Will the Banksters Finally Pay?

Federal regulators have finally decided to go after seventeen  big banks for bad mortgage lending practices.  In question are $200 billion in toxic mortgages sold to now bankrupt Fannie and Freddie.  The Federal Housing Finance Agency (FHFA) is the regulator suing BOA, JP Morgan, Morgan Stanley, Goldman Sachs and others. You may recall I wrote on a FED investigation last month.  This comes way too late to help many people who were put into loans they couldn’t possibly handle who were later evicted, but it may give these folks standing in future court suits to recoups some of their losses.  Financial sector-related equities and bonds lost in what was a dismal Friday market already given the unemployment figures.

The litigation represents a more intense effort by the federal government to go after the financial services industry for its supposed mortgage failures.

Indeed, the cases were brought on the basis of 64 subpoenas issued a year ago, giving the government an edge in its investigation that private investors suing the banks lack.

The Obama administration as well as regulators like the Federal Reserve have been criticized for going too easy on the banks, which benefited from a $700 billion bailout package shortly after the collapse of Lehman Brothers in the autumn 2008.

Much of that money has been repaid by the banks — but the rescue of the mortgage giants Fannie and Freddie has already cost taxpayers $153 billion, and the federal government estimates the effort could cost $363 billion through 2013.

Even though the banks already face high legal bills from actions brought by other plaintiffs, including private investors, the suits filed Friday could cost the banks far more. In the case against Bank of America, for example, the suit claims that Fannie and Freddie bought more than $57 billion worth of risky mortgage securities from the bank and two companies it also acquired, Merrill Lynch and Countrywide Financial.

In addition to suing the companies, the complaints also identified individuals at many institutions responsible for the machinery of turning subprime mortgages into securities that somehow earned a AAA grade from the rating agencies.

The filing did not cite a figure for the total losses the government wanted to recover, but in a similar case brought in July against UBS, the F.H.F.A. is trying to recover $900 million in losses on $4.5 billion in securities. A similar 20 percent claim against Bank of America could equal a $10 billion hit.

In a suit that identifies 23 securities that Bank of America sold for $6 billion, the company “caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial.”

The most interesting thing about these new lawsuits is that it is obvious that some of the most egregious practices like backdating  and robosigning are still being practiced even as these banks are making tons of fees from foreclosure. It’s hard to sympathize with an industry unable to correct it’s own bad practices.  This is especially true since so much tax payer money has gone to stabilize the results of these practices already.  This is from the American Banker and it’s damning.

Some of the largest mortgage servicers are still fabricating documents that should have been signed years ago and submitting them as evidence to foreclose on homeowners.

The practice continues nearly a year after the companies were caught cutting corners in the robo-signing scandal and about six months after the industry began negotiating a settlement with state attorneys general investigating loan-servicing abuses.

Several dozen documents reviewed by American Banker show that as recently as August some of the largest U.S. banks, including Bank of America Corp., Wells Fargo & Co., Ally Financial Inc., and OneWest Financial Inc., were essentially backdating paperwork necessary to support their right to foreclose.

Some of documents reviewed by American Banker included signatures by current bank employees claiming to represent lenders that no longer exist.

Many banks are missing the original papers from when they securitized the mortgages, in some cases as long ago as 2005 and 2006, according to plaintiffs’ lawyers. They and some industry members say the related mortgage assignments, showing transfers from one lender to another, should have been completed and filed with document custodians at the time of transfer.

“It’s one thing to not have the documents you’re supposed to have even though you told investors and the SEC you had them,” says Lynn E. Szymoniak, a plaintiff’s lawyer in West Palm Beach, Fla. “But they’re making up new documents.”

The banks argue that creating such documents is a routine business practice that simply “memorializes” actions that should have occurred years before. Some courts have endorsed that view, but others, such as the Massachusetts Supreme Judicial Court, have found that this amounts to a lack of sufficient evidence and renders foreclosures invalid.

Yves Smith at Naked Capitalism has been following this issue closely and continues to have harsh words for banks and banker apologists.

It’s disturbing at this juncture that Felix Salmon more or less falls in with the bogus bank party line on “memorializing” (he finesses it by saying they need to do it “transparently”). I suggest he try talking to an attorney who is expert in securitizations and does not have opinion letter liability on this matter. The contracts that governed these deals were immutable and set forth in precise detail the steps various parties to the deal were required to perform. That included strict cutoff dates for getting the properly prepared notes and mortgages to the securitization trusts. Long-standing precedents for New York trusts (virtually all RMBS trusts are New York trust) call for delivery to the trust to be as perfect as possible. Since all securitization through at least the late 1990s did deliver all the notes and mortgages to the trusts as stipulated, there is no excuse for later changes in practice (as in if the parties wanted to simplify procedures for reasons of cost or convenience, they needed to change the governing agreements to reflect that).

Put it another way: what about the Statute of Frauds don’t you understand? And while some judges have sided with banks, the robosigning scandal and greater media coverage of mortgage abuses has led many jurists to be much less bank friendly than they were a mere year ago. The trend is moving decisively against, not for, the banks.

The American Banker article, disappointingly, fails to discuss what these continued abuses mean. As we have stressed in repeated past posts, the failure to get the notes to the securitization trusts by the cutoff date is not fixable by any legitimate means. Do you think banks and law firms would continue to fabricate documents, particularly in the wake of so much harsh media and Congressional scrutiny, if they had any other way out?

The failure to get the notes to the securitization trust correctly does NOT mean that no one has the right to foreclose. It does mean that the party that can foreclose is someone earlier in the securitization chain who was paid for the note but in effect, no one bothered to collect it from him. No one wants that party to foreclose because, first, it would prove that the securitization did not have the note and investors were misled, and second, there is no way to get the proceeds into the trust for the benefit of the investors.

The FHFA actions against the banks rush to originate loans to package and dump is based in lack of due diligence which is central to the role of any lending institution. I’ve written a lot about this having been straight out of grad school and part of the secondary mortgage process back in the 1980s when the S&L crisis exploded.  My huge S&L was desperate to grab fee income any way it could to stay afloat.  Practices this time were based on giving people bonuses just to give high numbers.  That’s always a disaster policy from a quality stand point.

Buried in the filings themselves, however, is a damning portrait of the excesses of the housing bubble, when borrowers were able to obtain home loans without basic proof of income or creditworthiness, and banks appeared only too happy to mine profits taking the risky loans and assembling them into securities that could be sold to investors.

In the complaint against Goldman Sachs, for example, the suit says that “Goldman was not content to simply let poor loans pass into its securitizations.” In addition, the giant investment bank “took the fraud further, affirmatively seeking to profit from this knowledge.”

When an outside analytics firm, Clayton, identified potential problems in the underlying mortgages Goldman was turning into securities, the suit said, “Goldman simply ignored and did not disclose the red flags revealed by Clayton’s review.” Goldman Sachs declined to comment, as did JPMorgan Chase, Morgan Stanley, Credit Suisse and Citigroup.

Similar behavior in terms of warnings provided by Clayton transpired at Bank of America, Citigroup, Deutsche Bank, RBS and UBS, according to the complaints.

My hope is that this leads to some policy to compensate homeowners taken in by these schemes but I’m not holding my breath.  Speculators and gamblers should not be rewarded for causing homeless and lost wealth for honest people looking to live the American Dream.  My worry is that Timothy Geithner’s presence as Treasury Secretary will force policy that continues to prop up the wrong people. This entire spectacle is another example of the opposites reality we know seem to inhabit.  In this version of “It’s a wonderful life”, the cautionary tale is the ending.