Banks Still Out Cheating Their Customers and Everyone Else

It is easy to think of the mortgage meltdown as a period of time in which the banks went wild. Unfortunately that period of time never ended. They are still doing it. The level of sophistication it takes to do the kinds of things that banks have been doing for the last 20 years is probably beyond the knowledge and experience of any of the regulators. In addition, it is beyond the knowledge and experience of most consumers, lawyers and judges; in fact as to non-regulators, bank behavior makes no sense. After having seen the results of what are euphemistically called subprime mortgages, Wells Fargo is plunging back in and obviously expecting to make a profit. Apparently the quasi governmental entities that issue guarantees on certain mortgages will allow these subprime mortgages. Wells Fargo says it now understands the parameters under which the guarantors (Fannie and Freddie) will approve those mortgages without a risk that Wells Fargo will be required to buy them back.

That is kind of a mouthful. We have thousands of transactions that are being conducted that directly affect the ownership and balance of various types of loans including mortgage loans. The picture presented in court is that the ownership and status of each loan is stable enough for representations to be made. But the truth is that the professional witnesses hired by the bank’s foreclosure actions only present a slice of the life of a loan. They neither know nor do they inquire about the rest of the information. For example, they come to court with a a report showing the borrower’s record of payments to the servicer but they do not show servicer’s record of payments to the creditor. By definition they are saying that they only know part of the financial record and that consists of a made for trial report on the borrower’s activities. It does not show what happened to the payments made by the borrower and does not show payments made by others —  like loss sharing with the FDIC, servicer advances, insurance, and other actual payments that were made.

These payments are not allocated to any specific loan account because that would reduce the amount claimed as due from the borrower to the creditor — as it should. And the intermediaries and conduits who are making claims against the borrower have no intention of paying the actual creditors (the investors) any more than they absolutely have to. So you have these intermediaries claiming to be real parties in interest or claiming to represent the real parties in interest when in fact they are representing themselves.

They cheat the investor by not disclosing payments received from insurance and FDIC loss sharing. They cheat the borrower by not disclosing those payments that reduce the count receivable and therefore the account payable. They cheat the borrower again when they fail to show “servicer advances” which are payments received by the alleged trust beneficiaries regardless of whether or not the borrower submits monthly payments.  (That is, there can’t be a default in payments to the “trust” because the pass through beneficiaries are getting paid. Thus if there is any liability of the borrower it would be to intermediaries who made those servicer payments by way of a new liability created with each such payment and which is NOT secured by any mortgage because the borrower never entered into any deal with the servicer or investment bank — the real source of servicer advances).

Then they cheat the investor again by forcing a case into a foreclosure sale when the borrower was perfectly prepared, willing and able to enter into a settlement agreement that would have paid the rest are far more than the proceeds of a foreclosure sale and final liquidation. Their object is to maximize the loss of the investor and maximize the loss of the borrower to the detriment of both and solely for the benefit of the intermediary or conduit that is pulling the strings and handling the money.  And they are still doing it.

The banks have become so brazen that they are manipulating currency markets in addition to the debt markets. While we haven’t seen any reports about activities in the equity markets, there is no reason to doubt that their illegal activities are not present in equity transactions. For the judicial system to assume that the Banks are telling the truth or presenting an accurate picture of the  transaction activity relating to a particular loan is just plain absurd now. The presumption in court should be what it used to be, at a minimum. Before the era of securitization, most judges scrutinized the documentation to make sure that everything was in order. Today most judges will say that everything is in order because they are pieces of paper in front of them, regardless of whether any of those pieces of paper represents an accurate rendition of the facts related to the loan in dispute. Most judges in most cases are rubber-stamping judgments for intermediaries and thus are vehicles for the intermediaries and conduits to continue cheating and stealing from investors and borrowers.

The latest example is the control exercised by the large banks over currency trading. Regulators are clueless.  The banks are no longer even concerned with the appearance of propriety. They are cheating the system, the society, the government and of course the people with impunity. They are continuing to pay or promote their stocks as healthy investment opportunities. Perhaps they are right. If they continue to be impervious to prosecution for violating every written and unwritten rule and law then their stock is bound to rise both in price and in price-to-earnings ratio. They now have enough money which they have diverted out of the economy of this country and other countries that they can create fictitious transactions showing proprietary trading profits for the next 20 years.

This is exactly what I predicted six years ago. They are feeding the money back into the system and laundering it through the appearance of proprietary trading. It is an old trick. But they have enough money now to make their earnings go up every year indefinitely. On the other hand, if the regulators and investigators actually study the activities of the banks and start to bring enforcement actions and prosecutions, maybe some of that money that was taken from our economy can be recovered, and the financial statements of those banks will be revealed and smoke and mirrors. Then maybe their stock won’t look so good. Right now everyone is betting that they will get away with it.

New forex lawsuit parses data to make case

Yesterday, 03:13 PM ET · JPM

  • There have been a number of suits against the global banks over claims of forex manipulation, but this latest by the City of Philadelphia Board of Pensions and Retirement is the first to include research highlighting unusual movements in major currencies.
  • Using data compiled by Fideres, the plaintiffs analyzed daily trading right around the 4 PM fix of currency prices … curiously, anomalous price movements became rarer and less pronounced after the initial reports of rigging surfaced last summer.
  • Morgan Stanley has spent some time looking at euro/dollar spikes at 4 PM and also concluded they were unrelated to economic events. Instead of collusion though, Morgan pins the blame on computerized trading programs.
  • The seven banks sued by Philadelphia which is seeking damages as high as $10B: Barclays (BCS), Citigroup (C), Deutsche Bank (DB), HSBC, JPMorgan (JPM), RBS, and UBS.

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Mortgage-Currency Meltdown: Keep Your House as Long as You Can

The continuing decline of the U.S. dollar will only hurt you if you are holding U.S. dollars — NOT so much if you are holding real estate  — i.e, your home. Before you go overboard in panic mode, consider this, and hope…. 

The mortgage meltdown free money craze may have pulled the trigger, but the gun was decades of profligate spending on everything from congressional pork barrel to unnecessary “upgrades” to cell phones. Greenspan admits he missed the relevance of the housing boom in which prices rose at non-credible rates, but in his Republican ideology he believes that market forces will sort everything out. This is no better than evangelical rejection of science and no better than progressive spending programs. 

The U.S. dollar has been going down in value on world markets along with U.S. prestige and a precipitous decline in the trust of foreign investors in our financial markets and the players who perpetrated the largest fraud, so far, in currency, credit, and securities. 

Obviously foreclosures, defaults in all types of credit instruments and declines in consumer spending is going to slow the U.S. economy. Just as obviously, the dollar will continue its decline. Nobody knows where it will end up but it has already long since passed the point where a tidal wave of inflation will be felt here of such magnitude that it will receive attention in the economics textbooks, law books, and accounting standards. Yes, housing prices will have considerable downward pressure. And yes, those who point to the benefit to our “exports” from a weakening dollar sound like empty rhetoric.

Yet there is a grain of truth in what they say and it has a direct relevance to those sitting in houses that are lower in value, even upside down in equity. Buying has commenced from foreign investors. They are using currencies that did not decline, at least as much as the dollar has declined. So their buying power increased while our buying power has decreased. And the effect is magnified by the actual dollar decline in housing prices.  But don’t expect housing prices to stay down —unless inflation magically disappears. Right now all indications are that the Fed and the Bush administration are pushing dollars into the the U.S. economy. Like any other commodity, the more dollars are out there, the cheaper they become.

This translates for the lay person in an interesting turnabout. It if takes more dollars to buy milk and eggs than it did a month ago, so too will it take more dollars to buy real estate. So if your only major asset is your house, it might surprise you both as a hedge against inflation and as an investment. Put in simpler terms, the dollar cost of your home is going to go up as the value of the dollar declines. 

Let’s take an example. Suppose you bought a house for $400,000 in 2005. For the sake of argument, you put nothing down, so today in round numbers, you still owe $400,000. The fair market value of your home in our example here has declined by 20%, which means if you sold it you would get $320,000 less broker’s fees etc, leaving you with perhaps $300,000 in value. Thus you have a $300,000 asset with a $400,000 debt. This is the classic “upside down” reference — your equity is minus $100,000.  

And the situation seems even more bleak with projections of perhaps another 15% drop, which will bring you into the range of perhaps $250,000 on that $400,000 house. This leaves you with negative equity of $150,000. In other words, if you sold the house, you would have to come to the table with $150,000 to pay off the mortgage, just to be able to convey clear title. That’s pretty bleak. You could get some relief if your lender allowed a “short sale” and accepted the $250,000 as full payment and now under the new rules, that forgiveness of debt would no longer be income upon which you would be taxed, so that is good news. But how many lenders are going to accept the full $150,000 damage caused by this market. 

You might also ask, how any of this could have happened? The answer is simple, you were sold a $250,000 home for $400,000. And a whole bunch of people were involved in a tacit conspiracy to defraud you and the eventual buyer of your mortgage note. And of course you lost whatever money you put into your new house when you moved in — landscaping, furnishings, improvements etc.  You did get screwed, and there is nothing I can say that will change that. But the scenery might change and you might be sitting in a better position than you think — if you have the staying power.

The reason is that in round numbers, people in other countries have seen the value of their currency rise. A deposit of $1,000 worth of Euro or other currency a couple of years ago is worth 50% more than it was then.  Our loss is their gain. So that house that cost $400,000 in 2005 might only cost them $275,000 in their own currency. Let’s go further. That house that is now worth only $320,000 dollars in U.S. dollars, will cost the foreign investor around $225,000 in his own currency. it doesn’t get much better than that. But it will get better for these foreign buyers of U.S. real estate. The U.S. dollar will continue its decline. So these prices which are temporarily depressed, will get into “sillyville” when you factor in foreign exchange. 

This will result in at least a flattening of the decline in declining demand for U.S. real estate. And the continuing decline of the U.S. dollar will only hurt you if you are holding U.S. dollar — NOT if you are holding real estate.  

The likelihood is that foreign exchange induced inflation alone will increase the dollar price of your house at least another 15% over the next year. Add to that a modest increase in prices caused by increasing demand both from foreign investors picking up bargains and domestic buyers who still have cash and need to place the cash in some asset that will hedge against dollar inflation and you have a better picture than what is appearing from the pundits. It might not be all roses and good times. But the bleak picture might change to break-even or better, given 2-5 years.

This opens up the very real opportunity for lenders to get together with the buyers they screwed, the investment bankers that created the fraud, and the investors who got screwed holding collateralized debt obligations (CDO’s). If instead of foreclosing, they reach an agreement on sharing the losses and sharing the potential benefits, the inventory of foreclosed properties will cease to expand, thus providing a more stable marketplace for real estate sales and investment.

This in turn will magnify the effects outlined above and quite possibly provide a profit to all concerned.

Unfortunately the likelihood is that the players who caused this mess are more interested in blaming the victims and overing their tracks than in fixing the problem.

But the fact remains, that the undercutting of the U.S. economy and the U.S. dollar might produce results that [a] allow your personal financial situation to recover and [b] give you a decided advantage in paying off a mortgage later which far cheaper dollars than the ones you borrowed. You could still end up ahead of the game.

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