Who Can Help Me with Mortgage Problems?

A number of people have been contacting me about the work of people other than my company that produces reports and analysis and expert witnesses and my law firm, Garfield, Gwaltney, Kelley and White based in Tallahassee.

My first rule is that I don’t attack or smear anyone who might provide some service that has any chance of helping someone with a consumer debt, mortgage problem, foreclosure etc. Everyone is invited to the party and with more than 5 million foreclosures behind us and another 5 million projected into the future, there is plenty of room for everyone to take a share of the market.

My second rule is that this should be a collaborative effort in which anyone with an idea should have a platform to put forth their ideas.

And my third rule is that I don’t recommend anyone unless I have seen their work, examined their credentials (education, licenses and experience) and discussed their approach with them. Their are many approaches that work for a while then stop working because the banks change their tactics in response. There are many legal theories that are correct but the Judges refuse to apply them. What is important is that you develop a strategy for NOW, with those tactics and strategies, defenses and causes of action that are getting traction with Judges.

CAVEAT: There are many people and companies that are offering bogus relief programs — some with a lot of cash to do advertising and marketing. Be careful and ask questions. If you must take their word for it because they have no historical presence in the bank scam arena be extra careful. What I mean is how have they been contributing to the assistance of distressed consumers and homeowners?

With that in mind, here are some general guidelines for who can help and who might be well intended but ineffectual in achieving a satisfactory result. People that might possibly be of assistance include the following:

  1. LAWYERS: Simply because in the final analysis these are legal problems that usually end up in court where rules of procedure and rules of evidence usually determine the outcome. Within this category are lawyers with foreclosure defense experience, bankruptcy lawyers, property lawyers, and civil litigation lawyers. Anyone without a lot of trial experience should only be used for advice.
  2. HUD COUNSELORS: often overlooked, these people have relationships with the banks that neither lawyers nor forensic examiners have and can often ferret out facts that might not be available even through the process of legal discovery. The good ones have a pretty good track record of settling or modifying loans. AND they usually have relationships with lawyers, real estate brokers, appraisers, investigators, mortgage brokers, hard money lenders. They are licensed and regulated the same as lawyers, brokers, appraisers, and investigators.
  3. FORENSIC ANALYSTS: Very few of the people who perform this work can claim any credentials as an expert witness whose credibility will be accepted by the court. But on the other hand they often have become very adept at ferreting out information of value to your lawyer or whoever is helping you.
  4. EXPERT WITNESSES: Almost anyone will be allowed to testify as an expert witness these days because the rules are so relaxed. But the Judge is not going to give their testimony any weight unless the expert can clearly explain the facts, opinions and conclusions in a compelling way. An expert witness who is not licensed in any relevant field, possessing no academic degrees relating to a relevant field, who has no experience in the relevant field (e.g. a current or former banker, investment banker, broker etc.) might be allowed to testify but nobody is listening. On the other hand, such a witness can testify as a FACT witness rather than an opinion witness as to the results of their forensic examination of the loan, assignments or current status of the alleged loan. There are very few expert witnesses who can testify as to all aspects of securitization but many who can testify as to parts of it. You might need more than one. Lastly, even an unqualified expert witness with little credibility might give you or your lawyer an idea that had escaped your attention so there is no harm in talking or consulting with someone, even if they appear on paper to have few attributes of an actual expert.
  5. BROKERS: REAL ESTATE AND MORTGAGE: Firstly, as licensed, educated, experienced individuals they command some attention. They might have their own agenda they are pushing but when asked the right questions they can be worth the fee if they are able to describe past and current practices and their opinion of certain transactions alleged by your opposition. Keep in mind that real estate and mortgage brokers have a stake in the marketplace — to keep things moving, buying and selling, borrowing and refinancing.
  6. APPRAISERS: Usually licensed and experienced with many years behind them, they can provide very helpful insights as to whether the property was really worth anywhere near the loan value and the current fair market value. They could be a key ingredient, where it applies, to showing that that the originator was not acting as a lender because custom and practice in the industry was to take a lower appraisal righter than a higher one and that custom and practice was to “go back to the well” several times where the market appeared volatile — all things that were absent in the “underwriting” practices of the time. It was the the appraisers in 2005 who warned of the coming catastrophe and many of them suffered by getting no business because they refused to sign off on an appraisal that was misleading.
  7. INVESTMENT BANKERS: Lots of them exist, very few are willing to testify. But they obviously know a lot of shocking details if they were involved in the bundling and sale of mortgages. But remember there are several moving parts in securitization and some investment bankers might know nothing of value to your case. Only a few people at the top truly know what happened to the money and what decisions were made as to fabrication of paperwork to cover up the misappropriation of funds, title and rights to enforce.
  8. MORTGAGE ORIGINATORS: Lots of them exist, few are willing to testify. But there are some. They can tell you that they were never at risk on the Loan” and how the money came from a source outside the circle of parties at the loan closing table. TILA and RESPA claims can be corroborated with their testimony as well as questions regarding title and thee right to enforce.
  9. WHISTLE-BLOWERS: Like “experts” anyone can claim to be one. But if the person has information that can be corroborated they can be an excellent guide through the maze of curtains and obstacles that currently prevent most borrowers from figuring out and proving what is really going on.
  10. LOAN MODIFICATION PROGRAMS: As greater regulation and enforcement is starting to get some traction, so has the possibility of modification or settlement. Keep in mind that with so many successful illegal foreclosures behind them, the banks are more likely to seek finality to the situation since we have passed the half way mark and the possibilities of liability for buy-backs and refunds are declining. Be careful about anyone who tells you that you should stop paying the payments — a strategic default is something you should thoroughly examine and research and get advice before doing it. That includes especially the banks who are doing that as a matter of policy. If you do enter into a modification program make sure that the end result is going to be a modification and not just another excuse to foreclose on you with more information about you than they had before. And make sure you clear up title as well as the debt. Without that you are raising the probability that you will be fighting title issues later in court.

There are no doubt many other types of people who can or want to help. I can only mention the ones I know about. Be careful and don’t let desperation get the better of you.

FOOTNOTE: I am besieged by people trying to bait me into a “discussion” where I defend the strategies and tactics I use and describe on my blog. I won’t enter into such a discussion for the same reason that a judge would ignore what an “expert” says who has no credibility and no credentials. The only place where I will defend is in court for the benefit of clients. If someone doesn’t like my views because they think it discredits them or their services, then maybe they should do more research into what they are doing.

MORTGAGE BROKERS COMPLAIN ABOUT NEW FED RULES BARRING HIDDEN FEES

CLE SEMINAR: SECURITIZATION WORKSHOP FOR ATTORNEYS — REGISTER NOW

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EDITOR’S NOTE: Amazing how our culture has been one of “entitlement.” No I’m not talking about social security, medicare or medicare, or fire departments, police departments or teachers. I’m talking about the fees that mortgage brokers have been paid to steer borrowers into loans that were guaranteed to fail or at the very least, had worse terms than the broker knew the borrower could get. The Wall Street mentality of get what you can has permeated the entire marketplace.

Broker Fee Rules Take Effect

By MARYANN HAGGERTY

THERE have been changes in federal rules covering how mortgage brokers are paid, and while legal challenges to them persist, the question now is how the new system will work in practice.

Regulators and consumer advocates say borrowers are bound to benefit. Broker trade groups say their industry will shrivel and consumer costs will go up.

Mortgage brokers are middlemen who work with multiple lenders to arrange home loans for customers. They say they add value by helping borrowers find the best deal; their detractors say they add costs that have been hidden in complex fees.

The business has contracted significantly in the last five years. In 2005, during the real estate boom, brokers accounted for 31 percent of mortgages originated, according to Inside Mortgage Finance, a trade publication. Last year it was just 11 percent, and the market was only half as big.

Brokers used to be compensated by a mix of borrower-paid origination fees and lender-paid fees. The most controversial was a “yield spread premium,” paid by lenders when a broker placed a borrower in a loan that charged higher interest than other loans. The justification was that higher rates allowed lower upfront closing costs. The criticism was that the premiums were an incentive to push expensive loans and that the system contributed to a flood of risky loans and thus to the financial crisis.

In response, the Federal Reserve put out rules that prohibit loan originators from being paid by both the borrower and lender on the same deal, and also barring commissions based on anything other than loan size. The rules were set to take effect April 1; two trade groups sued, delaying enactment a few days before a federal appeals court allowed it. Both the National Association of Mortgage Brokers and the National Association of Independent Housing Professionals say they will keep pressing their lawsuits.

On the front line, the problem is that there has been “no clear guidance” on exactly how to arrange commission structures for employees who originate loans, said Melissa Cohn, the president of the Manhattan Mortgage Company, a loan brokerage firm.

“To be honest with you,” she said, “in some cases it’s going to create higher-priced mortgages.” Although the spirit of the law is to protect borrowers, she added, “the reality of it is it’s just going to cause more confusion.”

Mike Anderson, the director of the National Association of Mortgage Brokers, speaking just two days after the rules went into effect, said: “It’s already happening. Rates have already gone up; fees have gone up.” Mr. Anderson, who is also a broker in New Orleans, cited situations in which brokers could no longer cut fees to make deals go through, and others in which banks were raising charges. “The rules basically pick the winners and losers,” he said, with the winners being the big banks. “The losers are the small businesses.”

The Facebook page of the National Association of Independent Housing Professionals is full of complaints from what appear to be mortgage brokers saying the rules will hurt their business, and recounting how unnamed lenders have raised prices.

Despite industry opposition, the change is a victory for borrowers, according to representatives of the Center for Responsible Lending, an advocacy group long critical of the yield-spread premium system. Borrowers “should be getting more honest services from the originator they’re working with,” said Kathleen E. Keest, a senior policy counsel, “because that originator is no longer going to have a conflict of interest if they put a borrower in a loan with a higher interest rate or riskier terms.”

“If people were saying that the way things worked, worked well,” she added, “that’s one thing, but it’s very clear the way things worked before didn’t work for anybody. The notion we need to have the same rules is denying what happened. It’s denying that the way the market was working was disastrous for everybody.”

NYT: American Real Estate Market an Engrossing Piece of Fiction

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see 10-lies-we-live-by-and-should-stop-believing-if-we-want-this-to-stop

NOTABLE QUOTES:

“Alan M. White, a law professor at the Valparaiso University School of Law in Indiana, last year matched MERS’s ownership records against those in the public domain.

“The results were not encouraging. “Fewer than 30 percent of the mortgages had an accurate record in MERS,” Mr. White says. “I kind of assumed that MERS at least kept an accurate list of current ownership. They don’t. MERS is going to make solving the foreclosure problem vastly more expensive.”

EDITOR’S COMMENT: ONLY THE TRUTH WILL SAVE THE HOUSING INDUSTRY AND THE US ECONOMY. The lie that speeding foreclosures will put this behind us is totally without any factual basis. The exact reverse is true. Stopping foreclosures and compensating victims of the securitization scam is the ONLY path back to trust and integrity of our marketplace and our financial system. As it stands now, the use of MERS and similar devices puts more than 80 million, probably closer to 100 million real estate transactions in title purgatory.

The foundation of public record for birth certificates and death certificates, title ownership and other records and documentation of transactions we have taken for granted for hundreds of years has been completely undermined with no way out except to return to that system. You can’t announce that dog poop is more valuable than gold and expect people to believe it. You can force them to act on it but they will never believe it.

MERS? It May Have Swallowed Your Loan

By MICHAEL POWELL and GRETCHEN MORGENSON

FOR more than a decade, the American real estate market resembled an overstuffed novel, which is to say, it was an engrossing piece of fiction.

Mortgage brokers hip deep in profits handed out no-doc mortgages to people with fictional incomes. Wall Street shopped bundles of those loans to investors, no matter how unappetizing the details. And federal regulators gave sleepy nods.

That world largely collapsed under the weight of its improbabilities in 2008.

But a piece of that world survives on Library Street in Reston, Va., where an obscure business, the MERS Corporation, claims to hold title to roughly half of all the home mortgages in the nation — an astonishing 60 million loans.

Never heard of MERS? That’s fine with the mortgage banking industry—as MERS is starting to overheat and sputter. If its many detractors are correct, this private corporation, with a full-time staff of fewer than 50 employees, could turn out to be a very public problem for the mortgage industry.

Judges, lawmakers, lawyers and housing experts are raising piercing questions about MERS, which stands for Mortgage Electronic Registration Systems, whose private mortgage registry has all but replaced the nation’s public land ownership records. Most questions boil down to this:

How can MERS claim title to those mortgages, and foreclose on homeowners, when it has not invested a dollar in a single loan?

And, more fundamentally: Given the evidence that many banks have cut corners and made colossal foreclosure mistakes, does anyone know who owns what or owes what to whom anymore?

The answers have implications for all American homeowners, but particularly the millions struggling to save their homes from foreclosure. How the MERS story plays out could deal another blow to an ailing real estate market, even as the spring buying season gets under way.

MERS has distanced itself from the dubious behavior of some of its members, and the company itself has not been accused of wrongdoing. But the legal challenges to MERS, its practices and its records are mounting.

The Arkansas Supreme Court ruled last year that MERS could no longer file foreclosure proceedings there, because it does not actually make or service any loans. Last month in Utah, a local judge made the no-less-striking decision to let a homeowner rip up his mortgage and walk away debt-free. MERS had claimed ownership of the mortgage, but the judge did not recognize its legal standing.

“The state court is attracted like a moth to the flame to the legal owner, and that isn’t MERS,” says Walter T. Keane, the Salt Lake City lawyer who represented the homeowner in that case.

And, on Long Island, a federal bankruptcy judge ruled in February that MERS could no longer act as an “agent” for the owners of mortgage notes. He acknowledged that his decision could erode the foundation of the mortgage business.

But this, Judge Robert E Grossman said, was not his fault.

“This court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country,” he wrote, “that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law.”

With MERS under scrutiny, its chief executive, R. K. Arnold, who had been with the company since its founding in 1995, resigned earlier this year.

A BIRTH certificate, a marriage license, a death certificate: these public documents note many life milestones.

For generations of Americans, public mortgage documents, often logged in longhand down at the county records office, provided a clear indication of homeownership.

But by the 1990s, the centuries-old system of land records was showing its age. Many county clerk’s offices looked like something out of Dickens, with mortgage papers stacked high. Some clerks had fallen two years behind in recording mortgages.

For a mortgage banking industry in a hurry, this represented money lost. Most banks no longer hold onto mortgages until loans are paid off. Instead, they sell the loans to Wall Street, which bundles them into investments through a process known as securitization.

MERS, industry executives hoped, would pull record-keeping into the Internet age, even as it privatized it. Streamlining record-keeping, the banks argued, would make mortgages more affordable.

But for the mortgage industry, MERS was mostly about speed — and profits. MERS, founded 16 years ago by Fannie Mae, Freddie Mac and big banks like Bank of America and JPMorgan Chase, cut out the county clerks and became the owner of record, no matter how many times loans were transferred. MERS appears to sell loans to MERS ad infinitum.

This high-speed system made securitization easier and cheaper. But critics say the MERS system made it far more difficult for homeowners to contest foreclosures, as ownership was harder to ascertain.

MERS was flawed at conception, those critics say. The bankers who midwifed its birth hired Covington & Burling, a prominent Washington law firm, to research their proposal. Covington produced a memo that offered assurances that MERS could operate legally nationwide. No one, however, conducted a state-by-state study of real estate laws.

“They didn’t do the deep homework,” said an official involved in those discussions who spoke on condition of anonymity because he has clients involved with MERS. “So as far as anyone can tell their real theory was: ‘If we can get everyone on board, no judge will want to upend something that is reasonable and sensible and would screw up 70 percent of loans.’ ”

County officials appealed to Congress, arguing that MERS was of dubious legality. But this was the 1990s, an era of deregulation, and the mortgage industry won.

“We lost our revenue stream, and Americans lost the ability to immediately know who owned a piece of property,” said Mark Monacelli, the St. Louis County recorder in Duluth, Minn.

And so MERS took off. Its board gave its senior vice president, William Hultman, the rather extraordinary power to deputize an unlimited number of “vice presidents” and “assistant secretaries” drawn from the ranks of the mortgage industry.

The “nomination” process was near instantaneous. A bank entered a name into MERS’s Web site, and, in a blink, MERS produced a “certifying resolution,” signed by Mr. Hultman. The corporate seal was available to those deputies for $25.

As personnel policies go, this was a touch loose. Precisely how loose became clear when a lawyer questioned Mr. Hultman in April 2010 in a lawsuit related to its foreclosure against an Atlantic City cab driver.

How many vice presidents and assistant secretaries have you appointed? the lawyer asked.

“I don’t know that number,” Mr. Hultman replied.

Approximately?

“I wouldn’t even be able to tell you, right now.”

In the thousands?

“Yes.”

Each of those deputies could file loan transfers and foreclosures in MERS’s name. The goal, as with almost everything about the mortgage business at that time, was speed. Speed meant money.

ALAN GRAYSON has seen MERS’s record-keeping up close. From 2009 until this year, he served as the United States representative for Florida’s Eighth Congressional District — in the Orlando area, which was ravaged by foreclosures. Thousands of constituents poured through his office, hoping to fend off foreclosures. Almost all had papers bearing the MERS name.

“In many foreclosures, the MERS paperwork was squirrelly,” Mr. Grayson said. With no real legal authority, he says, Fannie and the banks eliminated the old system and replaced it with a privatized one that was unreliable.

A spokeswoman for MERS declined interview requests. In an e-mail, she noted that several state courts have ruled in MERS’s favor of late. She expressed confidence that MERS’s policies complied with state laws, even if MERS’s members occasionally strayed.

“At times, some MERS members have failed to follow those procedures and/or established state foreclosure rules,” the spokeswoman, Karmela Lejarde, wrote, “or to properly explain MERS and document MERS relationships in legal pleadings.”

Such cases, she said, “are outliers, reflecting case-specific problems in process, and did not repudiate the MERS business model.”

MERS’s legal troubles, however, aren’t going away. In August, the Ohio secretary of state referred to federal prosecutors in Cleveland accusations that notaries deputized by MERS were signing hundreds of documents without any personal knowledge of them. The attorney general of Massachusetts is examining a complaint by a county registrar that MERS owes the state tens of millions of dollars in unpaid fees.

As far back as 2001, Ed Romaine, the clerk for Suffolk County, on eastern Long Island, refused to register mortgages in MERS’s name, partly because of complaints that the company’s records didn’t square with public ones. The state Court of Appeals later ruled that he had overstepped his powers.

But Judith S. Kaye, the state’s chief judge at the time, filed a partial dissent. She worried that MERS, by speeding up property transfers, was pouring oil on the subprime fires. The MERS system, she wrote, ill serves “innocent purchasers.”

“I was trying to say something didn’t smell right, feel right or look right,” Ms. Kaye said in a recent interview.

Little about MERS was transparent. Asked as part of a lawsuit against MERS in September 2009 to produce minutes about the formation of the corporation, Mr. Arnold, the former C.E.O., testified that “writing was not one of the characteristics of our meetings.”

MERS officials say they conduct audits, but in testimony could not say how often or what these measured. In 2006, Mr. Arnold stated that original mortgage notes were held in a secure “custodial facility” with “stainless steel vaults.” MERS, he testified, could quickly produce every one of those files.

As for homeowners, Mr. Arnold said they could log on to the MERS system to identify their loan servicer, who, in turn, could identify the true owner of their mortgage note. “The servicer is really the best source for all that information,” Mr. Arnold said.

The reality turns out to be a lot messier. Federal bankruptcy courts and state courts have found that MERS and its member banks often confused and misrepresented who owned mortgage notes. In thousands of cases, they apparently lost or mistakenly destroyed loan documents.

The problems, at MERS and elsewhere, became so severe last fall that many banks temporarily suspended foreclosures.

Some experts in corporate governance say the legal furor over MERS is overstated. Others describe it as a useful corporation nearly drowning in a flood tide of mortgage foreclosures. But not even the mortgage giant Fannie Mae, an investor in MERS, depends on it these days.

“We would never rely on it to find ownership,” says Janis Smith, a Fannie Mae spokeswoman, noting it has its own records.

Apparently with good reason. Alan M. White, a law professor at the Valparaiso University School of Law in Indiana, last year matched MERS’s ownership records against those in the public domain.

The results were not encouraging. “Fewer than 30 percent of the mortgages had an accurate record in MERS,” Mr. White says. “I kind of assumed that MERS at least kept an accurate list of current ownership. They don’t. MERS is going to make solving the foreclosure problem vastly more expensive.”

THE Sarmientos are one of thousands of American families who have tried to pierce the MERS veil.

Several years back, they bought a two-family home in the Greenpoint section of Brooklyn for $723,000. They financed the purchase with two mortgages from Lend America, a subprime lender that is now defunct.

But when the recession blew in, Jose Sarmiento, a chef, saw his work hours get cut in half. He fell behind on his mortgages, and MERS later assigned the loans to U.S. Bank as a prelude to filing a foreclosure motion.

Then, with the help of a lawyer from South Brooklyn Legal Services, Mr. Sarmiento began turning over some stones. He found that MERS might have violated tax laws by waiting too long before transferring his mortgage. He also found that MERS could not prove that it had transferred both note and mortgage, as required by law.

One might argue that these are just legal nits. But Mr. Sarmiento, 59, shakes his head. He is trying to work out a payment plan through the federal government, but the roadblocks are many. “I’m tired; I’ve been fighting for two years already to save my house,” he says. “I feel like I never know who really owns this home.”

Officials at MERS appear to recognize that they are swimming in dangerous waters. Several federal agencies are investigating MERS, and, in response, the company recently sent a note laying out a raft of reforms. It advised members not to foreclose in MERS’s name. It also told them to record mortgage transfers in county records, even if state law does not require it.

MERS will no longer accept unverified new officers. If members ignore these rules, MERS says, it will revoke memberships.

That hasn’t stopped judges from asking questions of MERS. And few are doing so with more puckish vigor than Arthur M. Schack, a State Supreme Court judge in Brooklyn.

Judge Schack has twice rejected a foreclosure case brought by Countrywide Home Loans, now part of Bank of America. He had particular sport with Keri Selman, who in Countrywide’s court filings claimed to hold three jobs: as a foreclosure specialist for Countrywide Home Loans, as a servicing agent for Bank of New York and as an assistant vice president of MERS. Ms. Selman, the judge said, is a “milliner’s delight by virtue of the number of hats that she wears.”

At heart, Judge Schack is scratching at the notion that MERS is a legal fiction. If MERS owned nothing, how could it bounce mortgages around for more than a decade? And how could it file millions of foreclosure motions?

These cases, Judge Schack wrote in February 2009, “force the court to determine if MERS, as nominee, acted with the utmost good faith and loyalty in the performance of its duties.”

The answer, he strongly suggested, was no.

“The Prosperity Gospel”: Pastors Took Bribes From Mortgage Originators — $350 per subprime mortgage

And probably people “of the cloth” from all denominations.

We are a nation of faith. Jesus angrily drove the money lenders out of the temple. How can we stand by and allow the borrowers to be driven out of their homes?

The fact is most of these victims were hunted down like a foxhunt, with strangers knocking on doors, experts giving them quiet assurance of how wonderful their house was and how much it was worth, how wonderful it was that the bank would approve such generous terms (because they weren’t playing with their own money), and with undisclosed yield spread premiums of unimaginable size sometimes in multiples of the mortgage amount itself.

I have already spoken about how in Florida they hired and got licenses for 10,000 mortgage brokers to act as bird dog originators — all 10,000 of them were convicted felons, mostly for economic crimes, many of whom just got out of jail. Translation: they needed people who would be willing to lie in order to get borrowers to sign. Yet that was not enough. “One theme emerging from these suits is how banks teamed up with pastors to win over new customers for subprime loans.”

It is probably not politically correct and even offensive to say that American society has one faith in common: money. Belief in money and in particular that almighty dollar is something that all of us seem to converge on from disparate facets of life, class levels and religious faith. The protestant ethic on which our country supposedly rests, is all but dead. People who conduct their lives according to the principles of hard work, building a foundation of quality and prospering in the end usually are derided as old-fashioned or even naive in “today’s marketplace.”

If you really want to know why this nonsensical mortgage meltdown could occur, look no further. For all the cries of “shame” and demands for justice, our society, as a whole is doing virtually nothing about making sure it never happens again and in fact has already launched the next round of speculation based upon a government bailout of the losses when they occur.

It no longer matters if you work hard. It doesn’t matter if you are honest. It doesn’t even matter if what you do is successful. You will be paid a king’s ransom as long as you are playing “the game.” When the cards come tumbling down, it doesn’t matter — you are rich beyond your wildest dreams and even if you have nothing left to do, you don’t need to work anyway. The fact that tens of millions of people can’t work, are NOT rich, and have no income or safety net is of no concern. It isn’t that these people all lack conscience. The inconvenient truth is that they are following the rules of our society.

One recurring theme coming up in many lawsuits is “business Model” adopted by the Top Dogs (Bank of America, Countrywide, Wells Fargo etc.) who simply repeated the multilevel marketing schemes that proliferate across our great land in search of another unearned dollar.

I have already spoken about how in Florida they hired and got licenses for 10,000 mortgage brokers to act as bird dog originators — all 10,000 of them were convicted felons, mostly for economic crimes, many of whom just got out of jail. Translation: they needed people who would be willing to lie in order to get borrowers to sign. Yet that was not enough. “One theme emerging from these suits is how banks teamed up with pastors to win over new customers for subprime loans.”

Just look at how much trouble we are having distributing flu shots and getting people to accept the flu shot. Channels of every type and place imaginable are hawking the shots (which by the way I think is a good thing, and yes, I got one) at tens of thousands of outlets and delivery points. MERS says it has 60+ million mortgage transactions in its data records. How do you reach 60 million homeowners?

Well it turns out to be easy in country where the overwhelming majority of the populace are people of “faith.”

I invite you all to take a look at “Did Christianity Cause the Crash?” by Hanna Rosin published in the current issue of The Atlantic, December 2009 at page 39.

A Case in Point: Beth Jacobson, witness for the prosecution in City of Baltimore vs. Wells Fargo. Just the facts Ma’am. Virtually none of the mortgage “specialists” any of us spoke to over the phone had any education, training or experience in mortgages, finance or even bookkeeping. They were trained on how to look like they were experts. They would lie to you eye to eye. And they were rewarded. “Sometimes the bank would send a Hummer limo to pick up Jacobson for a celebration, she says. She’d arrive at a bar and find all her co-workers drunk and her boss “doing body shots off a waitress.”

Like any “good idea” (without any sens of “enough”) the marketing model of establishing sales channels through houses of worship was irresistible. After all, congregants were in a vulnerable mood when they went to church, they were easily pacified by their faith in their clergyman, and any “Wealth Now” seminar assumes an aura of both credibility at the least and mandate from God at most. And the Pastor, the Church or some “program” of the church would get a $350 “donation.” It didn’t take long for those in the congregation who were prospecting for the next person they could fool to get the point — bring subprime mortgage candidates to the bank and get paid $350 per mortgage. So if they did 10 mortgages per week, they earned themselves $3500 per week.

The results are well known, but not particularly flushed out. People who are living lives of quiet desperation under a mountain of debt they would never escape suddenly saw the jackpot. And so while the mortgage meltdown was in its hay day their income jumped from what had been $35,000 per year to an av erage of $350,000 per year. And after 2-3 years they were convinced that they now were big earners. When the crash occurred, they were slow to realize or believe that they were no six figure earners and they never were. They were low five figure earners, and those jobs were no longer available so now they would need unemployment or other public assistance.

What bothers me is not that people of the cloth are like anyone else — subject to temptation and possibly who got there because of the protection it provides for all sorts of deviants or corruption. N0, what bothers me is that even as mainstream media publishes these stories, the underlying assumption is that the mortgage mess is still MOSTLY the fault of consumers whose eyes were too big for their stomachs.

The fact is most of these victims were hunted down like a foxhunt, with strangers knocking on doors, experts giving them quiet assurance of how wonderful their house was and how much it was worth, how wonderful it was that the bank would approve such generous terms (because they weren’t playing with their own money), and with undisclosed yield spread premiums of unimaginable size sometimes in multiples of the mortgage amount itself. And yet the victims continue to be portrayed as gamers who lost. That bothers me because until we get all the facts out on the table, there never be a solution to this mess, this confabulation.

Until there is real understanding of the facts, we will continue to protect the large banks that are “too big to fail” and continue to ignore the plight of the common man and woman. As long as we persist, we will not rebuild the middle class. Without a stable prospering middle class, we are nothing. That’s the real irony. The wealth needs to be in the middle class to have society that survives itself. Legally I have no doubt that the wealth is there but it has not been claimed. Practically, until Judges and lawyers and homeowners “get it” they will continue to blame the “borrower” and let the pretender lender do body shots “off the waitress.”

Florida ex-cons get 10,000+ Mortgage Licenses

So is there any doubt as to criminality?

In Florida, Agency Gave Mortgage Licenses to Thousands of Ex-Cons

As we detailed yesterday, the Justice Department is pursuing a wide array of prosecutions and investigations in response to the subprime mortgage meltdown. There are the high-profile, complex Wall Street cases. On the other end of the scale are hundreds of mortgage fraud prosecutions, where small-time operators, drawn to the best game in town, allegedly scammed lenders or buyers.

Hillsborough County Sheriff's Office)
Scott Almeida (Credit: Hillsborough County Sheriff’s Office)

In an ongoing series, the Miami Herald has been demonstrating how it is that Florida came to be the nation’s leader in mortgage fraud. Part of the reason, of course, is that Florida was one of the hot spots for the housing boom and, later, bust. But as the Herald found, a lot had to do with the fact that the state allowed thousands of ex-cons to work in the mortgage profession.

Yesterday, in response to the paper’s series, the state’s attorney general called for an investigation of the Office of Financial Regulation, the office that polices the mortgage industry.

The stories are full of jaw-dropping numbers and anecdotes.

The paper found that from 2000 to 2007, “regulators allowed at least 10,529 people with criminal records to work in the mortgage profession. Of those, 4,065 cleared background checks after committing crimes that state law specifically requires regulators to screen out, including fraud, bank robbery, racketeering and extortion.” The Herald found that those criminals “went on to commit nearly $85 million in mortgage fraud.”

Only 29 applicants were rejected based on their criminal record. And the kicker: “Regulators allowed at least 20 brokers to keep their licenses even after committing the one crime that seemed sure to get them banned from the industry: mortgage fraud.”

As for the anecdotes, it’s hard to know which to choose. There’s the mortgage broker who won his license despite convictions for car theft and passing bad checks and who “didn’t even make it through the 24-hour mortgage-broker training class without breaking the law… He persuaded a classmate who worked for Sprint PCS to sell him cellphone customers’ Social Security numbers.” The broker went on to use buyers’ credit histories to steal more than $200,000.

But the most egregious has to be Scott Almeida, who got his license as a mortgage broker despite a conviction for cocaine trafficking. All Almeida had to do to get the license was offer a written explanation for his crime and rehabilitation. As he told the Herald, “I had to write a letter. It took three seconds. It wasn’t a battle.”

Almeida also had to sign a probation agreement, which entailed a promise not to own a brokerage or break any mortgage-industry laws for five years. He got to choose his own probation supervisor. He chose Frank Giffone, whom he’d met in federal prison. And, well, Giffone didn’t prove to be much of a mentor:

Shortly after going into business together, the pair sent salesmen to search out elderly, often disabled people living in ramshackle houses in poor neighborhoods of Hillsborough, Polk and Lee counties.

They promised home-equity loans for badly needed renovations.

State regulators received two written warnings in 2004 that Almeida was lying on the loan applications and stealing money. One was from the daughter of a 76-year-old victim, the other from investigators at the Hillsborough County Consumer Protection Agency.

But despite the fact that Almeida was on probation, and had promised not to break the law, regulators took no action against his license.

Almeida later pleaded guilty to stealing from both borrowers. Giffone pleaded guilty to racketeering.

There’s more on the Herald’s site, including a video report on the findings.

Blame the Lender not Yourselves or Each Other

WHEN WAS THE LAST TIME YOU HEARD ABOUT A BUNCH OF UNSOPHISTICATED, POORLY EDUCATED, SOMETIMES NON-ENGLISH SPEAKING PEOPLE SCATTERED OVER 50 STATES GETTING TOGETHER TO DEFRAUD THE POWERFUL FINANCIAL INDUSTRY ON WALL STREET?

  • We can all agree that there is enough blame to go around for everyone — from government and the financial industry, down to the mortgage brokers and borrowers.
  • But here is the essential question: do you want to sit around and arm-chair the game, or do you want to put a stop to it — because you can.
  • Do you want to wake up tomorrow morning and know that you helped some family stay in their home and that you are going to do it again today, or do you want to read more about declining home prices, no bottom, no credit available to expand the business you own or work for, no customers to buy your work product, your services or your products?

Many well-intended American patriots, believing in self-reliance as the core building block of American History have told me that they object to bailing out borrowers who got in over their heads using poor judgment or, even worse, intending to game the system. This is the current mantra of “conservatism” which if you think about it is certainly the bedrock of many American successes.

What’s wrong with applying these very good principles to the mortgage meltdown is that it attempts to force the facts into ideological beliefs which cannot accommodate our current reality. Put another way, people are seeing what they choose to believe regardless of the freely available facts.

It is easy to say that anyone in their right mind would read documents before they sign them. But when presented with an intimidating stack of papers at closing, virtually nobody reads those documents (even the lawyer who was hired to do the closing for the Buyer or the Seller). I know. I’ve been there. That is why the governmental authorities on the Federal and State Level required a consistent form of good faith estimate before closing and a standardized settlement form for the handling of the money (Truth in Lending Act and Respa, Hoepa etc.)

Under these laws, buyers/borrowers are required to be alerted by the lender and the mortgage broker and the real estate broker and the title agent and anyone else who knows the truth, that the terms of this loan are not what they appear on the face page of the documents where the signature and initials of the buyer/borrower appear. And none of these third party “fiduciaries/trustees” had any problem when they were really who they said they were. But when the “lender” became a conduit or a mortgage broker, when the mortgage broker became a loan officer for a particular bank, when the real estate broker became a salesperson for the mortgage broker, and when the appraiser became the agent of the “lender” to satisfy the real (but undisclosed) people who actually funded the “loan” — THAT is when the argument started.

And that is why everyone is suing everyone else. Not because of some nefarious plot by farmers who never heard of a “derivative” living in Montana, but because of people who work on Wall Street and who exerted unrelenting pressure to drop traditional loan underwriting standards in order to come up with more paper to sell (under equally false pretenses) to investors, some of whom were city governments in Europe who now must cut back on services their residents have relied upon for decades.

And the person who calls out those tax and spend liberals for wanting to bailout the borrowers in trouble is one of the many people who has not read his own documents from his own closing. He or she does not know how those documents could be used against them in ways that were never discussed or disclosed prior to or at closing. He or she doesn’t know that deep within the fine print of the note, the mortgage or both are provisions that allow the lender to increase your monthly payment, impose extra fees, force-place insurance (even what you already have it), increase the interest rates, increase the principal, and leave the payment of insurance and taxes to you instead of escrowing that money through an escrow payment to the mortgage servicer.

That person who calls out for “NO BAILOUTS” is probably sitting with a mortgage on record, the rights to which have been parsed up and transferred out to multiple third parties. But he doesn’t know that because he hasn’t checked. He or she is now paying a mortgage service provider that in 65% of the cases doesn’t have any right to collect money from the borrower because the revenue from the note payments was also parsed out and transferred to multiple parties, then parsed and packaged again and transferred again to multiple parties, and then re-packaged with cross guarantees with the mortgage or note of other people the borrower never met, and then pledged to some investor to protect and guarantee that investor a rate of return that exceeds the payments received from the borrower.

That person doesn’t realize that even he or she “played by the rules” the way everyone should, he or she has been paying their mortgage payments to a nominee who has no right to the payments, and that the people who at least think they are entitled to those payments are not receiving them now.

Mr. and Mrs. conservative have now placed themselves in a position where multiple third parties can sue him or her for payments that he or she already made — and they are screaming against the people who have set out to protect them from that problem. It is the people you are yelling at, who are clearing up a title problem that will prevent you from ever selling your house. These same people are, without ever knowing you, are protecting you from having to deal with more than one person or entity claiming you owe the full balance of your mortgage to both of them.

And sorry folks, this isn’t technical legal beagle stuff designed to get stupid consumers out of deals they should never have gotten into. This is real. And people just like you are losing their homes, their hopes, their families, and their savings through this intricate PONZI scheme invented by Wall Street “creative financiers.”

If you are a true conservative it is perfectly clear that you seek to conserve something — probably American values, American lifestyle and American ideals. But this Ponzi scheme conserved nothing and destroyed everything in its path. It didn’t just target the poor and disenfranchised that you feel should work harder to climb the American ladder of success.

It gave the “gotcha” to EVERY borrower (without exception) who took on a mortgage from 2001 to 2008. It doesn’t matter if you took a fixed rate 15 year mortgage or a variable rate, adjustable, negative amortization 30 year mortgage of the 2/28 or 3/27 variety et al. It now has resulted in the largest decline in the sale price, saleability and home equity in American history. Do you really think that such a disparate group, dispersed over the millions of square miles constituting the greatest country on earth, could have pulled this off?

The entire world financial market functions solely on trust and confidence. Do you really think that Wall Street and main Street Bankers did not understand the risk of the financial products that they, not the borrowers, created?

And who do you think cares most about the fact that your neighborhood, through action or fault of your own, is declining with  vandalism, renters, deferred maintenance homes and tumbling home equity? Certainly not the professional “conservers” or who call themselves conservatives. After all, it was they who created the financial “products” that resulted in this mess.

We can all agree that there is enough blame to go around for everyone — from government and the financial industry, down to the mortgage brokers and borrowers. But here is the essential question: do you want to sit around and arm-chair the game, or do you want to put a stop to it — because you can. Do you want to wake up tomorrow morning and know that you helped some family stay in their home and that you are going to do it again today, or do you want to read more about declining home prices, no bottom, no credit available to expand the business you own or work for, no customers to buy your services or products?

If you really want to conserve basic American values of hard work, honesty, savings, and good citizenry, then you should be at the head of the line demanding accounting and correction for the institutionalized lying of investment bankers, “banks” that hold themselves out as lenders but take no risk, mortgage brokers who hold themselves out as the expert upon whom the borrower can rely but get paid bonuses for getting the borrower to sign papers that include prepayment penalties, and government regulators who pretend to reign in excessive predatory practices, while they receive personal and private “donations” to look the other way.

If you really want to conserve the economic values, your nest egg, that you have worked all these years to build and protect it against the continued decline of the value of the American currency, and the hyper-inflation of basic commidty prices upon which you depend, then you will join the growing grass roots movements of concerned citizens of all ideologies including borrowers and professionals who seek to stop the freight train of foreclosures, the creation of 10-12 month inventory supplies of homes, and tell the world, we are as good as we say we are — that we make mistakes but we correct them because we stand for truth, justice, and honesty and that the American way is still an ideal worth looking to when modeling a new society or correcting an old one.

Mortgage Banking Meltdown AND Foreclosure Defense: Who Are the Victims?

When was the last time you heard of a crowd of debt-ridden consumers cornering the finance market and playing with the economy at their leisure?

THE WALL STREET GENIUSES HAD CREATED THIS MONSTER AND THE ONE ENTITY THAT WAS SUPPOSED TO HAVE THE VANTAGE POINT OF SEEING THE BIG PICTURE AND THE NEED TO REIN IN SOME PRACTICES WHILE ENCOURAGING OTHERS WAS GOVERNMENT. INSTEAD CONGRESS PASSED THE REMIC STATUTE, REGULATORS TURNED A BLIND EYE AND GREENSPAN AT THE FEDERAL RESERVE GAVE HIS STAMP OF APPROVAL ON THE WORST GROUP OF FINANCIAL PRACTICES TO HIT THE MARKET IN OVER ONE HUNDRED YEARS. 

In the smug circles of regulators and big finance, a myth is being propogated that the mortgage mess, the credit crisis and the bank failures together with 100 year old investment firms is all or mostly the fault of either speculators who got what they deserved or greedy home buyers who should have known better. Actually that is not true. Everyone is victim here and only a handful of people are really responsible.

Most of the loans were refi’s, so the argument that retail home buyers had eyes bigger than their pocket books, is simply not supported by the numbers. But as I have said in past blogs on public policy — the longer we wait to address the fundamentals of this situation the worse it is going to get. Everyday, a little more news shows that the numbers are growing. 

Very few of the loans were to speculators, but of these so-called “speculators” were 95% the victim of boiler room identify theft operations that gave the victim the idea he/she was a real estate investor when in fact, they had just sold their identities.

THE REAL FRAUD HERE IS INFLATION OF VALUE ABOUT WHICH NEITHER THE BUYER OF REAL ESTATE NOR THE BUYER OF ASSET BACKED SECURITIES HAD ANY KNOWLEDGE OR EXPERIENCE. THE METHOD WAS THE SAME ON BOTH ENDS — A GROUP OF SHARKS ON THE HOME BUYER SIDE PROVIDING “APPRAISALS” AND OFFICIAL LOOKING DOCUMENTS LEAVING THE BUYER WITH AN INVESTMENT THAT WAS NOT WORTH 75% WHAT HE/SHE PAID.

AND ON THE OTHER SIDE A GROUP OF SHARKS ON THE INVESTMENT SIDE, ) MONEY MANAGERS LOOKING OVER THE MONEY OF PEOPLE ON PENSIONS OR INVESTED IN MUTUAL FUNDS, OR CITY GOVERNMENTS AND CORPORATIONS PRUDENTLY EARNING INTEREST ON CASH THEY DID NOT YET NEED), PROVIDING “APPRAISALS’ (RATINGS) AND OFFICIAL LOOKING DOCUMENTS LEAVING THE BUYER AND ALL THE MILLIONS PEOPLE AFFECTED BY THE BUYER’S INVESTMENT DECISION WITH AN INVESTMENT THAT WAS NOT WORTH, IN SOME CASES, EVEN 1% OF WHAT HE/SHE PAID.

CONTROL OVER THE ENTIRE SCHEME WAS EXERCISED FROM THE BOARD ROOMS OF WALL STREET WHERE FINANCIAL INCENTIVES AND COERCION (DO IT OUR WAY OR YOU CAN’T BE PART OF THE “TEAM”) WHO UNDERSTOOD PERFECTLY WELL THAT THE HOMES WERE OVER-APPRAISED, THAT THE BORROWER’S ABILITY TO PAY WAS NEAR ZERO IN MANY CASES, AND THAT UNDERWRITING STANDARDS LIKE INCOME VERIFICATION, AND SERVICING STANDARDS LIKE PAYMENT OF TAXES AND INSURANCE, WERE COMPLETELY ELIMINATED.

THEY DIDN’T CARE BECAUSE THEY HAD “PARSED” THE RISK OUT TO A MULTITUDE OF UNRELATED PEOPLE WHO WERE VERY UNLIKELY TO GET TOGETHER AND ALL SUE AT ONCE. AND WITHOUT ALL OF THEM, THERE WOULD, IN LEGAL PARLANCE, BE AN ABSNECE OF NECESSARY AND INDISPENSAABLE PARTIES, THUS CREATING A BARRIER TO ACCESS TO THE COURTS FOR EVEN WELL-FUNDED PLAINTIFFS, LET ALONE BORROWERS FOR HOME MORTGAGES THAT HAD BEEN TAPPED OUT AND MAXED OUT ON CREDIT.  

In the shadows of the real world of finance, away from the public eye are numerous securities exchanges, currency exchanges, and entities acting like banks and agents of banks that are completely unregulated, off the radar, and serve as the loci of virtually all the manipulation that screws consumers and insures dominance and power to a select few.  

Look up ICE for example and you will find that it is something more than cold water that cools your drinks. It is the place where oil prices are manipulated by as much as 50% — that’s right double — where currency and money supply is generated at the price of downgrading the money in our pockets, and where schemes are hatched that take on the illusion of legal, ethical business while they bend, break, change laws to provide immunity for past acts or legitimacy for future acts that ANYONE would know are wrong in that those acts are against the interests of our society. 

When was the last time you heard of a crowd of debt-ridden consumers cornering the finance market and playing with the economy at their leisure?

Or is it more likely that the couple in Maryland was duped by high pressure, slick sales tactics into purging their entire life savings of $400,000 (including $150,000 from the medical trust fund for the ill son) and getting a mortgage that they could not possibly afford, but which was explained to them in a way that made it seem plausible.

Or maybe it is more likely that a retired community college administrator who bought and paid for his house in San Diego in 1972, added improvements, maintained it immaculately, and was making out just fine in retirement, was fooled into multimillion dollar refi’s to purchase rental property $1500 miles away, which he lost and is now faced with loss of a home with equity enough to secure what would have been his retirement?

Maybe it is more likely that Wall Street found a new toy in complex finance instruments that even the creators didn’t totally understand, increased money liquidity by a factor of 1,000 and was awash in money that needed to be placed somewhere or else they would be charged with fraud for taking investments when they had nothing. So maybe these Wall Street people had too much “inventory” (money) and put maximum pressure and illegal incentives to people downline — “lenders”, appraisers, mortgage brokers, real estate brokers, and title agents to get deals closed no matter what they had to do or say. 

Sure there were some people who were gaming the system. Not on the scale that the Wall Street tycoons were gaming the system, but nonetheless some people were “playing.”

THE WALL STREET GENIUSES HAD CREATED THIS MONSTER AND THE ONE ENTITY THAT WAS SUPPOSED TO HAVE THE VANTAGE POINT OF SEEING THE BIG PICTURE AND THE NEED TO REIN IN SOME PRACTICES WHILE ENCOURAGING OTHERS WAS GOVERNMENT. INSTEAD CONGRESS PASSED THE REMIC STATUTE, REGULATORS TURNED A BLIND EYE AND GREENSPAN AT THE FEDERAL RESERVE GAVE HIS STAMP OF APPROVAL ON THE WORST GROUP OF FINANCIAL PRACTICES TO HIT THE MARKET IN OVER ONE HUNDRED YEARS. 

Look up amnesty in the search box and you’ll see we predicted all this and we proposed a solution. Nobody is interested because the bankers are covering their behinds, the Wall Street people are trying to stay out of jail, and the appraisers are hiding under rocks along withe rating agencies who were paid off to give inappropriate ratings to asset-backed securities.

We maintain here now as we did before that this crisis is far greater that the numbers released thus far. Derivative securities are approaching $600 trillion which is more than 10 times all the money in the world. Instead of arresting people and suing people and arguing political ideology, we should be fixing the problem. And that starts with using all the resources and channels we have including the people who started this mess. I favor amnesty for EVERYONE in the process conditioned on their cooperation on putting the market right-side up.

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Brokers threatened by run on shadow bank system

Regulators eye $10 trillion market that boomed outside traditional banking

By Alistair Barr, MarketWatch
Last update: 6:29 p.m. EDT June 19, 2008
SAN FRANCISCO (MarketWatch) — A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system.
Big brokerage firms like Goldman Sachs (GS Lehman Brothers (LEH ) Merrill Lynch (MER , which some say are the biggest players in this non-bank financial network, may have the most to lose from stricter regulation.
The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.
While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn’t have reliable access to short-term borrowing during times of stress.
Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.
Such vulnerability helped transform what may have been an uncomfortable correction in credit markets into the worst global credit crunch in more than a decade as monetary policymakers and regulators struggled to contain the damage.
Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.
“The shadow banking system model as practiced in recent years has been discredited,” Ramin Toloui, executive vice president at bond investment giant Pimco, said.
Toloui expects greater regulation of big brokerage firms which may face stricter capital requirements and requirements to hold more liquid, or easily sellable, assets.
‘Clarion call’
“The bright new financial system — for all its talented participants, for all its rich rewards — has failed the test of the market place,” Paul Volcker, former chairman of the Federal Reserve, said during a speech in April. “It all adds up to a clarion call for an effective response.”
Two months later, Timothy Geithner, president of the Federal Reserve Bank of New York, and others have begun to answer that call.
“The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system,” he warned in a speech last week. That “made the crisis more difficult to manage.”
On Thursday, Treasury Secretary and former Goldman Chief Executive Henry Paulson said the Fed should be given the authority to collect information from large complex financial institutions and intervene if necessary to stabilize future crises. Regulators should also have a clear way of taking over and closing a failed brokerage firm, he added. See full story.
Banking bedrock
The bedrock of traditional banking is borrowing money over the short term from customers who deposit savings in accounts and then lending it back out as mortgages and other higher-yielding loans over longer periods.
The owners of banks are required by regulators to invest some of their own money and reinvest some of the profit to keep an extra level of money in reserve in case the business suffers losses on some of its loans. That ensures that there’s still enough money to repay all depositors after such losses.
In recent decades, lots of new businesses and investment vehicles have evolved that do the same thing, but outside the purview of traditional banking regulation.
Instead of getting money from depositors, these financial intermediaries often borrow by selling commercial paper, which is a type of short-term loan that has to be re-financed over and over again. And rather than offering home loans, these entities buy mortgage-backed securities and other more complex securities.
A $10 trillion shadow
By early 2007, conduits, structured investment vehicles and similar entities that borrowed in the commercial paper market and bought longer-term asset-backed securities, held roughly $2.2 trillion in assets, according to the Fed’s Geithner.
Another $2.5 trillion in assets were financed overnight in the so-called repo market, Geithner said.
Geithner also highlighted big brokerage firms, saying that their combined balance sheets held $4 trillion in assets in early 2007.
Hedge funds held another $1.8 trillion, bringing the total value of asset in the “non-bank” financial system to $10.5 trillion, he added.
That dwarfed the total assets of the five largest banks in the U.S., which held just over $6 trillion at the time, Geithner noted. The traditional banking system as a whole held about $10 trillion, he said.
“These things act like banks, but they’re not.”
— James Hamilton,
Economics professor
While acting like banks, these shadow banking entities weren’t subject to the same supervision, so they didn’t hold as much capital to cushion against potential losses. When subprime mortgage losses started last year, their sources of short-term financing dried up.
“These things act like banks, but they’re not,” James Hamilton, professor of economics at the University of California, San Diego, said. “The fundamental inadequacy of their own capital caused these problems.”
Big brokers targeted
Geithner said the most fundamental reform that’s needed is to regulate big brokerage firms and global banks under a unified system with stronger supervision and “appropriate” requirements for capital and liquidity.
Financial institutions should be persuaded to keep strong capital cushions and more liquid assets during periods of calm in the market, he explained, noting that’s the best way to limit the damage during a crisis.
At a minimum, major investment banks and brokerage firms should adhere to similar rules on capital, liquidity and risk management as commercial banks, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on Wednesday.
“It makes sense to extend some form of greater prudential regulation to investment banks,” she said.
Separation dwindled
After the stock market crash of 1929, the U.S. Congress passed laws that separated commercial banks from investment banks.
The Fed, the Office of the Comptroller of the Currency and state regulators oversaw commercial banks, which took in customer deposits and lent that money out. The Securities and Exchange Commission regulated brokerage firms, which underwrote offerings of stocks and corporate bonds.
This separation dwindled during the 1980s and 1990s as commercial banks tried to push into investment banking — following their large corporate clients which were selling more bonds, rather than borrowing directly from banks.
By 1999, the Gramm-Leach-Bliley Act rolled back Depression-era restrictions, allowing banks, brokerage firms and insurers to merge into financial holding companies that would be regulated by the Fed.
Commercial banks like Citigroup Inc. (C, Bank of America (BACand J.P. Morgan Chase (JPMsigned up and developed large investment banking businesses.
However, big brokerage firms like Goldman, Morgan Stanley and Lehman didn’t become financial holding companies and stayed out of commercial banking partly to avoid increased regulation by the Fed.
Run on a shadow bank
The Fed’s bailout of Bear Stearns in March will probably change all that, experts said this week.
Bear, a leading underwriter of mortgage securities, almost collapsed after customers and counterparties deserted the firm.
It was like a run on a bank. But Bear wasn’t a bank. It financed a lot of its activity by borrowing short term in repo and commercial paper markets and couldn’t borrow from the Fed if things got really bad.
Bear’s low capital levels left it with highly leveraged exposures to risky mortgage-related securities, which triggered initial doubts among customers and trading partners.
The Fed quickly helped J.P. Morgan Chase, one of the largest commercial banks, acquire Bear. To prevent further damage to the financial system, the Fed also started lending directly to brokerage firms for the first time since the Depression.
“They stepped in because Bear was facing a traditional bank run — customers were pulling short-term assets and the firm couldn’t sell its long-term assets quickly enough,” Hamilton said. “Rules should apply here: You should have enough of your own capital available to pay back customers to avoid a run like that.”
Bear necessity
A more worrying question from the Bear Stearns debacle is why customers and investors were willing to lend money to the firm in the absence of an adequate capital cushion, Hamilton said.
“The creditors thought that Bear was too big to fail and that the government would step in to prevent creditors losing their money,” he explained. “They were right because that’s exactly what happened.”
“This is a system in which institutions like Bear Stearns are taking far too much risk and a lot of that risk is being borne by the government, not these firms or the market,” he added.
The Fed has lent between $8 billion and more than $30 billion each week directly to brokerage firms since it set up its new program in March. Most experts say this source of emergency funding is unlikely to disappear, even though it’s scheduled to end in September.
“It’s almost impossible to go back,” FDIC’s Bair said on Wednesday.
With taxpayer money permanently on the line to save big brokers, these firms should now be more strictly regulated to keep future bailouts to a minimum, Bair and others said.
“By definition, if they’re going to give the investment banks access to the window, I for one do believe they have the right for oversight,” Richard Fuld, chief executive of Lehman, told analysts during a conference call this week. “What that means, though, particularly as far as capital levels or asset requirements, it’s way too early to tell.”
Super Fed
Next year, Congress likely will pass legislation forcing big brokerage firms to be regulated fully by the Fed as financial holding companies, Brad Hintz, a securities analyst at Bernstein Research and former chief financial officer of Lehman, said.
Legislators will probably also call for tighter limits on the leverage and trading risk taken on by large brokers, while demanding more conservative funding and liquidity policies, he added.
Restrictions on these firms’ forays into venture capital, private equity, real estate, commodities and potentially hedge funds may also follow too, Hintz warned.
This may undermine the source of much of the surging profit generated by big brokerage firms in recent years.
A newly empowered “super Fed” will likely encourage these firms to arrange longer-term, more secure sources of borrowing and even promote the development of deposit bases, just like commercial and retail banks, the analyst explained.
This will make borrowing more expensive for brokerage firms, undermining the profitability of businesses that require a lot of capital, such as fixed income, institutional equities, commodities and prime brokerage, Hintz said.
Such regulatory changes will cut big brokers’ return on equity — a closely watched measure of profitability — to roughly 15.5% from 19%, Hintz estimated in a note to investors this week.
Lehman and Goldman will be most affected by this — seeing return on equity drop by about four percentage points over the business cycle — because they have larger trading books and greater exposure to revenue from sales and trading. Goldman also has a major merchant banking business that may also be constrained, Hintz added.
Morgan Stanley and Merrill Lynch (MER

will see declines of 3.2 percentage points and 2.2 percentage points in their return on equity, the analyst forecast.

If you can’t beat them…
Facing lower returns and more stringent bank-like regulation, some big brokerage firms may decide they’re better off as part of a large commercial bank, some experts said.
“If you’re being regulated like a bank and your leverage ratio looks something like a bank’s, can you really earn the returns you were making as a broker dealer? Probably not,” Margaret Cannella, global head of credit research at J.P. Morgan, said.
Regulatory changes will be unpopular with some brokerage CEOs and could result in a shakeup of the industry and more consolidation, she added.
Hintz said the business models of some brokerage firms may evolve into something similar to Bankers Trust and the old J.P. Morgan.
In the mid 1990s, Bankers Trust and J.P. Morgan relied more on deposits and less on the repo market to finance their assets. They also operated with leverage ratios of roughly 20 times capital. That’s lower than today’s brokerage firms, which were levered roughly 30 times during the peak of the credit bubble last year, according to Hintz.
However, both firms soon ended up in the arms of more regulated commercial banks. Bankers Trust was acquired by Deutsche Bank (DBin 1998. Chase Manhattan Bank bought J.P. Morgan in 2000. End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco.

Foreclosure Defense: Issues, Pleadings and Analysis

We are still in process of revising our manuscript for publication with all the forms we can think of. Here is a  summary of our findings thus far.

Generally we have two types of jurisdictions — the non-judicial sale jurisdictions and the mortgage foreclosure jurisdictions. California, Arizona and Nevada are non-judicial sale jurisdictions as are many others. Florida is a judicial sale (mortgage foreclosure jurisdiction) as are many others

 

We also have numerous possible stages at which a borrower can find him/herself

  1. Loan not in default but TILA claims can still be made. 
  2. Loan approaching default. 
  3. Loan in default 
  4. Foreclosure suit filed or sale date published 
  5. Judgment entered 
  6. Sale occurred to either third party or the lender. I have advised people to go to the sale and inform all potential bidders that the matter is in dispute which usually stops anyone from bidding. 
  7. Notice to Vacate -Forcible Detainer
  8. Eviction notice from Sheriff 
  9. Evicted — but TILA claims survive for (a) recovery of money and (b) possibly recovery of house from lender 

Origination of loan:

  1. REAL BANK THAT GIVES MORTGAGE AND HOLDS NOTE THEMSELVES. Direct relationship between the lender and borrower and it is not sold, migrated or otherwise transferred in any manner shape or form. Borrower gave honest information, tax returns etc. My guess is that the only claim here would be fraudulent appraisal but even that is weak because the bank is actually at risk. 
  2. Mortgage broker steering borrower to worst deal for highest fees. Inflated income and appraisals submitted. Lender is selling off or has entered agreements to provide “inventory” to mortgage aggregators who will sell the aggregated loan portfolio to investment bank who in turn will sell “derivative” securities (CMO – collateralized Mortgage Obligations or CDO — Collateralized Debt Obligations) to investors who are defrauded by representations from the lender, appraiser, mortgage aggregator, investment bank, and intermediate sellers of securities. Bank is NOT in any relationship with borrower but that is not disclosed. Bank has no risk or interest in whether borrower pays on loan or not. 
  3. MOST COMMON: A “bank” that is actually a front for one of the major players. In actuality the bank is a mortgage broker steering customers to worst loans for highest fees. 
  4. While the “lender” takes the position that they were defrauded by the borrower, the mortgage broker and the appraiser, the truth is that they intentionally defrauded themselves by setting up the structure and giving themselves the position of “plausible deniability.” Their intent was to create a plausible record for the mortgages and notes they were selling to mortgage aggregators and investment bankers. 

Types of Loans:

  1. Fixed rate 30 year mortgage fully amortized. 
  2. Fixed rate 30 year mortgage amortized but partially negative — i.e. the borrower is paying less than the full payment and the balance owed on the note is going up. Possible TILA violation. 
  3. Fixed rate mortgage interest only, negative amortization. Clear TILA violations in most cases. 
  4. Adjustable rate mortgage fully amortized. First adjustment after teaser rate in 1, 3, 6, 12 or more months. Borrower “qualifies” for mortgage because income figures support paying the teaser rate. At the first or second adjustment however, they no longer qualify and the lender knows it by definition. TILA violation, fraud, etc. 
  5. Adjustable rate interest only, negative amortization 6. Multiple mortgages and notes for multiple properties for speculators — usually involves falsifying information that buyer is going to use the house as primary residence, falsifying income and falsifying appraised values. TILA, fraud etc. 

Authority and ownership of loans — Legal Standing and Jurisdiction

  1. Originating lender still servicing the loan, holds note and mortgage. No assignment, sale or other fancy financial tricks. 
  2. Originating lender is actually mortgage broker, loan migrates to senior lending institution, to mortgage aggregator to investment banker to seller of securities to investor. 
  3. Trustee in non-judicial sale states posts notice of sale based upon information from a source that (a) does not service the loan and therefore does not know if the borrower is in default or not and/or (b) does not own the mortgage or cannot prove that it owns the mortgage and/or (c) does not own the note or cannot prove that it owns the note. In most cases an investor owns the mortgage and note and the people involved in the foreclosure don’t have a clue as to which bundle of mortgages went into which bundle of securities and how many investors bought into that bundle of securities, and there are no proper assignment documents that were designed much less signed in anticipation of being able to establish legal standing in sale, foreclosure or eviction. 
  4. Originating lender files foreclosure or posts notice of sale and does not have servicing rights, ownership of mortgage or ownership of note. 

Potential Pleadings:

  1. Federal Claim for TILA, respa, RICO, fraud etc. 
  2. Memorandum of Law in support of complaint. 
  3. State Court claim for Fraud 
  4. State court action for stay of sale, eviction etc. 
  5. Emergency Petition for temporary Injunctions- State and Federal Courts and memorandums in support thereof. 
  6. Motion to expedite discovery. 
  7. Interrogatories 
  8. Requests for admission 
  9. Request to Produce 
  10. Notice of deposition duces tecum 
  11. Adversary proceeding in Bankruptpcy Court 
  12. Memorandum and pleading in opposition to Motion for lifting stay 
  13.  Demand letter to Originating lender — for documents tracing where the mortgage went and for refunds and damages, enclosing TILA audit. 
  14. Rescission letter 
  15. Form retainer agreement for audit an checklist for retaining auditor 
  16. Form retainer agreement for attorney and checklist for retaining attorney 

Foreclosures Go Hyper, Up 65%

Anyone reading this site will not find it surprising that the number of foreclosures is rising by unprecedented numbers at unprecedented rates. At the same time, the FBI is getting involved claiming mortgage fraud is on the rise at well.

Let’s tell it like it is: Until this scam was perpetrated by Wall Street on the American Public, the cases where people overstated their income or the value fo the house was manipulated were rarely far out of range of reality. It is only now that the major fraud of inflating stated fair market value by 40% or more that the FBI and lenders are looking for ways they can deflect attention to the cases where the borrowers actual numbers don’t match up to the original loan documentation.

Lenders should be careful what they wish for however. And the FBI is only doing a small part of its job, if it does not investigate the “fraud” of both lender and borrower. In most cases, the fraud case against the lender is more complex but far more egregious than anything the borrower did, all of which was well known to the lender,the mortgage broker and everyone else at the closing who didn’t care about anything except getting the borrower’s signature on those papers. 

Nobody cared and the borrower was clueless as to what was really happening. The lender was “underwriting” the loan knowing they had no risk. The mortgage broker knew he had steered the borrower into the loan that would give him the greatest commission and fees — the yield spread premium payments jumped geometrically during this period. The real estate brokers wanted the closing over because the higher the price, the greater their commission, and they wanted “closure” before the inevitable happened — a correction to real fair market values. The appraiser knew that he had to come in a little higher than the contract amount or he wouldn’t be hired again. And so on.

Foreclosure filings continued to climb in April
Actions rise 65 percent over the same month the year before
The Associated Press
updated 4:43 a.m. MT, Wed., May. 14, 2008

LOS ANGELES – More U.S. homeowners fell behind on mortgage payments last month, driving the number of homes facing foreclosure up 65 percent versus the same month last year and contributing to a deepening slide in home values, a research company said Tuesday.

Nationwide, 243,353 homes received at least one foreclosure-related filing in April, up 65 percent from 147,708 in the same month last year and up 4 percent since March, RealtyTrac Inc. said.

Nevada, Arizona, California and Florida were among the hardest hit states, with metropolitan areas in California and Florida accounting for nine of the top 10 areas with the highest rate of foreclosure, the company said.

Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions.

One in every 519 U.S. households received a foreclosure filing in April. Foreclosure filings increased from a year earlier in all but eight states.

The combination of weak housing sales, falling home values, tighter mortgage lending criteria and a slowing U.S. economy has left financially strapped homeowners with fewer options to avoid foreclosure. Many can’t find buyers or owe more than their home is worth and can’t get refinanced into an affordable loan.

Efforts by government and the mortgage industry to stem the tide of foreclosures aren’t keeping up with the rising number of troubled homeowners.

The April data show nearly half of the properties received an initial notice of default, suggesting many homes were new entrants to the foreclosure process.

“We’re still sitting at roughly the same percentage of loans handled in any way successfully as we were a year ago, and the volume (of foreclosure filings) still keeps going up,” said Rick Sharga, RealtyTrac’s vice president of marketing. “It’s apparent that what they’ve tried so far isn’t working.”

The U.S. House passed a bill last week that would offer government insurance on $300 billion in new mortgages to refinance loans for an estimated half-million borrowers facing foreclosure, particularly those who now owe more than their houses are worth because of declining values.

House lawmakers also passed a bill that would send $15 billion to states to buy and fix foreclosed homes.

Still, should the homeowner aid package clear the Senate, it faces a potential hurdle in the White House, which has threatened to veto the plan, arguing it’s too risky and amounts to a lender bailout.

Even if a legislative compromise is reached, it could come too late for homeowners with adjustable-rate mortgages scheduled to reset to higher rates this month and the next.

More than 1 million home foreclosures are forecast for 2008.

“It doesn’t look like the volume is going to slow down any time soon,” Sharga said.

More than 54,500 properties were repossessed by lenders nationwide in April. In all, about 2 percent of U.S. households were in some stage of foreclosure during the month, RealtyTrac said.

Still, as foreclosed properties pile up, they add to the inventory of homes on the market and can drag down home prices. The impact is felt mostly in regions where foreclosures are concentrated, such as Southern California, the Las Vegas area, South Florida and parts of Arizona.

Nevada posted the worst foreclosure rate in the nation, with one in every 146 households receiving a foreclosure-related notice last month, nearly four times the national rate.

The number of properties with a filing jumped 95 percent versus April last year but declined 5 percent from March.

California had the most properties facing foreclosure at 64,683, an increase of 112 percent from April 2007. The number of properties declined less than 1 percent from March.

The state posted the second-highest foreclosure rate in the country, with one in every 204 households receiving a foreclosure-related notice.

California metro areas accounted for six of the 10 U.S. metropolitan areas with the highest foreclosure rates, led by Merced, with one in every 66 households receiving a foreclosure notice.

Arizona had the third-highest foreclosure rate, with one in every 224 households reporting a foreclosure filing in April. A total of 11,620 homes reported at least one filing, up nearly 181 percent from a year earlier and up 26 percent from the previous month.

 

Like Las Vegas and inland regions in California, areas of Arizona saw a sharp run-up in speculator-driven home prices and new home construction during the housing boom.

Florida had 35,264 homes reporting at least one foreclosure filing last month, a 146 percent jump from a year earlier and a 17 percent hike from March. That translates into a foreclosure rate of one in every 242 households, the fourth-highest in the nation.

The other states among the 10 with the highest foreclosure rates in April were Colorado, Maryland, Georgia, Ohio, Michigan and Massachusetts.

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