The Real Danger From the Foreclosure Crisis → Washingtons Blog
The Real Danger From the Foreclosure Crisis - Washingtons Blog

Friday, October 15, 2010

The Real Danger From the Foreclosure Crisis

People were told that the investment in their house was as solid as a rock:

Unfortunately, millions are now upside down, because the housing bubble - fed to a large extent by fraud - has burst:

And the people who supposedly verified the accuracy of mortgage documents never did so, and - in many cases - weren't who they said there were:

The foreclosure scandal will likely depress the real estate market, as clear title for millions of homeowners comes into question.

This is obviously a huge problem.

But the largest problem for the economy could be - not from mortgages themselves - but from the securitizations of those mortgages:

Joshua Rosner - noted bond analyst, and Managing Director at independent research consultancy Graham Fisher & Co - told his clients Tuesday, that the impact from foreclosure gate on the securitized market could be huge.

As Shahien Nasiripour reports:

[Rosner] said he believes the paperwork problems regarding foreclosed properties will ultimately be resolved, he wrote that "We have a larger and more significant concern, which, if proved out, could call into question the validity of nearly all securitizations."


Rosner said, the current scandal "may give investors an opening to challenge the legality of deals, threatening to unnerve financial markets."


Those challenges, which would result from the revelations unearthed during the foreclosure process, could then be used to investigate the documentation practices that occurred when these mortgages were first given to borrowers. Inflated income levels, fake home appraisals and other lies inserted into mortgage documents -- something Wall Street and Washington have long suspected, but never truly investigated -- could then be used to force big banks to buy back the garbage they peddled in the first place to unwitting investors.

Another possibility is that trustees, who oversee the flow of documents from the originator of the mortgage to the vehicle that holds those documents for investors, may not have properly performed their role, either.


Just four firms dominate the trustee market for mortgage-backed securities in which the mortgages aren't guaranteed by Uncle Sam: Deutsche Bank, U.S. Bancorp, Bank of New York Mellon, and HSBC serve as trustees for 70.5 percent of all such issuance since 2005, according to Asset-Backed Alert, an industry newsletter and data provider. An additional four firms -- Wells Fargo, Bank of America, JPMorgan Chase, and Citigroup -- control 29.1 percent, Asset-Backed Alert data show.

All told, these eight firms have served as trustees for 99.6 percent of all private-label mortgage-backed securities issued since 2005.

Were the document errors now cropping up in a handful of cases "to be found to have resulted from [the] widespread failure of issuers and trusts" to properly handle and transfer documents, "there would ... appear to be a strong legal basis for the calling into question [of] securitizations," Rosner wrote.

Joshua Rosner On Foreclosure Fraud

As David Faber notes:

The worry centers on the mortgage loan pools created by many of the big banks as they fed the seemingly endless desire for mortgage-backed securities and CDO's (collateralized debt obligations) made from them.

It appears the mortgage content of many of those pools—created when the banks were dominating the mortgage securitization market in 2005, 2006 and 2007—may have been misrepresented. For example, an underwriter may have maintained that 80 percent of the mortgages in the pool were for primary residences when in fact far fewer were for that purpose. Or the underwriter stated that only 10 percent of the pool would be made of of "no-doc" loans—those that include less documentation about the borrower—when in fact the percentage was far higher.

That could be fraud, and if so, the creator of the mortgage pool could be liable. Given that the market for private label RMBS (residential mortgage-backed securities) was $1.5 trillion, the potential liability may be considerable. And while most of the originators of these mortgages are long gone, the securitizers are not.

(Because many there may be problems with many commercial mortgages as well, trillions more in commercial mortgage backed securities may also be at issue.)

Joshua Rosner agrees.

Rosner told Elliot Spitzer, the banks and rating agencies knew that 28% of the loans which the banks securitized and sold to pension funds and other investors didn't meet underwriting standards. And yet they turned around and processed them into sausage (securitized them) and sold them to investors, representing that they did meet underwriting standards.

Rosner said that the rating agencies apparently intentionally avoided looking into this, since the more deals they approved, the more profits the rating agencies got. [For background on the financial incentive of rating agencies to give high ratings to literally anything, see this.]

And Rosner points out that - knowing about the high percentage mortgages which failed to meet underwriting standards - the big banks then bet against the housing market. Spitzer called that trading on inside information:

The potential securitization problem is why bank stocks are now in trouble. See this, this and this.

And as former Managing Director of Goldman Sachs Nomi Prins points out, the Bernanke and Geithner are terrified of a meltdown in the securitization market as well:

The free-market, let the banks do what they do mentality was what allowed them to create a $14 trillion mountain of securities backed by precarious mortgages to begin with.


But the real reason for Geithner’s reluctance about a foreclosure moratorium is that he’s scared stiff about those securities – because even if he won’t admit it, he knows that the bailout wasn’t just about TARP and Bernanke isn’t just an economic savior.


If foreclosed homes couldn’t be sold because of fraudulent paperwork or had to wait for more detailed inspections, you can imagine how difficult selling assets stuffed with faulty loans might be. If it’s tough to find a title for a foreclosed home, think how tough it is to back the related loan out of a pyramid of securities sitting on top of it.

See, the loan that might be analyzed in a foreclosure situation could be part of a chain connecting the underlying home to 20 or 50 different securitized assets, all depending on it for either the interest payments the loan was supposed to provide, or the value of the foreclosure property if those payments stopped (in Wall Street speak, the "recovery value"). If a foreclosed property isn’t selling, it’s not recovering any money back to any asset waiting for it. Think what that can do to the value of toxic assets living at the Fed and the Treasury Department. Kill it.

The reason TARP and all the other subsidies happened was that Hank Paulson, Ben Bernanke, Tim Geithner (the pillage gang) and the most powerful Wall Street CEOs were scared. Banks had stopped trusting each other (no one cared about the person who couldn’t pay their mortgage, or had their home taken, whatever the reason). When there is no confidence in the market, there is no bid for securities, no matter what the reason.

The banks couldn’t pay for all their leverage and they were facing bankruptcy if the system remained seized up. So the gang paid to keep the securitization market going, by finding a home or back-up home for the assets. They did not propose any remotely effective plan to help individuals at the loan level .... They merely enabled the worst practices and excesses to keep going in the name of saving the country from a greater depression, by shifting them to Washington and providing the illusion of demand for them.

Foreclosure fraud is not new. Many sane people and organizations have been talking about fraud for years -- you don’t manufacture $14 trillion worth of mortgage-backed securities and all their permutations and mega leverage out of $1.4 trillion worth of subprime loans in five years without cutting a lot of corners. Banks knew that. But when the value of their assets plummeted, unlike individual borrowers, they got to dump them on the Fed and the Treasury department, while receiving cash injections and guarantees, and cheap money subsidies in return.

See this for more information on the government's ill-conceived effort to prop up the prices of securitized assets.

As Congressman Brad Miller told Dylan Ratigan, failure to use subpoena power to audit the quality of the mortgages in the securitized pools held by Fannie and Freddie and to pursue all available legal rights to protect taxpayers from getting stuck with the bill for toxic securitized assets would constitute yet another stealth bailout of the big banks:


  1. What about the same loans being placed into 3 or 4 different vehicles? Won't the game of musical chairs be discovered? I don't see anyone discussing this... your opinion?

  2. There's no danger! Just a roll up strategy in the midst of implementation stages...

    obtaining absolute power and control over the economy with their printing press (bank credit).

    By breaking the fundamental valuation of money (credit) by destroying the faith and integrity of the IOU/title.....the whole economic system is in utter panic desperation for the iron fist of government to step in and guarantee payment of IOU's and the creation of new credit (money) to keep the system alive and functioning......and whatever they have to do to make this happen!

    Whether that means garnishment of wages, garnishment of IRS tax return, debtor's prison, etc.....along with complete control over all transfer of property (taxed of course). Not to mention health care and all other aspects of our lives. They are nearly there.....just a few final steps that could easily take place within the next 6 months.

    How ironic would it be to have that blockade of Iran's ports go into effect in the next 6 weeks.....which would then compel Iran to attack the US or face utter economic destruction (no imported gasoline to keep economy alive)......and obviously North Korea would attack South Korea shortly there after for similar economic reasons (and thus spread what's left of the military to the breaking point).....and all of this would provide cover during the next 6 months.

  3. The things spoken of in this article are all true and very important. But still this article and others like it are diversions from the real fact that has the banks freaking out. That fact is that nearly ALL homeowners can not be foreclosed on, because nobody has the proper note. These crooks in the banks were so greedy that they broke the chain of the paperwork, and now nobody has a legal claim against any homeowner. WHAT IS REALLY GOING ON HERE IS THAT THEY ARE PETRIFIED THAT ALL OF US HOMEOWNERS WILL WAKE UP TO THE FACT THAT WE NOW OWN OUR HOUSES FREE AND CLEAR AND HAVE NO NEED TO PAY ONE MORE CENT ON OUR MORTGAGES AND NONE OF THESE BANKS CAN DO A THING ABOUT IT. This is what is trying to be hidden with all their talk that they just filled out some paperwork wrong, or made a typo or two, and it's no biggy.

  4. I found the compilation piece to be humorous and informative. Great work! Funny thing I had just done the same thing with a few different sources.

    Please check it out HOW WALL STREET SHAFTED MAIN STREET here

  5. The main thrust of this has been talked about. What is new is these docs. The Feds knew they were in trouble as far back as 2007. What this leaves out was why where 28% not up to standards and who originated them?

    Freddie & Fannie with the add of thousands of real estate agents, brokers, and loan brokers/agencies wrote bad loans. They lied.

    Folks it was the result of mass dishonesty. That is why no ones wants to confront it.

    Main Street, DC, Wall Street all played a part.

  6. We all need to repent, for we have, as Solzinitsen said, forgotten God, and we have been given over to our own greed, and lying hearts, and there is no soundness in us.
    We are a nest of writhing vipers, and a swarm of cockroaches over a stinking pile of maggoty rotting meat.

  7. The fact is that you only have to tell the bank
    show me the note ,if they cant, you own your house free and clear.Challenge the Bank and you win......Be bold.

  8. Michael, your theory only works in strictly judicial foreclosure states, maybe. It's called unjust enrichment and in AZ, for example, in Weisband Chapter 13 Case No. 4:09-bk-05175-EWH the court ruled against GMAC but also found that Barry Weisband owes someone the money.

  9. Mortgage-based CDOs are fraudulent not only from the point of view of people who bought the CDOs. They are also contract fraud at the other end - the pov of honest home loan borrowers. Here's why:

    When you take out a mortgage on a property, the lender bank receives and holds the property Land Title Deed. (At least, it does here in Australia.)

    Now, the fundamental understanding of the contract, is that when the borrower repays the loan plus interest, the lender will return the physical Title Deed, with the mortgage canceled.

    However, if the lender has bundled up the Title Deed with many others, and passed them on to a third party who holds them as collateral for the duration of the CDOs, the bank CANNOT return the physical Title Deed to the borrower if the loan is paid off early! This is intentional, premeditated contractual fraud.

    This actually happened to me - the Commonwealth Bank of Australia has effectively stolen the original historic Title Deed to my property, by failing to return it when I paid off a mortgage early. They've compounded their fraud by uttering multiple, differing lies about why they can't return the physical Title Deed. About the only excuse they haven't tried on is 'the dog ate it.'

    I'd really like to find a lawyer who'd take this case on a contingency basis. I'd think return of all interest paid plus heavy punitive damages would be appropriate. And that's not even getting into the matter of a major bank operating Ultra Vires.



→ Thank you for contributing to the conversation by commenting. We try to read all of the comments (but don't always have the time).

→ If you write a long comment, please use paragraph breaks. Otherwise, no one will read it. Many people still won't read it, so shorter is usually better (but it's your choice).

→ The following types of comments will be deleted if we happen to see them:

-- Comments that criticize any class of people as a whole, especially when based on an attribute they don't have control over

-- Comments that explicitly call for violence

→ Because we do not read all of the comments, I am not responsible for any unlawful or distasteful comments.