual basis, so that a house of exactly the same model and features would be appraised one month for $350,000 and then a month later for $375,000 or more.

The developers knew they could do this because they knew the “lender” would approve it. It was a classic dysfunctional dance in which everyone was lying to everyone else. And everyone, except the borrower and the investor-lender knew it. Thus suits against the developer, especially those with mortgage offices on premises, can be expected to rise by both private actions and public actions from regulatory agencies and law enforcement. It was fraud.

Posted on July 13, 2010 by Foreclosureblues,0,4893259.story
FDIC sues four former IndyMac executives
The agency accuses the managers of the defunct bank’s Homebuilder
Division of acting negligently by granting loans to developers who
were unlikely to repay the debts.
By E. Scott Reckard, Los Angeles Times

July 14, 2010

Launching a new offensive against leaders of failed financial
institutions, federal regulators are accusing four former executives
of Pasadena’s defunct IndyMac Bank of granting loans to developers and
home builders who were unlikely to repay the debts.

The lawsuit by the Federal Deposit Insurance Corp. alleges that the
IndyMac executives acted negligently and seeks $300 million in

It is the first suit of its kind brought by the FDIC in connection
with the spate of more than 250 bank failures that began in 2008.
Regulators said it wouldn’t be the last.

“Clearly we’ll have more of these cases,” said Rick Osterman, the
deputy general counsel who oversees litigation at the agency.

The FDIC has sent letters warning hundreds of top managers and
directors at failed banks — and the insurers who provided them with
liability coverage — of possible civil lawsuits, Osterman said. The
letters go out early in investigations of failed banks, he added, to
ensure that the insurers will later provide coverage even if the
policy expires.

The four defendants in the FDIC lending negligence case, who operated
the Homebuilder Division at IndyMac, collectively approved 64 loans
that are described in the 309-page lawsuit.

They are:

•Scott Van Dellen, the division’s president and chief executive during
six years ending in its seizure;

•Richard Koon, its chief lending officer for five years ending in July 2006;

•Kenneth Shellem, its chief credit officer for five years ending in
November 2006;

•William Rothman, its chief lending officer during the two years
before the seizure.

Through their attorneys, they vigorously denied the allegations.

“The FDIC has unfairly selected four hard-working executives of a
small division of the bank … to blame for the failure of IndyMac,”
said defense attorney Kirby Behre, who represents Shellem and Koon.
“We intend to show that these loans were done at all times with a
great deal of care and prudence.”

Defense attorney Michael Fitzgerald, who represents Van Dellen and
Rothman, said no one at the company or its regulators foresaw the
severity of the housing crash before it struck, and that IndyMac was
one of the first construction lenders to pull back when trouble struck
the industry in 2007.

Fitzgerald added that the FDIC thought Van Dellen trustworthy enough
that it kept him on to run the division after the bank was seized.

The suit naming the IndyMac executives was filed this month in federal
court in Los Angeles, two years after the July 2008 failure of the
Pasadena savings and loan. The bank is now operated under new
ownership as OneWest Bank.

IndyMac, principally a maker of adjustable-rate mortgages, was among a
series of high-profile bank failures early in the financial crisis
that were blamed on defaults on high-risk home loans and the
securities linked to them.

But the majority of failures since then have been at banks hammered by
losses on commercial real estate, particularly loans to residential
developers and builders — and IndyMac had a sideline in that business
as well through its Homebuilder Division.

The suit alleges that IndyMac’s compensation policies prompted the
home-building division to increase lending to developers and builders
with little regard for the quality of the loans.

“HBD’s management pushed to grow loan production despite their
awareness that a significant downturn in the market was imminent and
despite warnings from IndyMac’s upper management about the likelihood
of a market decline,” the FDIC said in its complaint.

An investigation of IndyMac’s residential mortgage lending practices
could lead to another civil suit, potentially naming higher-up
executives, attorneys involved in the case said.

Separately, a criminal grand jury investigation into the actions of
IndyMac executives continues, according to a knowledgeable federal
official who was not authorized to publicly discuss the investigation.

The bank, known mostly for providing home loans without requiring
proof of income from borrowers, had operated its builder-loan division
since 1994.

The lawsuit said IndyMac had about $900 million in land acquisition,
development and construction loans on its books when the bank
collapsed. Losses on the portfolio are expected to total $500 million
— minus whatever the FDIC can recover through litigation.

The FDIC’s Osterman said the government recovered about $5.1 billion
from former bank and thrift executives and their outside professional
advisors after the last major financial crisis devastated the savings
and loan industry in the 1980s. Most of the money came from insurers
that had written policies covering bank directors and officers against
negligence or other misdeeds.

Because the warnings of possible lawsuits are mailed out during the
early stages of investigations, it’s frequently decided later that the
cases aren’t strong enough to bring or aren’t likely to be
cost-effective and so are dropped, Osterman said.

FDIC spokesman David Barr said the agency generally had three years
from the date of a failure to file civil cases.


One of the hardest things for people to get their minds around is how borrowers were defrauded. The nagging question keeps coming to mind “But you DID sign the loan and take the money, didn’t you?” Yes you did, but you did it because of a representation and virtual guarantee from several parties at the closing table who knew the appraisal was a lie, that you were believing it, that you relied on it, and that you never would have done a deal where the real appraised fair market value was far less than the amount of the loan.

So then the question becomes “How can you be sure the appraisal was inflated? Were all appraisals inflated? How do you know that?” Answers: Read on, YES, Read On, in that order.

I start with the proposition that the only legitimate factors that cause changes in housing prices (up or down) are changes in supply and demand, rising costs or labor and materials and related services. Anything else is a manipulation UNLESS it is thoroughly disclosed in language that a normal reasonable person would understand. Even if such disclosure is made and the deal goes through BOTH parties would be defrauding someone by definition, to wit: they are agreeing that the stated price or value of the property is inflated but they are doing the deal anyway.

How could anyone inflate the price of a house without everyone knowing it? ANSWER: By inflating the entire market in that geographical area. Note that during the securitization era, ONLY the places that were targeted had sharply rising prices, sometimes from one month to the next. Other places, like Seneca Falls, NY (highlighted in NY Times article) were not not affected by either the boom or bust except indirectly where they are dealing with decreased services from the state and county resulting from budget deficits resulting from an expectation of rising revenues based upon the apparent rise in tax appraised value.

How does one inflate values of any commodity or property in the entire relevant marketplace? ANSWER: By creating false liquidity (i.e, availability of money) and by speculation pushing up the “value” of the derivatives and other hedge products which in turn raises the value of the actual commodity, or in our case, the actual house. Since the cost of the money decreases, despite government attempts to raise interest rates, and speculation is allowed without supervision, the speculators control the market on the way up and on the way down. They win on both sides because they are controlling the events. That is not a free market. That is a privately controlled market.

So the reason I am sure that false appraisals were the rule, not just the norm are as follows:

  1. There was no abnormal trends or changes in demand, supply, or costs — except that supply actually outpaced demand by a factor of at least 200%. Thus prices should have probably dropped as developers increased competition for buyers. There is no observable reason for prices to rise, much less at the pace seen in the period 2002-2007. By all public accounts it will be at least 2030 before the current inventory of houses are sold. This level of overbuilding is unprecedented and cannot be tied to an expectation of increased demand but rather an expectation that the seller controlled the transaction and collectively with loan brokers, originators, aggregators, and investment bankers would do anything to close the deal even if it meant having the borrower sign for a loan that called for NO PAYMENTS.
  2. 8,000 certified licensed appraisers signed a petition to Congress in 2005 complaining they were being coerced into justifying the deal rather than actually estimating fair market value. They feared they would be blacklisted from all the deals because an honest appraisal would have slowed down sales of homes and sales of financial products to borrowers.
  3. This was a complete reversal of practices existing before the securitization era. The value of the collateral was the Lender’s only guarantee of repayment. hence the tendency was to minimize the estimate of fair market value. Once the risk of repayment was eliminated “lenders” (i.e., mortgage brokers and originators) were under pressure to close loan transactions dollar volumes. The easiest way of doing that was to increase the value of the properties. The more this practice took hold of meeting the contract terms  which were always disclosed to the appraiser (contrary to prior practice) the easier it became, since the “comparables” used by the appraisers were produced by the same practice, incentives and pressures. As the mortgage bonds were sold in increasing dollar volumes, the pressure to place investment dollars increased exponentially. Incentives for mortgage brokers and originators to close deals at any level of risk or terms increased proportionately. Marketing and selling of loan products became big business, with large fees and apparently no risk as the managers of such companies perceived it. The upward pressure to increase the size of loans directly resulted in an upward pressure on sale prices and the perception of “value” in the marketplace. A snowball effect was thus created producing a spike in housing prices that is completely unprecedented in the history of housing since the 1870’s when such measurements began to  be recorded. No other boom or bust cycle in any part of the country had ever experienced spikes of this magnitude.
  4. Starting 3-4 loan products in the 1970’s, the number of possible loan products has skyrocketed to over 400 different kinds of loans — a bewildering array that increases asymmetry of information — causing the buyer to depend and rely upon the more sophisticated side (“lender”) for information about the loan product they were steered into.
  5. The number of loan originating companies masquerading as actual lenders went from 1 (Household Finance, now HSBC) to hundreds during the entire securitization period (circa 1990-2008) and then back down again as most of them went out of business, liquidated, or went bankrupt. New business start-ups would not  have flooded the market but for the virtual certainty of high fees without regard to whether the product worked or not (i.e., whether the loan was repaid or not).
  6. The amount of money attributable to derivatives that increased availability of loans increased from zero in 1983 to more than $30 trillion in 2007 — twice the Gross National Product of this country.
  7. I see no reason for price increases other than the flood of money into certain marketplaces, which in turn gave some color of verification of an appraisal that was plainly wrong, inflated, and where fees for such appraisals increased geometrically.

Yes they were virtually all inflated. That was the requirement. Just as the rating agencies falsely inflated the value and risk of the mortgage bonds that were used to attract the $30 trillion in capital used to flood the marketplace, the appraisers likewise inflated the appraisals of the value and thus the risk to the borrowers AND investors. The proof is simply in the present situation where prices have fallen by as much as 80%. This is further corroborated by the price levels before the flood of money into the marketplace. The final verification is that median income was flat during this period. Most economists and housing experts agree that ultimately median income is the main determinant in housing prices.

How do I know this is true? It is the only workable explanation that is being offered, even including comments, reports and statements issued by the financial services industry.

For an example of how this has worked against the poorest, starving people of the world, see the following, which demonstrates that the Wall Street process, if unregulated, leads to bizarre social and financial consequences.


Johann Hari: How Goldman gambled on starvation

Speculators set up a casino where the chips were the stomachs of millions. What does it say about our system that we can so casually inflict so much pain?

Friday, 2 July 2010

Is Your Bank In Trouble?
Free list Of Banks Doomed To Fail.The Banks and Brokers X List.

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By now, you probably think your opinion of Goldman Sachs and its swarm of Wall Street allies has rock-bottomed at raw loathing. You’re wrong. There’s more. It turns out that the most destructive of all their recent acts has barely been discussed at all. Here’s the rest. This is the story of how some of the richest people in the world – Goldman, Deutsche Bank, the traders at Merrill Lynch, and more – have caused the starvation of some of the poorest people in the world.

It starts with an apparent mystery. At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn’t afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it “a silent mass murder”, entirely due to “man-made actions.”

Earlier this year I was in Ethiopia, one of the worst-hit countries, and people there remember the food crisis as if they had been struck by a tsunami. “My children stopped growing,” a woman my age called Abiba Getaneh, told me. “I felt like battery acid had been poured into my stomach as I starved. I took my two daughters out of school and got into debt. If it had gone on much longer, I think my baby would have died.”

Most of the explanations we were given at the time have turned out to be false. It didn’t happen because supply fell: the International Grain Council says global production of wheat actually increased during that period, for example. It isn’t because demand grew either: as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent. Other factors – like the rise of biofuels, and the spike in the oil price – made a contribution, but they aren’t enough on their own to explain such a violent shift.

To understand the biggest cause, you have to plough through some concepts that will make your head ache – but not half as much as they made the poor world’s stomachs ache.

For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk. Farmer Giles can agree in January to sell his crop to a trader in August at a fixed price. If he has a great summer, he’ll lose some cash, but if there’s a lousy summer or the global price collapses, he’ll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked.

Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into “derivatives” that could be bought and sold among traders who had nothing to do with agriculture. A market in “food speculation” was born.

So Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that contract can be sold on to speculators, who treat the contract itself as an object of potential wealth. Goldman Sachs can buy it and sell it on for £20,000 to Deutsche Bank, who sell it on for £30,000 to Merrill Lynch – and on and on until it seems to bear almost no relationship to Farmer Giles’s crop at all.

If this seems mystifying, it is. John Lanchester, in his superb guide to the world of finance, Whoops! Why Everybody Owes Everyone and No One Can Pay, explains: “Finance, like other forms of human behaviour, underwent a change in the 20th century, a shift equivalent to the emergence of modernism in the arts – a break with common sense, a turn towards self-referentiality and abstraction and notions that couldn’t be explained in workaday English.” Poetry found its break with realism when T S Eliot wrote “The Wasteland”. Finance found its Wasteland moment in the 1970s, when it began to be dominated by complex financial instruments that even the people selling them didn’t fully understand.

So what has this got to do with the bread on Abiba’s plate? Until deregulation, the price for food was set by the forces of supply and demand for food itself. (This was already deeply imperfect: it left a billion people hungry.) But after deregulation, it was no longer just a market in food. It became, at the same time, a market in food contracts based on theoretical future crops – and the speculators drove the price through the roof.

Here’s how it happened. In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world’s frightened investors stampeded on to this ground.

So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.

When I asked Merrill Lynch’s spokesman to comment on the charge of causing mass hunger, he said: “Huh. I didn’t know about that.” He later emailed to say: “I am going to decline comment.” Deutsche Bank also refused to comment. Goldman Sachs were more detailed, saying they sold their index in early 2007 and pointing out that “serious analyses … have concluded index funds did not cause a bubble in commodity futures prices”, offering as evidence a statement by the OECD.

How do we know this is wrong? As Professor Ghosh points out, some vital crops are not traded on the futures markets, including millet, cassava, and potatoes. Their price rose a little during this period – but only a fraction as much as the ones affected by speculation. Her research shows that speculation was “the main cause” of the rise.

So it has come to this. The world’s wealthiest speculators set up a casino where the chips were the stomachs of hundreds of millions of innocent people. They gambled on increasing starvation, and won. Their Wasteland moment created a real wasteland. What does it say about our political and economic system that we can so casually inflict so much pain?

If we don’t re-regulate, it is only a matter of time before this all happens again. How many people would it kill next time? The moves to restore the pre-1990s rules on commodities trading have been stunningly sluggish. In the US, the House has passed some regulation, but there are fears that the Senate – drenched in speculator-donations – may dilute it into meaninglessness. The EU is lagging far behind even this, while in Britain, where most of this “trade” takes place, advocacy groups are worried that David Cameron’s government will block reform entirely to please his own friends and donors in the City.

Only one force can stop another speculation-starvation-bubble. The decent people in developed countries need to shout louder than the lobbyists from Goldman Sachs. The World Development Movement is launching a week of pressure this summer as crucial decisions on this are taken: text WDM to 82055 to find out what you can do.

The last time I spoke to her, Abiba said: “We can’t go through that another time. Please – make sure they never, never do that to us again.”


It is hard to state this strongly enough. The entire mortgage backed securitization structure was based upon FRAUD. An intentional misstatement of a material fact known to be untrue and which the receiving party reasonably relies to his detriment is fraud. BOTH ends of this deal required fraud for completion. The investors had to believe the securities were worth more and carried less risk than reality. The borrowers had to believe that their property was worth more and carried less risk than reality. Exactly the same. Using ratings/appraisals and distorting their contractual and statutory duties, the sellers of this crap defrauded the investors, who supplied the money and the borrowers were accepted PART of the benefit.

See this article posted by our friend Anonymous:

Posts by Aaron Task
“A Gigantic Ponzi Scheme, Lies and Fraud”: Howard Davidowitz on Wall Street
Jul 01, 2010 08:00am EDT by Aaron Task in Newsmakers, Banking
Related: XLF, AIG, GS, JPM, BAC, C, FNM
Play Video
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Day one of the Financial Crisis Inquiry Commission’s two-day hearing on AIG derivatives contracts featured testimony from Joseph Cassano, the former head of AIG’s financial products unit. Goldman Sachs president Gary Cohn was also on the Hill.
Meanwhile, the Democrats are still trying to salvage the regulatory reform bill, with critical support from Senator Scott Brown (R-Mass.) reportedly still uncertain.
According to Howard Davidowitz of Davidowitz & Associates, what connects the hearings and the Reg reform debate is the lack of focus on the real underlying cause of the financial crisis: Fraud.
“It was a massive fraud… a gigantic Ponzi Scheme, a lie and a fraud,” Davidowitz says of Wall Street circa 2007. “The whole thing was a fraud and it gets back to the accountants valuing the assets incorrectly.”
Because accountants and auditors allowed Wall Street firms to carry assets at “completely fraudulent” valuations, he says the industry looked hugely profitable and was able to use borrowed funds to make leveraged bets on all sorts of esoteric instruments. “Their bonuses were based on profits they never made and the leverage they never could have gotten if the numbers were right – no one would’ve given them the money in their right mind,” Davidowitz says.

To date, the accounting and audit firms have escaped any serious repercussions from the credit crisis, a stark difference to the corporate “death sentence” that befell Arthur Anderson for its alleged role in the Enron scandal.
To Davidowitz, that’s perhaps the greatest outrage of all: “Where were the accountants?,” he asks. “They did nothing, checked nothing, agreed to everything” and collected millions in fees while “shaking hands with the CEO.”

Discovery and Motion Practice: Watch Those Committee Hearings on Rating Agencies

Editor’s Note: As these hearings progress, you will see more and more admissible evidence and more clues to what you should be asking for  in discovery. You are getting enhanced credibility from these government inquiries and the results are already coming out as you can see below.The article below is a shortened version of the New York Times Paper version. I strongly recommend that you get the paper today and read the entire article. Some of the emails quoted are extremely revealing, clear and to the point. They knew they were creating the CDO market and that it was going to explode. One of them even said he hoped they were rich and retired when the mortgage mess blew up.
Remember that a rating is just word used on Wall Street for an appraisal So Rating=Appraisal.
  • The practices used to corrupt the rating system for mortgage backed securities  were identical in style to the practices used to corrupt the appraisals of the homes.
  • The appraisals on the homes were the foundation for the viability of the loan product sold to the borrower.
  • In the case of securities the buyers were investors.
  • In the case of appraisals the buyers were homeowners or borrowers.
  • In BOTH cases the “buyer” reasonably relied on an “outside” or “objective” third party who whose opinion was corrupted by money from the seller of the financial product (a mortgage backed security or some sort of loan, respectively).
  • In the case of the loan product the ultimate responsibility for verification of the viability of the loan, including verification of the appraisal is laid squarely on the LENDER.
  • Whoever originated the loan was either passing itself off as the lender using other people’s money in a table funded loan or they were the agent for the lender who either disclosed or not disclosed (nearly always non-disclosed).
  • A pattern of table funded loans is presumptively predatory.
  • The appraisal fraud is a key element of the foundation of your case. If the appraisal had not been inflated, the contract price would have been reduced or there would have been no deal because the buyer didn’t have the money.
  • The inflation of the appraisals over a period of time over a widening geographical area made the reliance on the appraiser and the “lender” even more reasonable.
  • Don’t let them use that as proof that it was market forces at work. Use their argument of market forces against them to establish the pattern of illegal conduct.
April 22, 2010

Documents Show Internal Qualms at Rating Agencies


WASHINGTON — In 2004, well before the risks embedded in Wall Street’s bets on subprime mortgages became widely known, employees at Standard & Poor’s, the credit rating agency, were feeling pressure to expand the business.

One employee warned in internal e-mail that the company would lose business if it failed to give high enough ratings to collateralized debt obligations, the investments that later emerged at the heart of the financial crisis.

“We are meeting with your group this week to discuss adjusting criteria for rating C.D.O.s of real estate assets this week because of the ongoing threat of losing deals,” the e-mail said. “Lose the C.D.O. and lose the base business — a self reinforcing loop.”

In June 2005, an S.& P. employee warned that tampering “with criteria to ‘get the deal’ is putting the entire S.& P. franchise at risk — it’s a bad idea.” A Senate panel will release 550 pages of exhibits on Friday — including these and other internal messages — at a hearing scrutinizing the role S.& P. and the ratings agency Moody’s Investors Service played in the 2008 financial crisis. The panel, the Permanent Subcommittee on Investigations, released excerpts of the messages Thursday.

“I don’t think either of these companies have served their shareholders or the nation well,” said Senator Carl Levin, Democrat of Michigan, the subcommittee’s chairman.

In response to the Senate findings, Moody’s said it had “rigorous and transparent methodologies, policies and processes,” and S.& P. said it had “learned some important lessons from the recent crisis” and taken steps “to increase the transparency, governance, and quality of our ratings.”

The investigation, which began in November 2008, found that S.& P. and Moody’s used inaccurate rating models in 2004-7 that failed to predict how high-risk residential mortgages would perform; allowed competitive pressures to affect their ratings; and failed to reassess past ratings after improving their models in 2006.

The companies failed to assign adequate staff to examine new and exotic investments, and neglected to take mortgage fraud, lax underwriting and “unsustainable home price appreciation” into account in their models, the inquiry found.

By 2007, when the companies, under pressure, admitted their failures and downgraded the ratings to reflect the true risks, it was too late.

Large-scale downgrades over the summer and fall of that year “shocked the financial markets, helped cause the collapse of the subprime secondary market, triggered sales of assets that had lost investment-grade status and damaged holdings of financial firms worldwide,” according to a memo summarizing the panel’s findings.

While many of the rating agencies’ failures have been documented, the Senate investigation provides perhaps the most thorough and vivid accounting of the failures to date.

A sweeping financial overhaul being debated in the Senate would subject the credit rating agencies to comprehensive regulation and examination by the Securities and Exchange Commission for the first time. The legislation also contains provisions that would open the agencies to private lawsuits charging securities fraud, giving investors a chance to hold the companies accountable.

Mr. Levin said he supported those measures, but said the Senate bill, and a companion measure the House adopted in December, did not go far enough.

“What they don’t do, and I think they should do, is find a way where we can avoid this inherent conflict of interest where the rating companies are paid by the people they are rating,” he said. “We’ve got to either find a way — or direct the regulatory bodies to find a way — to end that inherent conflict of interest.”

Although the agencies were supposed to offer objective and independent analysis of the securities they rated, the documents by Mr. Levin’s panel showed the pressures the companies faced from their clients, the same banks that were assembling and selling the investments.

“I am getting serious pushback from Goldman on a deal that they want to go to market with today,” a Moody’s employee wrote in an internal e-mail message in April 2006.

In an August 2006 message, an S.& P. employee likened the unit rating residential mortgage-backed securities to hostages who have internalized the ideology of their kidnappers.

“They’ve become so beholden to their top issuers for revenue they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation,” the employee wrote.

Lawrence J. White, an economist at the Stern School of Business at New York University, said he feared that the government’s own reliance on the rating agencies had “endowed them with some special aura.”

The House bill calls for removing references to the rating agencies in federal law, and both bills would require a study of how existing laws and regulations refer to the companies.

The addition of new regulations might inadvertently serve to empower the agencies, Mr. White said. “Making the incumbent guys even more important can’t be good, and yet that’s the track that we’re on right now,” he said.

David A. Skeel, a law professor at the University of Pennsylvania, said the Senate bill “basically just tinkers with the internal governance of the credit rating agencies themselves.”

Ending the inherent conflicts of interest is “more ambitious, but if you’re ever going to talk about it, then this is the time,” Mr. Skeel said.

Binyamin Appelbaum contributed reporting.

Obama Moves Closer to Principal Reduction Mandate

Editor’s note: This is red meat for investors and borrowers seeking restitution for losses caused by improper appraisals, ratings and representations concerning loan and property values, loan viability, securities fraud, deceptive lending practices, TILA violations etc.

Obama Bank Policy Signals $1 Trillion in Writedowns

April 3 (Bloomberg) — U.S. regulators may force Bank of America Corp., Citigroup Inc. and at least a dozen of the nation’s biggest financial institutions to write down as much as $1 trillion in loans, twice what they’ve already recorded, based on Federal Deposit Insurance Corp. auction data compiled by Bloomberg.

Banks failing Federal Reserve evaluations of loans this month may be ordered to make sales worth as little as 32 cents on the dollar, according to FDIC data. That would be less than half of the 84 cents on the dollar the Treasury Department suggested was a possible purchase price. Some of the bank- insurance agency’s auctions brought 0.02 cent on the dollar.

Lower valuations would lead to new writedowns and capital injections from the $134.5 billion remaining in the Troubled Asset Relief Program, Nobel Prize-winning economist Joseph Stiglitz said.

“The only way banks will sell is under duress,” the 66- year-old professor at Columbia University in New York said in a phone interview.

Asset sales are the latest step in President Barack Obama’s effort to restart the U.S. economy through the most costly rescue of the financial system in history. Treasury Secretary Timothy Geithner’s Legacy Loan Program and Legacy Securities Program together are targeted to start at $500 billion and may expand to $1 trillion.

Auctioning Assets

Geithner’s plan will purchase loans and be overseen by the FDIC, which will offer debt guarantees while the Treasury invests capital alongside investors.

The FDIC would auction assets after the Office of the Comptroller of the Currency, Office of Thrift Supervision or the Fed signals that a bank is in danger of failing.

“If we thought that was the right decision to address their situation, we would certainly tell an institution to move in that direction,” said William Ruberry, an OTS spokesman in Washington.

Geithner’s plan to buy loans and securities “can be very useful,” Comptroller of the Currency John Dugan said in a Bloomberg Television interview today. “It’s one more arrow in the quiver to address problems with assets on banks’ balance sheets.”

Treasury spokesman Isaac Baker said in an e-mail that the program is voluntary and the government expects banks will want to sell assets to clean their balance sheets and make it easier to raise capital from investors, he said.

Financing Help

“Past auctions cannot reliably predict asset prices in the Public Private Investment Program, as we are creating a new market that has not previously existed to help value these assets, and offering financing to help investors purchase them,” Baker said.

Setting up a facility to purchase distressed loans will allow the FDIC to put a bank into “a silent resolution,” said Joshua Rosner, a managing director at investment-research firm Graham Fisher & Co. in New York.

“This is a way to functionally wind down a bank as big as Citi without the world realizing that they’re essentially in resolution,” he said. “The real value of this is a tool to resolve a too-big-to-fail institution.”

The FDIC is considering allowing banks to share in future profits on loans sold to public-private partnerships to encourage healthier lenders to participate, according to Jim Wigand, the agency’s deputy director for resolutions and receiverships. The regulator is seeking comments through April 10 on the program, said spokesman David Barr.

Assets sold under the Legacy Loans Program may be worth an average of 56.3 cents on the dollar, based on the results of FDIC auctions at failed banks over the past 15 months.

‘Large Amounts’

Writedowns would total $1 trillion if the program buys $500 billion in loans at 32 cents on the dollar, the average for non- performing commercial loans in the FDIC sales.

Geithner said March 29 that some financial institutions will need “large amounts of assistance.” He’s trying to avoid bank nationalizations by wooing investors to purchase loans with taxpayer-guaranteed financing to protect them against loss. The U.S. move to clear away distressed assets contrasts with Japanese financial authorities’ reluctance to do so in a 1990s financial crisis, which led to a decade of economic stagnation.

“This is going to be our Yucca Mountain right here,” said Joseph Mason, an associate professor at Louisiana State University in Baton Rouge and former FDIC visiting scholar, referring to the proposed radioactive-waste storage site in Nevada.


“You can put it in a train car and ship it across the country. The half-life of this stuff is real long, but it has to burn off,” he said.

The FDIC’s average auction value of 56.3 cents on the dollar for residential and commercial loans is based on 312 sales worth $1.1 billion since Jan. 1, 2008, according to the FDIC. The average for 348 commercial loans for which borrowers stopped paying was 32 cents on the dollar. Auction prices ranged from 0.02 cent to 101.2 cents on the dollar, according to the FDIC.

In announcing its loan-sale program last week, the Treasury provided an example of a purchase price of 84 cents on the dollar, with taxpayers putting up 6 cents, investors 6 cents and the FDIC guaranteeing 72 cents in financing.

“Eighty-four cents is just laughable” because the market value for loans is much lower, said Barry Ritholtz, chief executive officer of New York-based FusionIQ, an independent research firm.

The U.S. is structuring the loan purchases to leave the government with most of the risk, while investors stand to gain most of any profit, economist Stiglitz said.

‘Almost No Upside’

“There’s almost no upside for the taxpayer,” he said. “The government is giving a 110 percent bailout.”

How much investors offer for assets is “going to be the key” determinant of Bank of America’s participation in the government’s two asset-purchase programs, CEO Kenneth Lewis said in a Bloomberg Television interview March 27.

“If there’s an issue with the program, it’s going to be trying to get banks to sell assets,” FDIC Chairman Sheila Bair said in a speech the same day at the Isenberg School of Management of the University of Massachusetts in Amherst.

“If I have concern, it’s the pricing may not be where seller and buyer are willing to meet,” she said.

Any standoff between investors and banks over loan prices may scuttle Geithner’s plan to segregate non-performing assets and restart lending, said Bob Eisenbeis, chief monetary economist with Vineland, New Jersey-based Cumberland Advisors and a former Atlanta Federal Reserve Bank research director.

‘Really Bad Stuff’

“It’s hard to believe that the really bad stuff that’s causing all the problems are going to be offered for sale,” Eisenbeis said. “The institutions won’t want to sell them if they get a true price, because their capital would take too much of a hit.”

With preparations for auctions under way, U.S. banks are being put through so-called stress tests, which Geithner said last month are a comprehensive set of standards for the financial system’s most important lenders. The examinations of loans and their collateral and payment histories are scheduled to be completed by April 30.

Banks have almost $4.7 trillion of mortgages and $3 trillion of other loans that aren’t packaged into bonds, according to the Fed. The vast majority are carried at full value because they don’t need to be written down until they default, according to Daniel Alpert, managing director of New York-based investment bank Westwood Capital LLC.

“Just because it’s being held at full value doesn’t mean it’s not bad,” Alpert said.

Obama Effort

While regulators don’t intend to publish the details of their stress tests, the results will effectively become known once banks announce how much capital they need to raise. Regulators will then give lenders six months to obtain funds from investors or taxpayers as a last resort.

The tests are designed to mesh with Obama’s effort to remove banks’ distressed mortgage assets that have hampered lending to consumers and businesses. Officials aim to have the first loan purchases by private investors financed by the government within weeks of the conclusion of the stress tests, according to the Treasury.

Including TARP, the U.S. government and the Fed have spent, lent or guaranteed $12.8 trillion to combat the financial collapse and a recession that began in December 2007. The amount approaches the $14.2 trillion U.S. gross domestic product last year.

‘Constructive Plan’

Obama met with the CEOs of the nation’s 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending.

Lenders undergoing stress tests include New York-based Citigroup, which has received three rounds of capital infusions valued at $60 billion, including $45 billion from TARP, according to Bloomberg data.

“The administration has put forth a constructive plan to address the critical issues facing the financial services industry, and we are committed to working together with the industry to help achieve the goals of the plan,” CEO Vikram Pandit said in a statement before meeting with Obama.

Citigroup spokesman Stephen Cohen declined to comment.

The U.S. tests also involve Charlotte, North Carolina-based Bank of America, which also received $45 billion from TARP. It bought Merrill Lynch & Co. — the largest underwriter of failed collateralized debt obligations, according to Standard & Poor’s — and home-lender Countrywide Financial Corp.

Bank of America spokesman Scott Silvestri declined to comment.

Option ARMs

San Francisco-based Wells Fargo purchased Wachovia Corp., the nation’s biggest provider of option adjustable-rate mortgages, for $15 billion. In doing so, it took responsibility for about $122 billion of option ARMs sold by the Charlotte bank.

Option ARM loans allow borrowers to defer part of their interest payments and add it to their principal. When housing collapsed, many holders of the mortgages were left owing more than the value of their homes.

Wachovia issued more than half its option ARMs in California, according to bank filings. Wells Fargo was already the biggest lender in the state.

“Wells Fargo supports any plan by the Treasury that helps financial institutions efficiently sell troubled assets while still providing an investment return to the U.S. taxpayer,” spokeswoman Janis Smith said in an e-mail.

Web Distribution

The ability to distribute loan information over the Internet will also support prices by expanding the number of buyers and allowing for sales as small as $100,000, said Stephen Emery, a managing director at New York-based Mission Capital Advisors, which brokered $3 billion of real-estate loan sales last year.

Terms offered under the Legacy Loans Program, including government-backed financing, will also help boost demand and selling prices by as much as 20 percent, he said.

“The leverage will allow buyers to bump their price a little bit,” Emery said. “But that still doesn’t mean that something that was worth 30 is now worth 60. What’s going to happen is now it’s worth 35 or 36 cents.”

To contact the reporter on this story: Mark Pittman in New York at;

Appraisal Fraud from the Appraiser’s Perspective

Ease of entry was a key in the jump from 11,000+- in CA in 1990, to over 21,000 by 2007.

From Steve Smith

This comment is not made to defend the actions of any appraiser, or the appraisal industry itself, but to add some dimension of what was going on transactionally.

Sadly, appraisers were Conditioned to Anchor on Sales Price. This, even though their USPAP Certifications state that they do not do that.

Those who would not play the game of committing to being able to support the Sales Price, were routinely put on exclusionary lists at the larger mortgage banking firms or departments.

Some of the best appraisers went hungry during the boom. Some choose not to play the game as lender work is the greatest source of client pressures and the cheapest fees in the world of appraisal.

When Licensing of appraisers was eminent, in 1988, my personal choice was to get away from lender work as a way to make a living. At that time, appraisers were making $250 for a house report on FNMA forms.

Rather than work fast and cheap, cutting out the due diligence that compliance with good appraisal procedures requires; my choice was not to play the game.

Unfortunately, Licensing ushered in the world of businesses who taught the Prep Courses, cramming test answers into students who became licensed, with out really understanding much more than they had been told they could make huge money, knocking off 3+- reports per day.

Even Money Magazine included Appraisal as one of the best high paying jobs in the world for several years. This was largely due to their interviews with some that had gotten on the gravy train and who had no idea of their responsibilities or liabilities. No, of course, Money does not include appraisal..

Ease of entry was a key in the jump from 11,000+- in CA in 1990, to over 21,000 by 2007.

It is easy to create a fake appraisal using Templates in a Forms program with the majority of the Fields filled in, and the Adjustments automated.

Keen minds entered appraisal and hired Trainees, often by the dozens. Larger minds opened Appraisal Management Companies, and took their rake off the top, cracking open reports when they did not come in, and changing them, etc.

Nowhere along the way has it been shown that the appraiser was the originator of the bubble, but they certainly were the enablers, and many still do not know it.

Case-Shiller Still Predicts Massive 45% Fall From Today’s Values

Editor’s Note: This might not be as far-fetched as you think. Median income is dropping like a rock. Housing prices have historically been closely related to median income. I don’t know about the percentage drop, but another crash in real estate values seems likely. median income is still out of whack with housing prices indicating an “adjustment” of very substantial proportions is in the works. With unemployment and underemployment at record highs, it is difficult to see how this will get better any time soon.

Case-Shiller Still Predicts Massive 45% Fall From Today’s Values

November 24th, 2009 • Related • Filed Under

Filed Under: Featured Posthousing bear markethousing stats


The 10 major cities in the Standard & Poor’s/Case-Shiller home price index have risen 5% from their April low, but the index is still predicting a massive 45% fall from today’s values.

The index is still showing a current loss of 30% from the high in June 2006. Based upon a trend generated from the actual prices of 1987 to 1997, and generated forward in a linear projection, the index will fall a total of 62% before it reaches the trend norm.

A more comprehensive analysis of the 10-city index based upon a full 120 years of data shows current values off 36% and a comparatively modest 20% fall ahead.

Review four charts and key data based upon major real estate price indexes at “Property Price Index”.

Appraisal Malpractice as State Court Action — Albright Case 561 So 2d 1326 5th DCA

Appraisal negligence and/or fraud is overlooked by many. Appraisers are usually licensed and insured. Filing a complaint with the licensing board as well as sending a demand letter to them to forward to their carrier could produce some substantial results. And remember that the originating “LENDER” supposedly has a committee or person verifying the appraisal independently — which is what any half decent bank would do if they were really the lender and were at risk of loss of the loan was not paid.

FIRST ST. SAV. v. ALBRIGHT & ASSOC., 561 So.2d 1326 (Fla.App. 5 Dist. 1990)
Nos. 88-2445 and 89-341.
District Court of Appeal of Florida, Fifth District.
May 31, 1990.

Appeal from the Circuit Court, Marion County, Wallace E.
Sturgis, Jr., J.
Page 1327

Leslie King O’Neal of Markel, McDonough & O’Neal, Orlando, for

W.C. O’Neal of O’Neal & O’Neal, Gainesville, for

DANIEL, Chief Judge.

First State Savings Bank appeals a final judgment in favor of
Stephen Albright, a real estate appraiser, and his firm, Albright
& Associates of Ocala, Inc. (Albright). The bank contends that
the trial court erred in denying its motion to amend the
pleadings to conform to the evidence presented at trial and in
directing a verdict in favor of Albright. Albright cross-appeals
an order finding that he is not a “professional” for purposes of
the two-year statute of limitations for professional malpractice.
We conclude that the trial court should not have directed a
verdict in favor of Albright and accordingly reverse the final
judgment. We agree, however, with the trial court that Albright
is not a professional for purposes of the malpractice statute of

In 1986, the bank filed suit against Albright and his firm for
damages resulting from an allegedly inaccurate appraisal of
property. In its complaint, the bank alleged that Albright
undertook, for consideration, to provide an accurate appraisal of
a development known as the “Golden Ocala” project,[fn1] that the
appraisal and an update were delivered to the bank in 1984, that
Albright knew that the bank would rely on the appraisal in
determining whether a loan secured by the property should be
made, that the bank loaned $37,000,000 for the Golden Ocala
project in reliance on the appraisal showing a value of
$57,000,000, that the project had in fact a market value of less
than $9,500,000, and that the mortgage on the property is now in
default. The bank further alleged that Albright had negligently,
unskillfully, and without due care prepared the appraisal and
that as a direct and proximate result of the detrimental reliance
on the negligent acts of Albright, the bank had been damaged.

In his answer, Albright admitted making the appraisal for his
client Golden Ocala but denied that it had been made for the
bank. Albright also moved for summary
Page 1328
judgment alleging in part that the action was barred by the
two-year statute of limitations for professional malpractice. The
trial court found that Albright is not a professional within the
meaning of the statute of limitations for professional
malpractice and denied his motion and renewed motion for summary

The evidence at trial established that the bank would generally
loan about seventy-five percent of the appraisal value to develop
raw land. The initial appraisal done by Albright valued the
Golden Ocala project at $31,000,000 and the update valued the
project at $57,000,000. The update was specifically addressed to
the president of the bank. The appraisal, along with the other
information concerning the developers, was presented to the board
of the bank which approved a loan of $37,000,000 to develop
Golden Ocala. The Federal Home Loan Bank Board rejected the
appraisal and eventually required the bank to write down the book
value of the loan to $13,400,000. The mortgage and the property
has been foreclosed and the bank has apparently received no money
from Golden Ocala or its developers. Two expert witnesses
testified that Albright’s appraisal grossly misrepresented the
value of the property and did not comply with federal banking

After the bank rested its case, Albright moved for entry of a
directed verdict on the basis that there can be no recovery in
tort for purely economic damages, as were sought here. Counsel
for the bank argued that he could not sue Albright in contract
because of a lack of privity and therefore was required to sue
under a negligence theory. The hearing on the motion was
continued until the following day. At this time, counsel for the
bank argued that its action, although couched in terms of
negligence, was also an action for failure to use due care on the
contract and arose out of the duties under the contract. Counsel
then moved to have the pleadings conform to the evidence. The
trial court denied this motion and directed a verdict in favor of

In First Florida Bank v. Max Mitchell & Company, 558 So.2d 9
(Fla. 1990), the Florida Supreme Court recently held that an
accountant may be held liable for negligence to parties, despite
a lack of privity, where the accountant knows that those parties
will rely upon his opinion. In that case, Mitchell, a certified
public accountant, went to First Florida Bank for the purpose of
negotiating a loan on behalf of his client, C.M. Systems, Inc.
Mitchell told the bank vice president that he was a certified
public accountant and gave the vice president audited financial
statements of C.M. Systems which had been prepared by Mitchell’s
accounting firm. The financial statements did not show that C.M.
Systems owed money to any bank and Mitchell later told the bank
vice president that C.M. Systems was not indebted to any bank.
The bank later approved a credit line of $500,000 to C.M.
Systems. C.M. Systems borrowed the entire amount of the $500,000
credit line which it never repaid.

The bank later discovered that the audit of C.M. Systems had
substantially overstated its assets, understated its liabilities,
and overstated its net income. Among other things, the financial
statement failed to reflect that C.M. Systems owed at least
$750,000 to several banks.

The bank filed a three count complaint against Mitchell and his
firm. Because of the absence of privity between either Mitchell
or his firm and the bank, the trial court granted Mitchell’s
request for summary judgment on the negligence counts. The
district court affirmed but certified a question to the supreme
court concerning the scope of an accountant’s liability.

The supreme court noted that there were essentially four lines
of authority with regard to the question of an accountant’s
liability: 1) except in cases of fraud, an accountant is only
liable to one with whom he is in privity or near privity; 2) an
accountant is liable to third parties in the absence of privity
under the circumstances described in section 552 of the
Restatement (Second) of Torts (1976); 3) an accountant
Page 1329
is liable to all persons who might reasonably be foreseen as
relying upon his work product; and 4) an accountant’s liability
to third persons shall be determined by balancing various
factors, including the foreseeability of harm, the closeness of
the connection between the defendant’s conduct and the injuries
suffered, and the policy of preventing future harm.

Because of the heavy reliance upon audited financial statements
in the financial world, the court believed that permitting
recovery only from those in privity or near privity was unduly
restrictive. On the other hand, the court believed that liability
should be limited to those persons or classes of persons whom an
accountant “knows” will rely on his opinion rather than those he
“should have known” because of the fact that an accountant
controls neither his client’s accounting records nor the
distribution of his reports. In light of these considerations,
the court adopted the rationale of section 552 of the
Restatement (Second) of Torts (1976), as setting forth the
circumstances under which an accountant may be held liable in
negligence to persons who are not in contractual privity. Section
552 provides as follows:

§ 552. Information Negligently Supplied for the
Guidance of Others

(1) One who, in the course of his business,
profession or employment, or in any other transaction
in which he has a pecuniary interest, supplies false
information for the guidance of others in their
business transactions, is subject to liability for
pecuniary loss caused to them by their justifiable
reliance on the information, if he fails to exercise
reasonable care or competence in obtaining or
communicating the information.

(2) Except as stated in Subsection (3), the
liability stated in Subsection (1) is limited to loss

(a) by the person or one of a limited group of
persons for whose benefit and guidance he intends to
supply the information or knows that the recipient
intends to supply it; and

(b) through reliance upon it in a transaction that
he intends the information to influence or knows that
the recipient so intends or in a substantially
similar transaction.

Applying section 552 to the facts, the court noted that
Mitchell had negotiated the loan and personally delivered the
financial statements to the bank with the knowledge that the bank
would rely upon them in considering whether to approve the loan.
In these circumstances, the court held that Mitchell had vouched
for the integrity of the audits and that his conduct in dealing
with the bank sufficed to meet the requirements of the rule which
it had adopted.

In the present case, the trial court directed a verdict in
favor of Albright on the ground that the bank did not have a
cause of action for negligence. We find no appreciable difference
between the accountant in First Florida Bank and the appraiser
in this case. Accordingly, we adopt section 552 as setting forth
the circumstances under which an appraiser may be held liable for
his negligence to third parties in the absence of privity. See
Security First Federal Savings and Loan Association v. Broom,
560 So.2d 304 (Fla. 1st DCA 1990).

Here the appraisal prepared by Albright specifically stated
that its objective was to estimate the fair market value of the
Golden Ocala project for mortgage financing. An update of the
appraisal prepared by Albright was addressed directly to the
president of the bank. The appraisal was part of the information
supplied to the bank for its consideration of Golden Ocala’s loan
request and there was evidence that the bank did rely on this
information to its detriment. There was also evidence that
Albright had grossly misrepresented the value of the project,
that the appraisal failed to comply with federal guidelines, and
that the appraisal was negligently prepared. A directed verdict
is proper only when the record conclusively shows an absence of
facts or inferences from facts to
Page 1330
support a jury verdict. Holmes v. Don Mealey Chevrolet, Inc.,
468 So.2d 552 (Fla. 5th DCA 1985); Ferber v. Orange Blossom
Center, Inc., 388 So.2d 1074 (Fla. 5th DCA 1980). Because there
was evidence which would have supported a verdict for the bank,
the trial court erred in directing a verdict in favor of

On cross-appeal, Albright argues that, as a member of the
American Institute of Real Estate Appraisers (MAI), he should be
deemed a professional for purposes of the two-year statute of
limitations for professional malpractice. Section 95.11(4)(a),
Florida Statutes (1987), provides that an action for professional
malpractice, other than medical malpractice, must be commenced
within two years from the discovery of the malpractice. For
purposes of this statute of limitation, a “profession” is a
calling requiring, as a minimum for licensing under the laws of
Florida, specialized knowledge and academic preparation amounting
to at least a four-year university level degree in the field of
study specifically related to that calling. “In other words, if,
under the laws and administrative rules of this state, a person
can only be licensed to practice an occupation upon completion of
a four-year college degree in that field, then that occupation is
a profession.” Pierce v. AAll Insurance, Inc., 531 So.2d 84, 87
(Fla. 1988).

According to Albright, a MAI designation requires membership in
the National Association of Realtors, an undergraduate college
degree or its equivalent from an approved school, five years
experience as an appraiser, and attendance at required courses
and successful examinations. However, according to an affidavit
submitted by the bank from the Director of the Division of Real
Estate, Florida does not require a four-year baccalaureate degree
in the field of real estate appraising as a requirement for real
estate appraisers. Albright himself admits that there is no
Florida statute which defines qualifications or sets forth
requirements for a person to be a real estate appraiser or a MAI
real estate appraiser. We agree with the first district that
although the requirements for MAI designation are rigorous, they
fail to meet the requirement under Pierce that a four-year
degree be in a field related to their profession. See Security
First Federal Savings and Loan Association v. Broom, 560 So.2d
at 307-308. Accordingly, Albright was not a professional for
purposes of the professional malpractice statute of limitations.

REVERSED and REMANDED for a new trial.

COBB and COWART, JJ., concur.

[fn1] The Golden Ocala project was designed to be an exclusive
community of single and multifamily dwellings surrounding two
golf courses in Ocala, Florida.


Cases Citing Albright:

Florida Case Law
No. 5D07-754.
February 22, 2008.
… [fn6] Vesta argues that our decision on this point is controlled by First State Savings Bank v. Albright & Associates of Ocala, Inc., 561 So.2d 1326 (Fla. 5th DCA 1990), disapproved in part, Garden v. Frier, 602 So.2d 1273 (Fla. 1992). However, Albright was not a contractual privity case. In Albright, a potential borrower had contracted with Albright and Associates, an appraisal firm, to produce a real estate appraisal for submission to First State Savings Bank in connection with the client …



,title:CleanText(‘COOPER v. BRAKORA & ASSOC., 838 So.2d 679 (Fla.App. 2 Dist. 2003)’)
Florida Case Law
Case No. 2D01-4685.
Opinion filed March 5, 2003.
… To support his claim, Cooper relies on First State Savings Bank v. Albright & Associates of Ocala, Inc., 561 So.2d 1326 (Fla. 5th DCA 1990), disapproved on other grounds, Garden v. Frier, 602 So.2d 1273 (Fla. 1992). In Albright, an appraiser was retained by the purchasers of a real estate development project to provide an accurate appraisal of the project. The appraisal specifically stated that its objective was to estimate the fair market value of the project for mortgage financing. It was …



No. 1:00CV80 MMP.
… See Russell v. Sherwin-Williams Co., 767 So.2d 592 (Fla. 4th DCA 2000) (citing Bay Garden Manor Condaminium Ass’n v. Marks Associates, 576 So.2d 744 (1991); First State Savings Bank v. Albright & Assoc., of Ocala, 561 So.2d 1326 (Fla. 5th DCA), review denied, 576 So.2d 284 (Fla. 1990)). Thus, a claim of negligence is not necessarily barred by the Florida economic loss rule. However, Plaintiffs should amend their complaint to properiy allege a cause of action for negligence. …



Case No. 4D97-3338
Opinion filed September 13, 2000 July Term 2000
… (Fla. 3d DCA 1991) (engineers hired to inspect buildings and prepare inspection reports that would guide others in making business decisions could be sued in negligence under section 552); First State Sav. Bank v. Albright & Assocs. of Ocala, Inc., 561 So.2d 1326 (Fla. 5th DCA), review denied, 576 So.2d 284 (Fla. 1990) (appraiser may be held liable to third party for negligence under section 552). …



No. CIV.A. AW-97-2498.
March 14, 2000.
… 1324, 1326 (1992) (imposing a duty on appraisers under Section 552 of the Restatement of Torts when the party suing was expected to rely on the representation of the appraiser); First State Savings Bank v. Albright & Associates of Ocala, Inc., 561 So.2d 1326, 1329 (Fla.App. 1990) (“[W]e adopt section 552 as setting forth the circumstances under which an appraiser may be held liable for his negligence to third parties in the absence of privity.”); Costa v. Neimon, 123 Wis.2d 410, 366 N.W.2d 896, 89 …



No. 97-3338.
Opinion filed March 17, 1999.
… (Fla. 3d DCA 1991) (engineers hired to inspect buildings and prepare inspection reports that would guide other in making business decisions could be sued in negligence under section 552); First State Sav. Bank v. Albright & Assocs. of Ocala, Inc., 561 So.2d 1326 (Fla. 5th DCA), review denied, 576 So.2d 284 (Fla. 1990) (appraiser may be held liable to third party for negligence under section 552). …



No. 97-2752
August 19, 1998
… Inspection Servs., Inc. v. Arnold Corp., 660 So.2d 730 (Fla. 3d DCA 1995); Bay Garden Manor Condominium Ass’n, Inc. v. James D. Marks Assocs., Inc., 576 So.2d 744 (Fla. 3d DCA 1991); First State Sav. Bank v. Albright & Assocs. of Ocala, Inc., 561 So.2d 1326 (Fla. 5th DCA), review denied, 576 So.2d 284 (Fla. 1990). …



No. 91-106.
July 26, 1995. Rehearing Denied October 11, 1995.
… Title Serv. Co. of the Fla. Keys Inc., 457 So.2d 467 (Fla. 1984) (abstracter); Bay Garden Manor Condominium Ass’n, Inc. v. James D. Marks Assocs., Inc., 576 So.2d at 744 (engineer); First State Sav. Bank v. Albright & Assoc. of Ocala, Inc., 561 So.2d 1326 (Fla. 5th DCA) (appraiser), review denied, 576 So.2d 284 (Fla. 1990). …



United States 11th Circuit Court of Appeals Reports
No. 93-2314.
Filed July 18, 1995. Rehearing Denied August 30, 1995.
… Garden Manor Condominium Ass’n v. James D. Marks Assocs., 576 So.2d 744 (Fla. 3d Dist.Ct.App. 1991) (applying § 552 to allow a negligence action by a condominium association against an engineering firm); First State Sav. Bank v. Albright & Assocs., 561 So.2d 1326 (Fla. 5th Dist.Ct.App.) (adopting § 552 as the standard for appraiser liability), review denied, 576 So.2d 284 (Fla. 1990). After the supreme court’s decision in Casa Clara, however, courts have been reluctant to extend the applicati …



No. 92-2529.
March 15, 1995. Rehearing Denied May 10, 1995.

… So.2d 744 (Fla.3d DCA 1991) (engineers hired to inspect buildings and prepare inspection reports that would guide others in making business decisions could be sued in negligence under section 552); First State Sav. Bank v. Albright & Assocs., Inc., 561 So.2d 1326 (Fla. 5th DCA) (appraiser may be held liable to third party for negligence under section 552), review denied, 576 So.2d 284 (Fla. 1990).

… (engineers); see also McElvy, Jennewein, Stefany, Howard, Inc. v. Arlington Elec., Inc., 582 So.2d 47, 49-50 (Fla.2d DCA) (architects), cause dismissed, 587 So.2d 1327 (Fla. 1991); First State Savings Bank v. Albright & Assoc’s of Ocala, Inc., 561 So.2d 1326, 1329 (Fla. 5th DCA) (real estate appraiser), review denied, 576 So.2d 284 (Fla. 1990), disapproved in part on other grounds, Garden v. Frier, 602 So.2d 1273, 1277 n. 10 (Fla. 1992).[fn1] …

Nebraska Reports
No. S-92-1107.
Filed July 15, 1994.
… 90 (Iowa 1981); Ryan v. Kanne, 170 N.W.2d 395 (Iowa 1969); Springdale Gardens v. Countryland Dev., Inc., 638 S.W.2d 813 (Mo. App. 1982); Merriman v. Smith, 599 S.W.2d 548 (Tenn. App. 1979); First State Sav. v. Albright & Assoc., 561 So.2d 1326 (Fla. App. 1990), disapproved on other grounds, Garden v. Frier, 602 So.2d 1273 (Fla. 1992); Page 372 Price-Orem Inv. v. Rollins, Brown & Gunnell, 713 P.2d 55 (Utah 1986). …



No. 91-2067.
December 30, 1992.
… though inartfully drawn, state a cause of action against appellee. See, e.g., Bay Garden Manor Condominium Ass’n, Inc. v. James D. Marks Assoc., Inc., 576 So.2d 744 (Fla. 3d DCA 1991); First State Sav. Bank v. Albright & Assoc. of Ocala, Inc., 561 So.2d 1326 (Fla. 5th DCA), review denied, 576 So.2d 284 (Fla. 1990); First Fla. Bank, N.A. v. Max Mitchell & Co., 558 So.2d 9 (Fla. 1990); State Farm Life Ins. Co. v. Bass, 605 So.2d 908 (Fla. 3d DCA 1992). …



No. 78156.
July 2, 1992.
… [fn10] We disapprove Cristich v. Allen Engineering, Inc., 458 So.2d 76 (Fla. 5th DCA 1984), to the extent it conflicts with the present opinion. We disapprove First State Savings Bank v. Albright & Associates of Ocala, Inc., 561 So.2d 1326 (Fla. 5th DCA 1990), and Security First Federal Savings & Loan Association v. Broom, Cantrell, Moody & Johnson, 560 So.2d 304 (Fla. 1st DCA 1990), solely to the extent they relied upon the portions of Pierce nullified by this opinion; but the resu …



No. 89-2576.
February 12, 1991. Rehearing Denied April 16, 1991.
… accounting profession, we do not believe the court intended to exclude other professionals who supply expert information for the purpose of guiding others in business transactions. The fifth district, in First State Sav. Bank v. Albright & Assocs., Inc., 561 So.2d 1326 (Fla. 5th DCA 1990), followed First Florida Bank and adopted section 552 as setting forth the circumstances under which an appraiser may be held liable to a third party for negligence. Factually, this case is within the reach of sec …

Foreclosure Defense: Over-appraisal argument: Why Would They DO that?

> To:
> Subject: Just a thought…opposing arguments
> On the whole idea with an inflated appraisal and the $amount delta between real and legit, if I’m opposing counsel I argue that that the only one an inflated appraisal benefited was the seller of the property, not anyone in the chain of “conspiracy” from mortgage broker to Wall Street, in fact the inflated appraisal increased their clients risk at no benefit…..obviously this may not wash with a condo/developer in bed with broker/appraiser conspiring to sell units but may be valid argument in typical homeowner sale


Dear Rainmaker: Look a the Bill Moyers piece on the blog and you’ll see the counter arguments.

It’s true that the seller benefited if his/her timing was right. But chances are he turned around and bought some other house at an equally inflated price and THEN took the same loss everyone else did.

In any event, the intent of the Wall $treet parties involved here was to get rid of the cash that was flooding in from investors all over the world, trillions and trillions of dollars of it — far in excess of any normal demand for mortgage loans.

So they had to create a euphoric bubble with the full complicity of developers, who dutifully raised prices every couple of months to give the people who bought the misimpression their house was going up in value and the misimpression to people who were thinking of moving that they better do it fast before the prices go out of reach. In the sales pitch it was the same as the car business. They switched from the price of the asset to the cost of the payment. You can afford $300 per month, can’t you? Yes. Well that’s it, what do you care about the rest of the numbers? If things get tight, you’ll be able to refi at an even higher price and pull out even more money.

The reason for the up market was two-fold — (a) it created demand where there wouldn’t be any because we had a situation of money looking for people not people looking for houses and (2) the higher the price the faster the money could be deployed. Brown’s suit in California says that Countrywide had a quota of 80 loans per day per “mortgage specialist”. So break that day down and see how much time was spent considering the character and qualities of the loan applicant after the socializing was over. 3 minutes, if that?

No, the seller got screwed just like everyone else did, but one step removed. After he “made” all that oney in a resale, he bought a house that plummeted in value. The developer was the only one who made out, but they got ahead of themselves just like the investment bankers etc., who started sucking on thier own exhaust and holding “inventory”.

As to the no benefit argument, you miss the point. They had no risk and ONLY benefit. Wall Street makes money when it moves from one place to another. Here the money moved from investors to home sellers and homeowners (refis). The certificates on asset backed securities (mortgage backed securities) sold to the investors had a premium so great that they could pay premiums all the way down the chain and pay bonuses and kickbacks that were undisclosed.

When the deals tanked who really bites the bullet? The source of funding (investors) and the people who did it to them when the investors start making their claims. Over appraisal was absolutely required because the fundamentals were not there. So appraisers used the developer hatched pricing scheme to justify unjustifiable appraisals. Even an amateur would examine things pretty closely if the same house was selling for $250,000 last year and now has a purchase price of $375,000. Any lay person if they were asked to fund that mortgage would say, wait a minute, how stable is that price?

In the end it was the same thing on both ends of the transaction. They lied to the investors with false desciptions of the underlying “assets” and false descriptions of the actual investment, and false pricing supported by false “independent” ratings and false insurance. They lied to the borowers with false description of the underlying assets to the mortgage, and false descriptions of the actual investment and loan documents, and false pricing supported by false “independent” appraisals and false assurances of future prices.

Foreclosure Defense: Fraudulent Appraisals, Teaser Rates, and Manufactured Defaults: Boons to Borrowers in Defending Foreclosure

Fraudulent Appraisals, Teaser Rates, and Manufactured Defaults: Boons to Borrowers in Defending Foreclosure
As more and more lender misconduct hits the Internet airwaves and more of us continue our investigation into and scrutiny of the practices of originating lenders and their downline successors, certain themes are developing which give rise to numerous defenses to mortgage foreclosure actions. Three such issues are discussed here which are not mutually exclusive; which are “inextricably intertwined”; and which, when properly presented, may force a foreclosing party to bring additional parties into a foreclosure action, each of which is not only a potential additional “settlement pot” for the borrower’s claims, but also, on playing the “blame game”, can provide the borrower with free information to bolster the borrower’s claim as well.
The first is the fraudulent appraisal, particularly in foreclosure actions involving equity lines of credit (also called home equity lines of credit or “HELOC”s) and refinance transactions where “cash out” is provided to the borrower. It goes without saying that a mortgage loan of any type depends in material part on the outcome of the appraisal of the property, which directly affects the loan-to-value (“LTV”) which percentage is used to calculate the maximum amount of money which can be disbursed as a “cash out” on a refinance, or amount of credit line which is extended on a HELOC. Given the literature concerning the tremendous pressure by the investment bankers to get mortgage loans signed up so that they could be sold to an aggregator and then bundled and used to “back” a “mortgage-backed” security, it was incumbent upon the appraiser to make sure that the appraised value of the property came in at the right number to close the loan, whether the appraisal was accurate or not. What is being learned is that a great many of these appraisals were inaccurate, misleading, or outright false and based not on true “comparable sales” as required for a proper appraisal.
The second is the so-called “teaser rate” in Adjustable Rate Mortgage (ARM) loans. Literally hundreds of thousands of these loans, made to borrowers with unproven, dubious, little, or no income, “teased” or lured the borrower in with a promise from the mortgage broker or “lender” that the interest rate on the loan would be small for the first couple of years before it would go up, but with the attitude that “Hey, don’t worry, your property keeps going up in value, so by the time the new rate kicks in, you will have more equity and you can just do another ARM for a low rate”. What the mortgage broker and lender knew, however (but which was not disclosed to the borrower) was that the loan was only qualified for the borrower, in view of the borrower’s unproven, dubious, little, or no income, on the “teaser” interest rate, with the “lender” knowing that the borrower, once the “new” rate kicked in, DID NOT AND COULD NOT qualify for the loan and would not be able to make the increased mortgage payment based on the borrower’s income. As such, a default was built into the loan from the outset. But hey, no matter, as the originating “lender” had no intention of keeping the loan anyway, that would be someone else’s problem later on and down the line.
Which brings us to the effects of the manufactured default. Teaser rate loans to borrowers with unproven, dubious, little, or no income were doomed from the start. The originating lender knew or had to know that a default upon instance of the new and higher interest rate on the loan was almost inevitable, but hey again (to my friend purchasing these loans), YOU CAN FORECLOSE ON THE PROPERTY, SO YOU ARE PROTECTED!  This line had to have been repeated down the line at least through the first few layers of resale of the loans before bundling and being used as alleged “backing” for a “mortgage backed security”, when it really didn’t matter anymore except to those who now seek to foreclose on something they may not really even legally own or have rights to, and is probably not worth what the lender said it was worth.
So now, as a hypothetical (based on existing facts from certain pending cases), mortgage broker sucks in low-income borrower to take a cash-out refi on his house on a 2-year ARM with a low initial interest rate. Mortgage broker convinces borrower that Bank A has the best deal for borrower and that loan WILL be approved shortly despite no proof of borrower’s income, or on whatever income figure borrower claims (also known in mortgage parlance as “stated” income). Mortgage broker and Bank A make sure that appraiser inputs the “right” value for property on the appraisal so that the proper LTV is met to make the loan work even if true comps are not available. Bank A makes loan and immediately sells off mortgage to aggregator who in turn sells it off to investment banker in bundles for mortgage-backed-securities purposes. Bank A sells off right to “service” the loan to Servicing Agent, which collects payments from borrower, who defaults when teaser rate expires. Although there are numerous legal issues in this process, the focus here is on the interplay of the effect of the fraudulent appraisal, teaser rate, and manufactured default as they relate to assisting the borrower defending a foreclosure.
Servicing Agent now sues borrower for foreclosure claiming default in payment. Borrower defends against the Servicing Agent (as the purported “lender”) and asserts claims against Servicing Agent for lender liability, violation of lending laws, and other remedies. Servicing Agent claims “not me”, then looks to see who it can blame for borrower’s claims, and is thus forced to bring in Bank A, appraiser, and mortgage broker, who are each going to cry “not me” as well and start pointing fingers. The beauty of this is that the Servicing Agent has now provided the borrower with several other parties to seek relief from and has also provided the claims to be asserted against these additional parties. Further, one or more of these new parties may agree to “cooperate” with the borrower by disclosing the truth in exchange for a quick settlement either directly or through their professional liability insurance carriers rather than risk the potential of an adverse Final Court Judgment being entered against them and/or a professional license suspension or revocation, or loss of professional liability insurance coverage.
Given the enormity of the resale/aggregation/bundling/securitizing of mortgage loans and the myriad legal issues involved in the broad scheme of these transactions, a borrower threatened with foreclosure should never be shy to seek an opinion as to their potential defenses from an attorney who has a working knowledge of the pertinent concepts and how they operate in synergy to the benefit of the borrower. The investment in obtaining such an opinion could literally save the roof over the head of you (the borrower) and your family.
Jeff Barnes, Esq.
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