DOJ Probes Wells Fargo: Unravelling the Scam Piece by Piece

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Editor’s Comment and Analysis: For those, like myself, frustrated with the pace of the investigation, we must remember that the convoluted manner in which money and documents were handled was intended to obscure the PONZI scheme at the root of the securitization scam and false claims based upon securitization.

None of us saw anything this complex and after devoting 6 years of life to unraveling this mess I am still learning more each day , even with an extensive background on Wall Street and even with my experience with bond trading, investment banking and related matters.

So first they are going after the low-hanging fruit, which is the obvious misrepresentations to the investors who actually comprise most of the same people who were foreclosed. It was pension funds and retirement accounts managed directly or indirectly by the Wall Street banks that bought these bogus “mortgage-backed” bonds. Those same funds are now underfunded and headed for another bailout fight with the Congress.

The problem is that DOJ is still looking at documents and representations when they should be probing the actual movement of money. It is there that they will find the holy grail of prosecutable crimes. The money just didn’t go the way the banks said it would. The banks took trading profits out of the money before it even landed in an account which incidentally was never titled in the name of the REMIC that issued the fake mortgage bonds backed by loans that did not exist in the “the pool.”

Nonetheless I am encouraged that DOJ is chipping away at this, and getting their feet wet, as they get to understand what was really happening, to wit: a simple PONZI scheme in which the deal would fold as soon as there were no more investments by investors.

This simple core was covered by multiple layers of false documentation, robo-signed documents and other transmissions with disclaimers, such that there would be plausible deniability. In the end it is nothing different than Madoff, Drier or other schemes that have landed many titans in prison for the rest of their lives — unless they died before serving their sentence.

I’m an optimist: I still believe that in the end, these banksters will be brought to  justice for real crimes they committed or were directing through their position in the institutions they supposedly represented. The end result is going to be an overhaul of banking like we have not seen before perhaps in all of U.S. history.

The fact remains that the assets on the balance sheets of these banks are (a) overstated by assets that are either non existent or overvalued and (b) understated by the amount of money they parked off-shore in “off balance sheet transactions.”

In the end, which I predict could still be five years away or more, the large banks will have disappeared and the banking industry will return to the usual marketplace of large, medium and small banks, each easily subject to regulation and audits.

How the staggering toll exacted from the middle class will be handled is another story. Nobody in power wants to give the ordinary guy money even if he was defrauded. But unless they give restitution to the pension funds and homeowners, the economy will continue to drag and lag behind where it should be.

Wells Fargo Wachovia Unit Faces Probe Over Mortgage Practices


Nov 6 (Reuters) – The government’s investigation of mortgage-related practices at Wells Fargo & Co includes the making and packaging of home loans by its Wachovia unit, the bank said in a filing Tuesday.

The No. 4 U.S. bank by assets disclosed in February that it may face federal enforcement action related to mortgage-backed securities deals leading to the financial crisis.

In Tuesday’s quarterly securities filing, Wells Fargo reiterated that it’s being investigated for whether it properly disclosed in offering documents the risks associated with its mortgage-backed securities.

The bank also said the government is investigating whether Wells Fargo complied with applicable laws, regulations and documentation requirements relating to mortgage originations and securitizations, including those at Wachovia.

San Francisco-based Wells Fargo acquired Wachovia at the peak of the financial crisis in 2008 as losses in the Charlotte, North Carolina-based bank’s mortgage portfolio ballooned.

Mortgages packaged into securities for investors during the housing boom still haunt big banks years later. Banks have been accused of failing to ensure the quality of the loans and for misrepresenting their risk to investors.

In January, the Obama administration set up a special task force to investigate practices related to mortgage-backed securities at banks.

In the group’s first action, New York State Attorney General Eric Schneiderman last month filed a civil suit against JPMorgan Chase & Co for alleged fraud at Bear Stearns, which JPMorgan bought at the government’s request in 2008.

Banks Pushing Homeowners Over Foreclosure Cliff

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Editor’s Comment:

Whether it is force-placed insurance or any other device available, banks and servicers are pushing homeowners, luring homeowners and tricking homeowners into foreclosures. It is the only way they can put distance between them and the collosal corruption of title, the fact that strangers are foreclosing on homes, and claims of predatory, deceptive and fraudulent lending practices.

Most of those five million homes belong back in the hands of the people who lost them in fake foreclosures. And that day is coming.

Foreclosures are good but short- sales are better as those in the real estate Market will tell you. Either way it has someone other than the bank or servicer signing the deed to the ” buyer” and eventually it will all come tumbling down. But what Banks and servicers are betting is that the more chaotic and confused the situation the less likely the blame will fall on them.

Watch out Mr. Banker, you haven’t seen our plan to hold you accountable. You might think you have control of the narrative but that is going to change because the real power is held by the people. Go read the constitution — especially the 9th Amendment.

Look Who’s Pushing Homeowners Off the Foreclosure Cliff

By the Editors

One of the more confounding aspects of the U.S. housing crisis has been the reluctance of lenders to do more to assist troubled borrowers. After all, when homes go into foreclosure, banks lose money.

Now it turns out some lenders haven’t merely been unhelpful; their actions have pushed some borrowers over the foreclosure cliff. Lenders have been imposing exorbitant insurance policies on homeowners whose regular coverage lapses or is deemed insufficient. The policies, standard homeowner’s insurance or extra coverage for wind damage, say, for Florida residents, typically cost five to 10 times what owners were previously paying, tipping many into foreclosure.

The situation has caught the attention of state regulators and the Consumer Financial Protection Bureau, which is considering rules to help homeowners avoid unwarranted “force- placed insurance.” The U.S. ought to go further and limit commissions, fine any company that knowingly overcharges a homeowner and require banks to seek competitive bids for force- placed insurance policies. Because insurance is not regulated at the federal level, states also need to play a stronger role in bringing down rates.

All mortgages require homeowners to maintain insurance on their property. Most mortgages also allow the lender to purchase insurance for the home and “force-place” it if a policy lapses or is deemed insufficient. These standard provisions are meant to protect the lender’s collateral — the property — if a calamity occurs.

High-Priced Policies

Here’s how it generally works: Banks and their mortgage servicers strike arrangements — often exclusive — with insurance companies in which the banks agree to buy high-priced policies on behalf of homeowners whose coverage has lapsed. The bank advances the premium to the insurer, and the insurer pays the bank a commission, which is priced into the premium. (Insurers say the commissions compensate banks for expenses like “advancing premiums, billing and collections.”) The homeowner is then billed for the premium, commissions and all.

It’s a lucrative business. Premiums on force-placed insurance exceeded $5.5 billion in 2010, according to the Center for Economic Justice, a group that advocates on behalf of low- income consumers. An investigation by Benjamin Lawsky, who heads New York State’s Department of Financial Services, has found nearly 15 percent of the premiums flow back to the banks.

It doesn’t end there. Lenders often get an additional cut of the profits by reinsuring the force-placed policy through the bank’s insurance subsidiary. That puts the lender in the conflicted position of requiring insurance to protect its collateral but with a financial incentive to never pay out a claim.

Both New York and California regulators have found the loss ratio on these policies — the percentage of premiums paid on claims — to be significantly lower than what insurers told the state they expected to pay out, suggesting that premiums are too high. For instance, most insurers estimate a loss ratio of 55 percent, meaning they’ll have to pay out about 55 cents on the dollar. But actual loss ratios have averaged about 20 percent over the last six years.

It’s worth noting that force-placed policies often provide less protection than cheaper policies available on the open market, a fact often not clearly disclosed. The policies generally protect the lender’s financial interest, not the homeowner’s. If a fire wipes out a house, most force-placed policies would pay only to repair the structure and nothing else.

Lack of Clarity

Homeowners can obviously avoid force-placed insurance by keeping their coverage current. Banks are required to remove the insurance as soon as a homeowner offers proof of other coverage. But the system, as the New York state investigation and countless lawsuits have demonstrated, is defined by a woeful lack of clarity, so much so that Fannie Mae has issued a directive to loan servicers to lower insurance costs and speed up removal times. And it said it would no longer reimburse commissions. The recent settlement with five financial firms over foreclosure abuses also requires banks to limit excessive coverage and ensure policies are purchased “for a commercially reasonable price.”

That’s not enough. Tougher standards should be applied uniformly, regardless of the loan source. Freddie Mac should follow Fannie Mae’s lead and require competitive pricing on the loans it backs. The consumer bureau should require mortgage servicers to reinstate a homeowner’s previous policy whenever possible, or to obtain competitive bids when not.

The bureau should also prevent loan servicers from accepting commissions or, at the very least, prohibit commissions from inflating the premium. It should require servicers to better communicate to borrowers that their policy has lapsed, explain clearly what force-placed insurance will cost and extend a grace period to secure new coverage. Finally, states should follow the example of California, which recently told force-placed insurers to submit lower rates that reflect actual loss ratios.

Many homeowners who experience coverage gaps have severe financial problems that lead them to stop paying their insurance bills. They are already at great risk of foreclosure. Banks and insurers shouldn’t be allowed to add to the likelihood of default by artificially inflating the cost of insurance.

Ghost Towns: 25 million more suburban homes by 2030 than are needed.

Editor’s Note: Put simply this crisis will still be ongoing in 20 years. When you add the student loans that were securitized and which were “non-dischargable” in bankruptcy because of the government guarantee of the “risk” (which never existed because the risk was sold before the loan was ever funded, hence the guarantee should not flow with sale of loans into securitized pools and should therefore be capable of discharge), auto loans, credit card loans etc., it is not just a career to help people ensnared by the derivative trap it is generational.

More than that, this report shows, corroborates and confirms a central thesis to this blog: APPRAISAL FRAUD, KNOWINGLY IMPLEMENTED AT ALL LEVELS OF THE SECURITIZATION CHAIN FROM THE INVESTOR DOWN TO THE BORROWER.

Think about it. 30 million EXTRA homes. It didn’t come from population growth. It didn’t come from rising incomes and people expanding their families. Where did the demand for these houses come from? The conventional wisdom is that the demand came from the people who bought the houses, never mind that they left vacant property to move in and now have moved out leaving vacant property, leaving themselves with less wealth or more debt than they had before.

Look to the result to determine intent. It’s a basic proposition in law, psychology and criminology. Sure accidents happen but this was no accident — everyone can see that. The negative result here is that the investors got bilked out of trillions, the homeowners lost their homes, down payments, monthly payments (which were higher than rental) leaving them with no savings, higher debt, more owed on their credit cards, either no job or less of a job, rising expenses and less money at the end of each month.

And remember we are not talking about a few people who were living high on the hog because they were con artists. We are talking about 30 MILLION nuns, priests, police chiefs, cops, fireman, soldiers who served in our wars, and every day people who worked 9-5 scratching out a living. So the idea that 30 million people somehow connected into a mob and decided to wreck the financial system and their own lives is not very compelling or credible.

No, the all the positive results went to Wall Street. They got the money from the investors, the homeowners, the taxpayers and now the investors again as they “re-securitize” the old toxic crap. So the inescapable conclusion is that the demand came from Wall Street. It was Wall Street that needed new homes and developers who got higher and higher prices for unneeded homes. without the homes they could not sell mortgage backed derivative securities. Yes it IS that simple.

Wall Street needed the homes because they had this new financial toy they were taking out for a spin — but it couldn’t work without more homes at ever higher prices. Since they had amassed trillions of dollars and they were taking about 1/3 of it in their pockets off-shore, it was easy to spread around the gelt and get the securitization and mortgage origination players to pretend these were legitimate transactions when everyone other than the ivnestors and the homeowners knew the transactions were doomed.

It was Wall Street that created the demand and it was Wall Street that bet against the result, knowing that they had artificially pumped up the demand for housing, artificially inflated the value of the property, improperly inflated the appraisal from the rating agencies, and fraudulently sold securities, bought insurance, and abused the taxpayers with their influence in Washington.

NOW we have ghost towns on the rise — rising areas of crime, slums, drug manufacture, gangs and all that a dysfunctional society can offer. Like Harry Truman said, “How many times do you have to get hit in the head before you look to see who’s hitting you?”

It is Wall Street that should bear the brunt of the loss and Wall Street who should pay the taxes they owe on income they never reported and “protected” off-shore, it is Wall Street that owes billions in taxes, fees, fines and penalties to state and local government for the transactions they created involving property within the borders of each state and county.

Housing crisis turns some suburban neighborhoods into ghost towns

March 30, 2010 |  3:01 pm

There are hundreds of stories about how the housing crisis has affected people who have lost their homes — but what about the people left behind?  Eddie and Maria Lopez can tell you that the flight of families who have walked away or been foreclosed on has completely changed their small gated community in Hemet.

When they moved in, they were enticed by the ducks walking around the development, the lakes, the pool and clubhouse. Families held parties during the holidays; kids would play together on the street. But homes in the gated community of Willowalk plummeted in value — the Lopezes’ home went from $440,000  to $169,000 — and families began leaving in droves.

Now, the Lopezes say just about every house on their block is either empty or rented, and the behavior of some of the tenants makes the family feel uncomfortable. The house next door, for instance, is rented out to a handful of men, each of whom live in a separate room.

Some observers say that these suburban communities could become the new slums of America. As baby boomers age, they won’t need McMansions and will want to live closer to urban centers. And Generation X and Y already prefer walkable residences, according to Arthur C. Nelson, a University of Utah professor who projects there could be 25 million more of these suburban homes by 2030 than are needed.

For more on Willowalk and how cities across the state are coping with gated ghost towns, check out the story.

— Alana Semuels

From bucolic bliss to ‘gated ghetto’

Hemet’s Willowalk tract was family-friendly. Then the recession hit.

Willowalk's decline“We loved how everything was family-oriented,” said Willowalk resident Eddie Lopez, left, with wife Maria and six of their children. They bought their 5,000-square-foot house for $440,000 in 2006. It’s probably worth about $170,000 now. (Gina Ferazzi / Los Angeles Times / March 17, 2010)
By Alana SemuelsMarch 30, 2010

Reporting from Hemet – The gated community in Hemet doesn’t seem like the best place for Eddie and Maria Lopez to raise their family anymore.

Vandals knocked out the streetlight in front of the Lopezes’ five-bedroom home and then took advantage of the darkness to try to steal a van. Cars are parked four deep in the driveway next door, where a handful of men rent rooms. And up and down their block of handsome single-family homes are padlocked doors, orange “no trespassing signs” and broken front windows.

It wasn’t what the Lopezes pictured when they agreed to pay $440,000 for their 5,000-square-foot house in 2006.

The 427-home Willowalk tract, built by developer D.R. Horton, featured eight distinct “villages” within its block walls. Along with spacious homes, Willowalk boasted four lakes, a community pool and clubhouse. Fanciful street names such as Pink Savory Way and Bee Balm Road added to the bucolic image.

Young families seemed to occupy every house, throwing block parties and holiday get-togethers, and distributing a newsletter about the neighborhood, Eddie Lopez recalled.

“We loved how everything was family-oriented — all our kids would run around together,” said Lopez, a 41-year-old construction supervisor and father of seven. “Now everybody’s gone.”

Home foreclosures have devastated neighborhoods throughout the country, but the transformation from suburban paradise to blighted community has been especially stark in places like Willowalk — isolated developments on the far fringes of metropolitan areas that found ready buyers when home prices were soaring but then saw an exodus as values crashed.

Vacant homes are sprinkled throughout Willowalk, betrayed by foot-high grass. Others are rented, including some to families that use government Section 8 vouchers to live in homes with granite countertops and vaulted ceilings.

When the development opened in 2006, buyers were drawn to the area by advertising describing it as a “gated lakeshore community.” Now, many in Hemet call Willowalk the “gated ghetto,” said John Occhi, a local real estate agent.

There are dozens of places like Willowalk, and they are turning into America’s newest slums, says Christopher Leinberger, a visiting fellow at the Brookings Institution. With home values at a fraction of their peak, he said, it no longer makes sense to live so far from the commercial centers where jobs are concentrated.

“We built too much of the wrong product in the wrong locations,” Leinberger said.

Thanks to overbuilding, demographic changes and shifts in preferences, by 2030 there could be 25 million more suburban homes on large lots than are needed, said Arthur C. Nelson of the University of Utah. Nelson believes that as baby boomers age and as younger generations buy real estate, the population will abandon remote McMansions for smaller homes closer to shops, jobs and the other necessities of life.

Whatever their number, the presence of unwanted or abandoned homes stands to be a burden on local governments for years to come, as cash-strapped cities and counties have to spend precious resources to patrol the neighborhoods and clean unkempt yards and abandoned houses.

“There are cities saying to us, ‘I used to have eight code enforcement officers, and now I have one,’ ” said Bill Higgins, a staff attorney for the League of California Cities.

About 80 California municipalities are striking back, enforcing ordinances that fine lenders up to $1,000 a day for not maintaining properties that have been foreclosed, Higgins said. But most cities don’t have the resources to force absentee owners or renters to keep up their properties.

In Hemet, city officials have simply boarded up homes in some troubled neighborhoods. Plywood covers the windows of dozens of apartments on Valley View Drive; resident David Hall says it keeps prostitutes and drug dealers out.

Willowalk presents a different challenge. The development promised a Tiffany neighborhood for what was then something closer to a Target price.

“Leave the world behind as you unwind by our picturesque lakes,” cooed one advertisement, which touted “intimate botanical gardens and walking trails, tranquil lakes” and other attractions.

At first, the reality matched the come-ons.

Maria Lopez, a stay-at-home mother, recalls gazing at the mountains in the distance as her children played with groups of neighbors their own age. The community pool was just a few blocks away, and she says she used to let her older children, ages 13 and 14, go there by themselves.

Now she accompanies her children to the pool — though it has been closed of late — because the people who now hang out there “have no class,” she said, and she sits out front with her children if they play in the yard.

“My next-door neighbors — there are so many people living there, I don’t know who they are,” she said.

Walking through the development, there is not much evidence of the well-kept yards and friendly families Maria Lopez fondly recalls.

Many of the people answering a knock say they are renters, and won’t open their doors more than a crack to see who is on their doorstep. Red-and-white “for sale” signs dot the neighborhood, clashing with the golds and browns of the homes. The contrast between occupied and empty houses is evident on one block, where high grass in weedy clumps gives way to a neatly mowed lawn with handwritten signs pleading “Please do not let your dog poop on our yard.”

Homeowner Norma Hernandez, one of the few people outside on a recent sunny afternoon, can point out which families are permanent on her block.

“Rented, owned, rented, rented, rented,” she said, gesturing at the gargantuan houses across the street, one after another. “It’s bad,” she said, shaking her head.

Nacho Gomez is paid by absentee owners to look after their rental properties. Currently, he’s taking care of 17.

Doing a check of the homes on a recent Thursday, he left his van’s engine running as he inspected a shattered window in one property.

“A lot of them can’t pay the rent, and they leave the house a mess,” Gomez said, referring to tenants.

He has had to fix holes punched in walls and replace refrigerators, dishwashers and other appliances — even ovens — stolen by renters on their way out.

Those tenants appear to be the exception, and the renters provide at least one benefit: Without them, there would be even more vacant homes. Even so, their presence has fundamentally changed the character of what was once sold as an exclusive community.

The Willowalk Homeowners Assn. is trying to recapture some of the community’s lost spirit. In recent months, it launched a trash committee — members pick up rubbish in the park — and started a neighborhood watch group to keep an eye on residents’ homes.

But it wasn’t enough for Angelica Stewart and her family, who are leaving the $318,000 home they bought in 2006. To Stewart, living in a gated community is absurd when drug busts are a regular occurrence.

“It’s not worth it for us to live in this neighborhood,” she said.

The Lopez family plans to stick it out, knowing they can’t sell their house for anywhere near the $440,000 they paid for it. Based on comparable prices in the neighborhood, the place is probably worth about $170,000 now, and maybe less. They’re petitioning their bank for a loan modification.

Despite the financial loss and the fact that Eddie Lopez’s hours at work were cut because of the construction slowdown, the family holds out for a brighter future.

They’re hoping that Willowalk will someday become the idyllic neighborhood they once knew, nearly as perfect as advertisements had promised.

“When we moved in, everybody was homeowners, now everybody’s renting them out,” Eddie Lopez said. “But I have to stay. There’s nothing I can do.” //

Mortgage Meltdown: Towns File Bankruptcy: Vallejo

Housing Crisis Bankrupts Vallejo

The crisis caused by dramatic changes in the home lending markets has claimed a new victim.  This time it is not a bank or mortgage lender, it is instead a working class suburb of San Francisco that has filed for bankruptcy protection.

A recent post by Adam Levitin on the Credit Slips blog site calls attention to the city of Vallejo, California, that on May 23, 2008, become the first city to have filed for Chapter 9 bankruptcy as a result of the plummeting home prices.  Although Vallejo stands out as a community particularly hard hit by the housing crisis – as one where the housing bubble was disproportionately bloated, and where city government used unrealistic revenue projections to live beyond its means – it is hardly unique.  The City of Vallejo website has a special set of pages containing the documents filed in the Chapter 9 case and a copy of the court docket for the pending case.

The experience in financial markets of the last year ought to teach us that one default, caused by what John Quigly, professor of Economics at University of California, Berkeley called in a Times interview “a low level of infection everywhere”, is a harbinger of many more as the problems work their way down the queue from the most egregious to the garden-variety.

I’m not an expert on macroeconomics, but it does not look to me as if HR 5818, The Neighborhood Stabilization  Act of 2008, is a viable solution to the problems facing Vallejo or any other community in a similar position.  A key provision of this bill, which just passed the House of Representatives, has the Federal Government extending loans, through states, to communities that would in turn loan the money to individuals to buy up and rehabilitate foreclosed properties.  Presumably a city that had already declared bankruptcy wouldn’t qualify.  For one a little less embroiled in a similar morass to borrow large sums of money, albeit under attractive terms, in order to allow individuals whose incomes may well drop in the next few years to incur debt for houses whose value, most probably, is still above a sustainable level, simply postpones the day of reckoning and ensures that the final bottom will be even more painful.

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