"The Fraud Perpetrated Upon Investors and Insurers Due to Multiple Pledges of Collateral Could Be Massive" → Washingtons Blog
"The Fraud Perpetrated Upon Investors and Insurers Due to Multiple Pledges of Collateral Could Be Massive" - Washingtons Blog

Wednesday, October 27, 2010

"The Fraud Perpetrated Upon Investors and Insurers Due to Multiple Pledges of Collateral Could Be Massive"


Christopher Whalen previously explained how the banks got away with pledging mortgages to multiple buyers.

Today, Whalen provides further details:

The short answer is "innovation." In her column, "One Mess That Can't Be Papered Over," Gretchen Morgenson of the New York Times reveals the practice in FL and other jurisdictions of destroying the physical note. We really like the 4th from last paragraph, the one about the standard practice of Florida bankers to destroy the original note when an electronic form was created, to "avoid confusion." If you know anything about the checkered history of FL real estate over the past century, this one bites you in the leg.

Is it just possible that creative Florida bankers discovered they could "sell" mortgages many times by conveniently delivering a "copy" of the electronic note for each subsequent sale? By delivering a "good" electronic note to each purchaser, the seller/servicer could kite the Ponzi scheme to the sky -- using the proceeds from each sale to pay interest to each new group of investors. As we told [Washington's Blog] in the failure of First National Bank of Keystone , management hid a Ponzi scheme in the loan servicing area for years, fooling regulators and internal auditors (See 'Audit Risk: Grant Thornton & The Keystone Saga', January 29, 2007) .

***

We know people in the servicing sector and related legal specialties who think that the fraud perpetrated upon investors and insurers due to multiple pledges of collateral could be massive. It is also, conveniently enough, another reason for the Obama White House and Fed to continue to prop up the top-three banks with significant GSE exposure -- and the mortgage insurers that help window dress the GSEs already horrible losses.

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