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“The debt load is so high, and the job outlook so bleak, that student loan default rates have almost doubled,” he wrote in a note to clients. “With the economy little improved since 2009 default rates are bound to rise further.”

“This number is greater than all credit card debt outstanding, and second only to mortgages in terms of total national debt.”

EDITOR’S NOTE: Once upon a time in a land we called America, people were prospering because nearly everyone had an opportunity to move up the economic ladder. Then, as human nature is want to do, some people with money controlling the world’s largest corporations decided they could have more money, more profit and higher share prices (wealth) if they simply stopped paying workers well. It wasn’t that these companies were in trouble. They just wanted more money. And being just people, like you and me, they didn’t stop to think about what the world would look like as a result of these short-sighted policies.

As wages went down profits went up for a short while. But of course people could not afford even modest price increases reflecting higher costs of materials. So the companies reduced quality to maintain their “profitability”.  So then we had lower wages and lower quality. But then normal increases in the cost of goods sold and ever-lowering wages took their toll on sales. People didn’t have the money to pay for the goods and services that were being produced.

There was only one thing to do, according to these geniuses, these titans of universe. By giving the worker money to spend, they would maintain sales and could even increase prices and maybe somewhere down the line they could even return to the quality that once adorned goods made in the USA. But there was a catch. If they gave the workers more wages, then THAT they would need to report as expenses which would lower reported profits and of course their wealth (share prices) would go down as the market is a reflection (long term) of ultimate profitability.

ENTER DEBT, STAGE RIGHT: Behold, here is money you can spend on our inferior goods and services that you can spend whenever and wherever you want on anything you want. The Gods call it debt. And debt will liberate you. Debt is a good thing because you can always buy that thing you wanted without saving up for it. So we will give you these plastic cards and you will have the money available to buy what you want.

And we, the money Gods, will also make your student loans from our private banks instead of the public funding. And we, the money Gods, will make hundreds of different types of loans to allow you a monthly payment in each case that you can afford so you can have anything you want — even if all the payments on all the loans are above your ability to pay. We can do that because we are going to give you more debt to pay the old debt.

BEHOLD! We, the money Gods, have created a class of assets that investors want to buy because it looks like they can earn a higher amount buying these assets than other assets they could buy with their investment money. And with student loans, you can’t lose because it is guaranteed by the U.S. Government. And if the U.S. Government doesn’t have the money to pay off these loans then we, the money Gods, will lend the Federal Government the money as long as they print enough money for us, so we can lend it to them. We will buy their bonds at 4% return while they print the money and give it to us at a cost of 0.01%. What a country!

So now we have lower wages, lower quality, and a mountain of debt that nobody can pay. Plus we have no jobs that could pay off student loans, which were made with investor money, just like all the other loans that were made with investor money. The money Gods, never at risk, made all the money that could be made and then tossed fictitious losses over the fence onto the taxpayers who had no money to pay for those losses. Exactly how the Banks could lose money when they never had any risk of loss is something that nobody has quite explained to me.

But as shown in the article below, the failure of the U.S. economy to provide jobs that provide sufficient wages to pay for the bills we have run up is now creating the inevitable result — nobody can pay for anything. And student debt is more onerous even than a mortgage. So the newbies that we always depend upon for “starter housing” are not there and they are not going to be there.

As goes housing, so goes the economy.

Surging student loan debt threatens homeownership


Monday, December 12th, 2011

College graduates may not be able get onto the property ladder as soon as they’d like due to the costs associated with funding higher education.

According to Rick Palacios, a senior research analyst at John Burns Real Estate Consulting, student loan debt now totals $865 billion, which is an average of $25,000 per student.

“Student loans are going to be yet another hurdle for the housing market to overcome,” Palacios said. “Faced with mounting student loan debt, poor job prospects and stagnant wages, an increasing number of people aged 25 to 34 have moved back in with their parents.”

According to John Burns, almost 6 million 25- to 34-year-olds now live with mom and dad. This number is up 26% from 2007.

The current rate of homeownership rate for this demographic stands at a 10-year low for under 30s. The rate for 30- to 34-year-olds is even worse, at its lowest rate in 17 years.

“The debt load is so high, and the job outlook so bleak, that student loan default rates have almost doubled,” he wrote in a note to clients. “With the economy little improved since 2009 default rates are bound to rise further.”

This number is greater than all credit card debt outstanding, and second only to mortgages in terms of total national debt.

“Even more troubling is the rise in debts associated with for-profit college and trade schools, whose revenues come primarily from debt available through federal government programs.,” said Palacios.

On Oct. 25, the Obama administration announced that it is taking steps to increase the affordability of higher education and aid those laden with outstanding student loan debt. In the short term, until the changes can take, current graduates will be relegated to the rental markets.

Their eventual introduction into the housing market will provide a boost, unless their credit profiles are degraded from lack of student loan repayments.

Write to Jacob Gaffney.

Follow him on Twitter @jacobgaffney.



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see also 1/3 of all homes underwater — at a minimum

EDITORIAL NOTE: With a few places as an exception, home prices, once predicted as bottoming out LAST YEAR, continue to drop and are expected to take another plunge of 15%-20%. Experts who once predicted the bottom in 2010 are now saying it will be sometime in 2012. Here is what I say: home prices will continue to drop and could even go to near zero because of the rise of title problems caused by exotic Wall Street scenarios in which the title to most properties were affected. As for when they hit “bottom” it will be when the foreclosure nightmare is over. Even the optimistic experts concede that is, on average, another 8 years, with New York topping the list at 57 years.

The reason is simple arithmetic. Start with joblessness, lack of capital for new businesses, and add a healthy amount of fraudulent foreclosures pushing the market downward while the Banks report higher and higher profits through accounting tricks that would baffle the most avid puzzle fanatic. Basic fact pattern: as the prices go lower people “default” on mortgages that have probably long since been paid off. The further prices go down the more people are underwater — either worse than before or for the first time. I spoke with one homeowner who bought his home for $550,000 and only took out a mortgage for $175,000. “Now I see and feel the problem,” he said. “I never thought that I could ever be underwater because the mortgage was so low compared with the purchase price. Yet here I am, the house listed for $175,000, the broker telling me I’ll be lucky to get $140,000 and after all selling expenses I might see $125,000 or less.”

He’ll need to come to the table with money in order to sell and he knows that whoever he pays is probably not entitled to the money. he just wants out of a neighborhood that is a virtual ghost town. What was once a thriving community is  bereft of the family, secure atmosphere on the brochures.

Home Prices Drop in Nearly 3/4 of U.S. Cities

home valuesWASHINGTON — Home prices dropped in nearly three quarters of U.S. cities over the summer, dragged down by a decline in buyer interest and a high number of foreclosures.

The National Association of Realtors said Wednesday that the median price for previously occupied homes fell in the July-September quarter in 111 out of 150 metropolitan areas tracked by the group. Prices are compared with the same quarter from the previous year.

Fourteen cities had double-digit declines. The median price in Mobile, Ala. dropped 17.7 percent, the largest of all declines. Phoenix and Allentown, Pa., Atlanta, Las Vegas and Miami also experienced steep declines.

Eight cities saw double-digit price increases. The largest was in Grand Rapids, Mich., where the median price rose 23.7 percent. South Bend, Ind., Palm Bay, Fla., and Youngstown, Ohio, also saw large price increases.

The national median home price was $169,500 in the third quarter, down 4.7 percent from the same period last year.

Most analysts say that prices will sink further because unemployment remains high and millions of foreclosures are expected to come onto the market over the next few years.

Sales of previously occupied homes dropped to a seasonally adjusted annual rate of 4.88 million in the third quarter, slightly ahead of last year’s pace for the same period. Sales were lower than usual for the summer season last year because a federal tax credit inspired more buying in the spring.

This year, sales are on pace to finish behind last year’s total, which was the lowest in 13 years.

Sales are low even though the average rate on the 30-year fixed mortgages is hovering near 4 percent.

Regionally, the median home price in the Midwest fell 2.2 percent to $142,300 in the quarter from the year before, even as sales activity jumped 25 percent. In the South, the median price also slid 2.2 percent to $153,200 and home sales increased 15.5 percent.

The Northeast’s median home price dipped 6.5 percent during the period to $236,700, as sales rose from the previous year by 11.6 percent. The median home price in the West dropped by 9 percent to $205,700 in the third quarter from a year ago. Sales there increased 16.7 percent.

Also see:
Where Are the Real Home Bargains? Not Where You Think!
Mortgage Rates Stay Low, But Homebuyers Aren’t Budging

Top 10 Cities For Military Retirement
Gallery: 10 Cheapest Places To Retire

Consumer Gloom: Could it be Housing?


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“That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow.”

EDITOR’S NOTE: I wonder if it could be housing. Is it possible the consumers have lost faith in the system and their prospects, having lost all their wealth and being mired in debt in an economy dragged down by the collapse of the financial system (except for a few companies)? It’s a difficult question — but only if you have had your eyes and ears closed and blocked to hearing the cries of the people of our once great nation. Bank of America, once great for being the largest bank, is now number two and probably on its way to dying off altogether. Why so gloomy?

For four years I have been writing about the depression — economic and psychological and how they relate — caused by the the crisis caused by Banks stealing the wealth out of the belly of the nation. In a scheme to issue securities to unwary investors, they involuntarily enlisted homeowners to sign and accept financial products that were doomed from the start. This isn’t like driving a new car off the lot and losing value because now it is a used car. This is like driving off a cliff.

HERE IS WHAT HAPPENED: The banks sold investors on the idea of buying “mortgage bonds.” But there actually were few real bonds. The Banks sold them and the world on the idea of pooling mortgage assets into trusts. There were no trusts. And the pools never had anything in them. AFTER they had the money, the Banks organized aggregators who supposedly were collecting mortgages, loans, notes and obligation from originators that were created or enlisted by the aggregators offering higher compensation than anything the world has ever seen.

Then the Banks ordered the aggregators to arrange the loans” which were not owned, into pools that did not exist. The Banks arranged for the aggregators to sell the pools to the Banks and then the Banks sold them to the special purpose vehicles into which the investors had invested their money.The Banks made a “proprietary trading profit” by diverting money that should have been used to fund mortgages into their own pockets. On average the Banks skimmed between 15% and 25% of the money given to them by investors. The rest was a cover-up of forged, fabricated, robo-signed, surrogate signed, fraudulent documents.

The investors were expecting 5% return but the loans were for rates as high as 18%, which meant that the dollar income from the loans exceeded the dollar return expected by the investors (on paper, because the loans did not conform to industry standard underwriting standards). So the amount funded as loans was far less than the amount that the investors advanced. The difference between the amount advanced by investors and the amount loaned out was called a proprietary trading profit for the Bank, which has now vanished because nobody except the Banks wants this system anymore. That’s why Goldman Sachs no longer reports high “proprietary” trading profits. It isn’t regulation that is depressing Bank earnings it is the fact that the market won’t tolerate theft anymore.

There was no profit. They merely didn’t loan out the amount that investors gave them to fund mortgages. They kept the rest and called it profit. Under the Truth in Lending Act, this would be an undisclosed yield spread premium — that puts the Bank squarely in the sites of investors who didn’t get what was promised and borrowers who didn’t get the disclosure that was required. What investor and what borrower would have signed onto a deal where the intermediaries were making in fees as much as the loan itself? These Banks are doomed and so are their shareholders and management who thought they could away with calling theft of investor money by another name — “proprietary trading profits.”

The effect on investors was devastating while the effect on banks was bountiful with bonuses, supercharged earnings, and the esteem of the world as they posted ever higher values on their balance sheets and income statements. The effect on borrowers was also devastating as they had been steered into loans that were guaranteed to fail, and that MUST fail, in order for the Banks to cover up the theft from investors. The money received from insurance and bailouts and such was taken by the Banks who never had any loss in the first instance because it was investor money that was used to fund the loans.

The ultimate result is that everyone who had anything invested in real property was demolished by the scheme of the banks. The scheme was covered up as a lending program but in fact it was a scam to cover up the theft from investors and the theft of money that was received to cover the investors’ advance. So the borrowers are portrayed as owing money on obligations that have been paid several times over and they not only have no money to pay it, they also have no prospects of getting out from under this mess. The mess includes millions of vacant homes and of course millions of homeless people. The effect also includes millions of closed businesses whose customers have no money to buy anything.

HERE IS WHAT WE CAN DO ABOUT IT: Apply existing standards of generally accepted accounting principles to the Banks and have them cough up the truth, disgorge the illicit profit, apply them to the investor accounts, and thus reduce the obligations, pro rata of borrowers for the money that was paid to cover the losses. Then we will have a basis for settling all the foreclosures, and the wealth of the pensioners and homeowners alike will be restored.

Investors and borrowers will be smarter and less gloomy if they know that their government demanded the truth and acted on it. Their rage will increase exponentially if their government insists on going to the Banks for projections and status reports. Politicians beware! The people now understand what was done to them, their neighbors and their nation — and they are not just gloomy, they are angry.

Gloom Grips Consumers, and It May Be Home Prices


ORLANDO, Fla. — Ernest Markey lost his stone-cutting business in 2009. He then sold his home for half a million dollars less than its value at the peak of the housing bubble and moved with his wife, Marie, to a smaller home in a less affluent suburb. They gave up two new cars and bought one. Used.

The Markeys have since patched together a semblance of their old life, opening a new stone-cutting shop. But they do not expect that they will ever recover financially from the loss of equity in their old home.

“For two years I kept thinking that things would get better,” Mr. Markey, 51, said as he stood in his empty store on a recent weekday. “Now I think the future doesn’t look so good.”

The United States has a confidence problem: a nation long defined by irrational exuberance has turned gloomy about tomorrow. Consumers are holding back, businesses are suffering and the economy is barely growing.

There are good reasons for gloom — incomes have declined, many people cannot find jobs, few trust the government to make things better — but as Federal Reserve chairman, Ben S. Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk.

That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow.

Many say they believe that the bust has permanently changed their financial trajectory.

“People don’t expect their home to regain value, and that’s really led to a change in consumer attitudes about the economy that we’ve just never seen before,” said Richard Curtin, a professor of economics at the University of Michigan who directs its Survey of Consumers. The latest data from the survey, released Friday by Thomson Reuters, shows that expectations for economic growth have fallen to the lowest level since May 1980.

In Orlando, a city that trades in upbeat fantasies, the housing crash has been particularly painful. The total value of area homes has fallen below the total mortgage debt on those homes, according to the real estate analytics firm CoreLogic. In the parlance of the real estate world, Orlando is underwater, a distinction matched by Las Vegas.

“I don’t know that it’s going to get better. We just have to get used to it,” said Sherry DeWeese, whose home in Ocoee, a northwestern suburb of Orlando, is worth less than she paid for it 13 years ago — and about a third of its value at the peak of the market. “It was nothing to buy whatever we wanted. Now we just think about what we really need.”

Economists have only recently devoted serious study to how a decline in housing prices affects consumer spending, not least because this is the first decline in the average price of an American home since the Great Depression. A 2007 review of existing research by the Congressional Budget Office reported that people reduce spending by $20 to $70 a year for every $1,000 decline in the value of their home.

This “wealth effect” is significantly larger for changes in home equity than in the value of other investments, such as stocks, apparently because people regard changes in housing prices as more likely to endure.

A recent paper by Karl E. Case, an economics professor at Wellesley College, and two co-authors estimated the decline in home prices from 2005 to 2009 caused consumer spending to be $240 billion lower in 2010 than it otherwise would have been. That figure is equal to about 1.7 percent of annual economic activity, enough to be the difference between the mediocre recent growth and healthy growth. And it does not include all the other effects of the housing crash, including the low level of new home construction, that are also weighing on the economy.

Roy Pugsley, who owns a pool supply store in Winter Garden, another suburb here, said that he made 2,500 fewer sales during the first eight months of 2011 compared with the same period in 2007. That translates to one less person walking through the doors to buy chemicals or toys or spare parts in each hour that the store is open.

Mr. Pugsley said business actually increased in the early days of the recession; customers had told him they were spending more time at home. But now people buy only what they need for maintenance. “People realized that it wasn’t going to get any better, and they stopped spending on their pools, too,” he said.

At Milcarsky’s Appliance Center in the adjacent town of Longwood, business now comes from people remodeling their own homes rather than builders, and customers are picking cheaper models, said Doug Morey, a sales manager.

“People who might have bought that” — he taps a stove with chunky burners, designed to look like it belongs in a restaurant kitchen — “are double-thinking it. Everyone has had to cut back.”

That means Milcarsky’s has cut back too. The company, which employed 26 people three years ago, now has about a dozen workers, and they are making less in salary and commissions.

“I might like to think that I’m middle class, but I’m not. I’m not anymore,” said Rae-Anne Crotty, a customer service manager at the store. She now shops for groceries at discount stores, she said, and buys gifts for her children at Christmas but not on their birthdays.

It remains the prevailing view of economic policy makers that economic activity will eventually return to the same trajectory as before the recession. Mr. Bernanke and others have said that they see no evidence of any permanent change in the economy. Previous bouts of economic pessimism, as in the early 1980s and early 1990s, went away once growth picked up.

But many people in the Orlando area do not share this confidence, at least not when it comes to their own prospects. Instead, like the Markeys, they are settling into lives of less prosperity.

The couple moved to Orlando 12 years ago from central Massachusetts in search of opportunities. The business Mr. Markey created, Stone Giant, grew to include two factories and 60 employees, and it installed granite countertops in up to 15 new kitchens every day.

His new company, Winter Park Granite, now installs two kitchens on the average day. He has eight employees but cannot afford health insurance for them or himself. The family income last year was less than a third of the $175,000 that he and his wife made in 2007, their last good year.

And he sees little room for growth. He has stopped spending money on advertising.

“We’re never going to get that big again,” he said. “I was someone employing people and taking people to the good life. Now I’m just trying to survive.”



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EDITOR’S NOTE: The Times Editorial hits the nail on the head, but uses the wrong hammer. Jobs and growth of the middle class is the only thing that will stand between us sustaining ourselves as a world power or becoming a banana republic. Jobs and growth are not magical concepts that suddenly happen when you waive a wand.

Jobs are created when businesses start and grow. Businesses start and grow with capital. Wall Street, directly or indirectly is holding $3.5 TRILLION hostage in its effort to force Obama from office while it starves the economy and literally takes food of the plates of tens of millions of Americans. The capital held by Wall Street is NOT the capital of Wall Street, it is the money stolen from other people that Wall Street is holding.

That money was stolen in the world’s largest financial fraud of all time — something that will remain unequaled for decades, perhaps hundreds of  years. They did it with the sale of exotic instruments to investors, betting against those investments because they knew they had the power to torpedo the investments, and the tools of destruction were exotic mortgages where even the simplest looking transaction was based upon fraudulent appraisals, non-disclosure of important information required by law, and in particular using conduits as though they were lenders, thus achieving insulation from charges of predatory and fraudulent lending practices. In fact the entire mortgage mess was really just part of the larger scheme of the issuance of unregulated securities in fraudulent schemes to deprive investors, pension funds and homeowners of what little they had left to survive.

As with all crimes against society the only way to cover them up is with more fraud. More deception and more intimidation. So the paperwork is mostly fabricated, forged and unduly notarized documents pretending to attest to the authority and knowledge of signors. But the paperwork is a distraction from the fact that the the “mortgage” transactions were really part of the securities issuance. This actually makes the signing of the mortgage documents an integral part of the issuance of the mortgage bonds. That changes the character of the transaction and probably the laws that apply.

Applying existing laws without any changes to substantive law, procedure or the rules of evidence, the banks will lose, pure and simple. Every time a Judge takes a close look at some piece of paper that is

  • signed by “John Jones, as authorized signor (it doesn’t even say agent) [without any document showing agency authority],
  • on behalf of XYZ corporation, as attorney in fact (same defect),
  • as successor to ABC, as servicer (under a PSA in which the loan transfer requirements were never satisfied and therefore never completed),
  • for the DEF Trust (a non-existent trust that is actually a general partnership),
  • on behalf of JKL Corp. Trustee (a trustee of a Trust that never existed because it lacked the elements under New York State law to create a common law trust, and in which the powers of the trustee actually amount to nothing once you read the whole document purporting to describe the “trustee”)”
  • all out of the chain of title using some private system of keeping track of the owners thus depriving anyone of the knowledge as to who can sign a satisfaction of a mortgage that was obviously never perfected into a valid lien, even though ti was recorded —
  • every time the Judge really looks —- he/she decides this smells to high heaven and that the entire process is defective.
  • There is no lending institution in existence that would accept such a signature from an agent for a borrower.
  • That they accept it from each other as they treat the loan was though it was transferred even though it wasn’t is just a game without risk because nobody is paying anything for the loan and nobody funded the loan except the hapless pension fund whose money was taken for fees first and mortgage later.

Housing drives the economy directly and indirectly. So if we want to see a change we must bring the banks and big business to task, force them to act like good citizens and return the favor of special tax treatment and subsidies with growth money, start-up money and easier credit for consumers, who drive 70% of the economy. Ignore housing and you abandon hope of a solution. Ignore consumers and their jobs and earnings, and you have disrupted 70% of the economy with no prospects for improvement.

Somehow the banks continue to be heard on their spin that it is better to let them keep the proceeds from stealing the purse than to give it back to the consumers from whom they stole it. That is ending now with Occupy Wall Street. The OWLS are wise beyond their years.

More Bleak Job Numbers

It would take a lot of optimism to put a positive spin on the jobs report for September, released on Friday by the Labor Department.

Employers added 103,000 jobs last month, allaying fears, for now, of a double-dip recession. But even if the economy avoids another contraction, the numbers confirm that the job market is in a deep rut that is, for all purposes, indistinguishable from recession. There are still 14 million people officially unemployed, and nearly 12 million more who have given up actively looking for work or who are working part time but need full-time jobs.

Earlier this week, President Obama and the Federal Reserve chairman, Ben Bernanke, delivered bleak economic assessments, which demand a government response. The economy, already at a crawl, could well slow down further in response to economic setbacks in Europe and China or to homegrown problems like political gridlock that delay spending on job-creation efforts.

The economy is not producing enough jobs, and many of the ones created are lousy. Much of last month’s job growth came as 45,000 striking Verizon employees returned to work. Without that one-time boost, the economy added only 58,000 new positions in September, roughly in line with the slow pace of job creation over the past several months.

That is not nearly enough to lower the unemployment rate, which is at 9.1 percent and is almost certain to rise in the months ahead, barring an unexpected upsurge in economic activity.

The new jobs are generally in lower-paying fields, like home health care, and in part-time and temporary employment. These kinds of employment may be better than no work, but they are generally not the types of jobs that allow workers to get ahead.

The September report also shows the permanent scars caused by persistent joblessness. The share of workers who have been unemployed for more than six months increased from 42.9 percent to 44.6 percent, near its record high from early last year. That is likely to translate into irreversible reductions in the standard of living for millions of Americans because the longer one is unemployed, the harder it becomes to find new work, especially at previous pay levels.

Children will be among those most harmed by the jobs crisis. The Economic Policy Institute, using data from the September report, has calculated that 278,000 teachers and other public school employees have lost their jobs since the recession began in December 2007. Over the same period, 48,000 new teaching jobs were needed to keep up with the increased enrollments but were never created. In all, public schools are now short 326,000 jobs.

At a time when more and better education is seen as crucial to economic dynamism and competitiveness, larger class sizes and fewer teachers are the last thing the nation needs. Staffing reductions also mean that schools are less able to respond to the needs of poor children, whose ranks have increased by 2.3 million from 2008 to 2010.

The situation calls out for swift passage of Mr. Obama’s jobs bill and even more far-reaching efforts to revive growth and employment. The alternative is lasting damage from a jobs crisis that has already done enormous harm to families and communities.

Alabama Court: Busted Securitization Prevents Foreclosure


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“the judge found the securitization of the Horace loan wasn’t done properly, so the trustee — LaSalle National Bank Association, now part of Bank of America (BAC) — couldn’t foreclose. In making that decision, the judge is the first to really address the issue, head-on: If a screwed-up securitization process meant a loan never got securitized, can a bank foreclose under the state versions of the Uniform Commercial Code anyway? This judge says no, finding that since the securitization was busted, the trust didn’t have the right to foreclose, period.”

EDITORIAL COMMENT: The fact that this case came from Alabama makes it all the more important to be watched and noted. Despite the reluctance of many Judges to give a free house to homeowners, this Judge picked up on the fact that the homeowner wasn’t getting a free house and that if he allowed the foreclosure it would have been the pretender lender getting the free house.

When it comes down to it, this really is simple: the trustee never got the loan. The asset-backed pool didn’t have it despite their claim to the contrary. Saying it doesn’t make so.

The Pooling and Service Agreement is very specific as to what can and cannot be done, it has an internal logic (the investors are expecting performing loans and are not authorizing acceptance of non-performing loans), and it specifies the manner in which the loan must be transferred. None of these things were e found in compliance. If you don’t get the deed then you don’t get the property. This is just common sense — a point disputed by securitizers who see an unparalleled opportunity to pick up trillions of dollars in homes that (a) belong to homeowners and (b) even if they were subject to foreclosure should be for the benefit of the people who put up the money — the investors who purchased bogus mortgage-backed securities.

The investors now easily recognize the invalidity of the liabilities, notes and mortgages and deed of trust, and the liability attached to wrongful foreclosure of invalid documents and making credit bids on property on which the creditor is not the bidder and has not been identified. This isn’t conspiracy theory stuff, this is application of Property 101, Contract 101, and Common sense as it has been applied in commercial and real estate transactions for hundreds of years in statutes and common law predating the creation of the United States and fully adopted by the U.S. when it came into existence.


Court: Busted Securitization Prevents Foreclosure

By Abigail Field Posted 6:25PM 04/01/11 Columns, Bank of America, Real Estate

On March 30, an Alabama judge issued a short, conclusory order that stopped foreclosure on the home of a beleaguered family, and also prevents the same bank in the case from trying to foreclose against that couple, ever again. This may not seem like big news — but upon review of the underlying documents, the extraordinarily important nature of the decision and the case becomes obvious.

No Securitization, No Foreclosure

The couple involved, the Horaces, took out a predatory mortgage with Encore Credit Corp in November, 2005. Apparently Encore sold their loan to EMC Mortgage Corp, who then tried to securitize it in a Bear Stearns deal. If the securitization had been done properly, in February 2006 the trust created to hold the loans would have acquired the Horace loan. Once the Horaces defaulted, as they did in 2007, the trustee would have been able to foreclose on the Horaces.

And that’s why this case is so big: the judge found the securitization of the Horace loan wasn’t done properly, so the trustee — LaSalle National Bank Association, now part of Bank of America (BAC) — couldn’t foreclose. In making that decision, the judge is the first to really address the issue, head-on: If a screwed-up securitization process meant a loan never got securitized, can a bank foreclose under the state versions of the Uniform Commercial Code anyway? This judge says no, finding that since the securitization was busted, the trust didn’t have the right to foreclose, period.

Since the judge’s order doesn’t explain, how should people understand his decision? Luckily, the underlying documents make the judge’s decision obvious.

No Endorsements

The key contract creating the securitization is called a “Pooling and Servicing Agreement” (pooling as in creating a pool of mortgages, and servicing as in servicing those mortgages.) The PSA for the deal involving the Horace mortgage is here and has very specific requirements about how the trust can acquire loans. One of the easiest requirements to check is the way the loan’s promissory note is supposed to be endorsed — just look at the note.

According to Section 2.01 of the PSA, the note should have been endorsed from Encore to EMC to a Bear Stearns entity. At that point, Bear could either endorse the note specifically to the trustee, or endorse it “in blank.” But the note produced was simply endorsed in blank by Encore. As a result, the trust never got the Horace loan, explained securitization expert Tom Adams in his affidavit.

But wait, argued the bank, it doesn’t matter if if the trust owns the loan — it just has to be a “holder” under the Alabama version of the UCC (Uniform Commercial Code), and the trust is a holder. The problem with that argument is securitization trusts aren’t allowed to simply take property willy-nilly. In fact, to preserve their special tax status, they are forbidden from taking property after their cut-off dates, which in this case was February 28, 2006. As a result, if the trust doesn’t own the loan according to the PSA it can’t receive the proceeds of the foreclosure or the title to the home, even if it’s allowed to foreclose as a holder.

Holder Status Can’t Solve Standing Problem

Allowing a trust to foreclose based on holder status when it doesn’t own the loan would seem to create yet another type of clouded title issue. I mean, it’s absurd to say the trust foreclosed and took title as a matter of the UCC, but to also have it be true that the trust can’t take title as a matter of its own formational documents. And what would happen to the proceeds of the foreclosure sale? That’s why people making this type of argument keep pointing out that the UCC allows people to contract around it and PSAs are properly viewed as such a contracting around agreement.

I’m sure the bank’s side will claim the judge was wrong, that he disagreed with another recent Alabama case that’s been heavily covered, US Bank vs. Congress. And there is a superficial if flat disagreement: In this case, the judge said the Horaces were beneficiaries of the PSA and so could raise the issue of the loan’s ownership; in Congress the judge said the homeowners weren’t party to the PSA and so couldn’t raise the issue.

But as Adam Levitin explained, the Congress decision was procedurally weird, and as a result the PSA argument wasn’t about standing, as it was in Horace and generally would be in foreclosure cases (as opposed to eviction cases, like Congress). And what did happen to the Congress proceeds? How solid is that securitization trust’s tax status now anyway?

In short, in the only case I can find that has ruled squarely on the issue, a busted securitization prevents foreclosure by the trust that thinks it owns the loan. Yes, it’s just one case, and an Alabama trial level one at that. But it’s still significant.

Homeowners Right to Raise Securitization Issue

As far as right-to-raise-the-ownership issue, I think the Horace judge was just being “belt and suspenders” in finding the homeowners were beneficiaries of the PSA. Why do homeowners have to be beneficiaries of the PSA to raise the issue of the trust’s ownership of their loans? The homeowners aren’t trying to enforce the agreement, they’re simply trying to show the foreclosing trust doesn’t have standing. Standing is a threshold issue to any litigation and the homeowners axiomatically have the right to raise it.

As Nick Wooten, the Horaces’ attorney, said:

“This is just one example of hundreds I have seen where servicers were trying to force through a foreclosure in the name of a trust that clearly had no interest in the underlying loan according to the terms of the pooling and servicing agreement. This conduct is a fraud on the borrower, a fraud on the investors and a fraud on the court. Thankfully Judge Johnson recognized the utter failure of the securitization transaction and would not overlook the fact that the trust had no interest in this loan.”

All that remains for the Horaces, a couple with a special needs child and whose default was triggered not only by the predatory nature of the loan, but also by Mrs. Horace’s temporary illness and Mr. Horace’s loss of overtime, is to ask a jury to compensate them for the mental anguish caused by the wrongful foreclosure.

Perhaps BofA will just want to cut a check now, rather than wait for that verdict. (As of publication BofA had not returned a request for comment.)

No one is suggesting the Horaces get a free house; they still owe their debt, and whomever they owe it to has the right to foreclose on it. Wooten explained to me that the depositor –in this case, the Bear Stearns entity –i s probably that party. Moreover if the Horaces wanted to sell and move, they’d have to quiet title and would be wise to escrow the mortgage pay off amount, if that amount can be figured out. But for now the Horaces get some real peace, even if a larger mess remains.

Much Bigger Than A Single Foreclosure

The Horaces aren’t the only ones affected by the issues in this case.

Homeowners everywhere that are being foreclosed on by securitization trusts — many, many people — can start making these arguments. And if their loan’s PSA is like the Horaces, they should win. At least, Wooten hopes so:

“Judge Johnson stopped a fraud in progress. I am hopeful that other courts will consider more seriously the very serious issues that are easily obscured in the flood of foreclosures that are overwhelming our Courts and reject the systemic and ongoing fraud that is being perpetrated by the mortgage servicers. Until Courts actively push back against the massive documentary fraud being shoveled at them by mortgage servicers this fraudulent conduct will not end.”

The issues stretch past homeowners to investors, too.

Investors in this particular mortgage-backed security, take note: What are the odds that the Horace note is the only one that wasn’t properly endorsed? I’d say nil, and not just because evidence in other cases, such as Kemp from New Jersey, suggests the practice was common. This securitization deal was done by Bear Stearns, which other litigation reveals was far from careful with its securitizations. So the original investors in this deal should speed dial their lawyers.

And investors in bubble-vintage mortgage backed securities, the ones that went from AAA gold to junk overnight, might want to call their attorneys too; this deal was in 2006, and in the securitization frenzy that followed processes can only have gotten worse.

Some investors are already suing, but the cases are at very early stages. Nonetheless, as cases like the Horaces’ come to light, the odds seem to tilt in investors’ favor — meaning they seem increasingly likely to ultimately succeed in forcing banks to buy back securities or pay damages for securities fraud connected with their sale. And that makes the Bank Bailout II scenario detailed by the Congressional Oversight Panel more possible.

The final, very striking feature of this case is what didn’t happen: No piece of paper covered in the proper endorsements –an allonge — magically appeared at the eleventh hour. The magical appearance of endorsements, whether on notes or on allonges, has been a hallmark of foreclosures done in the robosigning era. And investors, as you pursue your suits based on busted securitizations, that’s something to watch out for.

My, but the banks made a mess when they forced the fee-machine of mortgage securitizations into overdrive. The consequences are still unfolding, but one consequence just might be a whole lot of properties that securitization trusts can’t foreclose on.

See full article from DailyFinance:

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

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

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

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

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


Why We Do What We Do

 “Without your blog I would not have found the right lawyer in my state.”          

                                                                                                                   – Meghan in RI

“Some of the most rewarding work of my career.”

                                                                                                                  – Chris Brown Esq.

While we understand the many reasons borrowers pursue their cause on a ProSe or ProPer basis,  it has been our position since the beginning that people need competent licensed local counsel. Also, you must understand that no matter what anyone tells you, no letter or correspondence from anyone, no “loan audit,”  no promise of modification will stop a foreclosure particularly in non-judicial states, the only thing that will stop a foreclosure is a judge or court order. Our first mission here is education and the desimination of information to the public, judges, lawyers, legislators and homeowners. Unfortunately, the executive and legislative branches of government have dropped the ball and still don’t get it(with some exceptions like Marcy Kaptur D-Ohio).

The bottomline is that the Judicial branch is the only hope, Judges need to open their eyes, ask questions they may have never had to ask because the facts and circumstances are really unlike they have ever been in the past. Lawyers who do “get it” and are actively practicing in this area and succeeding we need to hear from you. People need to know how to find you. There are simply still not enough lawyers that “get it.” We also believe that if someone has the desire and financial wherewithal to hire a lawyer, we want them to give there money to someone that will be effective and is staying up to date on this everchanging area of practice. When we get emails like the ones below or other feedback it makes us feel like we are in some small part helping folks through what is and will be one of the most difficult period for our country in our lifetime.  Lawyers who are listed here are doing good work and quite frankly in many cases have practices that are expanding and thriving. If you or your law firm is interested in being listed here email your contact info to: Also, if you are a homeowner and have a lawyer who you think knows their stuff and has been doing a stellar job for you, let us know about them.

Hi Mr. Garfield, Mr. Keiser and the Livinglies team 

   I am writing to say thank you for starting this blog. Without it, I would not have found the right lawyer in my state. I was working with another lawyer, originally, and all he did was buy me some time. Otherwise, he took a lot of money from me for nothing…and continues to pursue me for more. It is also comforting to know that there are other people out there fighting for the same cause, whether they are victims or not. I know there are some naysayers presently posting on your sight but, anyone in my shoes, fighting like all of us are, all of us know when to read between the lines. I have learned so much from your blog and referred your site to others.   I would love to see you have another seminar on the East Coast sometime. Thanks for what you’re doing and let me know how I can help at anytime

Meghan in RI

From: Christopher Brown, Esq.
To: Neil, Brad

While I am at it, let me toss on some more praise for … you    I cannot thank you enough for the seminar I attended in August 2008, in Los Angeles, CA.  It has completely redefined my practice.  While we are still the only firm in Northern Virginia doing this, we are doing it well, and making HUGE strides recently .. it has taken a year to do it, but the foreclosing law firms are FINALLY beginning to concede they have a problem.
Every trial that has come up has been continued, or the case resolved with a “good” loan mod.  They have yet to put us to the test at trial, which we are eager to see happen, but our clients continue to accept the good loan mod offers that come before trial.  The client is the boss, and I can’t make guarantees, so they more often than not go for the mod, but I feel it coming.  We are making incredibly sound constitutional arguments (non-judicial foreclosure is violation of due process, no standing / article 3 injury for purported owner of the note/deed of trust), challenging title like no one else can (former 25 year in-house counsel for title companies on my staff since January), and raising all sorts of problems that were created by the securitization process (former NY securities atty on my staff as well).
This Kansas Sup Ct opinion closes the gap and makes us that much more confident in pursuing our clients interests. I am ecstatic about where my firm is right now and the work we are doing.  My staff, which is growing every few months, is ecstatic as well, as myself, my employees, and our families, are doing well in a recession, and we are helping families protect their homes at the same time.  I could not be happier – and with this Kansas Sup Ct opinion, things are going to get better even faster.
We have gone through several different strategies, and the one we settled on, ironically, is the one you espoused in the seminar (!!), file a suit claiming they can’t enforce the note, do discovery, and put the burden on them.  It is funny the trials and tribulations my office has gone through to get to this point, but it has also been some of the most rewarding work of my career.
Keep up the good work .. and …
Thank you.
Anything I can do for you, all you have to do is ask.
Christopher E. Brown, Esq.
Brown, Brown & Brown, P.C.

False recovery?

Doesn’t anyone see that if “financial services” accounts for 40% of our GDP that it means we are kidding ourselves? THAT only means we are trading from the left pocket into the right pocket into the back pocket and around again — and counting it as GDP. Our real GDP is far lower than anything reported.
Editor’s Note: The U.S. economy depends largely on the the state of the housing market. The housing market is a large factor in determining consumer confidence and consumer spending. Consumer spending accounts for the vast majority of transactions coutned in our gross domestic product, although health-care is certainly on track to over take consumer spending within 5-10 years.
Look around you. Have you noticed that home building is far from dead. Even though millions are homes are vacant and millions more will be vacant, the building continues. Why? Who in their right mind would be building homes in a market like this where the supply of new and existing homes so vastly outstrips demand?
It can only be the result of increasing demand for what they are building — shoddier, lower cost housing.
That is because the housing market is like a glass bowl on the edge of a shaky table. You know it is going to fall (again). It cannot recover because there appears to be serious motivation in the private banking and building sectors to see the housing situation worsen. Just follow the money. Wall Street and builders are set to make a ton of money while the rest of us go down the tubes. Then economic indicators are all there for anyone to see. It’s about time that Mr. Obama abandons conciliation and adopts the arm twisting aggressive tactics of Lyndon Johnson.
It is unfair to compare Obama with FDR’s situation. By the time FDR came to office in 1933, the depression was already 4 years old and there were hardly any Republicans left. This time the crisis was handed to Obama in midstream and now the republicans are working hard to pin the recession on Obama in the minds of gullible citizens who don’t have the time to inquire or research any of these issues.
I’m no fan of Johnson — but when it came to health care and civil rights he pushed it through over the vehement objections of vested special interests.And for all their venting, I don’t see anyone turning in their medicare card and very few people are left who want to go back to when women couldn’t vote (still less than 100 years ago) and minority races were prevented from voting or participating in the economy.
Each day we wait the situation gets worse and harder to reverse. Each foreclosure and each eviction, each time a homeowner leaves the keys on the kitchen counter in search of alternative, less expensive housing, the banks are laughing all the way off-shore where they are parking trillions of dollars in false untaxed profits, threatening the stability of our currency, the viability of our government financial structure and the confidence in our ability to actually start producing goods and services that people want.
We keep moving in the direction of vapor. False demand and dubious supply of things that nobody should be required to buy, much less need or want. Somehow, whether it is the tea party, the coffee party or something else must gain traction to break the death grip big business and Wall Street has on our government.
Doesn’t anyone see that if “financial services” accounts for 40% of our GDP that it means we are kidding ourselves? THAT only means we are trading from the left pocket into the right pocket into the back pocket and around again — and counting it as GDP. Our real GDP is far lower than anything reported.

Right now, our only hope is to convince one Judge at a time to listen to the facts and decide cases on the merits instead of presumptions.
March 3, 2010
Economic Scene

In Tracking Recovery, Jagged Lines

Could the economy be at risk of a double dip?

We’re now in the midst of the worst run of economic news in almost a year. Home sales have dropped. So has consumer confidence. Stocks peaked on Jan. 19.

This Friday may well bring the darkest piece of news yet, at least on the surface. Forecasters are predicting that the Labor Department will report that job losses accelerated in February, perhaps back above 100,000. The main reason will be the temporary hit from the big snowstorms last month. Yet there is reason to wonder if the economy also has bigger problems.

The weekly data on jobless benefits are narrower and less consistent than the monthly jobs report, but they have the advantage of being more current. From early January to late February, the number of workers filing new claims for jobless benefits rose 15 percent. Over the previous nine months, this number was generally falling.

Economies rarely move in a straight line, and — as the better-than-expected numbers on Tuesday on vehicle sales suggested — the recent run of bad data is probably overstating the troubles. But whatever you thought at the start of the year about the recovery — strong, moderate, fragile — you probably need to be more pessimistic today.

“The strength of data we saw at the end of last year exaggerated the strength of the underlying economy,” Richard Berner of Morgan Stanley, says. “And now we’re seeing some pullback.”

This is especially troubling because the economy is still such a long way from being healthy. Lawrence Katz, the Harvard labor economist, estimates that 10.6 million jobs would need to materialize immediately to return the job market to its condition when the Great Recession began. For it to get there four years from now, the economy would have to add 316,000 jobs a month. That pace would be faster than in any four-year stretch of the 1990s boom.

The economy’s biggest problem has not changed. When bubbles pop, they wreak enormous, lasting damage. Credit stays hard to get for years because banks need to rebuild their balance sheets. Families and businesses, whose net worth isn’t what they thought it was, have debts to pay off.

Over the last two years, households have been paying down their debts at a fairly good pace. But they aren’t yet close to being finished.

The average household still has debt that eats up roughly 17.5 percent of its disposable income — in mortgage payments, minimum credit card payments and the like. That’s down from a peak of 18.9 percent in 2008. It is still above the 1980-95 average of about 16.6 percent, according to the Federal Reserve. So debt payments will continue to hold down spending in the months ahead.

The economy did so well late last year in large part because companies began building up inventories they had whittled when they cut production during the recession. What worries some forecasters is that this buildup won’t last. Consumer spending, they say, will remain too weak to get companies to keep increasing production and to begin adding workers. “Not too long from now,” says Joshua Shapiro of MFR, a research firm in New York, “you’re going to need other demand to kick in.”

The second problem is that the stimulus program and the Fed’s emergency programs are in the early stages of slowing down.

These programs have done tremendous good, as I’ve written before. The bubbles in housing and stocks over the last decade were far larger than an average bubble, and yet the resulting bust is on pace to be shorter and less severe than the typical one in the wake of a financial crisis. That’s not an accident. It’s a result of an incredibly aggressive response by the Fed, Congress, the Bush administration and the Obama administration.

Just consider home sales. The stimulus bill last year included a tax credit for first-time home buyers that originally expired on Dec. 1. Like clockwork, home sales fell 16 percent in December. From March to November, sales rose 36 percent.

The credit has since been extended, but if you combine the other fading parts of the stimulus with household debt burdens, you can see why some economists are concerned. Mr. Shapiro predicts monthly job growth will be only 50,000 to 75,000 by the end of this year. To keep up with population growth — to keep unemployment from rising — the economy needs to add more than 100,000 jobs a month.

Recent events in Congress, however, have offered some cause for optimism. Last week, the Senate passed a small-bore $15 billion jobs bill, focused on road building and employer tax credits. But on Monday, Democratic leaders announced a proposal that would do more: a $150 billion bill to extend jobless benefits, Medicaid payments to states and some tax cuts.

Some of the extensions last through the end of the year, rather than for just a few months, as is typical. Senator Jack Reed, Democrat of Rhode Island, told me the bill was meant to prevent what he called the “Perils of Pauline” problem — referring to the silent movie serial that placed its heroine in repeated danger.

The most recent extension of jobless benefits expired on Sunday. The Senate voted Tuesday night to extend the benefits for 30 more days after Senator Jim Bunning, Republican of Kentucky, dropped his opposition to the measure.

If Congress passes a longer-term extension and adds some measures — like more aid to struggling states, maybe the single most effective form of stimulus — it can offset the winding down of other government programs. (Yes, these efforts to prop up the economy will have to end sometime soon, and debt reduction will have to begin. But the main historical lesson of financial crises is that governments are too timid and too quick to step back.)

It’s also possible that Mr. Shapiro and his fellow pessimists are being a bit too dire about the private sector. Inventories are still quite lean, and some restocking is likely to continue. Banks are becoming more willing to lend, Fed surveys show. Strong growth in China and other emerging markets will help American exporters like General Motors and Cargill. To my mind, these forces make a true double dip unlikely.

Still, the jobs number on Friday will be ugly. Macroeconomic Advisers, a research firm, estimates that the snow kept 150,000 to 220,000 people off a payroll when the government conducted its jobs survey in early February. But most of those jobs will reappear in March — the month when many economists think job growth will, at long last, resume.

Here’s the thing, though. Even the optimists are not very optimistic. Morgan Stanley expects average monthly job growth of just 110,000 this year. The great jobs deficit — 10.6 million and counting — will be with us for years.

So no matter when the recent run of bad news comes to an end, the economy is still going to need help.




  • any imaginary person or thing spoken of as though existing
  • any fictitious story, or unscientific account, theory, belief, etc.
  • Kudos to investigative journalist Kevin Hall with McClatchy Newspapers for inserting himself into the so called “loan modification” process and exposing the farce that is being perpetrated on the American public in the article below. Why is this happening? Pretty simple, two reasons, first the fact is that in almost all cases where you have a mortgage that has been securitized, you the homeowner or you the lawyer representing the homeowner are not dealing with a party that has authority to modify the loan and second they NEED a default. One of the many missions of this site is exposing the truth, hence the name “Livinglies.” The reality is that they, the “pretender lender,” know the debt is unenforceable, the real party in interest is unidentifiable in most cases, and the title to the property has a cloud on it. So what do they REALLY need:

    1. They need new paperwork and they need new signatures on something they can represent as your affirmation of the debt….to THEM… not the party that actually funded your loan who may be damaged by a default or even the party still on the deed or mortgage at the county recorders office. 
    2. They need you to waive any rights and claims you could assert because the “real lender”  or “real party in interest” and/or various parties in the chain of securitization assumed liablity for those claims you could assert as the notes flowed up the chain.
    3. Here’s the biggie, they have insurance in the event of default, they can’t collect on the insurance, credit default swaps, PMI, etc.  in the event of modification.

    Insurers have a habit of including exclusions into policies of all types and credit default insurance policies are not different. Here is a little sample of a PMI exclusion:

    “Notwithstanding any other provision of this Policy, the coverage extended to any Loan by a Certificate of Insurance may be terminated at the Company’s sole discretion, immediately andwithout notice, if, with respect to such Loan, the Insured shall permit or agree to any of thefollowing without prior written consent of the Company: (1) Any material change or modification of the terms of the Loan including, but not limited to, the borrowed amount, interest rate, term or amortization schedule, excepting such modifications as may be specifically provided for in theLoan documents, and permitted without further approval or consent of the Insured.“*

    *Radian Guaranty Master Policy, Condition 4.C, at Master_Policy

    So who is the “insured”? Well, the bondholders who put up the money that was actually used to fund your loan, reality is they are the only other party other than you that has been damaged in this whole mortage meltdown. Every other party between you and them was an intermediary, who made a killing, and had no capital at risk. The truth, there is no incentive or reason to modify your loan. In order to collect on the insurance they need a default, not a modification.

    Why do you think they want you to use the “fax” to resend them your “modification” paperwork for the umpteenth time? So they can “lose” it again. If they allowed you to scan and email it to them or send it Certified Mail Return Receipt Requested you would have evidence that a) they received it b) who received it and c) when they received it. Then all of a sudden you have a timeline, then all of a sudden someone has to be accountable and explain why they received your information 3 months ago and you haven’t heard “boo” since…

    They know that 60% of these “modifications” are back in default within a year so they need to clear the deck to foreclose when that happens. Meantime, with regard to these “trial” modifications, the paperwork I have seen explictly says that the payments will NOT be credited to your loan account but will be placed in a “suspense” account until after the trial modification period is done. Now, if you fail to complete the trial period or when the “trial” period is completed and you did comply, but they tell you they cannot approve your for a modification…who do you spose keeps that money sitting in the suspense account?

    Bottomline folks, even if you are “working with your servicer on a loan modification” you need to consult a competent attorney, don’t wait until the wolf is at the door to start looking for one.

    If you are a competent attorney, practicing in this area and not on our list of “Lawyers that Get It” we want to hear from you.

    Homeowners Often Rejected Under Obama Plan

    By Kevin G. Hall G. Hall | McClatchy Newspapers

    WASHINGTON — Ten months after the Obama administration began pressing lenders to do more to prevent foreclosures, many struggling homeowners are holding up their end of the bargain but still find themselves rejected, and some are even having their homes sold out from under them without notice.

    These borrowers, rich and poor, completed trial modifications of their distressed mortgage, and made all the payments, only to learn, often indirectly, that they won’t get help after all.

    How many is hard to tell. Lenders participating in the administration’s Home Affordable Modification Program, or HAMP, still don’t provide the government with information about who’s rejected and why.

    To date, more than 759,000 trial loan modifications have been started, but just 31,382 have been converted to permanent new loans. That’s averages out to 4 percent, far below the 75 percent conversion rate President Barack Obama has said he seeks.

    In the fine print of the form homeowners fill out to apply for Obama’s program, which lowers monthly payments for three months while the lender decides whether to provide permanent relief, borrowers must waive important notification rights.

    This clause allows banks to reject borrowers without any written notification and move straight to auctioning off their homes without any warning.

    That’s what happened to Evangelina Flores, the owner of a modest 902 square-foot home in Fontana, Calif. She completed a three-month trial modification, and made the last of the agreed upon monthly payments of $1,134.60 on Nov. 1. Her lawyer said that in late November, Central Mortgage Company told her that it would void her adjustable-rate mortgage, which had risen to a monthly sum above $2,000, and replace it with a fixed-rate mortgage.

    “The information they had given us is that she had qualified and that she would be getting her notice of modification in the first week of December,” said George Bosch, the legal administrator for the Law Firm of Edward Lopez  and Rick Gaxiola, which is handling Flores’ case for free.

    Flores, 58, a self-employed child care worker, wired her December payment to Central Mortgage Company on Nov. 30, thinking that her prayers had been answered. A day later, there was a loud, aggressive knock on her door.

    Thinking a relative was playing a prank, she opened her front door to find two strangers handing her an eviction notice.

    “They arrived real demanding, saying that they were the owners,” recalled Flores. “I have high blood pressure, and I felt awful.”

    Court documents show that her house had been sold that very morning to a recently created company, Shark Investments. The men told Flores she had to be out within three days. The eviction notice had a scribbled signature, and under the signature was the name of attorney John Bouzane.

    A representative in his office denied that Bouzane’s law firm was involved in Flores’ eviction, and said the eviction notice was obtained from Bouzane’s Web site,

    Why would a lawyer provide for free a document that gives the impression that his law firm is behind an eviction?

    “We hope to get the eviction business,” said the woman, who didn’t identify herself.

    Flores bought her home in 2006 for $352,000. Records show that it has a current fair-market value of $99,000. The new owner bought it for $78,000 at an auction Flores didn’t even know about.

    “I had my dream, but now I feel awful,” said Flores, who remains in the house while her lawyers fight her eviction. “I still can’t believe it.”

    How could Flores go so quickly from getting government help to having her home owned by Shark Investment? The answer is in the fine print of standard HAMP documents.

    The Aug. 25 cover letter from Central Mortgage Company, the servicer that collects Flores’ mortgage payments, offered Flores a trial modification with this comforting language:

    “If you do not qualify for a loan modification, we will work with you to explore other options available to help you keep your home or ease your transition into a new home.”

    CMC is owned by Arkansas regional Arvest Bank, itself controlled by Jim Walton, the youngest son of Wal-Mart founder Sam Walton.

    A glance past CMC’s hopeful promise finds a different story in the fine print of HAMP document, which contains standardized language drafted by the Obama Treasury Department and is used uniformly by lenders.

    The document warns that foreclosure “may be immediately resumed from the point at which it was suspended if this plan terminates, and no new notice of default, notice of intent to accelerate, notice of acceleration, or similar notice will be necessary to continue the foreclosure action, all rights to such notices being hereby waived to the extent permitted by applicable law.”

    This means that even when a borrower makes all the trial payments, a lender can put the house up for auction if it decides that the homeowner doesn’t qualify — assuming that foreclosure proceedings had been started before the trial period — without telling the homeowner.

    Until now, lenders haven’t even had to notify borrowers in writing that they’d been rejected for permanent modifications.

    In January, 11 months after Obama’s plan was announced, homeowners will begin receiving written rejection notices, and the Treasury Department finally will begin receiving data on rejection rates and reasons for rejections.

    The controversial clause notwithstanding, the handling of Flores’ loan raises questions.

    “Foreclosure actions may not be initiated or restarted until the borrower has failed the trial period and the borrower has been considered and found ineligible for other available foreclosure prevention options,” said Meg Reilly, a Treasury spokeswoman. “Servicers who continue with foreclosure sales are considered non-compliant.”

    CMC officials declined to comment and hung up when they learned that a reporter was listening in with permission from Flores’ legal team. Arvest officials also declined comment.

    McClatchy did hear from Freddie Mac, the mortgage finance agency seized by the Bush administration in September 2008. Freddie owns Flores’ loan, and spokesman Brad German insisted that Flores was reviewed three times for loan modification.

    “In each instance, there was a lack of documentation verifying that she had the income required for a permanent modification,” German said.

    That response is ironic, said Michael Calhoun, the president of the Center for Responsible Lending, a nonpartisan group in Durham, N.C., that works on behalf of borrowers.

    “These lenders gave loans with no documentation and charged them a penalty interest rate for doing so. And now when the people ask for help, they are using extravagant demands for documentation to give them the back of their hand and continue to foreclosure,” Calhoun said.

    German said that Flores was sent a letter on Nov. 24, which would have arrived several days later, given the Thanksgiving holiday, informing her that she’d been rejected for a permanent modification. Flores and her attorney said she never got a letter, and neither Freddie Mac nor CMC provided proof of that letter.

    Exactly one week after the letter supposedly was sent, Flores’ home was sold to Shark Investments. That company was formed on Aug. 19, according to records on the California Secretary of State’s Web site. Shark Investments, apparently an unsuspecting beneficiary of Flores’ woes, has no phone listing. The Riverside, Calif., address on the company’s filing as a limited liability company traces to a five-bedroom, four-bath house with a swimming pool.

    German didn’t comment on whether Flores received sufficient notice under Freddie Mac rules, or how the home could move to sale so quickly.

    Flores’ legal team, which specializes in foreclosure prevention, thinks that lenders and servicers are gaming Obama’s housing effort.

    “It seems servicers are giving people false hopes by sending them a plan, and they are using the program as a collection method, getting people to pay them with no intention of modifying the loan,” said Bosch. “I believe they are using this as a tool to suck people dry.”

    Dashed hopes aren’t exclusive to the working poor such as Flores.

    David Smith owns a beautiful home in San Clemente, Calif., the location of the Richard Nixon Presidential Library. Smith purchased his five bedroom home four years ago for $1.3 million. Today, the real estate Web site estimates the value of Smith’s home at $981,000, slightly below the $1 million he still owes on it.

    Smith said he went from “making a lot of money to making hardly any” as the national and California economies plunged into deep recession. He’s a salesman serving the hard-hit residential and commercial construction sector. On top of his hardship, Smith’s mortgage exceeds the limits for the HAMP plan.

    In late August, Smith signed and returned paperwork in a prepaid FedEx envelope to Bank of America that said it had received the contract needed to modify the adjustable-rate mortgage he originally took out with the disgraced lender Countrywide Financial, which Bank of America bought last year.

    The modification agreement shows that Bank of America agreed to give Smith a 3.375 percent mortgage rate through September 2014, and everything Smith paid between now and through 2019 would count as paying off interest. He’d begin paying principal and interest in October 2019, with the loan maturing in 2037.

    The deal favors the lender, but Smith, 55, jumped on it because it kept him in the home.

    Armed with what he thought was “a permanent modification,” Smith returned a notarized copy of the agreement and made subsequent payments on time.

    In return, he got a surprising notice from Bank of America saying that his house would be auctioned off on Dec. 18.

    “It looks like they’re trying to sell this out from underneath me,” Smith said. “My wife cries all the time.”

    After a Dec. 16 call from McClatchy asking why Bank of America wasn’t honoring its own modification, the lender backed off.

    “The case has been returned to a workout status and a Home Retention Division associate will be contacting Mr. Smith for further discussions,” said Rick Simon, a Bank of America spokesman. “The scheduled foreclosure sale will be postponed for at least 30 days to allow for review of the account in hope of completing a home retention solution for Mr. Smith.”

    The Center for Responsible Lending says such problems are common.

    “Everyone acknowledges that the system is not working well,” Calhoun said.

    TENT CITY, California While Vacant Houses Deteriorate

    TENT CITY, California While Vacant Houses Deteriorate

    From we have this post on the moronic ideology that misuses our natural and creative resources. It can be said that conservatives do not conserve and liberals do not liberate. I coined that because it is obvious that politics in this country is degrading even while some try to revive it.

    Out of pure ideology and ignorance, people are being ejected from homes they own on the pretense that they don’t own the home. This sleight of hand is accomplished by “bridge to nowhere” logic — the pretender lender merely pretends to be authorized to initiate foreclosure proceedings.  They come into court with a pile of  inconsistent documents with little or no REAL connection with the originating papers and zero connection with the REAL lender.

    So we end up with hundreds of thousands of homes that are empty, subject to vandalism and decay from lack of mainteance and lack of anyone living in them, combined with nobody paying utility bills etc that would help take the edge off the crisis. Instead, we choose to allow TENT CITY where there are no decent facilities, where people are living in tents literally, resulting in a greater drain on social services, police, fire, health, schools etc.

    Why because some ideologue and people who mindlessly subscribe to such ideology has already played Judge and Jury and convicted these victims of Wall Street fraud. They are certain that these are deadbeats that don’t pay thier bills and won’t listen when someone points out that many of these people had nearly perfect credit scores before tragedy hit. That means the victims were generally considered to have been better credit risks based upon an excellent record of paying their bills, than their ideological detractors.

    Someone of this ideology will tell us or anyone who will listen that the victims should have read what they were signing. The is fact that NOBODY reads those closing documents, not even lawyers, not even the ideological (don’t confuse me with the facts) conservatives. So the same people who say you should have read those documents, didn’t read their own.

    And now everyone who is NOT in foreclosure or who has already lost possession of their home and who signed a securitized loan package is “underwater” an average of 25% , which means that they are, on average around $70,000 in debt that will never be covered by equity in their lifetime — so they can’t move without coming to the table with the shortfall.

    Such ideologues fall short of helping their fellow citizens to be sure. What is astonishing is that they fall short of helping themselves, which means they subject their life partners, spouses, children and other dependents to the same mindless mind-numbing shoot myself in the foot political theology.  And somehow it is THESE people who are controlling the pace of the recovery, controlling the correction in housing and social services who are claiming to be angry about their country being taken away from them!

    New Shockwaves From Courts and Accounting Board

    Wall Street was not responding to legitimate consumer demand, it was creating an artificial demand simply to create mortgage product to feed its securitization machine and generate big fees for itself.

    Comment from Reader:
    “MERS and the Pretender Lenders are seeking the courts to credit them with a touchdown despite the obvious fact that they do not and never did have possession of the football. Challenge flag anyone?”

    The Next Financial Crisis Hits Wall Street, as Judges Start Nixing Foreclosures


    The financial tsunami unleashed by Wall Street’s esurient alchemy of spinning toxic home mortgages into triple-A bonds, a process known as securitization, has set off its second round of financial tremors.

    After leaving mortgage investors, bank shareholders, and pension fiduciaries awash in losses and a large chunk of Wall Street feeding at the public trough, the full threat of this vast securitization machine and its unseen masters who push the levers behind a tightly drawn curtain is playing out in courtrooms across America.

    Three plain talking judges, in state courts in Massachusetts and Kansas, and a Federal Court in Ohio, have drilled down to the “straw man” aspect of securitization. The judges’ decisions have raised serious questions as to the legality of hundreds of thousands of foreclosures that have transpired as well as the legal standing of the subsequent purchasers of those homes, who are more and more frequently the Wall Street banks themselves.

    Adding to the chaos, the Financial Accounting Standards Board (FASB) has made rule changes that will force hundreds of billions of dollars of these securitizations back onto the Wall Street banks balance sheets, necessitating the need to raise capital just as the unseemly courtroom dramas are playing out.

    The problems grew out of the steps required to structure a mortgage securitization. In order to meet the test of an arm’s length transaction, pass muster with regulators, conform to accounting rules and to qualify as an actual sale of the securities in order to be removed from the bank’s balance sheet, the mortgages get transferred a number of times before being sold to investors. Typically, the original lender [Editor’s Note: Read that as “originating lender” or “pretender lender”] (or a sponsor who has purchased the mortgages in the secondary market) will transfer the mortgages to a limited purpose entity called a depositor. The depositor will then transfer the mortgages to a trust which sells certificates to investors based on the various risk-rated tranches of the mortgage pool. (Theoretically, the lower rated tranches were to absorb the losses of defaults first with the top triple-A tiers being safe. In reality, many of the triple-A tiers have received ratings downgrades along with all the other tranches.)

    Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.

    Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost. (This raises the question as to whether these mortgage notes are really lost or might have been fraudulently used in multiple securitizations, a concern raised by some Wall Street veterans.)

    But, at last, some astute judges have done more than take a cursory look and render a shrug. In a decision handed down on October 14, 2009, Judge Keith Long of the Massachusetts Land Court wrote:

    The blank mortgage assignments they possessed transferred Massachusetts, a mortgage is a conveyance of land. Nothing is conveyed unless and until it is validly conveyed. The various agreements between the securitization entities stating that each had a right to an assignment of the mortgage are not themselves an assignment and they are certainly not in recordable form…The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.” [Italic emphasis in original.] (U.S. Bank National Association v. Ibanez/Wells Fargo v. Larace)

    A month and a half before, on August 28, 2009, Judge Eric S. Rosen of the Kansas Supreme Court took an intensive look at a “straw man” some Wall Street firms had set up to handle the dirty work of foreclosure and serve as the “nominee” as the mortgages flipped between the various entities. Called MERS (Mortgage Electronic Registration Systems, Inc.) it’s a bankruptcy-remote subsidiary of MERSCORP, which in turn is owned by units of Citigroup, JPMorgan Chase, Bank of America, the Mortgage Bankers Association and assorted mortgage and title companies. According to the MERSCORP web site, these “shareholders played a critical role in the development of MERS. Through their capital support, MERS was able to fund expenses related to development and initial start-up.”

    In recent years, MERS has become less of an electronic registration system and more of a serial defendant in courts across the land. In a May 2009 document titled “The Building Blocks of MERS,” the company concedes that “Recently there has been a wave of lawsuits filed by homeowners facing foreclosure which challenge MERS standing…” and then proceeds over the next 30 pages to describe the lawsuits state by state, putting a decidedly optimistic spin on the situation.

    MERS doesn’t have a big roster of employees or lawyers running around the country foreclosing and defending itself in lawsuits. It simply deputizes employees of the banks and mortgage companies that use it as a nominee. It calls these deputies a “certifying officer.” Here’s how they explain this on their web site: “A certifying officer is an officer of the Member [mortgage company or bank] who is appointed a MERS officer by the Corporate Secretary of MERS by the issuance of a MERS Corporate Resolution. The Resolution authorizes the certifying officer to execute documents as a MERS officer.”

    Kansas Supreme Court Judge Rosen wasn’t buying MERS’ story. In fact, Wall Street was probably not too happy to land before Judge Rosen. In January 2002, Judge Rosen had received the Martin Luther King “Living the Dream” Humanitarian Award; he previously served as Associate General Counsel for the Kansas Securities Commissioner, and as Assistant District Attorney in Shawnee County, Kansas. Judge Rosen wrote:

    “The relationship that MERS has to Sovereign [Bank] is more akin to that of a straw man than to a party possessing all the rights given a buyer… What meaning is this court to attach to MERS’s designation as nominee for Millennia [Mortgage Corp.]? The parties appear to have defined the word in much the same way that the blind men of Indian legend described an elephant — their description depended on which part they were touching at any given time. Counsel for Sovereign stated to the trial court that MERS holds the mortgage ‘in street name, if you will, and our client the bank and other banks transfer these mortgages and rely on MERS to provide them with notice of foreclosures and what not.’ ” (Landmark National Bank v. Boyd A. Kesler)

    Lawyers for homeowners see a darker agenda to MERS. Timothy McCandless, a California lawyer, wrote on his blog as follows:

    “…all across the country, MERS now brings foreclosure proceedings in its own name — even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers’ discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer’s home. While up against the wall of foreclosure, consumers that try to assert predatory lending defenses are often forced to join the party — usually an investment trust — that actually will benefit from the foreclosure. As a simple matter of logistics this can be difficult, since the investment trust is even more faceless and seemingly innocent than MERS itself. The investment trust has no customer service personnel and has probably not even retained counsel. Inquiries to the trustee — if it can be identified — are typically referred to the servicer, who will then direct counsel back to MERS. This pattern of non-response gives the securitization conduit significant leverage in forcing consumers out of their homes. The prospect of waging a protracted discovery battle with all of these well funded parties in hopes of uncovering evidence of predatory lending can be too daunting even for those victims who know such evidence exists. So imposing is this opaque corporate wall, that in a ‘vast’ number of foreclosures, MERS actually succeeds in foreclosing without producing the original note — the legal sine qua non of foreclosure — much less documentation that could support predatory lending defenses.”

    One of the first judges to hand Wall Street a serious slap down was Christopher A. Boyko of U.S. District Court in the Northern District of Ohio. In an opinion dated October 31, 2007, Judge Boyko dismissed 14 foreclosures that had been brought on behalf of investors in securitizations. Judge Boyko delivered the following harsh rebuke in a footnote:

    “Plaintiff’s ‘Judge, you just don’t understand how things work,’ argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process…There is no doubt every decision made by a financial institution in the foreclosure is driven by money. And the legal work which flows from winning the financial institution’s favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit – to the contrary, they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns. Unlike the focus of financial institutions, the federal courts must act as gatekeepers…” (In Re Foreclosure Cases)

    While the illegal foreclosure filings, investor lawsuits over securitization improprieties, and predatory lending challenges play out in courts across the country, a few sentences buried deep in Citigroup’s 10Q filing for the quarter ended June 30, 2009 signals that we’ve seen merely a few warts on the head of the securitization monster thus far and the massive torso remains well hidden in murky water.

    Citigroup tells us that the Financial Accounting Standards Board (FASB) has issued a new rule, SFAS No. 166, and this is going to have a significant impact on Citigroup’s Consolidated Financial Statements “as the Company will lose sales treatment for certain assets previously sold to QSPEs [Qualifying Special Purpose Entities], as well as for certain future sales, and for certain transfers of portions of assets that do not meet the definition of participating interests. Just when might we expect this new land mine to go off? “SFAS 166 is effective for fiscal years that begin after November 15, 2009.” There’s more bad news. The FASB has also issued SFAS 167 and, long story short, more of those off balance sheet assets are going to move back onto Citi’s books.

    Bottom line says Citi:

    “… the cumulative effect of adopting these new accounting standards as of January 1, 2010, based on financial information as of June 30, 2009, would result in an estimated aggregate after-tax charge to Retained earnings of approximately $8.3 billion, reflecting the net effect of an overall pretax charge to Retained earnings (primarily relating to the establishment of loan loss reserves and the reversal of residual interests held) of approximately $13.3 billion and the recognition of related deferred tax assets amounting to approximately $5.0 billion….” [Emphasis in original.]

    I’m trying to imagine how the American taxpayer is going to be asked to put more money into Citigroup as it continues to bleed into infinity.

    Citigroup is far from alone in financial hits that will be coming from the Qualifying Special Purpose Entities. Regulators are receiving letters from Citigroup and other Wall Street firms pressing hard to rethink when this change will take effect.

    Putting aside for the moment the massive predatory lending frauds bundled into mortgage securitizations, inadequate debate has occurred on whether securitization of home mortgages (other than those of government sponsored enterprises) should be resuscitated or allowed to die a welcome death. If we understand the true function of Wall Street, to efficiently allocate capital, the answer must be a resounding no to this racket.

    Trillions of dollars of bundled home mortgage loans and derivative side bets tied to those loans were being manufactured by Wall Street without any one asking the basic question: why is all this capital being invested in a dormant structure? Houses don’t think and innovate. Houses don’t spawn new technologies, patents, new industries. Houses don’t create the jobs of tomorrow.

    Also, by acting as wholesale lenders to the unscrupulous mortgage firms (some in house at Wall Street firms), Wall Street was not responding to legitimate consumer demand, it was creating an artificial demand simply to create mortgage product to feed its securitization machine and generate big fees for itself. Now we see the aftermath of that inefficient allocation of capital: a massive glut of condos and homes pulling down asset prices in neighborhoods as well as in those ill-conceived securitizations whose triple-A ratings have been downgraded to junk.

    There’s no doubt that one of the contributing factors to the depression of the 30s and the intractable unemployment today stem from a massive misallocation of capital to both bad ideas and fraud. Today’s Wall Street, it turns out, is just another straw man for a rigged wealth transfer system.

    Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than that which the U.S. Treasury has thrust upon her and fellow Americans involuntarily through TARP. She writes on public interest issues from New Hampshire. She can be reached at

    Wisdom Succumbs to Wise Guys

    It is difficult to imagine anything more obvious than splitting the risk taking core model of Wall Street from the risk averse core model of banking. The dilution of Glass-Steagel over the years and its eventual repeal is exactly how we got into this mess. Coupling that with deregulation and non-transparency created a context in which (moral hazard) theft was legal and inevitable on a scale unimaginable at any other time in history. Former FED Chairman Volker, 82, has the perspective to see all of the history of mistakes and triumphs from the long view. Yet his view is being routinely ignored by the Obama administration whose loyalty to their roots on Wall Street is greater than their commitment to the country. Volker is being treated as window dressing covering over the continuation of drastically stupid policies with horrendous results for ALL U.S. Citizens.
    Brave souls like Marcy Kaptur, Elizabeth Warren, Sheila Baer, are getting stepped on so that our government, captured by the financial sector, can go about the business of siphoning off liqulidity from an economy that desperately needs it returned to its rightful place. Thus a government whose prime directive is the common defense and common welfare completely abdicates its role under cover of “rational” policies in what has always been an irrational world.    
    The rationality and complexity of their arguments leads the populace to a confused state of non-comprehension and docile compliance as we are led down a path to yet another disaster that will in all probability alter the order of society, stability of governments and opportunity for despots. The consent of the governed is being managed by those who know how to at least keep dissent down to a minimum (and then call it consent).
    What started here on these pages as merely a research and self-help tool, is now the center of a growing movement by those who are in distress over the status of their country and not merely their homes. Livinglies no longer promotes the interests of only those in financial distress now, but also the interests of all Americans whose lives are being turned into a path toward financial ruin for all of us. The recovery of homes and wealth in the courts is required not only for each individual to gain justice and fairness back from a corrupt system, but to our society as a whole.
    October 21, 2009 NY Times

    Volcker Fails to Sell a Bank Strategy

    Listen to a top economist in the Obama administration describe Paul A. Volcker, the former Federal Reserve chairman who endorsed Mr. Obama early in his election campaign and who stood by his side during the financial crisis.

    “The guy’s a giant, he’s a genius, he is a great human being,” said Austan D. Goolsbee, counselor to Mr. Obama since their Chicago days. “Whenever he has advice, the administration is very interested.”

    Well, not lately. The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children.

    He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.

    “I am not pounding the desk all the time, but I am making my point,” Mr. Volcker said in one of his infrequent on-the-record interviews. “I have talked to some senators who asked me to talk to them, and if people want to talk to me, I talk to them. But I am not going around knocking on doors.”

    Still, he does head the president’s Economic Recovery Advisory Board, which makes him the administration’s most prominent outside economic adviser. As Fed chairman from 1979 to 1987, he helped the country weather more than one crisis. And in the campaign last year, he appeared occasionally with Mr. Obama, including a town hall meeting in Florida last fall. His towering presence (he is 6-foot-8) offered reassurance that the candidate’s economic policies, in the midst of a crisis, were trustworthy.

    More subtly, Mr. Obama has in Mr. Volcker an adviser perceived as standing apart from Wall Street, and critical of its ways, some administration officials say, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are seen, rightly or wrongly, as more sympathetic to the concerns of investment bankers.

    For all these reasons, Mr. Volcker’s approach to financial regulation cannot be just brushed off — and Mr. Goolsbee, speaking for the administration, is careful not to do so. “We have discussed these issues with Paul Volcker extensively,” he said.

    Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.

    The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.

    Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.

    “The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.

    The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.

    Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail.

    On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks.

    Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail — a designation that could arise for a handful of institutions under the administration’s proposal.

    “People say I’m old-fashioned and banks can no longer be separated from nonbank activity,” Mr. Volcker said, acknowledging criticism that he is nostalgic for an earlier era. “That argument,” he added ruefully, “brought us to where we are today.”

    He may not be alone in his proposal, but he is nearly so. Most economists and policy makers argue that a global economy requires that America have big financial institutions to compete against others in Europe and Asia. An administration spokesman says the Obama proposal for reform would result in financial institutions that could fail without damaging the system.

    Still, a handful side with Mr. Volcker, among them Joseph E. Stiglitz, a Nobel laureate in economics at Columbia and a former official in the Clinton administration. “We would have a cleaner, safer banking system,” Mr. Stiglitz said, adding that while he endorses Mr. Volcker’s proposal, the former Fed chairman is nevertheless embarked on a quixotic journey.

    Alan Greenspan, the only other former Fed chairman still living, favored the repeal of Glass-Steagall a decade ago and, unlike Mr. Volcker, would not bring it back now. He declined to be interviewed for this article, but in response to e-mailed questions he cited two recent public statements in which he suggested that the nation’s largest financial institutions become smaller, so that none would be too big to fail, requiring a federal rescue.

    Taking issue implicitly with the Volcker proposal to split commercial and investment banking, he has said: “No form of economic organization can fully contain bouts of destructive speculative euphoria.”

    For his part, Mr. Volcker is careful to explain that he supports 80 percent of the administration’s detailed plan for financial regulation, including much higher capital requirements and “guidelines” on pay. Wall Street compensation, he said in a recent television interview, “has gotten grotesquely large.”

    Before the credit crisis, the big institutions earned most of their profits from proprietary trading, and those profits led to giant bonuses. Mr. Volcker argues that splitting commercial and investment banking would put a damper on both pay and risky trading practices.

    His disagreement with the Obama people on whether to restore some version of Glass-Steagall appears to have contributed to published reports that his influence in the administration is fading and that he is rarely if ever in the small Washington office assigned to him.

    He operates from his own offices in New York, communicating with administration officials and other members of the advisory board mainly by telephone. (He does not use e-mail, although his support staff does.) He travels infrequently to Washington, he says, and when he does, the visits are too short to bother with the office. The advisory board has been asked to study, amid other issues, the tax law on corporate profits earned overseas, hardly a headline concern.

    So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.

    The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

    The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

    If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

    The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

    This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

    More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

    The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

    What is Cancellation of Debt?
    If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

    Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

    Is Cancellation of Debt income always taxable?
    Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

    • Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
    • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
    • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
    • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
    • Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

    These exceptions are discussed in detail in Publication 4681.

    What is the Mortgage Forgiveness Debt Relief Act of 2007?
    The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

    What does exclusion of income mean?
    Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

    Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
    No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing

    Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
    Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

    How long is this special relief in effect?
    It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

    Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
    There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

    If the forgiven debt is excluded from income, do I have to report it on my tax return?
    Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

    Do I have to complete the entire Form 982?
    No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

    Where can I get this form?
    If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

    How do I know or find out how much debt was forgiven?
    Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

    Can I exclude debt forgiven on my second home, credit card or car loans?
    Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.

    If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
    Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent.  You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.

    I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
    No.  Losses from the sale or foreclosure of personal property are not deductible.

    If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt?
    Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was canceled in a title 11 bankruptcy case.  An exclusion is also available for the cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a Midwestern disaster area.  See Form 982 for details.

    If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?
    Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

    Will I receive notification of cancellation of debt from my lender?
    Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.

    What if I disagree with the amount in box 2?
    Contact your lender to work out any discrepancies and have the lender issue a corrected Form 1099-C.

    How do I report the forgiveness of debt that is excluded from gross income?
    (1) Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2.  Any remaining canceled debt must be included as income on your tax return.

    (2) File Form 982 with your tax return.

    My student loan was cancelled; will this result in taxable income?
    In some cases, yes. Your student loan cancellation will not result in taxable income if you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation.

    Are there other conditions I should know about to exclude the cancellation of student debt?
    Yes, your student loan must have been made by:

    (a) the federal government, or a state or local government or subdivision;

    (b) a tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are considered public employees; or

    (c) a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization.

    Can I exclude cancellation of credit card debt?
    In some cases, yes. Nonbusiness credit card debt cancellation can be excluded from income if the cancellation occurred in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See the examples in Publication 4681.

    How do I know if I was insolvent?
    You are insolvent when your total debts exceed the total fair market value of all of your assets.  Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.

    How should I report the information and items needed to prove insolvency?
    Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation.  You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.

    To claim this exclusion, you must attach Form 982 to your federal income tax return.  Check box 1b on Form 982, and, on line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately prior to the cancellation.  You must also reduce your tax attributes in Part II of Form 982.

    My car was repossessed and I received a 1099-C; can I exclude this amount on my tax return?
    Only if the cancellation happened in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See Publication 4681 for examples.

    Are there any publications I can read for more information?
    (1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues.

    (2) See the IRS news release IR-2008-17 with additional questions and answers on

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

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

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

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

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

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

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

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

    The home you save could be your own: MSNBC Story by Mike Stuckey Quoting Living Lies Editor Neil Garfield

    The home you save could be your own
    In foreclosure crisis, more Americans representing themselves in court
    By Mike Stuckey
    Senior news editor
    updated 4:25 a.m. MT, Wed., Jan. 28, 2009
    Luis Molina is not a lawyer and he has never played one on TV.

    But that didn’t stop him from putting on his best suit, marching into a Miami courtroom this month and going up against an attorney with 30 years of experience to stop a foreclosure proceeding against his family’s home. Molina did such a good job of representing himself that the judge in the case thought he was a lawyer and punctuated his ruling in Molina’s favor by tearing up the other side’s motion for summary judgment and throwing it over his shoulder.

    “I felt like a million dollars,” Molina told, describing his day in Judge David C. Miller’s courtroom in Florida’s 11th Judicial Circuit Court. “I felt like if there was anything in my life that I had done correctly, it had to be that. Every single lawyer after the fight came over and shook my hand.”

    Molina, a former car salesman and deli owner whose formal education ended with a diploma from Teaneck High School in New Jersey, is among a growing number of American homeowners representing themselves as what are called “pro se” — a Latin phrase meaning “for oneself” — litigants in foreclosure proceedings.

    There’s no way to know how many pro se foreclosure cases are currently moving through U.S. courts, but anecdotal accounts from lawyers and others indicate the number is growing along with the nation’s mortgage crisis, which has reached unprecedented proportions.

    A myriad of issues
    Along with trained and licensed attorneys, pro se litigants are forcing courts to look at myriad foreclosure issues that go far beyond whether or not a loan is being properly repaid, including allegations of predatory lending practices and the fundamental question of who actually has the right to foreclose.

    “There’s a surge in the number of pro se litigants,” said Arizona attorney Neil F. Garfield, who runs a Web site called “Living Lies” that offers information to homeowners facing foreclosure and lawyers defending foreclosure lawsuits. He said traffic to his Web site had increased from 1,000 hits a month at this time last year to more than 67,000 last month.

    Eric Halperin, director of the Center for Responsible Lending in Washington, D.C., said, “I haven’t done any statistical study to know whether there’s an increase, but it makes sense given that there’s a lot more foreclosures.”

    More than 2.3 million U.S. properties were involved in foreclosure proceedings last year, almost double the number in 2007 and more than triple the 2006 volume, according to RealtyTrac, an online foreclosure information service. Even more foreclosures are expected this year. While many occur in the states that normally handle the process outside court, including California and Arizona, many occur in the 20 states where foreclosure is only accomplished via a lawsuit, as in New York and Florida.

    Driven by finances
    The reasons that foreclosure defendants end up representing themselves are usually financial. “A lot of lawyers out there have been extremely reluctant to take homeowners’ cases,” said Garfield. “They figure if the person can’t pay their mortgage, they can’t pay their lawyer.”

    Even when homeowners in foreclosure can show errors by their lenders and mortgage servicers, many lawyers still aren’t interested in representing them, according to Halperin.

    “A lot of the time, what you’re getting is loan forgiveness,” he said. “There’s no cash for you to take a piece of. It’s challenging. … I don’t think there’s an adequate number of attorneys who both are trained and will take foreclosure cases.”

    Molina and other pro se litigants told that when they found attorneys willing to take their cases, the lawyers didn’t know a lot of basic information about foreclosure defense that is available on Web sites like Garfield’s “Living Lies” and “Mortgage Servicing Fraud.”

    Mario Kenny, another Miami resident who is fighting foreclosure pro se and writing about his experience online, said the cost of professional help is too high. “A lawyer wants too much money — … $5,000, $10,000, $15,000,” he said.

    Besides, Kenny said, the legal profession is doing more to aid foreclosures than avert them.

    “They are stopping us and getting in our way,” he charged, referring to what he described as a warning by someone with the Florida Bar Association that advice on his Web site bordered on practicing law without a license. “I don’t practice law, I don’t have any clients, I don’t charge anybody,” said Kenny, a 52-year-old fashion designer.

    The bar association, which regulates the state’s 85,000 lawyers, had no record of Kenny being contacted or investigated, but said it could not rule that out. Lori Holcomb, the bar’s counsel for unlicensed practice of law, said the bar is much more likely to investigate “companies that have gone into business to do this, not individuals who say, ‘Hey, I’ve done my foreclosure, let me help you with yours.’”

    Experts advise: Get a lawyer
    The bar and other experts contacted for this story strongly advised any property owner facing foreclosure to consult an attorney.

    “It’s better to be pro se than not to do anything at all,” said Garfield, the Arizona attorney. “But it’s better to have a lawyer than be pro se. A lot of this stuff requires knowledge of motion practice, civil procedure, evidence, proof that the average person never had a reason to learn.”

    “Representing yourself should really be a last resort,” agreed Halperin of the Center for Responsible Lending, a nonprofit organization with a mission of protecting U.S. homeowners  from unscrupulous lenders. While legal help for embattled homeowners is scarce, “There are resources out there,” he said. Many bar associations, for instance, match up clients with volunteer lawyers, and his group has formed the Institute for Foreclosure Assistance, which recently received a $15 million grant to provide legal aid to homeowners.

    Thanks but no thanks, said Luis Molina. He said he stopped making payments on a $416,000 home loan after discovering numerous predatory and illegal practices by the original lender and sought to have the loan rescinded, as is his right under federal law.

    Doing it himself
    After he was served with foreclosure papers over the summer, Molina said he had “so many meetings with so many attorneys and not one of them knew what they were doing.” So the 41-year-old husband and father of an 8-year-old daughter who had been forced out of a publishing business by the souring South Florida economy, started reading everything he could find online and elsewhere about foreclosure. He used Garfield’s Web site, self-help legal books and pleadings by foreclosure attorneys to fashion his own case.

    He said he kept asking the other side for documents to which he was entitled under the legal process of discovery. The most important document he sought was the original loan note. To have standing in a foreclosure proceeding, a financial institution must show that it possesses the note, and can document the chain of sales and assignments by which it was obtained. In today’s financial world, home loans are sold and resold many times to various investors, often as part of highly complex securities transactions, and true ownership is often unclear.

    Instead of providing the documents, Molina said, the plaintiff’s lawyers filed a motion for summary judgment in which they asked Judge Miller to simply declare them the winners of the case and grant the foreclosure. Molina showed up for the Jan. 6 hearing on that motion and told the judge that the plaintiffs had not complied with his requests for discovery.

    Molina said he was very nervous as he presented his case. “This is a big fight for my life,” he said. “I’m going up against some lawyer who has been doing this for 30 years. Either I walk out of there with my house or I walk out of there homeless.”

    He doesn’t recall now exactly what he said during the very brief proceeding.

    Judge’s compliments
    Neither does Judge Miller, who handled dozens of cases that day. But he remembers this: “It was a good argument. Whatever it was convinced me to vacate the judgment and stop the foreclosure.”

    Even then, the judge said, Molina didn’t seem to understand that he’d prevailed. “He kept talking and I didn’t know why he was talking. I said, ‘Would it make you happy if I just ripped it up? Here, I’m tearing it up!’

    “I don’t make a practice of that,” Miller said. “I don’t want people to think I’m some crazy judge tearing stuff up down in Miami, but that time I did. … It was a funny hearing.”

    Molina made such a good case that Miller thought he was an attorney until informed otherwise during an interview with “You’re kidding!” the judge said. “He was very good. He sounded like a lawyer, he looked like a lawyer. If he was representing himself, he was doing a good job.”

    Molina, who emphasizes repeatedly in interviews that he is only representing himself and gives legal advice to no one, burst out laughing when told about the judge’s impression.

    But he said many of the 30 to 40 observers in the courtroom who applauded his victory also mistook him for a lawyer, patting him on the back and asking for his business card.

    “The guy from legal aid asked me where did I get my pleading from,” meaning his legal argument, Molina said. “I said I got it at Office Depot. I thought he meant, where did I get my folder?”

    Deposition looms
    Molina said the principal attorneys for the plaintiff, who did not respond to’s requests for an interview, appear to be pursuing the case despite the initial setback, requesting that he be deposed next month. But he said they have yet to produce the original loan note and that he believes they’re merely stalling.

    “I still don’t see how they’re going to trial with this thing,” he said.

    In the meantime, he’s pursuing the separate case to have the loan rescinded. He believes he’ll eventually wind up having the lien cleared from the title of his property without having to pay off the balance. And, for now, he’ll keep representing himself.

    “It’s a straight-up job,” he said.

    Swindlers Find Growing Market in Foreclosures

    January 15, 2009

    Swindlers Find Growing Market in Foreclosures

    As home values across the country continue to plummet, the authorities say a new breed of swindler is preying on the tens of thousands of homeowners desperate to avoid foreclosure.

    Until recently, defrauders tried to bilk homeowners out of the equity in their homes. Now, with that equity often dried up, they are presenting themselves as “foreclosure rescue companies” that charge upfront fees to modify loans but often do nothing to stave off foreclosure.

    The Federal Trade Commission brought lawsuits last year against five companies representing 20,000 customers, and state and local prosecutors have brought dozens more. In Florida, Attorney General Bill McCollum recently sued a company that he said had more than 600 victims.

    “There’s no way for the consumer to sort out the legitimate companies,” said Mr. McCollum, who added that he had limited resources to fight what he called “a sheer volume question.”

    The companies under suspicion typically charge an upfront fee of up to $3,000 to help borrowers get lower rates on their mortgages from their lenders. But borrowers often cannot afford the fees, the service can be bogus and, in the worst cases, the homeowners lose their chance to renegotiate with their bank or to file for bankruptcy protection because of the time wasted.

    There are companies that provide legitimate foreclosure services, but the industry is largely unregulated, making it difficult for homeowners to separate the good from the bad. Some of the fraudulent companies — often run by former real estate agents or mortgage brokers — are local; others are national. Many have official-looking Web sites that suggest that the companies have government affiliations and give homeowners a false sense of security.

    “That’s all I’ve been doing for the last year,” said Angela Rosenau, a deputy attorney general in California, citing more than 300 complaints about fraudulent companies last year, not counting those made to local prosecutors.

    Experiences like those of Maria Martinez, of Stockton, Calif., are playing out with greater frequency across the country, the authorities say. Ms. Martinez struggled to pay her mortgage last summer. She had no shortage of people offering to help. Fliers for rescue companies filled her mailbox.

    At a seminar for troubled borrowers near her home, one company offered a service that promised just what Ms. Martinez needed: for $1,000, the company said it would negotiate with her mortgage company to lower her interest rate.

    “I was desperate,” said Ms. Martinez, 57, a clerk at the San Joaquin County Jail. She made an initial payment of $500 and paid another $500 a few weeks later.

    Now the house is in foreclosure, and Ms. Martinez is waiting for the sheriff to evict her. She cannot reach the man she paid to modify her loan.

    In California and 20 other states, including New York, companies are prohibited from collecting payment until they have completed their services, something Ms. Martinez did not know. In Colorado, the attorney general’s office has closed 15 mortgage rescue companies that charged fees up front.

    Carol McClelland, 46, fell into foreclosure on her Chicago home when she lost her job as a waitress in two restaurants. She received a call from a company called Foreclosure Solutions Experts, promising to stop the foreclosure and lower her mortgage payments to around $550 a month, from $1,056, Miss McClelland said.

    “She showed me other clients’ files, and they were paying $650 a month,” she said. The charge for the service was $1,300, which Miss McClelland paid in installments, borrowing the money from friends and relatives.

    When the loan servicer notified her that the house was still in foreclosure, Miss McClelland said, the representative from Foreclosure Solutions Experts told her that the matter had been taken care of.

    “She told me everything was all settled; I don’t have to worry about anything,” Miss McClelland said. “All I had to worry about was getting the rest of the money to her.”

    According to a suit brought by the Illinois attorney general in November, Foreclosure Solutions Experts does little or nothing to help consumers, and when it does take action, the result is often a repayment plan unsuited to the borrower’s ability to pay. The suit alleges that the company never contacted Miss McClelland’s lender, HSBC.

    Illinois is one of the states that bans upfront payments to foreclosure rescue companies. The attorney general’s office has received “thousands” of complaints about such companies, said Michelle Garcia, an assistant attorney general, and the suit against Foreclosure Solutions Experts is one of 22 filed by the state.

    Stacy Strong, who runs Foreclosure Solutions Experts, did not return calls for comment.

    Advocates say foreclosure rescue scams are particularly insidious because they prey on people’s desperation and because they victimize those who can least afford it.

    Borrowers seeking loan modification are often frustrated that they cannot reach the right people at their lender or that the lender insists on a repayment plan they cannot keep, said Ira Rheingold, executive director of the National Association of Consumer Advocates.

    “When you’re desperate, that’s when the crooks come out,” Mr. Rheingold said. “You’ve tried everything, and a guy calls you up on the phone or there’s an ad on TV, and you have no other options, what do you do? You go to those guys.

    “People probably know in their heart of hearts that they may be getting ripped off, just like most people understood on their mortgages that they were getting in too deep, but bankers said yes, so it must be O.K. It’s the same thing. The real problem is that we continue to fail to have systems in place that help people.”

    Ms. Rosenau, the California prosecutor, said that even when she told people that they had been swindled, “they don’t believe it, because they want it not to be true.”

    “And any money they had to possibly work with the lender is now gone to the scam,” she said.

    In Baltimore, where neighborhoods have been buffeted by successive waves of mortgage scams, Ann Norton, director of foreclosure prevention at the nonprofit St. Ambrose Housing Aid Center, said companies promising loan modifications started to multiply last summer.

    “It’s the same people that joined the industry during the refinance boom, and now they’re making fees for submitting loan remediation forms,” said Ms. Norton, whose agency provides free help to borrowers.

    Although Maryland was among the first states to enact legislation defining mortgage rescue fraud, Ms. Norton said, “it’s a growing industry, and it’s under the radar.”

    Often the scammers represent themselves as having connections to government groups, or copy the name and typography of the Hope Now program, an alliance of nonprofit, government and lending agencies, said Marietta Rodriguez, director of national homeownership programs at NeighborWorks America, a nonprofit group that provides free government-certified foreclosure counseling through 235 local organizations.

    “Several took the Hope Now Web site and just reskinned it with their own information, or they use government seals,” Ms. Rodriguez said. “They’re very crafty, and their marketing strategies are aggressive.”

    Peggy L. Twohig, associate director of the financial practices division at the Federal Trade Commission, said consumers should be wary of companies that promise results, charge upfront fees or tell them not to contact their lender on their own. Ms. Twohig said consumers could get the same help free from nonprofit housing counselors.

    “Our advice to consumers is to contact their loan servicers directly or to call Hope Now or HUD-approved housing counselors,” she said.

    Last year, Congress approved $180 million in grants to nonprofit housing counselors.

    As Ms. Martinez awaits eviction, the temptation to try another foreclosure rescue specialist remains. “There’s other agencies that say they can help,” she said, “but I’m scared that I can’t trust them.

    “One man said, ‘You have to be persistent,’ ” she said. “But I’m scared to get someone else, because they probably won’t help me, or can’t.”




    Red Flags

    Critical loan processing activities, such as  verification of

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

    Delegated underwriting allowed for correspondents that are new or

    lack an established track record with the FI.

    A growing number of loans is being repurchased due to

    misrepresentations by the FI under purchase and sale agreements

    with secondary market investors.  The originating FI may suffer

    significant financial losses in the event of a large and

    unforeseen fraud.

    Third party mortgage loan fraud is not covered in standard

    fidelity bond insurance.

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


    Alimony is paid but not disclosed.

    Evidence of white out or other document alterations is observed.

    Type or handwriting varies from other loan file documents or

    handwriting is the same on documents that should have been

    prepared by different people or entities.

    Internal Controls/Best Practices

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

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

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

    Regularly document the FI’s review of insurance coverage.

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

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

    Base underwriter compensation on loans reviewed and not loans

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

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

    Employ internally developed or vendor-provided fraud detection

    Institute corporate wide fraud awareness training.

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

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

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

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

    Mortgage Brokers

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

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


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

    Conduct an annual re-certification of brokers.

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

    Conduct QC underwriting reviews.

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

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

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

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

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

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

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

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

    Perform social security number validation procedures to validate
    borrower identity.

    Red Flags

    No attempt is made to determine the financial condition of the

    broker or obtain references and background information.

    A close relationship exists between the broker, appraiser, and

    lender, raising independence questions.

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

    as the FI’s representative/agent.

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

    Original documents are not provided to the funding FI within a

    reasonable time.

    An unusually high volume of loans with maximum loan to value

    limits have been originated by one broker.

    An uncommonly large number of foreclosures, delinquencies, early

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

    characteristics, QC findings, or compliance problems exist on

    loans purchased from any broker.

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


    High repurchase volume exists for a specific broker.

    Numerous applications from a particular broker are provided

    possessing unique similarities.

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

    companies, or offshore companies.

    An unusually large increase is noted in overall volume of loans

    during a short time period.

    Internal Controls/Best Practices5

    Conduct an initial acceptance review and obtain documentation to

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


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

    Red Flags

    The application is unsigned or undated.

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

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

    Price and date of purchase is not indicated.

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

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

    Borrower has high income with little or no personal property.

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

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

    Borrower claims to have no debt.

    Borrower owns an excessive amount of RE.

    New housing expense exceeds 150% of current housing expense.

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

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

    Application date and verification form dates are not consistent.

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

    Certain brokers are unusually active in a soft RE market.

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

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

    Borrower’s income is not consistent with job type.

    Employer is an unrealistic commuting distance from property.

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

    Borrower is buying investment properties with no primary

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

    Internal Controls/Best Practices

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

    Conduct pre-funding reviews on new production.

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

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

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

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

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

    Conduct risk based QC audits prior to funding.

    Ensure that prior liens are immediately paid from new loan

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

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

    Establish a periodic independent audit of mortgage loan

    Provide fraud updates/alerts to employees.

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

    Establish a fraud hotline for anonymous fraud tips.

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


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

    Red Flags

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

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

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

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

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

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

    An appraisal is ordered before the sales contract is written.

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

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

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

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

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

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

    All comparables are on properties appraised by the same appraiser.

    Unusual or too few comparables are used.

    Similar comparables are used across multiple transactions.

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

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

    Appreciation is noted in a stable or declining areas.

    Large unjustified valuation adjustments are shown.

    The land constitutes a large percentage of the value.

    The market approach greatly exceeds the replacement cost approach.

    Overall adjustments are in excess of 25%.

    Photos do not match the description of the property.

    Photos of comparables look familiar.

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

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

    Loan amounts are disclosed to the appraiser.

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

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

    Independent reviews of external fee appraisals are never

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

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

    Internal Controls/Best Practices

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

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

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

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

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

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

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

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

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

    Develop appraisal requirements based on transaction risks.

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

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

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

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

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

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

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

    Conduct periodic independent audits of mortgage loan operations.

    Credit Report

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

    Red Flags

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

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

    Indebtedness disclosed on the application differs from the credit

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

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

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

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

    Recent inquiries from other mortgage lenders are noted.

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

    The borrower cannot be reached at his place of business.

    FI cannot confirm the borrower’s employment.

    DTI ratios are right at maximum approval limits.

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

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

    Internal Controls/Best Practices

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

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

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

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

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

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

    Establish a periodic independent audit of mortgage loan

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

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

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

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

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


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

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

    Red Flags

    Related parties are involved in the transaction.

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

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

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

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

    The sale is subject to the seller acquiring title.

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

    No amendments are made to escrow.

    A house is purchased that is not subject to inspection.

    Unusual amendments are made to the original transaction.

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

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

    Zero funds are due from the buyer.

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

    Odd amounts are paid as escrow deposits or down payment.

    Multiple mortgages are paid off.

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

    Unusual credits or disbursements are shown on settlement

    Discrepancies exist between the HUD-1 and escrow instructions.

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

    Internal Controls/Best Practices

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

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

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

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

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

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

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

    Conduct periodic independent audits of mortgage loan operations.

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

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

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

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

    Receipt of an undisclosed or unusually high commission or fee,

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

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

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

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

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

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

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

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

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

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


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


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

    Buyer – a person acquiring the property,

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

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

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

    Appraiser – a person who prepares a written valuation of the

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

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

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

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

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

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

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

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


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

    Documentation Misrepresentation

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

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

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

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

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

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

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

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

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

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

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

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

    Identity Theft

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

    Mortgage Warehousing

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

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


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


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

    Appraiser Fraud

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

    Double Selling

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

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

    False Down Payment

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

    Fictitious Mortgage Loan

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

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

    conceal a questionable transaction,

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

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

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

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


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

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

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


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

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

    Indymac: federal banking regulator allowed the bank to backdate a capital infusion and gloss over its deepening problems, the Treasury Department’s independent investigator said Monday

    December 23, 2008

    Irregularity Uncovered at IndyMac



    WASHINGTON — Two months before IndyMac Bancorp collapsed in July, at a cost of $8.9 billion to taxpayers, a top federal banking regulator allowed the bank to backdate a capital infusion and gloss over its deepening problems, the Treasury Department’s independent investigator said Monday.

    In what industry analysts said was an example of the excessively cozy relations between high-flying subprime lenders and federal bank regulators, the Office of Thrift Supervision’s West Coast director allowed IndyMac’s parent company to backdate an $18 million contribution to preserve its status as a “well-capitalized” institution.

    Investigators reported that similar officially approved backdating appears to have occurred at other financial institutions, though they did not name them.

    IndyMac, based in Pasadena, Calif., was one of the nation’s biggest subprime mortgage lenders at the time. But analysts said it was already in trouble when the maneuver occurred, because of rising default rates and a big stockpile of subprime loans on its books that investors abruptly refused to buy.

    The Office of Thrift Supervision’s western regional director, Darrel W. Dochow, allowed IndyMac Bank to receive $18 million from its parent company on May 9 but to book the money as having arrived on March 31, according to the Treasury Department’s inspector general, Eric M. Thorson. The backdated capital infusion allowed IndyMac to plug a hole that its auditors had belatedly found in the bank’s financial results for the first quarter. If IndyMac had not been able to plug that hole retroactively, its reserves would have slipped below the minimum level that regulators require for classifying banks as well capitalized.

    Though the $18 million transaction was minuscule in comparison to IndyMac’s $32 billion in assets, it had tremendous significance. If IndyMac had lost its well-capitalized status it would not have been allowed to accept “brokered deposits” from other financial institutions. Brokered deposits are typically high-yielding certificates of deposit arranged by brokers and sold to savings and loans. IndyMac relied heavily on brokered deposits, which amounted to $6.8 billion or 37 percent of its total deposits last spring.

    “This is very significant in terms of whether IndyMac was over or under the O.T.S.’s thresholds for capital,” said Bert Ely, a veteran banking analysts in Alexandria, Va. “But what’s really troubling is that it seems to have been going on elsewhere.”

    The episode had a link to the savings-and-loan scandals of the late 1980s, which cost the federal government more than $100 billion.

    Mr. Dochow played a central role in the savings-and-loan scandal of the 1980s, overriding a recommendation by federal bank examiners in San Francisco to seize Lincoln Savings, the giant savings and loan owned by Charles Keating. Lincoln became one of the biggest institutions to collapse. Mr. Keating served four and a half years in prison before his fraud and racketeering convictions were overturned. He later pleaded guilty to more limited charges, and was sentenced to the time already served.

    Senator Charles E. Grassley, Republican of Iowa and the ranking member of the Senate Finance Committee, said the regulator’s behavior raised new doubts about the Office of Thrift Supervision, which has long had a reputation for being the most permissive of all the federal bank regulators.

    “The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them,” Mr. Grassley said in a statement. “If the Office of Thrift Supervision is turning a blind eye to capitalization requirements, Congress needs to know.”

    John M. Reich, director of the Office of Thrift Supervision, said the $18 million maneuver was “a relatively small factor” in the collapse of IndyMac. But he said he had removed Mr. Dochow from his job as the agency’s western director pending the results of a separate inquiry.

    Mr. Thorson, the Treasury’s inspector general, described an intricate process by which the Office of Thrift Supervision, or at least Mr. Dochow, had quietly helped IndyMac paper over its difficulties.

    In a letter to Mr. Grassley, Mr. Thorson said that IndyMac’s auditor, Ernst & Young, had discovered several issues in early May that required IndyMac to retroactively adjust its financial results for the three months that ended on March 31.

    Those adjustments would have reduced IndyMac’s capital to a level that would have deprived it of its classification as a well-capitalized institution.

    IndyMac executives did not dispute the adjustments, according to Mr. Thorson. But they did meet with Mr. Dochow on May 9 to ask if they could backdate the $18 million capital injection by retroactively listing it as a “receivable” on IndyMac’s books as of March 31, Mr. Thorson said.

    Mr. Dochow agreed, and IndyMac filed an amended report for its first quarter that showed a higher capital ratio., Mr. Thorson said. To investors, there was no sign that IndyMac’s capital had ever dipped below what was required to qualify for well-capitalized status. In fact, the amended report slightly increased the capital ratio above what the bank had originally reported.

    William K. Black, a senior bank regulator during the savings and loan crisis and the author of “The Best Way to Rob a Bank is to Own One,” said Mr. Dochow’s lenience highlighted the longstanding unwillingness of the Office of Thrift Supervision to take charge.

    “The O.T.S. did nothing effective to regulate any of the specialized large nonprime lenders,” Mr. Black said. “So what you got was what the F.B.I. accurately described as early as 2004 as an epidemic of mortgage fraud.”

    Mr. Black said that the Office of Thrift Supervision had never put IndyMac on its watch list of troubled institutions before the Federal Deposit Insurance Corporation took it over in July and booked a loss of $8.9 billion to its insurance fund.

    Unnamed Defendants in Mortgage Meltdown: Accountants for Banks and Investment Bankers

    Some time ago we mentioned on these pages that the auditors who certified the financial statements (KPMG, here) would come under intense scutiny simply because they MUST have known, by simple common sense, that the economics of mortgage lending had been turned on its head. The worse the loan quality the more they made leaving hapless investors, who put up the money, and hapless borrowers, who put up their homes, in unworkable investment schemes devised to decieve, manipulate and steal. Here, laid bare, along with the IndyMac story, shows the outright complicity of the big accounting firms in the major frauds to jolt our economy in the past few years. regulators, virtually owned by the banks, of course played the game. As former, current or future employees of the banks they knew who was writing their paychecks, directly or indirectly.


    December 22, 2008

    In Madoff’s Wake, Scrutiny of Accounting Firms



    As more details unfurl in the Bernard L. Madoff fraud case, so do the lawsuits. And the big accounting firms, which oversaw many of the feeder funds that funneled billions of dollars into what prosecutors describe as the largest Ponzi scheme ever perpetrated, are likely to be among the defendants.

    Though Bernard L. Madoff Investment Securities itself was audited by small firms, questions are arising over how major firms like PricewaterhouseCoopers and KPMG overlooked several red flags related to the operations over a number of years. The big accounting firms are likely to face queries about why they gave their seal of accounting to the astoundingly steady positive returns booked by a fund manager whose investment strategy was nearly completely opaque.

    One investor in a feeder fund, New York Law School, has already sued BDO Seidman, the auditor of one of its money managers, arguing that the firm failed to notice warning signs related to the $50 billion scandal.

    The district attorney for Rockland County, N.Y., Thomas P. Zugibe, has also begun inquiries into Friehling & Horowitz, the three-person accounting firm that provided services to Mr. Madoff’s firm. Many have asked how a company as small as Friehling — a three-employee firm based in New City, N.Y., that occupies a 13-foot-by-18-foot storefront space in an office plaza — could have handled an operation as large as Bernard L. Madoff Investment Securities. Friehling & Horowitz is also the subject of a preliminary ethics investigation by the American Institute of Certified Public Accountants started after the scandal broke.

    Another small accounting firm, Sosnik Bell, handled paperwork for investors in Mr. Madoff’s firm, according to Clusterstock, a financial news blog. Sosnik Bell, based in Fort Lee, N.J., processed forms for these investors, and then forwarded its work to the investors’ own accountants. Executives from Sosnik Bell could not be reached for comment.

    A more lucrative place for victims of the fraud, however, are at the giant accounting firms that audited the investment managers who directed money into Mr. Madoff’s firm.

    In several other fraud cases, accounting firms, which are responsible for scrutinizing the financial underpinnings of companies, have become targets for investor lawsuits. Ernst & Young paid $300 million to settle a lawsuit filed by Cendant related to fraud at one of the conglomerate’s subsidiaries. It had earlier paid $335 million to settle a lawsuit filed by Cendant shareholders.

    Also last year, Pricewaterhouse agreed to pay $225 million to settle auditing malpractice claims tied to the Tyco scandal, which saw the convictions of top executives for grand larceny, conspiracy and securities fraud. Pricewaterhouse’s payment amounted to about 7 percent of total amount paid in Tyco lawsuits.

    But the Madoff case presents an unusual situation, said Scott M. Berman, a partner at the law firm Friedman Kaplan Seiler & Adelman who represents investors in several feeder funds. Previous cases focused on the auditors of the firm at the center of the scandal, not the auditors of investment managers one rung removed.

    “I expect that this is an issue that has not been litigated before,” Mr. Berman said.

    With many of the feeder funds’ managers having taken losses from their own personal exposure to Mr. Madoff’s firm, the accounting firms may be a likely target for investors seeking to recoup at least some of their money.

    PricewaterhouseCoopers was the main auditor for Sentry, the largest fund run by Fairfield Greenwich Group, the $14.1 billion investment manager that has lost the most money so far in the Madoff scandal. The accounting firm was tasked with minding Sentry, which had about $7.5 billion invested in Mr. Madoff’s firm.

    “The company has not yet settled on a legal strategy,” said a Fairfield spokesman, Thomas Mulligan.

    A spokesman for PricewaterhouseCoopers, Mike Davies, said, “No claim has been asserted against the PWC member firm in relation to Madoff, and we know of no valid basis for any claim.”

    The lawsuit by New York Law School, filed in federal court in Manhattan last week, names J. Ezra Merkin, the money manager who placed $3 million of the school’s money into Mr. Madoff’s firm. But it also sues BDO Seidman, the American arm of BDO International and the auditor for one of Mr. Merkin’s funds, Ascot Partners.

    In its lawsuit, New York Law School said that BDO Seidman had “utterly failed” in its auditing of Ascot Partners. The lawsuit says that BDO Seidman failed to flag Ascot’s reliance on a single money manager, Mr. Madoff, as well as Mr. Madoff’s reliance on Friehling & Horowitz.

    BDO Seidman has said that it never audited Mr. Madoff’s firm, just Mr. Merkin’s, and that its audits of Ascot Partners “conformed to all professional standards.”

    Mr. Berman, however, said the firm had a duty to dig deeper. “I don’t think that they can simply, blindly accept what Madoff did without doing their own auditing work,” he said.


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