The Continuing Saga of Bankster Fraud

Here’s another story in the continuing saga of Bankster fraud.

As I’ve argued since 2008, it is likely that all—or nearly all–of the residential mortgage backed securities (RMBSs) are fraudulent. The Banksters engaged in fraud at every link in the RMBS food chain.

They defrauded the borrowers. They forced the appraisers to commit fraud (pressured them to overvalue property). They conspired with ratings agencies to overvalue the RMBSs. They created MERS to destroy property records and to cheat local governments out of recording fees. They separated the promissory notes from the deed of trust, invalidating the lien. They hired BurgerKing Robo-signers to create forged documents. They lie in court, committing perjury. They steal homes from owners who don’t even have mortgages. And on, and on, and on. Their depravity knows no bounds.

But here’s an entertaining story. Bear with me, it is a bit complicated.

The mortgages were originated by specialized mortgage brokers, thrifts, and banks. They would be bought and sold among banks maybe ten times before going through securitization (this was one of the reasons MERS was created—to reduce the costs of the buying&selling by avoiding recording fees; it was also a source of confusion because a bank would sometimes sell the same mortgage to several different buyers).

In the securitization process, a Trustee bank would be appointed. Almost all of these securitizations were done in New York because it had strict laws—this provided a patina of respectability. The Trustee would certify that it actually had all the docs related to the mortgages. In fact, it looks like they usually had none of them.

In turn, the selling bank would certify that the mortgages met the “reps and warranties” regarding quality. In fact, as I reported last time, whistle-blower Richard Bowen at Citi discovered that 60% of the mortgages did not.

Trustees are supposed to ensure the bank’s certification is valid; they are also responsible for monitoring servicing rights and enforcing servicing obligations. In short, they protect the investors in the RMBSs.

By 2006, insiders knew that the whole RMBS market was going to hell in a hand-basket. Things were so bad that even the Fed (usually clueless) discussed the exploding numbers of defaults. (We know that because transcripts from that period have now been released. See here.) As I reported before, the transcripts reveal the following extraordinary statement by Gov Bies:

“Part of what’s amazing in all of this is that in 2004 and 2006, particularly toward the end of that period, purchase money seconds, by which people borrowed the downpayments for homes, were a big part of mortgage financing… The one sector that has had a jump in delinquencies is subprime ARMs, and clearly the jump is related to rates that have already reset. We’ve got more to come. One thing I’m hearing more from some folks who have been investing in mortgage-backed securities and maybe in some CDOs (collateralized debt obligations), where they’ve been tranched into riskier positions through economic leverage, is the realization that a lot of the private mortgages that have been securitized during the past few years really do have much more risk than the investors have been focusing on… We’re seeing that some of the private-label mortgage-backed securities are having very high early default rates or delinquencies in the mortgages, which usually means that the originator has to buy them back out of the pools. There isn’t a whole lot of transparency in the disclosures around some of these bonds, and some of the brokers are underwriting products that have very high early default rates, which is something that investors are starting to focus on. As more products are generated outside the banking sector, they get funneled to pools through broker-dealers as opposed to the banks. I think that we’re missing a level of due diligence regarding brokers, who may not be doing a good job. As you all know, the fraud rate on mortgages has tripled in the past two years. So I think we could see noise in some of the mortgage-backed private deals and some of the riskier CDO economic leverage positions….”

Yep. As we all know, buyers are borrowing their downpayments, risks are higher than investors thought, early defaults are rising, and the fraud rate has tripled! This is 2006.

The investors in RMBSs began to demand that their Trustee banks look into mortgage quality, suspecting the mortgages did not meet the Reps&Warranties. The Trustee banks, however, were “conflicted”. They needed the goodwill of the banks that were originating and selling trashy mortgages.

All the banksters—originators, securitizers, trustees—were making so much money hand-over-fist by originating and selling and securitizing trash assets that no one wanted to stop.

Sure, they knew the whole thing would blow up, but meantime, they had to make as much money as possible “while the music was playing”. They hoped to be retired, having sold all the trash to clueless investors before the music stopped.

So the Trustee banks ignored the pleading of the investors in the RMBSs. They had a choice: sue or be sued, and chose to wait it out, dancing to the music.

They’ve been ignoring their investors ever since—as the investors lost money on the securities.

Recently, a funny thing happened. The NY Supreme Court ruled that a six year statute of limitations holds—the Banksters who lied about the quality of the trash they securitized cannot be sued after six years.

A group of the biggest investors, including PIMCO and BlackRock, filed a $250 Billion lawsuit against the biggest Trustee banks: Bank of NY-Mellon, USBank, Wells Fargo, Citibank, Deutsche Bank, and HSBC.

Two-hundred and fifty BILLION smackaroos dwarfs Eric Holder’s tiny little $7B settlement against Citi.

It gets funnier. The Trustee banks are now quickly filing lawsuits against their brethren banks for the false reps and warranties.

So now the Trustee banks are suing and being sued!

The Trustees might be able to get off if they can prove the issuing banks breached the reps & warranties, but cannot evade their own gross negligence, bad faith, and misconduct. We know, for example, that they lied about having the mortgage docs. MERS broke the chain of title and destroyed most docs—even recommending that the paper docs should be shredded—so there is no way that the Trustees had them.

See an excellent article on the lawsuit here. According to Isaac Gradman, typical judgments in such cases run at about 75% of losses. The investors have claimed $250 Billion in losses, so a judgment could be $200 Billion. That might be big enough to take a bite out of crime. (However, Gradman notes that PIMCO and BlackRock might settle for much less.)

Others have joined suit, including banks, credit unions, insurance companies and the FHLB of Topeka.

This is just the tip of the iceberg.

MERS recorded 65 million mortgages. There is $10 Trillion (with a T) of mortgage debt of which $7 Trillion (another T) were securitized. The whole sector is riddled with fraud.

The fun will continue for years.

Meanwhile, US property records are in disarray. Banksters continue to steal homes. Real estate markets are turning down. And it looks like the economy is beginning to slow.

Looks like déjà vu all over again.