A year ago, Long Island Judge Jeffrey Spinner concluded that a mortgage company’s paperwork in a foreclosure case was so flawed and its behavior in negotiations with the borrower so “repugnant” that he erased the family’s $292,500 debt and gave the house back for free.
The judgment in favor of the homeowner, Diane Yano-Horoski, which is being appealed, has alarmed the nation’s biggest lenders, who say it could establish a dramatic new legal precedent and roil the nation’s foreclosure system.
It is not the only case that has big banks worried. Spinner and some of colleagues in the New York City area estimate they are dismissing 20 to 50 percent of foreclosure cases on the basis of sloppy or fraudulent paperwork filed by lenders.
Good. It may be unjust enrichment, but it seems to me like a just penalty for fraud on the Court. The Banks have the burden and responsibility to maintain their paperwork. In fact they are the only ones who can do so. If they mess it up and cause their own loss, so be it.
they gave out loans in an incompetent fashion, and they are doing the same with foreclosures. Who could be surprised?
BTW, depending on the town $292k will buy an average suburban home (anything from a small colonial or cape to a ranch – or less) on Long Island, not a McMansion.
This is far worse than most people imagine.
Briefly put, on the basis of recently published testimony before the Congressional Commission investigating the financial crisis, it is now clear that the largest banks routinely bundled and sold packages of mortgages they [i]knew[/i] to be defective, beginning no later than 2006. By mid-’08 approximately 80% of the mortgage bundles being sold to both institutional and private investors were known to be defective by the institutions issuing them. That meets the legal definition of fraud.
In fact, the system developed to catch defective mortgages was clearly designed NOT to catch them. Only 5 to 10% of mortgages in a bundle were ever examined. [b]If a mortgage proved to be defective, it was not rejected, but transferred to a different bundle. If the same mortgage came up as defective in the second bundle it was transferred to a third bundle.[/b]
Only if that same mortgage cropped up a third time was it rejected. The probability of that happening is only about 1 in 1500.
In mid-October PIMCO (one of the largest bond investment companies in the world), Freddie Mac, the New York Federal Reserve, and a very large European investment firm came together and sued Countrywide for not forcing Bank of America to buy back defective mortgages bundled and sold under fraudulent circumstances.
Basically, if buyers of 25% or more of a mortgage-backed security can come together they have legal standing to sue the mortgage servicer – in this case Countrywide – to do its duty to investors and force the issuers (Bank of America, Citi, Morgan and others) to repurchase bad mortgages. If the servicer fails to do so, the plaintiffs can take control of the process and sue the issuer directly. That’s a simplistic description but broadly accurate. This does not bode well for BofA, any of the others, or the American taxpayer likely to be forced once again to subsidize repeatedly illegal financial behavior.
More importantly, a leading financial litigator has been hired by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, to investigate hundreds of billions of dollars in potential claims against the major issuers of mortgage securities known to be toxic. Because it is a federal agency, FHFA has to power to subpoena both documents and witness. Over dozens of such subpoenas have already been issued. This is just getting started.
What has to date been but a trickle of compelling evidence that Bank of America, Citi, and others committed intentional fraud – some banks even taking huge market positions against the bundles they had just sold to investors (!) – is on the verge of becoming a torrent. It will cause immense trouble in the mortgage and housing industry for years.
Making things even worse, a number of [i]state[/i] bank regulators now report that in 2009 they informed appropriate [i]FEDERAL[/i] regulators that state banks were being adversely affected by the widespread fraudulent activities in the national banks. They were told to mind their own business. The incoming House of Representatives is likely to launch a robust investigation.
As just one example, in the case of Bank of America their exposure on Countrywide alone is about 75 Billion dollars, exclusive of impending fines, which are likely to be immense. Countrywide (meaning BofA) recently coughed up $624 million to the State of New York to settle a pension fraud case. BofA also now owns Merrill Lynch, which issued about 275 Billion dollars in mortgage bundles, many of which exploded less than six months after issue.
Here’s the real problem for ordinary people: Against something like [b]300 to 350 Billion dollars in exposure to forced buy-backs of all this financial toxic waste, Bank of America has set aside only four billion dollars in reserves.[/b]
Courts and bank regulators will soon require BofA to increase those reserves substantially. Fees will rise, credit lines will be reduced or cancelled, loans will be called, and they will become over-zealous, attempting to get as many things as possible “exactly right” in order to demonstrate their “due diligence†to mitigate the litigation they no longer can avoid.
What an amazing mess, eh? Enron was minor league compared to what’s coming. There will be prison time for a number of executives.
So when will those individuals who committed fraud begin to be prosecuted? They should be easy to spot…they signed all the documents. There should be a nice cell waiting for all these suited criminals. Perhaps a 5-10 year time out (per offence) will encourage others to play by the rules.
Those that live by the technicality, die by the technicality!
What is a “defective” mortgage? Does it mean they lent money to folks who didn’t qualify under the offering terms? Does it mean supporting documents are insufficient to produce a clear title (including through foreclosure)? Does it mean that the “bundling process” produced an under par, or even fraudulent, investment?
The answer is of course, yes.
Yes, it is a mess – financial, political, and ethical, and it should be “resolved” just as it was created – one mortgage at a time.
During the resolution people will lose houses because they don’t/can’t/won’t make the payments. Originators of the loan will take a loss on that mortgage. “Bundlers and/or servicers” will lose on each transcation.
However, what of the so-called regulators (both Fed & State) who were well paid with public money, will any of them lose their jobs? What of the academics, politicians, and the rest of the supporting cast?
There are plenty of black hats to go around.
“Defective” mortgages were those for which the paperwork assuring the mortgagee’s ability to pay had been falsified. And in 1499 out of 1500 cases that fact was intentionally hidden from institutions and individuals purchasing the bundles of such mortgages.
A family in Florida was taken to court in a foreclosure case by a bank that did not hold their mortgage and they were not even behind on their payments.
A Google search will show you that foreclosure and mortgage fraud is a widespread problem….a plague…a disgrace.
Also read The Anglican Curmudgeon’s article, ‘Debasing the Currency of Truth’:
http://accurmudgeon.blogspot.com/2009/12/debasing-currency-of-truth.html
Chilling when you can’t trust a bank.
Much of science, the Church, academia and the courtroom have been hijacked by evil agendas.
Hi Bart,
Thanks for the definition. The next question to ask is, of course, who had the primary responsibility for “assuring the mortgagee’s ability to pay”? The underwriter is required to verify (document) only what has been presented to them in accordance with the terms of the program under which the mortgage is being issued.
Are you saying that you believe “1499 out of 1500” underwriters falsified their documents? Or that their work was so incompetent that it amounted to fraud? Or that folks took out mortgages they couldn’t support under the various “little or no doc” loans issued at the height of the bubble.
What I was attempting to get across in my original post is the principle of “proportionate fault”. What I would like to see – for our country’s sake – is the rule of law enforced on a case by case basis, not a wholesale political settlement. (cf. GM bondholders for e.g.)
[i]Are you saying that you believe “1499 out of 1500†underwriters falsified their documents? Or that their work was so incompetent that it amounted to fraud? Or that folks took out mortgages they couldn’t support under the various “little or no doc†loans issued at the height of the bubble. [/i]
No. I’m saying that the banks’ system for checking mortgages originated by others (but bundled by the bigger banks) was intentionally designed to keep garbage loans in the system. In a number of documented cases the bundle-issuing bank then took a substantially leveraged position [i]against[/i] the bundle they had just sold.
The lousy mortgages were all the liar-loans, no-doc, un-verified pieces of absolute junk written against vastly over-priced houses sold to people who never had a prayer of actually paying for them.
Those mortgages were dog $#!+, the banks knew it, and they sold them as something else. Not only that, they designed a system to hide the toxic waste while pretending it was all Double-A or better.
Therein lies one part of the fraud. The other part of the fraud is that through their “nominee” system — too complicated to explain here — those same banks defrauded multiple states of hundreds of billions of dollars in fees, mortgage transfer, and mortgage tax revenues.
You can guarantee the states will attempt to recover, though by the time this is over BofA, Citi, Morgan, and some others will be empty husks … unless the people in Washington shovel them another bailout stolen from our grandchildren.
One note on the Judge Schack story; the media continues to report in error. He erased the 1st mortgage. but Wells Fargo, trustee for the 2d mortgagee, was a co-plaintiff and moved into 1st position.
The securitized loan problems were actually two-fold. the first was that the pools of loans often violated the “reps and warranties”, as Bart noted. The descritption matches what the Cit QA guy said about the quality audits.
The 2d, perhaps larger problem is that an estimated 60% of the securitized loans never made it throught the four steps necessary to go into the trust. And IRS rules normally prevent any transfer more than three months after creation. So you can’t correct now. And whoever legally owns the loans may no longer be in business. HUGE mess that will take remedial congressional legislation and more. One reason the banks have pushed foreclosure so hard is to try to bury as much of the dirt as possible.
When you consider that the robosigning scandal involved just four banks (GMAC, BoA, Wells Fargo, and Chase) and that the PROVEN perjured affidavits monthly were 10,000, 18,000, 5,000 (for one of the signers), and 18,000, respectively, that’s over 40,000 instances of perjury per month/500k/yr. And that’s just for only four banks in only 23 states. And just the ones we have found.
All this is causing judges in NY and elsewhere to wake up and realize they have been badly played by the banks. No longer will banks get the presumption of correctness. And yet the banks’ spin machine continues to try to blame everyone except themselves.
What a mistake to bail out these crooks and send only Madoff to prison. He should have the company of thousands.
A final touch of schadenfreude. Someone dug up the documents for the payoff of Obama’s Chicago home when he sold it. One bank officer had to sign three documents, two notarized by the same notary. All three signatures were radically different. So even the President may have been a victim of robosigning, although in that situation no one is likely to complain.
Correction: JudgeSpinner, not Schack.
So again…where are the Attorney’s General? Where are the perp walks with these suited bandits in cuffs? These people need to be in jail with 5 to 10 years per fraud committed. Start building the tent cities to house the prisoners. UNICOR has a job waiting for these criminals!!! If Joe Sixpack passed a note to a bank teller and demanded $10,000, he would be put in jail for years. Where is the moral hazard for these criminals that stole BILLIONS? The only laws congress should be passing on this are laws to fund special prosecutors, prisons, and repeal the statute of limitations. JAIL, JAIL, JAIL!!!