Blame the Victims and Enrich the Perpetrators

It’s outrageous the way subprime borrowers swarmed and solicited unsuspecting lenders and camped out in the offices of investment banks to push them to find ways to finance their insatiable need for capital to purchase homes. It’s a scandal the way they got in bed with appraisers to get the home values stated at three to five times market value. It’s criminal the way they falsified income to push through the mortgage loans. Oh wait… they didn’t. [Hat tip to Nomi Prins, author of It Takes a Pillage.] While there were instances of fraud by borrowers, the key drivers of our housing crisis were fraud perpetrated by mortgage lenders and securities fraud — by some of our most revered financial institutions — that provided money to fuel fraudulent mortgage lending. After the largest bank bailout in world history, we have a national epidemic of foreclosure fraud. In cases where foreclosures are being delayed, banks are walking away from abandoned homes and sticking local taxpayers with the bill to clean up the mess they left behind. Yet, as Arianna Huffington points out in her latest book, banks continue to find ways to get Americans to subsidize problems that the banks themselves were chiefly responsible for creating. Consumers struggle to keep up with payments as the unemployment rate rises along with food and energy prices, and loan resets kick in:

When they don’t, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties–all of which makes it less likely consumers will be able to pay off mounting debts. Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream Pp. 77 & 78.

GSAMP: Garbage Sold at Mythical Prices In 2007, the state of Ohio kicked the California-based New Century mortgage lending carpetbaggers out of the state and barred New Century from doing business after despicable practices. A complaint against Goldman Sachs detailed its close relationships with Countrywide, New Century, and Fremont. The complaint showed Goldman knew of “an accelerating meltdown for subprime lenders such as New Century and Fremont.” Despite known serious loan problems, Goldman continued to securitize the loans and sell them in packages of residential mortgage backed securities. Suspect deals like GSAMP-2006 S3; $494 million of securities bought by institutional investors in April 2006 were created and distributed by Goldman Sachs Alternative Products (GSAMP). Fortune’s Allan Sloan and Doris Burke followed the deal as its value slid ever downward as well as the fudgy way the deal’s deteriorating value seemed to be overstated by the trustee’s report:

More than a third of the loans were on homes in California, then a superhot market, now a frigid one. Defaults and rating downgrades began almost immediately. In July 2008, the last piece of the issue originally rated below AAA defaulted — it stopped making interest payments. Now every month’s report by the issue’s trustee, Deutsche Bank, shows that the old AAAs — now rated D by S&P and Ca by Moody’s [junk ratings] — continue to rot out. As of Oct. 26, date of the most recent available trustee’s report, only $79.6 million of mortgages were left, supporting $159.9 million of bonds…But even worse, those mortgages aren’t worth anything like their $79.6 million of face value, according to ABSNet Loan HomeVal…As of Sept. 26 — a slightly different date from what we’re using above — ABSNet valued the remaining mortgages in our issue at a tad above 20% their face value. Now, watch this math. If the mortgages are worth 20% of their face value and each dollar of mortgages supports more than $2 of bonds, it means that the remaining bonds are worth maybe 10% of face value. “Junk mortgages: It just gets worse, ” by Allan Sloan and Doris Burke, Fortune, December 1, 2009.

“Countrywide Broke the Law” In above mentioned complaint against Goldman Sachs, allegations of suspect practices from mortgage lenders, including Countrywide, now owned by Bank of America, were revealed. According to a former Countrywide employee:

“approximately 90% of all reduced documentation loans [also known as “liars’ loans] sold out of a Chicago office had inflated incomes, and one of Countrywide’s [mortgage brokerage arms] routinely doubled the amount of the potential borrower’s income…so that borrowers could qualify for loans they could not afford.”

When Countrywide’s employees received documents verifying income that showed the borrower couldn’t afford the mortgage and didn’t qualify for a loan, they simply ignored it and “the loan was re-submitted as a stated income loan with an inflated income figure so as to facilitate the approval of the loan.” In other words, the former Countrywide employee said that brokers, not borrowers, engaged in massive fraud to push loans through the system and earn commissions. Illinois Attorney General Lisa Madigan told First Business Morning News: “Countrywide broke the law, homeowners did not.” Pump and Dump The same banks that supplied money — and in some cases now own — suspect mortgage lenders also packaged up and sold those loans to investors. These banks also own or owned “servicers” that are supposed to act as stewards for investors. But if servicers cannot recover foreclosure costs combined with the costs of maintaining and reselling the house, they often abandon the property. After pumping up appraisals and falsifying borrowers’ income on applications, banks are walking away. Once again, American taxpayers will foot the bill:

In Chicago, the mortgage servicers and trustees most often associate with the [abandoned] properties are Bank of America, with 314 properties; Wells Fargo (234), U.S. Bank (185), Deutsche Bank (178), and JPMorgan Chase (165). “More banks walking away from homes, adding to housing crisis,” by Mary Ellen Podmolik, Chicago Tribune, January 13, 2011.

Despite evidence of widespread interconnected mortgage lending, securitization, and foreclosure wrong-doing, there are no meaningful felony indictments. Arianna Huffington’s suggests a solution and a long and difficult road ahead:

The most effective way of fixing the multitude of problems facing America is through the democratic process, but the democratic process itself is badly broken. That is why the first step toward stopping our relentless transformation into Third World America has to be breaking the choke hold that special interest money has on our politicians. Third World America P. 172

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

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About Janet Tavakoli 34 Articles

Affiliation: Tavakoli Structured Finance, Inc.

Janet Tavakoli is the founder and president of Tavakoli Structured Finance, Inc. (TSF), a Chicago based consulting firm providing expert experience and knowledge about maximizing value in the capital markets in the face of complexity and uncertainty. TSF provides consulting services to financial institutions, institutional investors, and hedge funds.

Ms. Tavakoli was years ahead of the financial industry predicting lax underwriting and misrating of structured financial products would result in the collapse of the global credit bubble. She also predicted the collapse of the thrift industry, Long Term Capital Management, and First Alliance Mortgage prompting Business Week to profile her as "The Cassandra of Credit Derivatives." [2008].

Ms. Tavakoli pointed out grave flaws in the methodology for rating structured financial products in her books, Structured Finance & Collateralized Debt Obligations (2003, 2008), and Credit Derivatives (1998, 2001). She wrote the first letter the SEC posted in February 2007 in response to its proposed rules for the credit rating agencies; she made the case that the NRSRO designation for the rating agencies should be revoked for structured financial products.

Ms. Tavakoli is frequently published and quoted in financial journals including The Wall Street Journal, The Financial Times, Business Week, Fortune, Global Risk Review, RISK, IDD, Chicago Tribune, Los Angeles Times, LIPPER HedgeWorld, Asset Securitization Report, Journal of Structured Finance, Investor Dealers' Digest, International Securitization Report, Bloomberg News, Bloomberg Magazine, Credit, Derivatives Week,, Finance World, and others.

Frequent television appearances include CNN, CNBC, BNN, CBS Evening News, Bloomberg TV, First Business Morning News, Fox, ABC, and BBC.

Tavakoli is a former adjunct associate professor of finance at Chicago Booth (the University of Chicago's Graduate School of Business) where she taught "Derivatives: Futures, Forwards, Options and Swaps".

Janet Tavakoli is the former Executive Director, Head of Financial Engineering in the Global Financial Markets Division at Westdeutsche Landesbank in London. She headed market risk management for the capital markets group for Bank One in Chicago. Tavakoli headed the asset swap trading desk at Merrill Lynch in New York, headed mortgage backed securities marketing for Merrill Lynch in New York, and headed mortgage backed securities marketing to Japanese clients for PaineWebber in New York. She also worked for Bear Stearns heading marketing for quantitative research.

She is the author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008), and Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley, 2009).

During her career, she has been registered and licensed with the SFA, NASD, ASE, CBOE, NYSE, PSE and the NFA and has passed the series 7, 63 and 3 qualifying exams.

Ms. Tavakoli has a B.S. in Chemical Engineering from Illinois Institute of Technology and an MBA in Finance from University of Chicago Graduate School of Business.

Visit: Tavakoli Structured Finance

3 Comments on Blame the Victims and Enrich the Perpetrators

  1. I used to work as a mortgage broker for a very respectable mortgage bank. In your article you have failed to acknowledge one important aspect to the whole real estate problem. We’re the banks greedy? Yes. We’re the brokers greedy? Yes. We’re the appraisers greedy? Yes. But let’s not forget, I never ever met a borrower who did not want me to pursue ever avenue available to secure them the home they wanted, the house of their dreams. Even though by law I was not allowed to give financial advice, only mortgage information, there were plenty of times, I would shake my head thinking why do these people want to go so far in debt or have such a huge mortgage? The answer is, “Keeping up with the Jones!” You wouldn’t believe the “sense of entitlement” many people have. People want what they want!! This ecomonic mess is everyone’s fault. Don’t kid yourself into thinking otherwise. American greed is everyone’s disease! The HUD program was created to allow this all to happen. It gave lenders the ability to add incredible leverage. HUD was created by the government. The banks simply went along. When they saw the money that could be made, there was no stopping the snowball rolling down hill. Greed kicked in at full throttle!

  2. BTW stated income programs are totally legal. Banks don’t ignore stated incomes, assets, etc. They accept it at face value because they’re assuming people are honest. Those people are the borrowers! Liar loans are given that name because it’s the borrower’s that lie, not the banks! Your whole article is way off.

    I’m not defending the banks, but get this straight, everyone is to blame!

  3. Our society is a mess. We blame drug pushers for the wants and desires of the users. It’s basic economics, if there’s a big enough demand someone will provide the supply in order make money. If people want huge houses they can’t afford, someone will figure out a way to give it to them and make money. Get real.

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