Frameworks, benchmarks, generalities and hypothetical’s

Frameworks, benchmarks, generalities and hypothetical’s without specifics and enforcement seemed to sum up the G20 meeting over the weekend but that description can usually be applied to any G meeting. Avoiding ‘competitive devaluations’ on the part of US trading partners just give a green light to another move lower in the US$ as everyone there knew the elephant in the room was Federal Reserve policy in terms of its FX impact and no one other than the German economic Minister challenged it. He said “it’s the wrong policy way to try to prevent or solve problems by adding more liquidity. Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.” Also helping the reflation trade was a 2.6% rally in the Shanghai index to a fresh 6 month high and copper is following to the highest since July ’08.

Category: MacroNotes

YouTube’s Best Stunt Fails

Hilarious: >

Category: Weekend

15 Inviolable Rules for Dealing with Wall Street

The never ending parade of stock scandals seems to continue unabated, the stock lending scam being only the most recent. As history has shown us — from Mexico to Orange County to analyst banking crisis to Derivatives to etc., when the Street comes aknockin, best for you to hide your wallets. For reasons we are…Read More

Category: Apprenticed Investor, Corporate Management, Investing, Really, really bad calls, Rules

FDIC Bank Failures

Hey, we haven’t run this in a few weeks! >

Category: Credit, Regulation

BofA Hit with Fraudclosure Class Action Suit

Three fascinating Fraudclosure related items:

Law.com: Bank of America Sued in Class Action Over Flouting of Foreclosure Rules

Bank of America has been hit with a class action on behalf of homeowners seeking damages for alleged disregard of foreclosure process rules.

The suit, filed Wednesday in federal court in Newark, N.J., accuses Bank of America and two subsidiaries, LaSalle Bank and BAC Home Loans Servicing, of “an undisciplined rush to seize homes” through “pervasive and willful disregard of knowledge, facts and statutes.”

Bank of America has filed foreclosure proceedings on many mortgages in New Jersey without holding the necessary rights as the mortgagee or assignee at the time of foreclosure, the suit says.

“Many thousands of foreclosures are plainly void under statute and settled New Jersey case law. Many borrowers never obtain statutorily required notices, and many foreclosure suits are filed entirely based in inaccurate recitations concerning ownership of the mortgage, the note, or the assignment,” the suit says.

The putative class in the suit, Beals v. Bank of America, N.A., 10-cv-05427, consists of all named defendants in pending New Jersey foreclosure actions initiated by Bank of America or its affiliates. The complaint includes counts of common-law fraud, breach of the covenant of good faith and fair dealing and violations of the New Jersey Fair Foreclosure Act and Consumer Fraud Act.

Macro Index:

Courts are hurriedly catching up to the changes technology and financial innovation have brought to mortgage and equity law. The new rules adhere to an established legal tradition that slows the pace at which cases can be brought to trial. This is a good thing 99% of the time as civil and criminal trial processes are designed to terminate cases before they ever reach the courtroom. Trials are expensive. Settling cases before trial will save the plaintiffs, defendants and taxpayers significant sums of money.

NYSBAS.org Template New York Courts First in Country to Institute Filing Requirement to Preserve Integrity of Foreclosure Process

(PDF after the jump)

Read More

Category: Foreclosures

The Subprime Debacle: Act 2, Part 2

The Subprime Debacle: Act 2, Part 2
October 23, 2010
By John Mauldin

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The Subprime Debacle: Act 2, Part 2
They Knew What They Were Selling
Warning to Mr. Robert Rubin and Management
Popping Through
It’s Time for Some Putback Payback
The Worst Deal of the Decade?
And Now to the World Series

At the end of last week’s letter on the whole mortgage foreclosure mess, I wrote:

“All those subprime and Alt-A mortgages written in the middle of the last decade? They were packaged and sold in securities. They have had huge losses. But those securities had representations and warranties about what was in them. And guess what, the investment banks may have stretched credibility about those warranties. There is the real probability that the investment banks that sold them are going to have to buy them back. We are talking the potential for multiple hundreds of billions of dollars in losses that will have to be eaten by the large investment banks. We will get into details, but it could create the potential for some banks to have real problems.”

Real problems indeed. Seems the Fed, PIMCO, and others are suing Countrywide over this very topic. We will go into detail later in this week’s letter, covering the massive fraud involved in the sale of mortgage-backed securities. Frankly, this is scandalous. It is almost too much to contemplate, but I will make an effort.

But first, let me acknowledge the huge deluge of emails I got over last week’s letter, the most I can ever remember. I thought about just making this week’s letter a response to many of them, but decided I needed to go ahead and finish the topic at hand. Maybe another time. As a side note, I quoted a letter that came to me anonymously via David Kotok. I said if I found out who wrote it, I would give them credit. It was originally written by Gonzalo Liro, at www.gonzalolira.blogspot.com.

Many of you wrote to point out that his argument about the tracking of title was not correct, but others pointed out many other issues as well. This is one of the most complex problems we face, and I got a lot of good information from readers. It just makes me wish I had our new web site finished so you could avail yourselves of the wisdom among my readers. We are close, down to final changes. And now, on to today’s letter.

They Knew What They Were Selling

It’s hard to know where to start. There is just so much here. So let’s begin with testimony from Mr. Richard Bowen, former senior vice-president and business chief underwriter with CitiMortgage Inc. This was given to the Financial Crisis Inquiry Commission Hearing on Subprime Lending andnd Securitization andnd Government Sponsored Enterprises. I am going to excerpt from his testimony, but you can read the whole thing (if you have a strong stomach) at http://fcic.gov/hearings/pdfs/2010-0407-Bowen.pdf. (Emphasis obviously mine.)

“The delegated flow channel purchased approximately $50 billion of prime mortgages annually. These mortgages were not underwriten by us before they were purchased. My Quality Assurance area was responsible for underwriting a small sample of the files post-purchase to ensure credit quality was maintained.

“These mortgages were sold to Fannie Mae, Freddie Mac [We will come back to this - JM] and other investors. Although we did not underwrite these mortgages, Citi did rep and warrant to the investors that the mortgages were underwritten to Citi credit guidelines.

In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets. This situation represented a large potential risk to the shareholders of Citigroup.

“I started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group.

We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production.

Mr. Bowen was no young kid. He had 35 years of experience. He was the guy they hired to pay attention to the risks, and they ignored him. How could a senior manager not get such an email and not notify his boss, if only to protect his own ass? They had to have known what they were selling all the way up and down the ladder. But the music was playing and Chuck Prince said to dance and rake in the profits (and bonuses!). More from his testimony:

“Beginning in 2006 I issued many warnings to management concerning these practices, and specifically objected to the purchase of many identified pools. I believed that these practices exposed Citi to substantial risk of loss.

Warning to Mr. Robert Rubin and Management

On November 3, 2007, I sent an email to Mr. Robert Rubin and three other members of Corporate ManagementIn this email I outlined the business practices that I had witnessed and attempted to address. I specifically warned about the extreme risks that existed within the Consumer Lending Group. And I warned that there were ‘resulting significant but possibly unrecognized financial losses existing within Citigroup.’”

And now taxpayers own 75% of Citi, and our losses to them are huge. They are going to get worse, as we will see.

Now let’s turn to the testimony of Keith Johnson, who worked for various mortgage companies and in 2006 became the president and chief operating officer of Clayton Holdings, the largest residential loan due diligence and securitization surveillance company in the United States and Europe. This is testimony he gave before the Financial Crisis Inquiry Commission. Part of the testimony is by his associate Vicki Beal, senior vice-president of Clayton. The transcript is some 277 pages long, so let me summarize.

Investment banks would come to Clayton and give then roughly 10% of the mortgages that they intended to buy and put into a security. Clayton rated them on whether the documentation was what it was supposed to be, not as to whether they thought it was a good loan. Still, 46% of the loans did not have proper documentation (out of a pool of 9 million loans) and 28% had what was determined to be level 3 disqualifications that simply had no mitigating circumstances. Understand, these were loans that were already written, and there was no effort to check the facts, just the documentation.

And ultimately 11% of these loans (39% of the level 3′s) were put back in by the investment bank. And what happened to the loans that were rejected? (This might require an adult beverage and a few expletives deleted.)

Popping Through

They were put back into another pool, where again only 10% of the loans were examined. Quoting from the testimony:

“MR. JOHNSON: I think it goes to the ‘three strikes, you’re out’ rule.

“CHAIRMAN ANGELIDES: So this was a case of – okay, three strikes.

“MR. JOHNSON: I’ve heard that even used. Try it once, try it twice, try it three times, and if you can’t get it out, then put -

“CHAIRMAN ANGELIDES: Well, the odds are pretty good if you are sampling 5 to 10 percent that you’ll pop through. When you said the good, the bad, the ugly, the ugly will pop through.”

Yes, you read that right. If a loan was rejected a second time, it went back into yet another pool for a third try. The odds of coming up three times, when only 5 or 10 percent are sampled? About 1 in a thousand. Popping through, indeed.

Clayton presented their data to the ratings agencies, investment banks, and others in the industry. They were frustrated that no one was really paying attention or taking heed of their warnings.

Here is what Shahien Nasiripour, the business reporter for the Huffington Post, wrote (his emphasis). For those interested, the entire article is worth reading. (http://www.huffingtonpost.com/2010/09/25/wall-street-subprime-crisis_n_739294.html):

Johnson told the crisis panel that he thought the firm’s findings should have been disclosed to investors during this period. He added that he saw one European deal mention it, but nothing else.

“The firm’s findings could have been ‘material,’ Johnson said, using a legal adjective that could determine cause or affect a judgment.

“It’s unclear whether the firms ended up buying all of those loans, or whether Wall Street securitized them all and sold them off to investors.

“‘Clayton generally does not know which or how many loans the client ultimately purchases,’ Beal said. That likely will be the subject of litigation and investigations going forward.

“‘This should have a phenomenal effect legally, both in terms of the ability of investors to force put-backs and to sue for fraud,’ said Joshua Rosner, managing director at independent research consultancy Graham Fisher & Co.

“‘Original buyers of these securities could sue for fraud; distressed investors, who buy assets on the cheap, could force issuers to take back the mortgages and swallow the losses.

“‘I don’t think people are really thinking about this,’ Rosner said. ‘This is not just errors and omissions – this appears to be fraud, especially if there is evidence to demonstrate that they went back and used the due diligence reports to justify paying lower prices for the loans, and did not inform the investors of that.

“Beal testified that Clayton’s clients use the firm’s reports to ‘negotiate better prices on pools of loans they are considering for purchase,’ among other uses.

Nearly $1.7 trillion in securities backed by mortgages not guaranteed by the government were sold to investors during those 18 months, according to Inside Mortgage Finance. Wall Street banks sold much of that. At its peak, the amount of outstanding so-called non-agency mortgage securities reached $2.3 trillion in June 2007, according to data compiled by Bloomberg. Less than $1.4 trillion remain as investors refused to buy new issuance and the mortgages underpinning existing securities were either paid off or written off as losses, Bloomberg data show.

“The potential for liability on the part of the issuer ‘probably does give an investor more grounds for a lawsuit than they would ordinarily have’, Cecala said. ‘Generally, to go after an issuer you really have to prove that they knowingly did something wrong. This certainly seems to lend credibility to that argument.’

“‘This appears to be a massive fraud perpetrated on the investing public on a scale never before seen,’ Rosner added.”

Read More

Category: Foreclosures, Think Tank

Housing Cartoons

Tom Toles

Category: Humor

Big Money on Wall Street

Want to pull down the big bucks? Floyd Norris advises you to get a job on the street of dreams: “Wall Street incomes are surging back. The government reported this week that the real wage and salary income of finance industry employees based in Manhattan rose nearly 20 percent in the first quarter of this…Read More

Category: Wages & Income

How to Have Ideas

Awesome back of the napkin idea generating flow chart from Frank Chimero: click for ginormous graphic Hat tip Flowing Data

Category: Psychology, Weekend

‘Should have paid the extra $2 an hour…’

Abelson on robo-signers last week: “Truth is, bankers just can’t stand prosperity, even after their near-death experience of a couple of years ago, when so many of them, emphatically including the gargantuas, were kept alive only by grace of rich Uncle Sam generously ladling out our tax dollars. The nub of the problem were the…Read More

Category: Employment, Foreclosures